G.R. No.

152685 December 4, 2007 With the denial of the NTCs partial reconsideration of the CA PLDT wrote a letter protesting the assailed February 10, 2000
Decision, the issue of the basis for the assessment of the SRF assessment which was not acted upon by the NTC. Instead,
was brought before this Court under G.R. No. 127937 wherein the NTC sent a second assailed assessment on September 5,
PHILIPPINE LONG DISTANCE TELEPHONE
we ruled that the SRF should be based neither on the par 2000. Thus, in an attempt to clarify and resolve this issue,
COMPANY, petitioner, vs. NATIONAL
value nor the market value of the outstanding capital stock PLDT filed a Motion for Clarification of Enforcement of the
TELECOMMUNICATIONS COMMISSION, JOSEPH
but on the value of the stocks subscribed or paid including Decision dated 28 July 1999 in G.R. No. 127937 which this
[Link], in his capacity as NTC Commissioner, and
the premiums paid therefor, that is, the amount that the Court simply noted for the case had already become final and
EDGARDO CABARRIOS, in his capacity as Chief,
corporation receives, inclusive of the premiums if any, in executory.
CCAD, respondents.
consideration of the original issuance of the shares. We added
that in the case of stock dividends, it is the amount that the
Thus, on October 2, 2000, PLDT instituted the special civil
RESOLUTION corporation transfers from its surplus profit account to its
action for certiorari and prohibition docketed as CA-G.R. SP
capital account, that is, the amount the stock dividends
No. 6103310 before the CA. To maintain the status quo and to
VELASCO, JR., J.: represent is equivalent to the value paid for its original
defer the enforcement of the assailed assessments and
issuance.
subsequent assessments, on October 3, 2000, the CA issued
Before us is a Petition for Review on Certiorari 1 under Rule 45 a Temporary Restraining Order. On December 4, 2000, a writ
of the Rules of Court. It assails the February 12, 2001 PLDT wanted our July 28, 1999 Decision in G.R. No. 127937 of preliminary injunction was granted.
Decision2 of the Court of Appeals (CA) in CA-G.R. SP No. clarified. It posited that the SRF should be based on the par
61033, which dismissed petitioners special civil action for value in consonance with our holding in Philippine Long
Subsequently, on February 12, 2001, the CA rendered the
certiorari and prohibition, and the March 21, 2002 Distance Telephone Company v. Public Service
assailed Decision dismissing the petition. The dispositive
Resolution3 of the CA denying petitioners motion for Commission,7 and that the premiums on issued shares should
portion reads:
reconsideration. The petition raises the sole issue on whether not be included in the valuation of the outstanding capital
the appellate court erred in holding that the assessments of stock. Through our November 15, 1999 Resolution in G.R. No.
127937, we elucidated that our July 28, 1999 decision was not WHEREFORE, the petition is DISMISSED for lack of merit,
the National Telecommunications Commission (NTC) were
in conflict with our ruling in Philippine Long Distance and the writ of preliminary injunction heretofore issued is
contrary to our Decision in G.R. No. 127937 entitled NTC v.
Telephone Company since we never enunciated in the said DISSOLVED.11
Honorable Court of Appeals. 4
case that the phrase "capital stock subscribed or paid" must
5
be determined at par value. We reiterated that the term PLDTs motion for reconsideration was denied by the CAs
This case pertains to Section 40 (e) of the Public Service
6
"capital stock subscribed or paid" is the amount that the Special Division of Five on March 21, 2002.
Act (PSA), as amended on March 15, 1984, pursuant to Batas
corporation receives, inclusive of the premiums, if any, in
Pambansa Blg. 325, which authorized the NTC to collect from
consideration of the original issuance of the shares.
public telecommunications companies Supervision and Hence, the instant petition for review, raising the core issue:
Regulation Fees (SRF) of PhP 0.50 for every PhP 100 or a
fraction of the capital and stock subscribed or paid for of a Thereafter, to comply with our disposition in G.R. No. 127937,
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
stock corporation, partnership or single proprietorship of the for the reassessment of the SRF based on the value of the
DISPUTED NTC ASSESSMENTS WERE NOT CONTRARY TO
capital invested, or of the property and equipment, whichever stocks subscribed or paid including the premiums paid for the
THE PURISIMA DECISION.12
is higher. stocks, if any, the NTC sent the assailed assessments of
February 10, 20008 and September 5, 20009 to PLDT which
included the value of stock dividends issued by PLDT. The The petition is bereft of merit.
Under Section 40 (e) of the PSA, the NTC sent SRF
assailed assessments were based on the schedule of capital
assessments to petitioner Philippine Long Distance Telephone
stock submitted by PLDT. PLDT argues that in our Decision in G.R. No. 127937 we have
Company (PLDT) starting sometime in 1988. The SRF
assessments were based on the market value of the excluded from the coverage of the SRF the capital stocks
outstanding capital stock, including stock dividends, of PLDT. PLDT now contends that our disposition in G.R. No. 127937 issued as stock dividends. Petitioner argues that G.R. No.
PLDT protested the assessments contending that the SRF excluded stock dividends from the SRF coverage, while the 127937 clearly delineates between capital subscribed and
ought to be based on the par value of its outstanding capital NTC asserts the contrary. Also, PLDT questions the stock dividends to the effect that the latter are not included in
stock. Its protest was denied by the NTC and likewise, its assessments for violating our disposition in G.R. No. 127937 the concept of capital stock subscribed because subscribers
motion for reconsideration. since these assessments were identical to the previous or shareholders do not pay for their subscriptions as no
assessments from 1988 which were questioned by PLDT in amount is received by the corporation in consideration of
G.R. No. 127937 for being based on the market value of its such issuances since these are effected as mere book entries,
PLDT appealed before the CA. The CA modified the disposition
outstanding capital stock. that is, the transfer from the retained earnings account to the
of the NTC by holding that the SRF should be assessed at par
capital or stock account. To bolster its position, PLDT
value of the outstanding capital stock of PLDT, excluding
repeatedly used the phrase "actual payments" received by a
stock dividends.

CORPORATION LAW: 7. captial structure Page 1 of 201

corporation as a consideration for issuances of shares which PLDTs contention, that stock dividends are not similarly case the stockholders are forced to forego cash in lieu of
do not apply to stock dividends. situated as the subscribed capital stock because the property or stocks.
subscribers or shareholders do not pay for their issuances as
no amount was received by the corporation in consideration
We are not persuaded. In essence, therefore, the stockholders by receiving stock
of such issuances since these are effected as a mere book
dividends are forced to exchange the monetary value of their
entry, is erroneous.
dividend for capital stock, and the monetary value they
Crucial in point is our disquisition in G.R. No. 127937
forego is considered the actual payment for the original
entitled National Telecommunications Commission v.
Dividends, regardless of the form these are declared, that is, issuance of the stocks given as dividends. Therefore, stock
Honorable Court of Appeals, which we quote:
cash, property or stocks, are valued at the amount of the dividends acquired by shareholders for the monetary value
declared dividend taken from the unrestricted retained they forego are under the coverage of the SRF and the basis
The term "capital" and other terms used to describe the earnings of a corporation. Thus, the value of the declaration for the latter is such monetary value as declared by the board
capital structure of a corporation are of universal in the case of a stock dividend is the actual value of the of directors.
acceptance and their usages have long been established original issuance of said stocks. In G.R. No. 127937 we said
in jurisprudence. Briefly, capital refers to the value of the that "in the case of stock dividends, it is the amount that the
On the second issue, do the assailed NTC assessments violate
property or assets of a corporation. The capital corporation transfers from its surplus profit account to its
the ruling in G.R. No. 127937? PLDT contends that these did
subscribed is the total amount of the capital that capital account" or "it is the amount that the corporation
since the assessments are identical to the previous
persons (subscribers or shareholders) have agreed receives in consideration of the original issuance of the
assessments from 1988 which were questioned by PLDT in
to take and pay for, which need not necessarily by, and shares." It is "the distribution of current or accumulated
the seminal G.R. No. 127937 for being based on the market
can be more than, the par value of the shares. In fine, it is earnings to the shareholders of a corporation pro rata based
value of its outstanding capital stock.
the amount that the corporation receives, inclusive on the number of shares owned." 14 Such distribution in
of the premiums if any, in consideration of the whatever form is valued at the declared amount or monetary
original issuance of the shares. In the case of stock equivalent. A cursory review of the assessments made by the NTC prior to
dividends, it is the amount that the corporation our July 28, 1999 Decision in G.R. No. 127937 and the
transfers from its surplus profit account to its assailed assessments of February 10, 2000 and September 5,
Thus, it cannot be said that no consideration is involved in the
capital account. It is the same amount that can be 2000 does show that the assessments are substantially
issuance of stock dividends. In fact, the declaration of stock
loosely termed as the "trust fund" of the corporation. The identical. In our July 28, 1999 Decision in G.R. No. 127937, we
dividends is akin to a forced purchase of stocks. By declaring
"Trust Fund" doctrine considers this subscribed capital as noted, and similarly true in the petition before us, that, "The
stock dividends, a corporation ploughs back a portion or its
a trust fund for the payment of the debts of the actual capital paid or the amount of capital stock paid and for
entire unrestricted retained earnings either to its working
corporation, to which the creditors may look for which PLDT received actual payments were not disclosed or
capital or for capital asset acquisition or investments. It is
satisfaction. Until the liquidation of the corporation, no extant in the records before the Court."16
simplistic to say that the corporation did not receive any
part of the subscribed capital may be returned or released
actual payment for these. When the dividend is distributed, it
to the stockholder (except in the redemption of
ceases to be a property of the corporation as the entire or Hence, as before, we cannot factually determine whether the
redeemable shares) without violating this principle. Thus,
portion of its unrestricted retained earnings is distributed pro assailed assessments substantially followed our Decision in
dividends must never impair the subscribed capital;
rata to corporate shareholders. G.R. No. 127937. It is apparent that the assessments are
subscription commitments cannot be condoned or
identical and that the NTC in the earlier case asserted that
remitted; nor can the corporation buy its own shares using
the SRF be based on the market value of the capital stock, yet
the subscribed capital as the considerations When stock dividends are distributed, the amount declared
it assessed it to PLDT. However, a closer look at the assailed
therefor.13 (Emphasis supplied.) ceases to belong to the corporation but is distributed among
assessments of February 13, 2000 and September 5, 2000
the shareholders. Consequently, the unrestricted retained
would show that the NTC based its assessment on the
earnings of the corporation are diminished by the amount of
Two concepts can be gleaned from the above. First, what schedule of capital stock submitted by PLDT. PLDT did not
the declared dividend while the stockholders equity is
constitutes capital stock that is subject to the SRF. Second, dispute this; it only disputed the level of assessment which
increased. Furthermore, the actual payment is the cash value
such capital stock is equated to the "trust fund" of a was the same as before.
from the unrestricted retained earnings that each shareholder
corporation held in trust as security for satisfaction to
foregoes for additional stocks/shares which he would
creditors in case of corporate liquidation.
otherwise receive as required by the Corporation Code to be Now, where should the NTC base its assessment? It is
given to the stockholders subject to the availability and incumbent upon PLDT to furnish the NTC the actual payment
The first asks if stock dividends are part of the outstanding conditioned on a certain level of retained earnings. 15 Elsewise made on the subscription of its capital stock in order for the
capital stocks of a corporation insofar as it is subject to the put, where the unrestricted retained earnings of a corporation NTC to assess the proper SRF. Logically, the NTC would base
SRF. They are. The first issue we have to tackle is, are all the are more than 100% of the paid-in capital stock, the its SRF assessment of PLDT from PLDT data.
stock dividends that are part of the outstanding capital stock corporate Board of Directors is mandated to declare dividends
of PLDT subject to the SRF? Yes, they are. which the shareholders will receive in cash unless otherwise PLDT should not bewail that the assailed assessments are
declared as property or stock dividends, which in the latter substantially the same assessments it protested in G.R. No.
127937. After all, it had not shown the actual figures of the

CORPORATION LAW: 7. captial structure Page 2 of 201

amount of premiums and subscriptions it had received for the WHEREFORE, we DENY the petition for lack of merit,
original issuances of its capital stock. While indeed it and AFFIRM the February 12, 2001 Decision and March 21,
submitted a table of the comparative assessments made by 2002 Resolution in CA-G.R. SP No. 61033. Costs against
the NTC to this Court, PLDT has not furnished the NTC nor this petitioner.
Court the correct figures of the actual payments made for its
capital stock.
SO ORDERED.

We are not unaware that in accounting practice, the journal

entries for transactions are recorded in historical value or
cost. Thus, the purchase of properties or assets is recorded at
acquisition cost. The same is true with liabilities and equity
transactions where the actual loan and the amount paid for
the subscription are recorded at the actual payment,
including the premiums paid for the subscription of capital
stock.

Moreover, it is common practice that the values of the

accounts recorded at historical value or cost are not increased
or decreased due to market forces. In the case of properties,
the appreciation in values is generally not recorded as income
nor the increase in the corresponding asset because the
increase or decrease is not yet realized until the property is
actually sold. The same is true with the capital account. The
market value may be much higher than the actual payment of
the par value and premium of capital stock. Still, the books of
account will not reflect such increase; and vice-versa, any
decrease of the value of stocks is likewise not reflected in the
books of account. Thus, given the general practice that book
entries of the premiums and subscriptions for capital stock
are the actual value for the original issuance of stocks, then
the NTC was correct to follow the schedule of capital stocks
submitted by PLDT.

Moreover, the "Trust Fund" doctrine, the second concept this

Court elucidated in G.R. No. 127937 and quoted above,
bolsters the correctness of the assessments made by the NTC.
As a fund in trust for creditors in case of liquidation, the
actual value of the subscriptions and the value of stock
dividends distributed may not be decreased or increased by
the fluctuating market value of the stocks. Thus, absent any
showing by PLDT of the actual payment it received for the
original issuance of its capital stock, the assessments made
by the NTC, based on the schedule of outstanding capital
stock of PLDT recorded at historical value payments made, is
deemed correct.

Anent stock dividends, the value transferred from the

unrestricted retained earnings of PLDT to the capital stock
account pursuant to the issuance of stock dividends is the
proper basis for the assessment of the SRF, which the NTC
correctly assessed.

CORPORATION LAW: 7. captial structure Page 3 of 201

G.R. No. 127937 July 28, 1999 On September 29, 1993, the NTC rendered a Decision 8 in NTC Simply put, the submission of NTC is that the fee under
Case No. 90-223, denying the protest of PLDT and disposing Section 40 (e) should be based on the market value of PLDT's
NATIONAL TELECOMMUNICATIONS COMMIS-
thus: outstanding capital stock inclusive of stock dividends and
SION, petitioner, vs. HONORABLE COURT OF APPEALS
premium, and not on the par value of PLDT's capital stock
and PHILIPPINE LONG DISTANCE TELEPHONE FOR ALL THE FOREGOING, finding PLDT's protest to be
excluding stock dividends and premium, as contended by
COMPANY, respondents. without merit, the Commission has no alternative but to
PLDT.
uphold the law and DENIES the protest of PLDT. Unless
otherwise restrained by a competent court of law, the Succinct and clear is the ruling of this Court in the case
PURISIMA, J.: Common Carrier Authorization Department (CCAD) is of Philippine Long Distance Telephone Company vs. Public
hereby directed to update its assessments and collections Service Commission, 66 SCRA 341, that the basis for
At bar is a Petition for Review on Certiorari under Rule 45 of on PLDT and all public telecommunications carriers for the computation of the fee to be charged by NTC on PLDT, is " the
the Revised Rules of Court seeking to modify the October 30, payment of the fees in accordance with the provisions of capital stock subscribed or paid and not, alternatively, the
1 2
1996 Decision and the January 27, 1997 Resolution of the Section 40 (e) (f) and (g) of the Revised NTC Schedule of property and equipment."
3
Court of Appeals in CA-G.R. SP No. 34063. Fees and Charges.
The law in point is clear and categorical. There is no room for
The antecedent facts that matter can be culled as follows: This decision takes effect immediately. construction. It simply calls for application. To repeat, the fee
Sometime in 1988, the National Telecommunications in question is based on the capital stock subscribed or paid,
SO ORDERED.
Commission (NTC) served on the Philippine Long Distance nothing less nothing more.
Telephone Company (PLDT) the following assessment notices On October 22, 1993, PLDT interposed a Motion for
It bears stressing that it is not the NTC that imposed such a
and demands for payment: Reconsideration, 9 which was denied by NTC in an
fee. It is the legislature itself. Since Congress has the power to
Order 10 issued on May 3, 1994.
1. the amount of P7,495,161.00 as supervision and exercise the State inherent powers of Police Power, Eminent
regulation fee under Section 40 (e) of the PSA for the said On May 12, 1994, PLDT appealed the aforesaid Decision to Domain and Taxation, the distinction between police power
year, 1988, computed at P0.50 per P100.00 of the the Court of Appeals, which came out with its questioned and the power to tax, which could be significant if the
Protestant's (PLDT) outstanding capital stock as at Decision of October 30, 1996, modifying the disposition of exercising authority were mere political subdivisions (since
December 31, 1987 which then consisted of Serial NTC as follows: delegation by it to such political subdivisions of one power
Preferred Stock amounting to P1,277,934,390.00 (Billion) does not necessarily include the other), would not be of any
WHEREFORE, the assailed decision and order of the moment when, as in the case under consideration, Congress
and Common Stock of P221,097,785 (Million) or a total of
respondent Commission dated September 29, 1993 and itself exercises the power. All that is to be done would be to
P1,499,032,175.00 (Billion).
May 03, 1994, respectively, in NTC Case No. 90-223 are apply and enforce the law when sufficiently definitive and not
2. the amount of P9.0 Million as permit fee under Section hereby MODIFIED. The Commission is ordered to constitutional infirm.
40 (f) of the PSA for the approval of the protestant's recompute its assessments and demands for payment
increase of its authorized capital stock from P2.7 Billion to from petitioner PLDT as follows. The term "capital" and other terms used to describe the
P4.5 Billion; and capital structure of a corporation are of universal acceptance,
A. For annual supervision and regulation fees (SRF) under and their usages have long been established in jurisprudence.
3. the amounts of P12,261,600.00 and P33,472,030.00 as Section 40 (e) of the Public Service Act, as amended, they Briefly, capital refers to the value of the property or assets of
permit fees under Section 40 (g) of the PSA in connection should be computed at fifty centavos for each one a corporation. The capital subscribed is the total amount of
with the Commission's decisions in NTC Cases Nos. 86-13 hundred pesos or fraction thereof of the par value of the the capital that persons (subscribers or shareholders) have
and 87-008 respectively, approving the Protestant's equity capital stock subscribed or paid excluding stock agreed to take and pay for, which need not necessarily be,
participation in the Fiber Optic Interpacific Cable systems dividends, premiums or capital in excess of par. and can be more than, the par value of the shares. In fine, it
and X-5 Service Improvement and Expansion Program. 4
B. For permit fees for the approval of petitioner's increase is the amount that the corporation receives, inclusive of the
In its two letter-protests 5 dated February 23, 1988 and July of authorized capital stock under Section 40 (f) of the premiums if any, in consideration of the original issuance of
14, 1988, and position papers 6dated November 8, 1990 and same Act, they should be computed at fifty for each one the shares. In the case of stock dividends, it is the amount
March 12, 1991, respectively, the PLDT challenged the hundred pesos or fraction thereof, regardless of any that the corporation transfers from its surplus profit account
aforesaid assessments, theorizing inter alia that: regulatory service or expense incurred by respondent. to its capital account. It is the same amount that can loosely
be termed as the "trust fund" of the corporation. The "Trust
(a) The assessments were being made to raise revenues On November 20, 1996, NTC moved for partial Fund" doctrine considers this subscribed capital as a trust
and not as mere reimbursements for actual regulatory reconsideration of the abovementioned Decision, with respect fund for the payment of the debts of the corporation, to which
expenses in violation of the doctrine in PLDT vs. PSC, 66 to the basis of the assessment under Section 40 (e), i.e., par the creditors may look for satisfaction. Until the liquidation of
SCRA 341 [1975]; value of the subscribed capital stock. It also sought a partial the corporation, no part of the subscribed capital may be
reconsideration of the fee of fifty (P0.50) centavos for the returned or released to the stockholder (except in the
(b) The assessment under Section 40 (e) should only have issuance or increasing of the capital stock under Section 40 redemption of redeemable shares) without violating this
been on the basis of the par values of private (f). 11
respondent's outstanding capital stock; principle. Thus, dividends must never impair the subscribed
With the denial of its motions for reconsideration by the capital; subscription commitments cannot be condoned or
(c) Petitioner has no authority to compel private Resolution of the Court of Appeals dated January 27, 1997, remitted; nor can the corporation buy its own shares using
respondents payment of the assessed fees under Section petitioner found its way to this Court via the present Petition; the subscribed capital as the consideration therefor.
12

40 (f) for the increase of its authorized capital stock since posing as sole issue:
petitioner did not render any supervisory or regulatory In the same way that the Court in PLDT vs. PSC has rejected
activity and incurred no expenses in relation thereto. WHETHER THE COURT OF APPEALS ERRED IN HOLDING the "value of the property and equipment" as being the
THAT THE COMPUTATION OF SUPERVISION AND proper basis for the fee imposed by Section 40(e) of the
7
xxx xxx xxx REGULATION FEES UNDER SECTION 40 (F) OF THE PUBLIC Public Service Act, as amended by Republic Act No. 3792, so
SERVICE ACT SHOULD BE BASED ON THE PAR VALUE OF also must the Court disallow the idea of computing the fee on
THE SUBSCRIBED CAPITAL STOCK. "the par value of [PLDT's] capital stock subscribed or paid

CORPORATION LAW: 7. captial structure Page 4 of 201

excluding stock dividends, premiums, or capital in excess of PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V. This resolves the motions for reconsideration of the 28 June
par." Neither, however, is the assessment made by the PANGILINAN OF PHILIPPINE LONG DISTANCE 2011 Decision filed by (1) the Philippine Stock Exchange's
National Telecommunications Commission on the basis of the TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS (PSE) President, 1 (2) Manuel V. Pangilinan (Pangilinan),2 (3)
market value of the subscribed or paid-in capital stock
MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD., Napoleon L. Nazareno (Nazareno ), 3and ( 4) the Securities and
acceptable since it is itself a deviation from the explicit
language of the law. PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE Exchange Commission (SEC)4 (collectively, movants ).
LONG DISTANCE TELEPHONE COMPANY, CHAIR FE
From the pleadings on hand, it can be gleaned that the BARIN OF THE SECURITIES EXCHANGE COMMISSION,
assessment for supervision and regulation fee under Section The Office of the Solicitor General (OSG) initially filed a
and PRESIDENT FRANCIS LIM OF THE PHILIPPINE
40(e) made by NTC for 1988, computed at P0.50 per 100 of motion for reconsideration on behalfofthe SEC, 5 assailing the
PLDT's outstanding capital stock as of December 31, 1987, STOCK EXCHANGE, Respondents. 28 June 2011 Decision. However, it subsequently filed a
amounted to P7,495,161.00. The same was based on the Consolidated Comment on behalf of the State, 6declaring
amount of P1,277,934,390.00 of serial preferred stocks and see cases on 6. Voting expressly that it agrees with the Court's definition of the term
P221,097,785.00 of common stocks or a total of
"capital" in Section 11, Article XII of the Constitution. During
P1,499,032,175.00. The assessment was reported to include
stock dividends, premium on issued common shares and the Oral Arguments on 26 June 2012, the OSG reiterated its
premium on preferred shares converted into common position consistent with the Court's 28 June 2011 Decision.
stock. 13 The actual capital paid or the amount of capital stock
paid and for which PLDT received actual payments were not
disclosed or extant in the records before the Court. The only We deny the motions for reconsideration.
other item available is the amount assessed by petitioner
from PLDT, which had been based on market value of the I. Far-reaching implications of the legal issue justify
outstanding capital stock on given dates. 14
treatment of petition for declaratory relief as one for
All things studiedly considered, and mindful of the aforesaid mandamus.
ruling of this Court in the case of Philippine Long Distance
Telephone Company vs. Public Service Commission, it should
be reiterated that the proper basis for the computation of As we emphatically stated in the 28 June 2011 Decision, the
subject fee under Section 40(e) of the Public Service Act, as G.R. No. 176579 October 9, 2012 interpretation of the term "capital" in Section 11, Article XII of
amended by Republic Act No. 3792, is "the capital stock the Constitution has far-reaching implications to the national
subscribed or paid and not, alternatively, the property and economy. In fact, a resolution of this issue will determine
equipment. HEIRS OF WILSON P. GAMBOA, * Petitioners, vs. FINANCE
whether Filipinos are masters, or second-class citizens, in
SECRETARYMARGARITO B. TEVES, FINANCE
WHEREFORE, the decision of the Court of Appeals, dated their own country. What is at stake here is whether Filipinos or
UNDERSECRETARYJOHN P. SEVILLA, AND
October 30, 1996, and its Resolution, dated January 27, 1997, foreigners will have effective control of the Philippine
in CA G.R. SP No. 34063, as well as the decision of the COMMISSIONER RICARDO ABCEDE OF THE
national economy. Indeed, if ever there is a legal issue that
National Telecommunication Commission, dated September PRESIDENTIAL COMMISSION ON GOOD
has far-reaching implications to the entire nation, and to
29, 1993, and Order, dated May 3, 1994, in NTC case No. 90- GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR
223, are hereby SET ASIDE and the National AND MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION future generations of Filipinos, it is the threshold legal issue
Telecommunication Commission is hereby ordered to make a COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC presented in this case.
re-computation of the fee to be imposed on Philippine Long CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO
Distance Telephone Company on the basis of the latter's
PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V. Contrary to Pangilinans narrow view, the serious economic
capital stock subscribed or paid and strictly in accordance
with the foregoing disquisition and conclusion. PANGILINAN OF PHILIPPINE LONG DISTANCE consequences resulting in the interpretation of the term
TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS "capital" in Section 11, Article XII of the Constitution
No pronouncement as to costs. MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD., undoubtedly demand an immediate adjudication of this
SO ORDERED. PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE issue. Simply put, the far-reaching implications of this
LONG DISTANCE TELEPHONE COMPANY, CHAIR FE issue justify the treatment of the petition as one for
BARIN OF THE SECURITIES AND EXCHANGE mandamus.7
COMMISSION, and PRESIDENT FRANCIS LIM OF THE
G.R. No. 176579 June 28, 2011
PHILIPPINE STOCK EXCHANGE, Respondents.
In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court
deemed it wise and expedient to resolve the case although
WILSON P. GAMBOA, Petitioner, v. FINANCE SECRETARY
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner- the petition for declaratory relief could be outrightly
MARGARITO B. TEVES, FINANCE UNDERSECRETARY in-Intervention. dismissed for being procedurally defective. There, appellant
JOHN P. SEVILLA, AND COMMISSIONER RICARDO
admittedly had already committed a breach of the Public
ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD
RESOLUTION Service Act in relation to the Anti-Dummy Law since it had
GOVERNMENT (PCGG) IN THEIR CAPACITIES AS CHAIR
been employing non- American aliens long before the
AND MEMBERS, RESPECTIVELY, OF THE PRIVATIZATION
decision in a prior similar case. However, the main issue
COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CARPIO, J.:
in Luzon Stevedoring was of transcendental importance,
CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO
involving the exercise or enjoyment of rights, franchises,

CORPORATION LAW: 7. captial structure Page 5 of 201

privileges, properties and businesses which only Filipinos and The opinions of the SEC, as well as of the Department of 60% of the total percentage of common and preferred
qualified corporations could exercise or enjoy under the Justice (DOJ), on the definition of the term "capital" as shares in Filipino hands would amount to
Constitution and the statutes. Moreover, the same issue could referring to both voting and non-voting shares (combined circumvention of the principle of control by Philippine
be raised by appellant in an appropriate action. Thus, total of common and preferred shares) are, in the first place, stockholders that is implicit in the 60% Philippine
in Luzon Stevedoring the Court deemed it necessary to finally conflicting and inconsistent. There is no basis whatsoever to nationality requirement in the Constitution. (Emphasis
dispose of the case for the guidance of all concerned, despite the claim that the SEC and the DOJ have consistently and supplied)
the apparent procedural flaw in the petition. uniformly adopted a definition of the term "capital" contrary
to the definition that this Court adopted in its 28 June 2011
In short, Minister Mendoza categorically rejected the
Decision.
The circumstances surrounding the present case, such as the theory that the term "capital" in Section 9, Article XIV of the
supposed procedural defect of the petition and the pivotal 1973 Constitution includes "both preferred and common
legal issue involved, resemble those in Luzon In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the stocks" treated as the same class of shares regardless of
Stevedoring. Consequently, in the interest of substantial scope of the term "capital" in Section 9, Article XIV of the differences in voting rights and privileges. Minister Mendoza
justice and faithful adherence to the Constitution, we opted to 1973 Constitution was raised, that is, whether the term stressed that the 60-40 ownership requirement in favor of
resolve this case for the guidance of the public and all "capital" includes "both preferred and common stocks." The Filipino citizens in the Constitution is not complied with unless
concerned parties. issue was raised in relation to a stock-swap transaction the corporation "satisfies the criterion of beneficial
between a Filipino and a Japanese corporation, both ownership" and that in applying the same "the primordial
stockholders of a domestic corporation that owned lands in consideration is situs of control."
II. No change of any long-standing rule; thus, no
the Philippines. Then Minister of Justice Estelito P. Mendoza
redefinition of the term "capital."
ruled that the resulting ownership structure of the corporation
On the other hand, in Opinion No. 23-10 dated 18 August
would be unconstitutional because 60% of the voting stock
2010, addressed to Castillo Laman Tan Pantaleon & San Jose,
Movants contend that the term "capital" in Section 11, Article would be owned by Japanese while Filipinos would own only
then SEC General Counsel Vernette G. Umali-Paco applied
XII of the Constitution has long been settled and defined to 40% of the voting stock, although when the non-voting stock
the Voting Control Test, that is, using only the voting stock
refer to the total outstanding shares of stock, whether voting is added, Filipinos would own 60% of the combined voting and
to determine whether a corporation is a Philippine national.
or non-voting. In fact, movants claim that the SEC, which is non-voting stock. This ownership structure is remarkably
The Opinion states:
the administrative agency tasked to enforce the 60-40 similar to the current ownership structure of PLDT.
ownership requirement in favor of Filipino citizens in the Minister Mendoza ruled:
Constitution and various statutes, has consistently adopted Applying the foregoing, particularly the Control Test, MLRC
this particular definition in its numerous opinions. Movants is deemed as a Philippine national because: (1) sixty percent
xxxx
point out that with the 28 June 2011 Decision, the Court in (60%) of its outstanding capital stock entitled to vote is
effect introduced a "new" definition or "midstream owned by a Philippine national, the Trustee; and (2) at least
redefinition"9 of the term "capital" in Section 11, Article XII of Thus, the Filipino group still owns sixty (60%) of the entire sixty percent (60%) of the ERF will accrue to the benefit of
the Constitution. subscribed capital stock (common and preferred) while the Philippine nationals. Still pursuant to the Control Test,
Japanese investors control sixty percent (60%) of the common MLRCs investment in 60% of BFDCs outstanding
(voting) shares. capital stock entitled to vote shall be deemed as of
This is egregious error.
Philippine nationality, thereby qualifying BFDC to own
private land.
It is your position that x x x since Section 9, Article XIV
For more than 75 years since the 1935 Constitution, the Court
of the Constitution uses the word "capital," which is
has not interpreted or defined the term "capital" found in
construed "to include both preferred and common Further, under, and for purposes of, the FIA, MLRC and BFDC
various economic provisions of the 1935, 1973 and 1987
shares" and "that where the law does not distinguish, are both Philippine nationals, considering that: (1) sixty
Constitutions. There has never been a judicial precedent
the courts shall not distinguish." percent (60%) of their respective outstanding capital
interpreting the term "capital" in the 1935, 1973 and 1987
stock entitled to vote is owned by a Philippine national
Constitutions, until now. Hence, it is patently wrong and
(i.e., by the Trustee, in the case of MLRC; and by MLRC, in the
utterly baseless to claim that the Court in defining the term xxxx
case of BFDC); and (2) at least 60% of their respective board
"capital" in its 28 June 2011 Decision modified, reversed, or
of directors are Filipino citizens. (Boldfacing and italicization
set aside the purported long-standing definition of the term
In light of the foregoing jurisprudence, it is my opinion that supplied)
"capital," which supposedly refers to the total outstanding
the stock-swap transaction in question may not be
shares of stock, whether voting or non-voting. To repeat, until
constitutionally upheld. While it may be ordinary corporate
the present case there has never been a Court ruling Clearly, these DOJ and SEC opinions are compatible with the
practice to classify corporate shares into common voting
categorically defining the term "capital" found in the various Courts interpretation of the 60-40 ownership requirement in
shares and preferred non-voting shares, any arrangement
economic provisions of the 1935, 1973 and 1987 Philippine favor of Filipino citizens mandated by the Constitution for
which attempts to defeat the constitutional purpose should be
Constitutions. certain economic activities. At the same time, these opinions
eschewed. Thus, the resultant equity arrangement
highlight the conflicting, contradictory, and inconsistent
which would place ownership of 60%11 of the common
positions taken by the DOJ and the SEC on the definition of
(voting) shares in the Japanese group, while retaining

CORPORATION LAW: 7. captial structure Page 6 of 201

the term "capital" found in the economic provisions of the regulations. In short, any opinion of individual JUSTICE CARPIO:
Constitution. Commissioners or SEC legal officers does not
constitute a rule or regulation of the SEC.
So, you combine the two (2), the SEC officer, if
The opinions issued by SEC legal officers do not have the delegated that power, can issue an opinion but that
force and effect of SEC rules and regulations because only the The SEC admits during the Oral Arguments that only the opinion does not constitute a rule or regulation,
SEC en banc can adopt rules and regulations. As expressly SEC en banc, and not any of its individual commissioners or correct?
provided in Section 4.6 of the Securities Regulation legal staff, is empowered to issue opinions which have the
Code,12 the SEC cannot delegate to any of its individual same binding effect as SEC rules and regulations, thus:
COMMISSIONER GAITE:
Commissioner or staff the power to adopt any rule or
regulation. Further, under Section 5.1 of the same Code,
JUSTICE CARPIO:
it is the SEC as a collegial body, and not any of its Correct, Your Honor.
legal officers, that is empowered to issue opinions and
approve rules and regulations. Thus: So, under the law, it is the Commission En Banc that can
JUSTICE CARPIO:
issue a SEC Opinion, correct?

4.6. The Commission may, for purposes of efficiency, delegate So, all of these opinions that you mentioned they are
any of its functions to any department or office of the COMMISSIONER GAITE:13
not rules and regulations, correct?
Commission, an individual Commissioner or staff member of
the Commission except its review or appellate authority Thats correct, Your Honor.
COMMISSIONER GAITE:
and its power to adopt, alter and supplement any rule
or regulation.
JUSTICE CARPIO:
They are not rules and regulations.
The Commission may review upon its own initiative or upon
Can the Commission En Banc delegate this function to an
the petition of any interested party any action of any JUSTICE CARPIO:
SEC officer?
department or office, individual Commissioner, or staff
member of the Commission. If they are not rules and regulations, they apply only to that
COMMISSIONER GAITE:
particular situation and will not constitute a precedent,
SEC. 5. Powers and Functions of the Commission.- 5.1. The correct?
Commission shall act with transparency and shall have the Yes, Your Honor, we have delegated it to the General
powers and functions provided by this Code, Presidential Counsel.
COMMISSIONER GAITE:
Decree No. 902-A, the Corporation Code, the Investment
Houses Law, the Financing Company Act and other existing JUSTICE CARPIO:
laws. Pursuant thereto the Commission shall have, among Yes, Your Honor.14 (Emphasis supplied)
others, the following powers and functions:
It can be delegated. What cannot be delegated by the
Significantly, the SEC en banc, which is the collegial body
Commission En Banc to a commissioner or an individual
xxxx statutorily empowered to issue rules and opinions on behalf of
employee of the Commission?
the SEC, has adopted even the Grandfather Rule in
determining compliance with the 60-40 ownership
(g) Prepare, approve, amend or repeal rules, COMMISSIONER GAITE: requirement in favor of Filipino citizens mandated by the
regulations and orders, and issue opinions and provide Constitution for certain economic activities. This prevailing
guidance on and supervise compliance with such rules, SEC ruling, which the SEC correctly adopted to thwart any
regulations and orders; Novel opinions that [have] to be decided by the En Banc...
circumvention of the required Filipino "ownership and
control," is laid down in the 25 March 2010 SEC en
x x x x (Emphasis supplied) JUSTICE CARPIO: banc ruling in Redmont Consolidated Mines, Corp. v. McArthur
Mining, Inc., et al.,15 to wit:
Thus, the act of the individual Commissioners or legal officers What cannot be delegated, among others, is the power to
of the SEC in issuing opinions that have the effect of SEC adopt or amend rules and regulations, correct? The avowed purpose of the Constitution is to place in the
rules or regulations is ultra vires. Under Sections 4.6 and hands of Filipinos the exploitation of our natural
5.1(g) of the Code, only the SEC en banc can "issue opinions" COMMISSIONER GAITE: resources. Necessarily, therefore, the Rule interpreting
that have the force and effect of rules or regulations. Section the constitutional provision should not diminish that
4.6 of the Code bars the SEC en banc from delegating to any right through the legal fiction of corporate ownership
Thats correct, Your Honor.
individual Commissioner or staff the power to adopt rules or and control. But the constitutional provision, as interpreted

CORPORATION LAW: 7. captial structure Page 7 of 201

and practiced via the 1967 SEC Rules, has favored foreigners which is permitted by the Corporation Code, does the doctrine that any interpretation of the law that administrative
contrary to the command of the Constitution. Hence, the Committee adopt the grandfather rule? or quasi-judicial agencies make is only preliminary, never
Grandfather Rule must be applied to accurately conclusive on the Court. The power to make a final
determine the actual participation, both direct and interpretation of the law, in this case the term "capital" in
MR. VILLEGAS. Yes, that is the understanding of the
indirect, of foreigners in a corporation engaged in a Section 11, Article XII of the 1987 Constitution, lies with this
Committee.
nationalized activity or business. Court, not with any other government entity.

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

Compliance with the constitutional limitation(s) on engaging In his motion for reconsideration, the PSE President cites the
in nationalized activities must be determined by ascertaining cases of National Telecommunications Commission v. Court of
if 60% of the investing corporations outstanding capital stock MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; Appeals17 and Philippine Long Distance Telephone Company v.
is owned by "Filipino citizens", or as interpreted, by natural or italicization in the original) National Telecommunications Commission 18 in arguing that
individual Filipino citizens. If such investing corporation is in the Court has already defined the term "capital" in Section 11,
19
turn owned to some extent by another investing corporation, This SEC en banc ruling conforms to our 28 June 2011 Article XII of the 1987 Constitution.
the same process must be observed. One must not stop until Decision that the 60-40 ownership requirement in favor of
the citizenships of the individual or natural stockholders of Filipino citizens in the Constitution to engage in certain The PSE President is grossly mistaken. In both cases
layer after layer of investing corporations have been economic activities applies not only to voting control of the of National Telecommunications v. Court of
established, the very essence of the Grandfather Rule. corporation, but also to the beneficial ownership of the Appeals20 and Philippine Long Distance Telephone Company v.
corporation. Thus, in our 28 June 2011 Decision we stated: National Telecommunications Commission,21 the Court did not
Lastly, it was the intent of the framers of the 1987 define the term "capital" as found in Section 11, Article XII of
Constitution to adopt the Grandfather Rule. In one of Mere legal title is insufficient to meet the 60 percent the 1987 Constitution. In fact, these two cases never
the discussions on what is now Article XII of the present Filipinoowned "capital" required in the Constitution. Full mentioned, discussed or cited Section 11, Article XII of
Constitution, the framers made the following exchange: beneficial ownership of 60 percent of the outstanding the Constitution or any of its economic provisions, and
capital stock, coupled with 60 percent of the voting thus cannot serve as precedent in the interpretation of
Section 11, Article XII of the Constitution. These two
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated rights, is required. The legal and beneficial ownership of 60
cases dealt solely with the determination of the correct
local or Filipino equity and foreign equity; namely, 60-40 in percent of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the regulatory fees under Section 40(e) and (f) of the Public
Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
constitutional mandate. Otherwise, the corporation is Service Act, to wit:
"considered as non-Philippine national[s]." (Emphasis
MR. VILLEGAS. That is right.
supplied) (e) For annual reimbursement of the expenses incurred by the
Commission in the supervision of other public services and/or
MR. NOLLEDO. In teaching law, we are always faced with the in the regulation or fixing of their rates, twenty centavos for
Both the Voting Control Test and the Beneficial Ownership Test
question: Where do we base the equity requirement, is it on each one hundred pesos or fraction thereof, of the capital
must be applied to determine whether a corporation is a
the authorized capital stock, on the subscribed capital stock, stock subscribed or paid, or if no shares have been issued,
"Philippine national."
or on the paid-up capital stock of a corporation? Will the of the capital invested, or of the property and equipment
Committee please enlighten me on this? whichever is higher.
The interpretation by legal officers of the SEC of the term
"capital," embodied in various opinions which respondents
MR. VILLEGAS. We have just had a long discussion with the (f) For the issue or increase of capital stock, twenty
relied upon, is merely preliminary and an opinion only of such
members of the team from the UP Law Center who provided centavos for each one hundred pesos or fraction thereof, of
officers. To repeat, any such opinion does not constitute an
us a draft. The phrase that is contained here which we the increased capital. (Emphasis supplied)
SEC rule or regulation. In fact, many of these opinions contain
adopted from the UP draft is 60 percent of voting stock.
a disclaimer which expressly states: "x x x the foregoing
opinion is based solely on facts disclosed in your query and The Courts interpretation in these two cases of the terms
MR. NOLLEDO. That must be based on the subscribed capital relevant only to the particular issue raised therein and shall"capital stock subscribed or paid," "capital stock" and
stock, because unless declared delinquent, unpaid capital not be used in the nature of a standing rule binding "capital" does not pertain to, and cannot control, the
stock shall be entitled to vote. upon the Commission in other cases whether of similar definition of the term "capital" as used in Section 11, Article
or dissimilar circumstances."16 Thus, the opinions clearly XII of the Constitution, or any of the economic provisions of
make a caveat that they do not constitute binding precedents the Constitution where the term "capital" is found. The
MR. VILLEGAS. That is right.
on any one, not even on the SEC itself. definition of the term "capital" found in the Constitution must
not be taken out of context. A careful reading of these two
MR. NOLLEDO. Thank you. With respect to an investment by
Likewise, the opinions of the SEC en banc, as well as of the cases reveals that the terms "capital stock subscribed or
one corporation in another corporation, say, a corporation
DOJ, interpreting the law are neither conclusive nor paid," "capital stock" and "capital" were defined solely to
with 60-40 percent equity invests in another corporation
controlling and thus, do not bind the Court. It is hornbook determine the basis for computing the supervision and

CORPORATION LAW: 7. captial structure Page 8 of 201

regulation fees under Section 40(e) and (f) of the Public Under Section 10, Article XII of the 1987 Constitution, corporations or associations at least 60 percent of whose
Service Act. Congress may "reserve to citizens of the Philippines or to "capital" is owned by Filipino citizens. Hence, in the case of
corporations or associations at least sixty per centum of individuals, only Filipino citizens can validly own and operate
whose capital is owned by such citizens, or such higher a public utility. In the case of corporations or associations, at
III. Filipinization of Public Utilities
percentage as Congress may prescribe, certain areas of least 60 percent of their "capital" must be owned by Filipino
investments." Thus, in numerous laws Congress has reserved citizens. In other words, under Section 11, Article XII of
The Preamble of the 1987 Constitution, as the prologue of the certain areas of investments to Filipino citizens or to the 1987 Constitution, to own and operate a public
supreme law of the land, embodies the ideals that the corporations at least sixty percent of the "capital" of which is utility a corporations capital must at least be 60
Constitution intends to achieve.22 The Preamble reads: owned by Filipino citizens. Some of these laws are: (1) percent owned by Philippine nationals.
Regulation of Award of Government Contracts or R.A. No.
We, the sovereign Filipino people, imploring the aid of 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; IV. Definition of "Philippine National"
Almighty God, in order to build a just and humane society, (3) Magna Carta for Micro, Small and Medium Enterprises or
and establish a Government that shall embody our ideals and R.A. No. 6977; (4) Philippine Overseas Shipping Development
Pursuant to the express mandate of Section 11, Article XII of
aspirations, promote the common good, conserve and Act or R.A. No. 7471; (5) Domestic Shipping Development Act
the 1987 Constitution, Congress enacted Republic Act No.
develop our patrimony, and secure to ourselves and our of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer
7042 or the Foreign Investments Act of 1991 (FIA), as
posterity, the blessings of independence and democracy Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage Decree
amended, which defined a "Philippine national" as follows:
under the rule of law and a regime of truth, justice, freedom, or P.D. No. 1521.
love, equality, and peace, do ordain and promulgate this
Constitution. (Emphasis supplied) With respect to public utilities, the 1987 Constitution SEC. 3. Definitions. - As used in this Act:
specifically ordains:
Consistent with these ideals, Section 19, Article II of the 1987 a. The term "Philippine national" shall mean a citizen of the
Constitution declares as State policy the development of a Section 11. No franchise, certificate, or any other form Philippines; or a domestic partnership or association wholly
national economy "effectively controlled" by Filipinos: of authorization for the operation of a public utility owned by citizens of the Philippines; or a corporation
shall be granted except to citizens of the Philippines or organized under the laws of the Philippines of which at
least sixty percent (60%) of the capital stock
Section 19. The State shall develop a self-reliant and to corporations or associations organized under the
outstanding and entitled to vote is owned and held by
independent national economy effectively controlled by laws of the Philippines, at least sixty per centum of
whose capital is owned by such citizens; nor shall such citizens of the Philippines; or a corporation organized
Filipinos.
franchise, certificate, or authorization be exclusive in abroad and registered as doing business in the Philippines
character or for a longer period than fifty years. Neither shall under the Corporation Code of which one hundred percent
Fortifying the State policy of a Filipino-controlled economy, (100%) of the capital stock outstanding and entitled to vote is
any such franchise or right be granted except under the
the Constitution decrees: wholly owned by Filipinos or a trustee of funds for pension or
condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so requires. other employee retirement or separation benefits, where the
Section 10. The Congress shall, upon recommendation of the The State shall encourage equity participation in public trustee is a Philippine national and at least sixty percent
economic and planning agency, when the national interest utilities by the general public. The participation of foreign (60%) of the fund will accrue to the benefit of Philippine
dictates, reserve to citizens of the Philippines or to investors in the governing body of any public utility enterprise nationals: Provided, That where a corporation and its non-
corporations or associations at least sixty per centum of shall be limited to their proportionate share in its capital, and Filipino stockholders own stocks in a Securities and Exchange
whose capital is owned by such citizens, or such higher all the executive and managing officers of such corporation or Commission (SEC) registered enterprise, at least sixty percent
percentage as Congress may prescribe, certain areas of association must be citizens of the Philippines. (Emphasis (60%) of the capital stock outstanding and entitled to vote of
investments. The Congress shall enact measures that will supplied) each of both corporations must be owned and held by citizens
encourage the formation and operation of enterprises whose of the Philippines and at least sixty percent (60%) of the
capital is wholly owned by Filipinos. members of the Board of Directors of each of both
This provision, which mandates the Filipinization of public
corporations must be citizens of the Philippines, in order that
utilities, requires that any form of authorization for the
the corporation, shall be considered a "Philippine national."
In the grant of rights, privileges, and concessions covering the operation of public utilities shall be granted only to "citizens
(Boldfacing, italicization and underscoring supplied)
national economy and patrimony, the State shall give of the Philippines or to corporations or associations organized
preference to qualified Filipinos. under the laws of the Philippines at least sixty per centum of
whose capital is owned by such citizens." "The provision is Thus, the FIA clearly and unequivocally defines a "Philippine
national" as a Philippine citizen, or a domestic corporation at
The State shall regulate and exercise authority over foreign [an express] recognition of the sensitive and vital
least "60% of the capital stock outstanding and entitled
investments within its national jurisdiction and in accordance position of public utilities both24 in the national
economy and for national security." to vote" is owned by Philippine citizens.
with its national goals and priorities. 23

The 1987 Constitution reserves the ownership and operation The definition of a "Philippine national" in the FIA reiterated
of public utilities exclusively to (1) Filipino citizens, or (2) the meaning of such term as provided in its predecessor

CORPORATION LAW: 7. captial structure Page 9 of 201

statute, Executive Order No. 226 or the Omnibus Investments per cent (60%) of the fund will accrue to the benefit of Board of Investments before accepting such investment. Such
Code of 1987,25 which was issued by then President Corazon Philippine nationals: Provided, That where a corporation and approval shall not be granted if the investment "would
C. Aquino. Article 15 of this Code states: its non-Filipino stockholders own stock in a registered conflict with existing constitutional provisions and laws
enterprise, at least sixty per cent (60%) of the capital stock regulating the degree of required ownership by Philippine
outstanding and entitled to vote of both corporations must be nationals in the enterprise."31 A "non-Philippine national"
Article 15. "Philippine national" shall mean a citizen of the
owned and held by the citizens of the Philippines and at least cannot own and operate a reserved economic activity like a
Philippines or a diplomatic partnership or association wholly-
sixty per cent (60%) of the members of the Board of Directors public utility. Again, this means that only a "Philippine
owned by citizens of the Philippines; or a corporation
of both corporations must be citizens of the Philippines in national" can own and operate a public utility.
organized under the laws of the Philippines of which at
order that the corporation shall be considered a Philippine
least sixty per cent (60%) of the capital stock
national. (Boldfacing, italicization and underscoring supplied)
outstanding and entitled to vote is owned and held by The FIA, like all its predecessor statutes, clearly defines a
citizens of the Philippines; or a trustee of funds for "Philippine national" as a Filipino citizen, or a domestic
pension or other employee retirement or separation benefits, Under Article 69(3) of the Omnibus Investments Code of corporation "at least sixty percent (60%) of the capital
where the trustee is a Philippine national and at least sixty 1981, "no corporation x x x which is not a Philippine national stock outstanding and entitled to vote" is owned by
per cent (60%) of the fund will accrue to the benefit of x x x shall do business x x x in the Philippines x x x without Filipino citizens. A domestic corporation is a "Philippine
Philippine nationals: Provided, That where a corporation and first securing a written certificate from the Board of national" only if at least 60% of its voting stock is owned by
its non-Filipino stockholders own stock in a registered Investments to the effect that such business or economic Filipino citizens. This definition of a "Philippine national" is
enterprise, at least sixty per cent (60%) of the capital stock activity x x x would not conflict with the Constitution or laws crucial in the present case because the FIA reiterates and
outstanding and entitled to vote of both corporations must be of the Philippines."29 Thus, a "non-Philippine national" cannot clarifies Section 11, Article XII of the 1987 Constitution, which
owned and held by the citizens of the Philippines and at least own and operate a reserved economic activity like a public limits the ownership and operation of public utilities to Filipino
sixty per cent (60%) of the members of the Board of Directors utility. Again, this means that only a "Philippine national" can citizens or to corporations or associations at least 60%
of both corporations must be citizens of the Philippines in own and operate a public utility. Filipino-owned.
order that the corporation shall be considered a Philippine
national. (Boldfacing, italicization and underscoring supplied)
Prior to the Omnibus Investments Code of 1981, Republic Act The FIA is the basic law governing foreign investments in the
No. 518630 or the Investment Incentives Act, which took effect Philippines, irrespective of the nature of business and area of
26
Under Article 48(3) of the Omnibus Investments Code of on 16 September 1967, contained a similar definition of a investment. The FIA spells out the procedures by which non-
1987, "no corporation x x x which is not a Philippine national "Philippine national," to wit: Philippine nationals can invest in the Philippines. Among the
x x x shall do business key features of this law is the concept of a negative list or the
Foreign Investments Negative List. 32 Section 8 of the law
(f) "Philippine National" shall mean a citizen of the Philippines;
states:
x x x in the Philippines x x x without first securing from the or a partnership or association wholly owned by citizens of
Board of Investments a written certificate to the effect that the Philippines; or a corporation organized under the
such business or economic activity x x x would not conflict laws of the Philippines of which at least sixty per cent SEC. 8. List of Investment Areas Reserved to Philippine
with the Constitution or laws of the Philippines." 27Thus, a of the capital stock outstanding and entitled to vote is Nationals [Foreign Investment Negative List]. - The Foreign
"non-Philippine national" cannot own and operate a reserved owned and held by citizens of the Philippines; or a Investment Negative List shall have two 2 component
economic activity like a public utility. This means, of course, trustee of funds for pension or other employee retirement or lists: A and B:
that only a "Philippine national" can own and operate a public separation benefits, where the trustee is a Philippine National
utility. and at least sixty per cent of the fund will accrue to the
a. List A shall enumerate the areas of activities
benefit of Philippine Nationals: Provided, That where a
reserved to Philippine nationals by mandate of the
corporation and its non-Filipino stockholders own stock in a
In turn, the definition of a "Philippine national" under Article Constitution and specific laws.
registered enterprise, at least sixty per cent of the capital
15 of the Omnibus Investments Code of 1987 was a
stock outstanding and entitled to vote of both corporations
reiteration of the meaning of such term as provided in Article
28 must be owned and held by the citizens of the Philippines and b. List B shall contain the areas of activities and enterprises
14 of the Omnibus Investments Code of 1981, to wit:
at least sixty per cent of the members of the Board of regulated pursuant to law:
Directors of both corporations must be citizens of the
Article 14. "Philippine national" shall mean a citizen of the Philippines in order that the corporation shall be considered a
1. which are defense-related activities, requiring prior
Philippines; or a domestic partnership or association wholly Philippine National. (Boldfacing, italicization and underscoring
clearance and authorization from the Department of National
owned by citizens of the Philippines; or a corporation supplied)
Defense [DND] to engage in such activity, such as the
organized under the laws of the Philippines of which at
manufacture, repair, storage and/or distribution of firearms,
least sixty per cent (60%) of the capital stock
Under Section 3 of Republic Act No. 5455 or the Foreign ammunition, lethal weapons, military ordinance, explosives,
outstanding and entitled to vote is owned and held by
Business Regulations Act, which took effect on 30 September pyrotechnics and similar materials; unless such
citizens of the Philippines; or a trustee of funds for
1968, if the investment in a domestic enterprise by non- manufacturing or repair activity is specifically authorized, with
pension or other employee retirement or separation benefits,
Philippine nationals exceeds 30% of its outstanding capital a substantial export component, to a non-Philippine national
where the trustee is a Philippine national and at least sixty
stock, such enterprise must obtain prior approval from the by the Secretary of National Defense; or

CORPORATION LAW: 7. captial structure Page 10 of 201

2. which have implications on public health and morals, such and operate public utilities in the Philippines. The Correct, Your Honor.
as the manufacture and distribution of dangerous drugs; all following exchange during the Oral Arguments is revealing:
forms of gambling; nightclubs, bars, beer houses, dance halls,
JUSTICE CARPIO:
sauna and steam bathhouses and massage clinics.
JUSTICE CARPIO:
(Boldfacing, underscoring and italicization supplied)
And even prior to the Omnibus Investments Act of 1987,
Counsel, I have some questions. You are aware of the under the Omnibus Investments Act of 1981, the same
Section 8 of the FIA enumerates the investment areas
Foreign Investments Act of 1991, x x x? And the FIA of 1991 rules apply: x x x only a Philippine national can own and
"reserved to Philippine nationals." Foreign Investment
took effect in 1991, correct? Thats over twenty (20) years operate a public utility and a Philippine national, if it is a
Negative List A consists of "areas of activities
ago, correct? corporation, sixty percent (60%) of its x x x voting stock,
reserved to Philippine nationals by mandate of the
must be owned by citizens of the Philippines, correct?
Constitution and specific laws," where foreign equity
participation in any enterprise shall be limited to the COMMISSIONER GAITE:
maximum percentage expressly prescribed by the COMMISSIONER GAITE:
Constitution and other specific laws. In short, to own Correct, Your Honor.
and operate a public utility in the Philippines one must Correct, Your Honor.
be a "Philippine national" as defined in the FIA. The
JUSTICE CARPIO:
FIA is abundant notice to foreign investors to what
JUSTICE CARPIO:
extent they can invest in public utilities in the
Philippines. And Section 8 of the Foreign Investments Act of 1991 states
that []only Philippine nationals can own and operate public And even prior to that, under [the]1967 Investments
utilities[], correct? Incentives Act and the Foreign Company Act of 1968, the
To repeat, among the areas of investment covered by the
same rules applied, correct?
Foreign Investment Negative List A is the ownership and
operation of public utilities, which the Constitution expressly COMMISSIONER GAITE:
reserves to Filipino citizens and to corporations at least 60% COMMISSIONER GAITE:
owned by Filipino citizens. In other words, Negative List A Yes, Your Honor.
of the FIA reserves the ownership and operation of Correct, Your Honor.
public utilities only to "Philippine nationals," defined in
Section 3(a) of the FIA as "(1) a citizen of the Philippines; x JUSTICE CARPIO:
x x or (3) a corporation organized under the laws of the JUSTICE CARPIO:
Philippines of which at least sixty percent (60%) of the And the same Foreign Investments Act of 1991 defines a
capital stock outstanding and entitled to vote is owned "Philippine national" either as a citizen of the Philippines, or So, for the last four (4) decades, x x x, the law has
and held by citizens of the Philippines; or (4) a if it is a corporation at least sixty percent (60%) of the been very consistent only a Philippine national can
corporation organized abroad and registered as doing voting stock is owned by citizens of the Philippines, correct? own and operate a public utility, and a Philippine
business in the Philippines under the Corporation Code of national, if it is a corporation, x x x at least sixty
which one hundred percent (100%) of the capital stock percent (60%) of the voting stock must be owned by
COMMISSIONER GAITE:
outstanding and entitled to vote is wholly owned by Filipinos citizens of the Philippines, correct?
or a trustee of funds for pension or other employee retirement
or separation benefits, where the trustee is a Philippine Correct, Your Honor.
COMMISSIONER GAITE:
national and at least sixty percent (60%) of the fund will
accrue to the benefit of Philippine nationals." JUSTICE CARPIO:
Correct, Your Honor.33 (Emphasis supplied)
Clearly, from the effectivity of the Investment Incentives Act And, you are also aware that under the predecessor law of
of 1967 to the adoption of the Omnibus Investments Code of Government agencies like the SEC cannot simply ignore
the Foreign Investments Act of 1991, the Omnibus
1981, to the enactment of the Omnibus Investments Code of Sections 3(a) and 8 of the FIA which categorically prescribe
Investments Act of 1987, the same provisions apply: x x x
1987, and to the passage of the present Foreign Investments that certain economic activities, like the ownership and
only Philippine nationals can own and operate a public
Act of 1991, or for more than four decades, the operation of public utilities, are reserved to corporations "at
utility and the Philippine national, if it is a corporation, x x x
statutory definition of the term "Philippine national" least sixty percent (60%) of the capital stock outstanding and
sixty percent (60%) of the capital stock of that corporation
has been uniform and consistent: it means a Filipino entitled to vote is owned and held by citizens of the
must be owned by citizens of the Philippines, correct?
citizen, or a domestic corporation at least 60% of Philippines." Foreign Investment Negative List A refers to
the voting stock is owned by Filipinos. Likewise, these "activities reserved to Philippine nationals by mandate of the
same statutes have uniformly and consistently COMMISSIONER GAITE: Constitution and specific laws." The FIA is the basic
required that only "Philippine nationals" could own statute regulating foreign investments in the

CORPORATION LAW: 7. captial structure Page 11 of 201

Philippines. Government agencies tasked with regulating or The PSE President argues that the term "Philippine national" V. Right to elect directors, coupled with beneficial
monitoring foreign investments, as well as counsels of foreign defined in the FIA should be limited and interpreted to refer to ownership,
investors, should start with the FIA in determining to what corporations seeking to avail of tax and fiscal incentives translates to effective control.
extent a particular foreign investment is allowed in the under investment incentives laws and cannot be equated with
Philippines. Foreign investors and their counsels who ignore the term "capital" in Section 11, Article XII of the 1987
The 28 June 2011 Decision declares that the 60 percent
the FIA do so at their own peril. Foreign investors and their Constitution. Pangilinan similarly contends that the FIA and its
Filipino ownership required by the Constitution to engage in
counsels who rely on opinions of SEC legal officers that predecessor statutes do not apply to "companies which have
certain economic activities applies not only to voting control
obviously contradict the FIA do so also at their own peril. not registered and obtained special incentives under the
of the corporation, but also to the beneficial ownership of
schemes established by those laws."
the corporation. To repeat, we held:
Occasional opinions of SEC legal officers that obviously
contradict the FIA should immediately raise a red flag. There Both are desperately grasping at straws. The FIA does not
Mere legal title is insufficient to meet the 60 percent Filipino-
are already numerous opinions of SEC legal officers that cite grant tax or fiscal incentives to any enterprise. Tax and fiscal
owned "capital" required in the Constitution. Full beneficial
the definition of a "Philippine national" in Section 3(a) of the incentives to investments are granted separately under the
ownership of 60 percent of the outstanding capital
FIA in determining whether a particular corporation is Omnibus Investments Code of 1987, not under the FIA. In
stock, coupled with 60 percent of the voting rights, is
qualified to own and operate a nationalized or partially fact, the FIA expressly repealed Articles 44 to 56 of Book II of
required. The legal and beneficial ownership of 60 percent of
nationalized business in the Philippines. This shows that SEC the Omnibus Investments Code of 1987, which articles
the outstanding capital stock must rest in the hands of Filipino
legal officers are not only aware of, but also rely on and previously regulated foreign investments in nationalized or
nationals in accordance with the constitutional mandate.
invoke, the provisions of the FIA in ascertaining the eligibility partially nationalized industries.
Otherwise, the corporation is "considered as non-Philippine
of a corporation to engage in partially nationalized industries.
national[s]." (Emphasis supplied)
The following are some of such opinions:
The FIA is the applicable law regulating foreign investments in
nationalized or partially nationalized industries. There is
This is consistent with Section 3 of the FIA which provides that
1. Opinion of 23 March 1993, addressed to Mr. Francis F. nothing in the FIA, or even in the Omnibus Investments Code
where 100% of the capital stock is held by "a trustee of funds
How; of 1987 or its predecessor statutes, that states, expressly or
for pension or other employee retirement or separation
impliedly, that the FIA or its predecessor statutes do not apply
benefits," the trustee is a Philippine national if "at least sixty
to enterprises not availing of tax and fiscal incentives under
2. Opinion of 14 April 1993, addressed to Director Angeles percent (60%) of the fund will accrue to the benefit of
the Code. The FIA and its predecessor statutes apply to
T. Wong of the Philippine Overseas Employment Philippine nationals." Likewise, Section 1(b) of the
investments in all domestic enterprises, whether or not such
Administration; Implementing Rules of the FIA provides that "for stocks to be
enterprises enjoy tax and fiscal incentives under the Omnibus
deemed owned and held by Philippine citizens or Philippine
Investments Code of 1987 or its predecessor statutes. The
nationals, mere legal title is not enough to meet the required
3. Opinion of 23 November 1993, addressed to Messrs. reason is quite obvious mere non-availment of tax
Filipino equity. Full beneficial ownership of the stocks,
Dominador Almeda and Renato S. Calma; and fiscal incentives by a non-Philippine national
coupled with appropriate voting rights, is essential."
cannot exempt it from Section 11, Article XII of the
4. Opinion of 7 December 1993, addressed to Roco Bunag Constitution regulating foreign investments in public
utilities. In fact, the Board of Investments Primer on Since the constitutional requirement of at least 60 percent
Kapunan Migallos & Jardeleza;
Investment Policies in the Philippines,34 which is given Filipino ownership applies not only to voting control of the
out to foreign investors, provides: corporation but also to the beneficial ownership of the
5. SEC Opinion No. 49-04, addressed to Romulo Mabanta corporation, it is therefore imperative that such requirement
Buenaventura Sayoc & De Los Angeles; apply uniformly and across the board to all classes of shares,
PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES
regardless of nomenclature and category, comprising the
6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo capital of a corporation. Under the Corporation Code, capital
G. David; and Investors who do not seek incentives and/or whose chosen stock35 consists of all classes of shares issued to stockholders,
activities do not qualify for incentives, (i.e., the activity is not that is, common shares as well as preferred shares, which
listed in the IPP, and they are not exporting at least 70% of may have different rights, privileges or restrictions as stated
7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby
their production) may go ahead and make the investments in the articles of incorporation.36
Rose J. Yusi and Rudyard S. Arbolado.
without seeking incentives. They only have to be guided
by the Foreign Investments Negative List (FINL).
The Corporation Code allows denial of the right to vote to
The SEC legal officers occasional but blatant disregard of the
preferred and redeemable shares, but disallows denial of the
definition of the term "Philippine national" in the FIA signifies
The FINL clearly defines investment areas requiring at least right to vote in specific corporate matters. Thus, common
their lack of integrity and competence in resolving issues on
60% Filipino ownership. All other areas outside of this list are shares have the right to vote in the election of directors, while
the 60-40 ownership requirement in favor of Filipino citizens
fully open to foreign investors. (Emphasis supplied) preferred shares may be denied such right. Nonetheless,
in Section 11, Article XII of the Constitution.
preferred shares, even if denied the right to vote in the
election of directors, are entitled to vote on the following

CORPORATION LAW: 7. captial structure Page 12 of 201

corporate matters: (1) amendment of articles of to support his claim that the term "capital" refers to the total MR. AZCUNA. May I be clarified as to that portion that was
incorporation; (2) increase and decrease of capital stock; (3) outstanding shares of stock, whether voting or non-voting, the accepted by the Committee.
incurring, creating or increasing bonded indebtedness; (4) following excerpts of the deliberations reveal otherwise. It is
sale, lease, mortgage or other disposition of substantially all clear from the following exchange that the term "capital"
MR. VILLEGAS. The portion accepted by the Committee is the
corporate assets; (5) investment of funds in another business refers to controlling interest of a corporation, thus:
deletion of the phrase "voting stock or controlling interest."
or corporation or for a purpose other than the primary
purpose for which the corporation was organized; (6)
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated
adoption, amendment and repeal of by-laws; (7) merger and MR. AZCUNA. Hence, without the Davide amendment, the
local or Filipino equity and foreign equity; namely, 60-40 in
consolidation; and (8) dissolution of corporation. 37 committee report would read: "corporations or associations at
Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.
least sixty percent of whose CAPITAL is owned by such
citizens."
Since a specific class of shares may have rights and privileges
MR. VILLEGAS. That is right.
or restrictions different from the rest of the shares in a
corporation, the 60-40 ownership requirement in favor of MR. VILLEGAS. Yes.
Filipino citizens in Section 11, Article XII of the Constitution MR. NOLLEDO. In teaching law, we are always faced with this
must apply not only to shares with voting rights but also to question: "Where do we base the equity requirement, is it on
MR. AZCUNA. So if the Davide amendment is lost, we are
shares without voting rights. Preferred shares, denied the the authorized capital stock, on the subscribed capital stock,
stuck with 60 percent of the capital to be owned by citizens.
right to vote in the election of directors, are anyway still or on the paid-up capital stock of a corporation"? Will the
entitled to vote on the eight specific corporate matters Committee please enlighten me on this?
MR. VILLEGAS. That is right.
mentioned above. Thus, if a corporation, engaged in a
partially nationalized industry, issues a mixture of MR. VILLEGAS. We have just had a long discussion with the
common and preferred non-voting shares, at least 60 members of the team from the UP Law Center who provided MR. AZCUNA. But the control can be with the
percent of the common shares and at least 60 percent us a draft. The phrase that is contained here which we foreigners even if they are the minority. Let us say 40
of the preferred non-voting shares must be owned by adopted from the UP draft is "60 percent of voting percent of the capital is owned by them, but it is the
Filipinos. Of course, if a corporation issues only a single stock." voting capital, whereas, the Filipinos own the
class of shares, at least 60 percent of such shares must nonvoting shares. So we can have a situation where
necessarily be owned by Filipinos. In short, the 60-40 the corporation is controlled by foreigners despite
MR. NOLLEDO. That must be based on the subscribed capital
ownership requirement in favor of Filipino citizens being the minority because they have the voting
stock, because unless declared delinquent, unpaid capital
must apply separately to each class of shares, whether capital. That is the anomaly that would result here.
stock shall be entitled to vote.
common, preferred non-voting, preferred voting or any
other class of shares. This uniform application of the 60-40 MR. BENGZON. No, the reason we eliminated the word
ownership requirement in favor of Filipino citizens clearly MR. VILLEGAS. That is right.
"stock" as stated in the 1973 and 1935 Constitutions is
breathes life to the constitutional command that the that according to Commissioner Rodrigo, there are
ownership and operation of public utilities shall be reserved MR. NOLLEDO. Thank you. associations that do not have stocks. That is why we
exclusively to corporations at least 60 percent of whose say "CAPITAL."
capital is Filipino-owned. Applying uniformly the 60-40
ownership requirement in favor of Filipino citizens to each With respect to an investment by one corporation in another
class of shares, regardless of differences in voting rights, corporation, say, a corporation with 60-40 percent equity MR. AZCUNA. We should not eliminate the phrase
privileges and restrictions, guarantees effective Filipino invests in another corporation which is permitted by the "controlling interest."
control of public utilities, as mandated by the Constitution. Corporation Code, does the Committee adopt the grandfather
rule?
MR. BENGZON. In the case of stock corporations, it is
Moreover, such uniform application to each class of shares assumed.40 (Boldfacing and underscoring supplied)
insures that the "controlling interest" in public utilities always MR. VILLEGAS. Yes, that is the understanding of the
lies in the hands of Filipino citizens. This addresses and Committee. Thus, 60 percent of the "capital" assumes, or should result
extinguishes Pangilinans worry that foreigners, owning most in, a "controlling interest" in the corporation.
of the non-voting shares, will exercise greater control over MR. NOLLEDO. Therefore, we need additional Filipino capital?
fundamental corporate matters requiring two-thirds or
The use of the term "capital" was intended to replace the
majority vote of all shareholders.
MR. VILLEGAS. Yes.39 word "stock" because associations without stocks can operate
public utilities as long as they meet the 60-40 ownership
VI. Intent of the framers of the Constitution requirement in favor of Filipino citizens prescribed in Section
xxxx
11, Article XII of the Constitution. However, this did not
While Justice Velasco quoted in his Dissenting Opinion 38 a change the intent of the framers of the Constitution to
portion of the deliberations of the Constitutional Commission

CORPORATION LAW: 7. captial structure Page 13 of 201

reserve exclusively to Philippine nationals the "controlling In the example given, only the foreigners holding the common Indeed, the only point of contention during the deliberations
interest" in public utilities. shares have voting rights in the election of directors, even if of the Constitutional Commission on 23 August 1986 was the
they hold only 100 shares. The foreigners, with a minuscule extent of majority Filipino control of public utilities. This is
equity of less than 0.001 percent, exercise control over the evident from the following exchange:
During the drafting of the 1935 Constitution, economic
public utility. On the other hand, the Filipinos, holding more
protectionism was "the battle-cry of the nationalists in the
41 than 99.999 percent of the equity, cannot vote in the election
Convention." The same battle-cry resulted in the THE PRESIDENT. Commissioner Jamir is recognized.
of directors and hence, have no control over the public utility.
nationalization of the public utilities. 42 This is also the same
This starkly circumvents the intent of the framers of the
intent of the framers of the 1987 Constitution who adopted
Constitution, as well as the clear language of the Constitution, MR. JAMIR. Madam President, my proposed amendment on
the exact formulation embodied in the 1935 and 1973
to place the control of public utilities in the hands of Filipinos. lines 20 and 21 is to delete the phrase "two thirds of whose
Constitutions on foreign equity limitations in partially
xxx voting stock or controlling interest," and instead substitute
nationalized industries.
the words "SIXTY PERCENT OF WHOSE CAPITAL" so that the
sentence will read: "No franchise, certificate, or any other
Further, even if foreigners who own more than forty percent
The OSG, in its own behalf and as counsel for the form of authorization for the operation of a public utility shall
of the voting shares elect an all-Filipino board of directors, this
State,43 agrees fully with the Courts interpretation of the term be granted except to citizens of the Philippines or to
situation does not guarantee Filipino control and does not in
"capital." In its Consolidated Comment, the OSG explains that corporations or associations organized under the laws of the
any way cure the violation of the Constitution. The
the deletion of the phrase "controlling interest" and Philippines at least SIXTY PERCENT OF WHOSE CAPITAL is
independence of the Filipino board members so elected by
replacement of the word "stock" with the term "capital" were owned by such citizens."
such foreign shareholders is highly doubtful. As the OSG
intended specifically to extend the scope of the entities
pointed out, quoting Justice George Sutherlands words
qualified to operate public utilities to include associations
in Humphreys Executor v. US,44 "x x x it is quite evident that x x x x
without stocks. The framers omission of the phrase
one who holds his office only during the pleasure of another
"controlling interest" did not mean the inclusion of all shares
cannot be depended upon to maintain an attitude of THE PRESIDENT: Will Commissioner Jamir first explain?
of stock, whether voting or non-voting. The OSG reiterated
independence against the latters will." Allowing foreign
essentially the Courts declaration that the Constitution
shareholders to elect a controlling majority of the board, even
reserved exclusively to Philippine nationals the ownership and MR. JAMIR. Yes, in this Article on National Economy and
if all the directors are Filipinos, grossly circumvents the letter
operation of public utilities consistent with the States policy Patrimony, there were two previous sections in which we fixed
and intent of the Constitution and defeats the very purpose of
to "develop a self-reliant and independent national the Filipino equity to 60 percent as against 40 percent for
our nationalization laws.
economy effectively controlled by Filipinos." foreigners. It is only in this Section 15 with respect to public
utilities that the committee proposal was increased to two-
VII. Last sentence of Section 11, Article XII of the thirds. I think it would be better to harmonize this provision by
As we held in our 28 June 2011 Decision, to construe broadly
Constitution providing that even in the case of public utilities, the
the term "capital" as the total outstanding capital stock,
treated as a single class regardless of the actual minimum equity for Filipino citizens should be 60 percent.
classification of shares, grossly contravenes the intent and The last sentence of Section 11, Article XII of the 1987
letter of the Constitution that the "State shall develop a self- Constitution reads: MR. ROMULO. Madam President.
reliant and independent national economy effectively
controlled by Filipinos." We illustrated the glaring anomaly
The participation of foreign investors in the governing body of THE PRESIDENT. Commissioner Romulo is recognized.
which would result in defining the term "capital" as the total
any public utility enterprise shall be limited to their
outstanding capital stock of a corporation, treated as
proportionate share in its capital, and all the executive and
a single class of shares regardless of the actual classification MR. ROMULO. My reason for supporting the amendment is
managing officers of such corporation or association must be
of shares, to wit: based on the discussions I have had with representatives of
citizens of the Philippines.
the Filipino majority owners of the international record
carriers, and the subsequent memoranda they submitted to
Let us assume that a corporation has 100 common shares
During the Oral Arguments, the OSG emphasized that there me. x x x
owned by foreigners and 1,000,000 non-voting preferred
was never a question on the intent of the framers of the
shares owned by Filipinos, with both classes of share having a
Constitution to limit foreign ownership, and assure majority
par value of one peso (P 1.00) per share. Under the broad Their second point is that under the Corporation Code, the
Filipino ownership and control of public utilities. The OSG
definition of the term "capital," such corporation would be management and control of a corporation is vested in the
argued, "while the delegates disagreed as to the percentage
considered compliant with the 40 percent constitutional limit board of directors, not in the officers but in the board of
threshold to adopt, x x x the records show they clearly
on foreign equity of public utilities since the overwhelming directors. The officers are only agents of the board. And they
understood that Filipino control of the public utility
majority, or more than 99.999 percent, of the total believe that with 60 percent of the equity, the Filipino
corporation can only be and is obtained only through the
outstanding capital stock is Filipino owned. This is obviously majority stockholders undeniably control the board. Only on
election of a majority of the members of the board."
absurd. important corporate acts can the 40-percent foreign equity
exercise a veto, x x x.

CORPORATION LAW: 7. captial structure Page 14 of 201

x x x x45 MS. ROSARIO BRAID. x x x They also like to suggest that we CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE
amend this provision by adding a phrase which states: "THE CONTROLLED BY CITIZENS OF THE PHILIPPINES."
MANAGEMENT BODY OF EVERY CORPORATION OR
MS. ROSARIO BRAID. Madam President.
ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY
This will prevent management contracts and assure
CITIZENS OF THE PHILIPPINES." I have with me their position
control by Filipino citizens. Will the committee assure us
THE PRESIDENT. Commissioner Rosario Braid is recognized. paper.
that this amendment will insure that past activities such as
management contracts will no longer be possible under this
MS. ROSARIO BRAID. Yes, in the interest of equal time, may I THE PRESIDENT. The Commissioner may proceed. amendment?
also read from a memorandum by the spokesman of the
Philippine Chamber of Communications on why they would
MS. ROSARIO BRAID. The three major international record xxxx
like to maintain the present equity, I am referring to the 66
carriers in the Philippines, which Commissioner Romulo
2/3. They would prefer to have a 75-25 ratio but would settle
mentioned Philippine Global Communications, Eastern
for 66 2/3. x x x FR. BERNAS. Madam President.
Telecommunications, Globe Mackay Cable are 40-percent
owned by foreign multinational companies and 60-percent
xxxx owned by their respective Filipino partners. All three, THE PRESIDENT. Commissioner Bernas is recognized.
however, also have management contracts with these foreign
THE PRESIDENT. Just to clarify, would Commissioner Rosario companies Philcom with RCA, ETPI with Cable and Wireless FR. BERNAS. Will the committee accept a reformulation of the
Braid support the proposal of two-thirds rather than the 60 PLC, and GMCR with ITT. Up to the present time, the general first part?
percent? managers of these carriers are foreigners. While the
foreigners in these common carriers are only minority owners,
MR. BENGZON. Let us hear it.
the foreign multinationals are the ones managing and
MS. ROSARIO BRAID. I have added a clause that will put
controlling their operations by virtue of their management
management in the hands of Filipino citizens.
contracts and by virtue of their strength in the governing FR. BERNAS. The reformulation will be essentially the formula
bodies of these carriers.47 of the 1973 Constitution which reads: "THE PARTICIPATION OF
x x x x46 FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY
PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR
xxxx
PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND..."
While they had differing views on the percentage of Filipino
ownership of capital, it is clear that the framers of the
MR. OPLE. I think a number of us have agreed to ask
Constitution intended public utilities to be majority Filipino- MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING
Commissioner Rosario Braid to propose an amendment with
owned and controlled. To ensure that Filipinos control public OFFICERS OF SUCH CORPORATIONS AND ASSOCIATIONS MUST
respect to the operating management of public utilities, and
utilities, the framers of the Constitution approved, as BE CITIZENS OF THE PHILIPPINES."
in this amendment, we are associated with Fr. Bernas,
additional safeguard, the inclusion of the last sentence of
Commissioners Nieva and Rodrigo. Commissioner Rosario
Section 11, Article XII of the Constitution commanding that
Braid will state this amendment now. MR. BENGZON. Will Commissioner Bernas read the whole
"[t]he participation of foreign investors in the governing body
thing again?
of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and Thank you.
managing officers of such corporation or association must be FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN
citizens of the Philippines." In other words, the last sentence THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE
MS. ROSARIO BRAID. Madam President.
of Section 11, Article XII of the Constitution mandates that (1) SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE
the participation of foreign investors in the governing body of CAPITAL THEREOF..." I do not have the rest of the copy.
THE PRESIDENT. This is still on Section 15.
the corporation or association shall be limited to their
proportionate share in the capital of such entity; and (2) all MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING
officers of the corporation or association must be Filipino MS. ROSARIO BRAID. Yes. OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST
citizens. BE CITIZENS OF THE PHILIPPINES." Is that correct?
MR. VILLEGAS. Yes, Madam President.
Commissioner Rosario Braid proposed the inclusion of the MR. VILLEGAS. Yes.
phrase requiring the managing officers of the corporation or
xxxx
association to be Filipino citizens specifically to prevent
MR. BENGZON. Madam President, I think that was said in a
management contracts, which were designed primarily to
more elegant language. We accept the amendment. Is that all
circumvent the Filipinization of public utilities, and to assure MS. ROSARIO BRAID. Madam President, I propose a new
section to read: THE MANAGEMENT BODY OF EVERY right with Commissioner Rosario Braid?
Filipino control of public utilities, thus:

CORPORATION LAW: 7. captial structure Page 15 of 201

MS. ROSARIO BRAID. Yes. MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE Section 11, Article XII of the Constitution and directed the SEC
OR AUTHORIZATION BE EXCLUSIVE IN CHARACTER OR FOR A to apply such definition in determining the exact percentage
PERIOD LONGER THAN TWENTY-FIVE YEARS RENEWABLE FOR of foreign ownership in PLDT.
xxxx
NOT MORE THAN TWENTY-FIVE YEARS. Neither shall any such
franchise or right be granted except under the condition that
IX. PLDT is not an indispensable party;SEC is
MR. DE LOS REYES. The governing body refers to the board of it shall be subject to amendment, alteration, or repeal by
impleaded in this case.
directors and trustees. Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the
general public." In his petition, Gamboa prays, among others:
MR. VILLEGAS. That is right.

VOTING xxxx
MR. BENGZON. Yes, the governing body refers to the board of
directors.
xxxx 5. For the Honorable Court to issue a declaratory relief that
ownership of common or voting shares is the sole basis in
MR. REGALADO. It is accepted.
determining foreign equity in a public utility and that any
The results show 29 votes in favor and 4 against; Section 15,
48
other government rulings, opinions, and regulations
MR. RAMA. The body is now ready to vote, Madam President. as amended, is approved. (Emphasis supplied)
inconsistent with this declaratory relief be declared
unconstitutional and a violation of the intent and spirit of the
VOTING The last sentence of Section 11, Article XII of the 1987 1987 Constitution;
Constitution, particularly the provision on the limited
participation of foreign investors in the governing body of
xxxx 6. For the Honorable Court to declare null and void all sales of
public utilities, is a reiteration of the last sentence of Section
49
common stocks to foreigners in excess of 40 percent of the
5, Article XIV of the 1973 Constitution, signifying its
total subscribed common shareholdings; and
The results show 29 votes in favor and none against; so the importance in reserving ownership and control of public
proposed amendment is approved. utilities to Filipino citizens.
7. For the Honorable Court to direct the Securities and
Exchange Commission and Philippine Stock Exchange to
xxxx VIII. The undisputed facts
require PLDT to make a public disclosure of all of its
foreign shareholdings and their actual and real
THE PRESIDENT. All right. Can we proceed now to vote on There is no dispute, and respondents do not claim the beneficial owners.
Section 15? contrary, that (1) foreigners own 64.27% of the common
shares of PLDT, which class of shares exercises the sole right
Other relief(s) just and equitable are likewise prayed for.
MR. RAMA. Yes, Madam President. to vote in the election of directors, and thus foreigners control
(Emphasis supplied)
PLDT; (2) Filipinos own only 35.73% of PLDTs common
shares, constituting a minority of the voting stock, and thus
THE PRESIDENT. Will the chairman of the committee please Filipinos do not control PLDT; (3) preferred shares, 99.44% As can be gleaned from his prayer, Gamboa clearly asks this
read Section 15? owned by Filipinos, have no voting rights; (4) preferred shares Court to compel the SEC to perform its statutory duty to
earn only 1/70 of the dividends that common shares investigate whether "the required percentage of ownership of
MR. VILLEGAS. The entire Section 15, as amended, reads: "No earn; (5) preferred shares have twice the par value of the capital stock to be owned by citizens of the Philippines
50

franchise, certificate, or any other form of authorization for common shares; and (6) preferred shares constitute 77.85% has been complied with [by PLDT] as required by x x x the
51
the operation of a public utility shall be granted except to of the authorized capital stock of PLDT and common shares Constitution." Such plea clearly negates SECs argument
citizens of the Philippines or to corporations or associations only 22.15%. that it was not impleaded.
organized under the laws of the Philippines at least 60
PERCENT OF WHOSE CAPITAL is owned by such citizens." May Despite the foregoing facts, the Court did not decide, and in Granting that only the SEC Chairman was impleaded in this
I request Commissioner Bengzon to please continue reading. fact refrained from ruling on the question of whether PLDT case, the Court has ample powers to order the SECs
violated the 60-40 ownership requirement in favor of Filipino compliance with its directive contained in the 28 June 2011
MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS citizens in Section 11, Article XII of the 1987 Constitution. Decision in view of the far-reaching 52
implications of this case.
IN THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE Such question indisputably calls for a presentation and In Domingo v. Scheer, the Court dispensed with the
SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE determination of evidence through a hearing, which is amendment of the pleadings to implead the Bureau of
CAPITAL THEREOF AND ALL THE EXECUTIVE AND MANAGING generally outside the province of the Courts jurisdiction, but Customs considering (1) the unique backdrop of the case; (2)
OFFICERS OF SUCH CORPORATIONS OR ASSOCIATIONS MUST well within the SECs statutory powers. Thus, for obvious the utmost need to avoid further delays; and (3) the issue of
BE CITIZENS OF THE PHILIPPINES." reasons, the Court limited its decision on the purely legal and public interest involved. The Court held:
threshold issue on the definition of the term "capital" in

CORPORATION LAW: 7. captial structure Page 16 of 201

The Court may be curing the defect in this case by adding the First Pacific violates the constitutional limit on foreign Movants fear that the 28 June 2011 Decision would spell
BOC as party-petitioner. The petition should not be dismissed ownership of PLDT; (2) whether the sale of common shares to disaster to our economy, as it may result in a sudden flight of
because the second action would only be a repetition of the foreigners exceeded the 40 percent limit on foreign equity in existing foreign investors to "friendlier" countries and
first. In Salvador, et al., v. Court of Appeals, et al., we held PLDT; and (3) whether the total percentage of the PLDT simultaneously deterring new foreign investors to our country.
that this Court has full powers, apart from that power and common shares with voting rights complies with the 60-40 In particular, the PSE claims that the 28 June 2011 Decision
authority which is inherent, to amend the processes, ownership requirement in favor of Filipino citizens under the may result in the following: (1) loss of more than P 630 billion
pleadings, proceedings and decisions by substituting as party- Constitution for the ownership and operation of PLDT. These in foreign investments in PSE-listed shares; (2) massive
plaintiff the real party-in-interest. The Court has the power issues indisputably call for an examination of the parties decrease in foreign trading transactions; (3) lower PSE
to avoid delay in the disposition of this case, to order respective evidence, and thus are clearly within the Composite Index; and (4) local investors not investing in PSE-
its amendment as to implead the BOC as party- jurisdiction of the SEC. In short, PLDT must be impleaded, and listed shares.58
respondent. Indeed, it may no longer be necessary to must necessarily be heard, in the proceedings before the SEC
do so taking into account the unique backdrop in this where the factual issues will be thoroughly threshed out and
Dr. Bernardo M. Villegas, one of the amici curiae in the Oral
case, involving as it does an issue of public resolved.
Arguments, shared movants apprehension. Without providing
interest. After all, the Office of the Solicitor General has
specific details, he pointed out the depressing state of the
represented the petitioner in the instant proceedings, as well
Notably, the foregoing issues were left untouched by Philippine economy compared to our neighboring countries
as in the appellate court, and maintained the validity of the
the Court. The Court did not rule on the factual issues raised which boast of growing economies. Further, Dr. Villegas
deportation order and of the BOCs Omnibus Resolution. It
by Gamboa, except the single and purely legal issue on the explained that the solution to our economic woes is for the
cannot, thus, be claimed by the State that the BOC was not
definition of the term "capital" in Section 11, Article XII of the government to "take-over" strategic industries, such as the
afforded its day in court, simply because only the petitioner,
Constitution. The Court confined the resolution of the instant public utilities sector, thus:
the Chairperson of the BOC, was the respondent in the CA,
case to this threshold legal issue in deference to the fact-
and the petitioner in the instant recourse. In Alonso v.
finding power of the SEC.
Villamor, we had the occasion to state: JUSTICE CARPIO:

Needless to state, the Court can validly, properly, and fully

There is nothing sacred about processes or pleadings, I would like also to get from you Dr. Villegas if you have
dispose of the fundamental legal issue in this case even
their forms or contents. Their sole purpose is to additional information on whether this high FDI 59 countries in
without the participation of PLDT since defining the term
facilitate the application of justice to the rival claims East Asia have allowed foreigners x x x control [of] their
"capital" in Section 11, Article XII of the Constitution does not,
of contending parties. They were created, not to hinder public utilities, so that we can compare apples with apples.
in any way, depend on whether PLDT was impleaded. Simply
and delay, but to facilitate and promote, the administration of
put, PLDT is not indispensable for a complete resolution of the
justice. They do not constitute the thing itself, which courts DR. VILLEGAS:
purely legal question in this case.55 In fact, the Court, by
are always striving to secure to litigants. They are designed
treating the petition as one for mandamus, 56 merely directed
as the means best adapted to obtain that thing. In other
the SEC to apply the Courts definition of the term "capital" in Correct, but let me just make a comment. When these
words, they are a means to an end. When they lose the
Section 11, Article XII of the Constitution in determining neighbors of ours find an industry strategic, their solution is
character of the one and become the other, the
whether PLDT committed any violation of the said not to "Filipinize" or "Vietnamize" or "Singaporize." Their
administration of justice is at fault and courts are
constitutional provision. The dispositive portion of the solution is to make sure that those industries are in
correspondingly remiss in the performance of their obvious
Courts ruling is addressed not to PLDT but solely to the hands of state enterprises. So, in these countries,
duty.53(Emphasis supplied)
the SEC, which is the administrative agency tasked to nationalization means the government takes over. And
enforce the 60-40 ownership requirement in favor of because their governments are competent and honest
In any event, the SEC has expressly manifested 54 that Filipino citizens in Section 11, Article XII of the enough to the public, that is the solution. x x
it will abide by the Courts decision and defer to the Constitution. x 60 (Emphasis supplied)
Courts definition of the term "capital" in Section 11,
Article XII of the Constitution. Further, the SEC entered
Since the Court limited its resolution on the purely legal issue If government ownership of public utilities is the solution,
its special appearance in this case and argued during
on the definition of the term "capital" in Section 11, Article XII then foreign investments in our public utilities serve no
the Oral Arguments, indicating its submission to the
of the 1987 Constitution, and directed the SEC to investigate purpose. Obviously, there can never be foreign investments in
Courts jurisdiction. It is clear, therefore, that there
any violation by PLDT of the 60-40 ownership requirement in public utilities if, as Dr. Villegas claims, the "solution is to
exists no legal impediment against the proper and
favor of Filipino citizens under the Constitution, 57 there is no make sure that those industries are in the hands of state
immediate implementation of the Courts directive to
deprivation of PLDTs property or denial of PLDTs right to due enterprises." Dr. Villegass argument that foreign investments
the SEC.
process, contrary to Pangilinan and Nazarenos in telecommunication companies like PLDT are badly needed
misimpression. Due process will be afforded to PLDT when it to save our ailing economy contradicts his own theory that
PLDT is an indispensable party only insofar as the other presents proof to the SEC that it complies, as it claims here, the solution is for government to take over these companies.
issues, particularly the factual questions, are concerned. In with Section 11, Article XII of the Constitution. Dr. Villegas is barking up the wrong tree since State
other words, PLDT must be impleaded in order to fully resolve ownership of public utilities and foreign investments in such
the issues on (1) whether the sale of 111,415 PTIC shares to
X. Foreign Investments in the Philippines

CORPORATION LAW: 7. captial structure Page 17 of 201

industries are diametrically opposed concepts, which cannot utilities to Philippine nationals, who are defined in the Foreign foreigners, be they Indonesians, Malaysians or
possibly be reconciled. Investments Act of 1991 as Filipino citizens, or corporations or Chinese, even in the absence of reciprocal treaty
associations at least 60 percent of whose capital with voting arrangements. At least the Parity Amendment, as
rights belongs to Filipinos. The FIAs implementing rules implemented by the Laurel-Langley Agreement, gave the
In any event, the experience of our neighboring countries
explain that "[f]or stocks to be deemed owned and held by capital-starved Filipinos theoretical parity the same rights as
cannot be used as argument to decide the present case
Philippine citizens or Philippine nationals, mere legal title is Americans to exploit natural resources, and to own and
differently for two reasons. First, the governments of our
not enough to meet the required Filipino equity. Full control public utilities, in the United States of America. Here,
neighboring countries have, as claimed by Dr. Villegas, taken
beneficial ownership of the stocks, coupled with movants interpretation would effectively mean
over ownership and control of their strategic public utilities
appropriate voting rights is essential." In effect, the FIA a unilateral opening up of our national economy to all
like the telecommunications industry. Second, our
clarifies, reiterates and confirms the interpretation that the foreigners, without any reciprocal arrangements. That
Constitution has specific provisions limiting foreign ownership
term "capital" in Section 11, Article XII of the 1987 would mean that Indonesians, Malaysians and Chinese
in public utilities which the Court is sworn to uphold
Constitution refers to shares with voting rights, as well nationals could effectively control our mining companies and
regardless of the experience of our neighboring countries.
as with full beneficial ownership. This is precisely public utilities while Filipinos, even if they have the capital,
because the right to vote in the election of directors, coupled could not control similar corporations in these countries.
In our jurisdiction, the Constitution expressly reserves the with full beneficial ownership of stocks, translates to effective
ownership and operation of public utilities to Filipino citizens, control of a corporation.
The 1935, 1973 and 1987 Constitutions have the same 60
or corporations or associations at least 60 percent of whose
percent Filipino ownership and control requirement for public
capital belongs to Filipinos. Following Dr. Villegass claim, the
Any other construction of the term "capital" in Section 11, utilities like PLOT. Any deviation from this requirement
Philippines appears to be more liberal in allowing foreign
Article XII of the Constitution contravenes the letter and necessitates an amendment to the Constitution as
investors to own 40 percent of public utilities, unlike in other
intent of the Constitution. Any other meaning of the term exemplified by the Parity Amendment. This Court has no
Asian countries whose governments own and operate such
"capital" openly invites alien domination of economic power to amend the Constitution for its power and duty is
industries.
activities reserved exclusively to Philippine nationals. only to faithfully apply and interpret the Constitution.
Therefore, respondents interpretation will ultimately result in
XI. Prospective Application of Sanctions handing over effective control of our national economy to
WHEREFORE, we DENY the motions for
foreigners in patent violation of the Constitution, making
reconsideration WITH FINALITY. No further pleadings shall
In its Motion for Partial Reconsideration, the SEC sought to Filipinos second-class citizens in their own country. be entertained.
clarify the reckoning period of the application and imposition
of appropriate sanctions against PLDT if found violating Filipinos have only to remind themselves of how this country
SO ORDERED.
Section 11, Article XII of the Constitution.1avvphi1 was exploited under the Parity Amendment, which gave
Americans the same rights as Filipinos in the exploitation of
As discussed, the Court has directed the SEC to investigate natural resources, and in the ownership and control of public
and determine whether PLDT violated Section 11, Article XII of utilities, in the Philippines. To do this the 1935 Constitution,
the Constitution. Thus, there is no dispute that it is only after which contained the same 60 percent Filipino ownership and
the SEC has determined PLDTs violation, if any exists at the control requirement as the present 1987 Constitution, had to
time of the commencement of the administrative case or be amended to give Americans parity rights with Filipinos.
62
investigation, that the SEC may impose the statutory There was bitter opposition to the Parity Amendment and
sanctions against PLDT. In other words, once the 28 June 2011 many Filipinos eagerly awaited its expiration. In late 1968,
Decision becomes final, the SEC shall impose the appropriate PLDT was one of the American-controlled public utilities that
sanctions only if it finds after due hearing that, at the start of became Filipino-controlled when the controlling American
the administrative case or investigation, there is an existing stockholders divested in anticipation of the expiration of the
63
violation of Section 11, Article XII of the Constitution. Under Parity Amendment on 3 July 1974. No economic suicide
prevailing jurisprudence, public utilities that fail to comply happened when control of public utilities and mining
with the nationality requirement under Section 11, Article XII corporations passed to Filipinos hands upon expiration of the
and the FIA can cure their deficiencies prior to the start of the Parity Amendment.
administrative case or investigation.61
Movants interpretation of the term "capital" would bring us
XII. Final Word back to the same evils spawned by the Parity
Amendment, effectively giving foreigners parity rights
with Filipinos, but this time even without any
The Constitution expressly declares as State policy the
amendment to the present Constitution. Worse,
development of an economy "effectively controlled" by
movants interpretation opens up our national economy
Filipinos. Consistent with such State policy, the Constitution
to effective control not only by Americans but also by all
explicitly reserves the ownership and operation of public

CORPORATION LAW: 7. captial structure Page 18 of 201

G.R. NOS. 174457-59 The facts, as culled from the records of these cases, follow: (vi) all amounts maintained in the Accounts and all
monies, securities and instruments deposited or required
to be deposited in the Accounts;
EXPRESS INVESTMENTS III PRIVATE LTD. AND EXPORT Respondent Bayantel is a duly organized domestic
DEVELOPMENT CANADA, Petitioner, vs. DAYAN corporation engaged in the business of providing
TELECOMMUNICATIONS, INC., THE BANK OF NEW YORK telecommunication services. It is 98.6% owned by Bayan (vii) all other chattel paper and documents;
(AS TRUSTEE FOR THE HOLDERS OF THE Telecommunications Holdings Corporation (BTHC), which in
US$200,000,000 13.5% SENIOR NOTES OF DAYAN turn is 85.4% owned by the Lopez Group of Companies and
(viii) all other property, assets and revenues of Bayantel,
TELECOMMUNICATIONS, INC.) AND ATTY. REMIGIO A. Benpres Holdings Corporation.
whether tangible or intangible; and
NOVAL (AS THE COURT-APPOINTED REHABILITATION
RECEIVER OF BAYANTEL), Respondents.
On various dates between the years 1995 and 2001, Bayantel
(ix) all proceeds and products of any and all of the
entered into several credit agreements with Express
foregoing.11
x---------------x Investments III Private Ltd. And Export Development Canada
(petitioners in G.R. Nos. 174457-59), Asian Finance and
Investment Corporation, Bayerische Landesbank (Singapore In July 1999, Bayantel issued US$200 million worth of 13.5%
DECISION
Branch) and Clearwater Capital Partners Singapore Pte Ltd., Senior Notes pursuant to an Indenture 12 dated July 22, 1999
as agent for Credit Industriel et Commercial (Singapore), that it entered into with The Bank of New York (petitioner in
VILLARAMA, JR., J.: Deutsche Bank AG, Equitable PCI Bank, JP Morgan Chase G.R. Nos. 175418-20) as trustee for the holders of said notes.
Bank, Metropolitan Bank and Trust Co., P.T. Bank Negara Pursuant to the said Indenture, the notes are due in 2006 and
Bayantel shall pay interest on them semi-annually. Bayantel
Before us are seven consolidated petitions for review on Indonesia (Persero), TBK, Hong Kong Branch, Rizal
managed to make two interest payments, on January 15,
certiorari filed m connection with the corporate rehabilitation Commercial Banking Corporation and Standard Chartered
Bank. To secure said loans, Bayantel executed an Omnibus 2000 and July 15, 2000, before it defaulted on its obligation.
of Bayan Telecommunications, Inc. (Bayantel).
Agreement dated September 19, 1995 and an EVTELCO
Mortgage Trust Indenture9 dated December 12, 1997. 10 Foreseeing the impossibility of further meeting its obligations,
The Petition for Partial Review on Certiorari 1 in G.R. Nos.
Bayantel sent, in October 2001, a proposal for the
174457-59 was filed by Express Investments III Private Ltd.
restructuring of its debts to the Bank Creditors and the
and Export Development Canada to assail the August 18, Pursuant to the Omnibus Agreement, Bayantel executed an
Holders of Notes. To facilitate the negotiations between
2006 Decision2 of the Court of Appeals in CA-G.R. SP No. Assignment Agreement in favor of the lenders under the
Omnibus Agreement (hereinafter, Omnibus Creditors, Bank Bayantel and its creditors, an Informal Steering Committee
87203.
Creditors, or secured creditors). In the Assignment was formed composed of Avenue Asia Investments, L.P.,
Agreement, Bayantel bound itself to assign, convey and Avenue Asia International, Ltd., Avenue Asia Special Situations
3
On the other hand, the Petition for Review on Certiorari in Fund II, L.P., Avenue Asia Capital Partners, L.P. (petitioners in
transfer to the Collateral Agent, the following properties as
G.R. Nos. 175418-20 was filed by The Bank of New York; G.R. Nos. 175418-20) and Van Eck Global Opportunity
collateral security for the prompt and complete payment of its
Avenue Asia Investments, L.P.; Avenue Asia International, Ltd.; Masterfund, Ltd. The members of the Informal Steering
obligations to the Omnibus Creditors:
Avenue Asia Special Situations Fund II, L.P.; Avenue Asia Committee are the assignees of the unsecured credits
Capital Partners, L.P. and Avenue Asia Special Situations Fund extended to Bayantel by J.P. Morgan Europe, Ltd., Bayerische
III, L.P. Said petition questions as well the said August 18, (i) all monies payable to Bayantel under the Project
Landesbank Singapore Branch and Deutsche Bank AG,
2006 Court of Appeals Decision, and also the November 8, Documents (as the term is defined by the Omnibus
London in the total principal amount of US$13,637,485.20.
2006 Resolution 4 of the Court of Appeals in CA-G.R. SP Nos. Agreement);
They are holders, as well, of the Notes issued by Bayantel
87100 and 87111 affirming the June 28, 2004 Decision 5 of the pursuant to the Indenture dated July 22, 1999.
Regional Trial Court (RTC) of Pasig City, Branch 158, in SEC (ii) all Project Documents and all Contract Rights arising
Case No. 03-25. thereunder;
In its initial proposal called the "First Term Sheet," Bayantel
suggested a 25% write-off of the principal owing to the
Meanwhile, the Petition for Review on Certiorari 6 in G.R. No. (iii) all receivables; Holders of Notes. The Informal Steering Committee rejected
177270 was filed by The Bank of New York, in its capacity as the idea, but accepted Bayantels proposal to pay the
trustee for the holders of the US$200 million 13.5% Senior restructured debt, pari passu,13 out of its cash flow. This pari
(iv) all general intangibles;
Notes of Bayantel and upon the instructions of the Informal passu or equal treatment of debts, however, was opposed by
Steering Committee, to contest the Decision 7 and the Bank Creditors who invoked their security interest under
Resolution8 of the Court of Appeals in CA-G.R. SP No. 89894 (v) each of the Accounts (as the term is defined by the the Assignment Agreement.
which nullified the November 9, 2004 and March 15, 2005 Omnibus Agreement);
Orders of the Pasig RTC, Branch 158, in SEC Case No. 03-25
Bayantel continued to pay reduced interest on its debt to the
insofar as it defined the powers and functions of the
Bank Creditors but stopped paying the Holders of Notes
Monitoring Committee.

CORPORATION LAW: 7. captial structure Page 19 of 201

starting July 17, 2000. By May 31, 2003, Bayantels total debt reached an impasse when the Informal Steering 2. Due regard shall be given to the rights of the secured
indebtedness had reached US$674 million or P35.928 billion Committee insisted on a pari passu treatment of the claims of creditors and no changes in the security positions of the
in unpaid principal and interest, based on the prevailing both secured and unsecured creditors. creditors shall be granted as a result of the rehabilitation
conversion rate of US$1 = P53.282. Out of its total liabilities, plan as amended and approved herein.
Bayantel allegedly owes 43.2% or US$291 million (P15.539
Meanwhile, on January 20, 2004, Bayantel filed a "Motion to
billion) to the Holders of the Notes.
Include Radio Communications Philippines, Inc. [RCPI] and 3. The level of sustainable debt of the rehabilitation plan,
Naga Telephone Company [Nagatel] as Debtor-Corporations as amended, shall be reduced to the amount of [US]
On July 25, 2003, The Bank of New York, as trustee for the for Rehabilitation x x x."20 $325,000,000 for a period of 19 years.
Holders of the Notes, wrote Bayantel an Acceleration Letter
declaring immediately due and payable the principal,
The Rehabilitation Court denied said motion in an 4. Unsustainable debt shall be converted into an
premium interest, and other monetary obligations on all
Order21 dated April 19, 2004. The fallo of said order reads: appropriate instrument that shall not be a financial burden
outstanding Notes. Then, on July 30, 2003, The Bank of New
for Bayantel.
York filed a petition14 for the corporate rehabilitation of
Bayantel upon the instructions of the Informal Steering WHEREFORE, the Court resolves the pending incidents as
Committee. follows: 5. All provisions relating to equity in the rehabilitation
plan, as approved and amended, must strictly conform to
the requirements of the Constitution limiting foreign
On August 8, 2003, the Pasig RTC, Branch 158, issued a Stay 1. The Urgent Motion to Resolve of petitioner is hereby
ownership to 40%.
Order15 which directed, among others, the suspension of all granted. The creditors of Bayantel, whether secured or
claims against Bayantel and required the latters creditors unsecured, should be treated equally and on the same
and other interested parties to file a comment or opposition footing or pari passu until the rehabilitation proceedings is 6. A Monitoring Committee shall be formed composed of
to the petition. The court appointed Dr. Conchita L. Manabat terminated in accordance with the Interim Rules; representatives from all classes of the restructured debt.
to act as rehabilitation receiver but the latter declined. 16 In The Rehabilitation Receivers role shall be limited to the
her stead, the court appointed Atty. Remigio A. Noval (Atty. powers of monitoring and oversight as provided in the
2. The Motion of Bayantel to Include RCPI and Nagatel in
Noval) who took his oath and posted a bond on September Interim Rules.
the present rehabilitation proceedings as debtor-
26, 2003.17 corporations is denied;
All powers provided for in the Report and Recommendations,
On November 28, 2003, the Rehabilitation Court gave due which exceed the monitoring and oversight functions
3. The Motion of Bayantel to Exempt from the Stay Order
course to the petition and directed the Rehabilitation Receiver mandated by the Interim Rules shall be amended accordingly.
the payment of the compensation package of its former
to submit his recommendations to the court within 120 days employees per Annex "A" attached to said motion is
from the initial hearing. 18 After several extensions, Atty. Noval granted, subject to the verification and confirmation of the SO ORDERED.25
filed on March 22, 2004 a Compliance and Submission of the items therein by the Rehabilitation Receiver;
Report as Compelling Evidence that Bayantel may be
Dissatisfied, The Bank of New York filed a Notice of
Successfully Rehabilitated.19
4. The Motion of Petitioner to Strike Out the proposed Appeal26 on August 6, 2004. So did Avenue Asia Investments,
rehabilitation plan of Bayantel is denied. L.P., Avenue Asia International, Ltd., Avenue Asia Special
In his report, Atty. Noval classified Bayantels debts into three: Situations Fund II, L.P., Avenue Asia Capital Partners, L.P., and
(1) those owed to secured Bank Creditors pursuant to the 22 Avenue Asia Special Situations Fund III, L.P. which filed a Joint
SO ORDERED.
Omnibus Agreements (Omnibus Creditors) in the total amount Record on Appeal27 on August 9, 2004.
of US$334 million or P17.781 billion; (2) those owed to
Holders of the Senior Notes and Bank Creditors combined On June 28, 2004, the Pasig RTC, Branch 158, acting as a
On September 28, 2004, Bayantel submitted an Implementing
(Chattel Creditors), comprising US$625 million, of which Rehabilitation Court, approved the Report and
Term Sheet to the Rehabilitation Court and the Receiver.
US$473 million (P25.214 billion) is principal and US$152 Recommendations23 attached by the Receiver to his
Claiming that said Term Sheet was inadequate to protect the
million (P8.106 billion) is accrued unpaid interest; and (3) "Submission with Prayer for Further Guidance from the
interest of the creditors, The Bank of New York (petitioner in
those that Bayantel owed to persons other than Financial Honorable Court,"24 subject to the following clarifications
G.R. No. 177270) filed a Manifestation 28 dated October 15,
Creditors/unsecured creditors in the amount of US$49 million and/or amendments:
2004 praying for the constitution of a Monitoring Committee
or P2.608 billion.
and the creation of a convertible debt instrument to cover the
1. The ruling on the pari passu treatment of all creditors unsustainable portion of the restructured debt.
According to The Bank of New York, out of the US$674 million whose claims are subject to restructuring shall be
that respondent owes its creditors under groups 2 and 3 maintained and shall extend to all payment terms and
On November 9, 2004, the Rehabilitation Court issued an
above, the amount outstanding under the Senior Notes treatment of past due interest.
Order29 directing the creation of a Monitoring Committee to be
represent 43.2% of its liabilities as of May 31, 2003.
composed of one member each from the group of Omnibus
Subsequently, negotiations for the restructuring of Bayantels
Creditors and unsecured creditors, and a third member to be

CORPORATION LAW: 7. captial structure Page 20 of 201

chosen by the unanimous vote of the first two members. In Thereafter, on November 30, 2004, petitioners Express the Rehabilitation Courts determination of Bayantels
the same Order, the court defined the scope of the Monitoring Investments III Private Ltd. and Export Development Canada sustainable debt at US$325 million payable in 19 years. It
Committees authority, as follows: along with Bayerische Landesbank (Singapore Branch), Credit rejected the Receivers proposal to set the sustainable debt at
Industriel et Commercial, Deutsche Bank AG, P.T. Bank Negara US$370 million payable in 15 years, and the proposal of the
Indonesia (Persero), TBK, Hong Kong Branch and Rizal Avenue Asia Capital Group to set it at US$471 million payable
x x x The Monitoring Committee shall participate with the
Commercial Banking Corporation filed a Petition for in 12 years.
Receiver in monitoring and overseeing the actions of the
Review33 which was docketed as CA-G.R. No. 87203 in the
Board of Directors of Bayantel and may, by majority vote,
Tenth Division of the Court of Appeals. The secured creditors
adopt, modify, revise or substitute, any of the following items: The Court of Appeals agreed with the Rehabilitation Court that
likewise assailed the Rehabilitation Courts June 28, 2004
it is reasonable to adopt a level of sustainable debt that
Decision insofar as it ordered the pari passu treatment of all
approximates respondent Bayantels proposal because the
(1) any proposed Annual OPEX Budgets; claims against Bayantel. Said petitioners invoke a lien over
latter is in the best position to determine the level of
the cash flow and receivables of Bayantel by virtue of the
sustainable debt that it can manage. It found Bayantels
(2) any proposed Annual CAPEX Budgets; Assignment Agreement.
proposal more credible considering that it was prepared using
"updated financial information with realistic cash flow
(3) any proposed Reschedule; On December 23, 2004, Bayantel filed an Omnibus figures."[40] The appellate court noted that Bayantels
Motion34 for the consolidation of CA-G.R. SP Nos. 87111 and proposal was drafted without regard for its status as a "niche
CA-G.R. SP No. 87203 with CA-G.R. SP No. 87100, the lowest- player" in the telecommunications market and after factoring
(4) any proposed actions by the Receiver on a payment
numbered case. the cost of reorganization. In contrast, it expressed concern
default;
that the proposals submitted by Avenue Asia Capital Group
and the Receiver might eventually leave Bayantel with an
In a Resolution dated January 20, 2005, the Court of Appeals,
(5) terms of Management Incentivisation Scheme and unworkable financial debt-to-revenue ratio.
Fifteenth Division, ordered the consolidation of CA-G.R. SP No.
Management Targets;
87203 with CA-G.R. SP No. 87100. This was accepted by the
Court of Appeals, Seventh Division, in a Resolution 35 dated The Court of Appeals also confirmed the Rehabilitation Courts
(6) the EBITDA/Revenue ratios set by the Bayantel Board March 29, 2005. Then, in the Resolution 36 dated June 10, authority to approve, reject, substitute, or even change the
of Directors; and 2005, the Court of Appeals, First Division, ordered the rehabilitation plans submitted by the Receiver and the
consolidation of CA-G.R. SP No. 87111 with 87100 and the parties. It upheld the trial court in adopting the Receivers
(7) any other proposed actions by the Bayantel Board of transmittal of the records of the three cases to the Seventh recommendation to limit the equity conversion of Bayantels
Directors including, without limitation, issuance of new Division. unsustainable debt to 40% of its paid-up capital. This
shares, sale of core and noncore assets, change of percentage, the appellate court explains, is consistent with
business, etc. that will materially affect the terms and the constitutional limitation on the allowable foreign equity in
Meanwhile, on January 10, 2005, Atty. Noval submitted to the
conditions of the rehabilitation plan and its 37 Filipino corporations. It also maintained the write-off of
Rehabilitation Court an Implementing Term Sheet to serve as
implementation. penalties and default interest and recomputation of
a guide for Bayantels Rehabilitation. The same was approved
38 Bayantels past due interest, as a valid exercise of discretion
in an Order dated March 15, 2005. In the same Order, the
by the Rehabilitation Court under the Interim Rules of
In case of disagreement between the Monitoring Committee Rehabilitation Court appointed Avenue Asia Investments L.P.
Procedure on Corporate Rehabilitation (Interim Rules). The
and the Board of Directors of Bayantel on any of the foregoing and Export Development Canada to represent the unsecured
appellate court negated any violation of the pari
matters, the same shall be submitted to the Court for and secured creditors, respectively, in the Monitoring
passu principle with the use of these measures since they
resolution.30 Committee.
shall apply to all classes of creditors.

On November 16, 2004, The Bank of New York filed a Petition On May 26, 2005, Bayantel filed a petition for certiorari and
As to the claim of the secured creditors in CA-G.R. SP No.
for Review31 before the Court of Appeals. The petition was Prohibition39 docketed as CA-G.R. SP No. 89894 in the Court of
87203, the Court of Appeals ruled that while rehabilitation is
docketed as CAG. R. SP No. 87100 in the Fifteenth Division of Appeals. Said petition assailed the Rehabilitation Courts
ongoing, the sole control over the security on the receivables
the Court of Appeals. On even date, Avenue Asia Investments, Orders dated November 9, 2004 and March 15, 2005, for
and cash flow of Bayantel is vested in the Rehabilitation
L.P., Avenue Asia International, Ltd., Avenue Asia Special purportedly conferring upon the Monitoring Committee,
Court. To allow otherwise would not only violate the Stay
Situations Fund II, L.P., Avenue Asia Capital Partners, L.P., and powers of management and control over its operations.
Order but interfere as well with the duty of the Receiver to
Avenue Asia Special Situations Fund III, L.P (Avenue Asia "take possession, control and custody of the debtors
Capital Group) filed a similar petition32 which was docketed as The Court of Appeals Decision in CA-G.R. Nos. 87100, assets." 41 Ultimately, the Court of Appeals ruled that
CA-G.R. SP No. 87111 in the Second Division of the Court of 87111 and 87203 preference in payment cannot be accorded the secured
Appeals. Both petitions contest the Rehabilitation Courts June creditors since preference applies only in liquidation
28, 2004 Decision for, among others, fixing the level of proceedings.
In the assailed August 18, 2006 Decision, the Court of
Bayantels sustainable debt at US$325 million to be paid in 19
Appeals dismissed the petitions in CA-G.R. SP Nos. 87100,
years.
87111 and 87203 for lack of merit. The appellate court upheld

CORPORATION LAW: 7. captial structure Page 21 of 201

Discontented, The Bank of New York and the Avenue Asia The Court of Appeals likewise approved of the Implementing On February 22, 2007, respondent Bayantel moved for the
Capital Group (petitioners in CA-G.R. SP Nos. 87100 and Term Sheet, clarifying that the same is not intended to consolidation of G.R. Nos. 174457-59 with G.R. Nos. 175418-
87111) filed a Motion for Partial Reconsideration. 42 Said address every contingency that may arise in the 20. In a Resolution 45 dated April 23, 2007, we directed the
motion was, however, denied in the Resolution dated implementation of the Plan. It assured that any doubt in the Division Clerk of Court to study the feasibility of consolidating
November 8, 2006. interpretation of the Term Sheet shall be resolved by the said cases. In a Memorandum Report 46 dated May 17, 2007,
Rehabilitation Court. the First Division Clerk of Court recommended the
consolidation of G.R. Nos. 174457-59 with G.R. Nos. 175418-
In the meantime, Express Investments III Private Ltd. and
20.
Export Development Canada had filed before this Court a Lastly, the appellate court affirmed the creation of a
Petition for Partial Review on Certiorari of the Court of Appeals convertible debt instrument to cover the unsustainable
Decision docketed as G.R. Nos. 174457-59. According to portion of respondents debt. It perceives such instrument as On May 21, 2007, The Bank of New York, as trustee for the
petitioners, the other secured creditors who were also a tool to generate surplus cash to satisfy Bayantels debt Holders of the Senior Notes, filed a Petition for Review on
petitioners in CA-G.R. SP No. 87203 had not remained in under Tranche B. As well, it serves as a buy-back scheme for Certiorari, docketed as G.R. No. 177270, to assail the October
contact with them and had not authorized them to file further the assignment and transfer of credits by the Financial 27, 2006 Decision and March 23, 2007 Resolution of the Court
petitions on their behalf. Creditors in a manner that will not unduly burden Bayantel. of Appeals in CA-G.R. SP No. 89894. Amplified, the petition
presents the lone issue of whether the Monitoring Committee
in this case may exercise control over Bayantels operations.
On December 28, 2006, The Bank of New York and the Issues
Avenue Asia Capital Group also filed their own Petition for
Review on Certiorari which was docketed as G.R. Nos. In a Resolution47 dated June 6, 2007, we directed the Division
On October 19, 2006, Express Investments III Private Ltd. and
175418-20. Clerk of Court to study the feasibility of consolidating G.R. No.
Export Development Canada 44 filed a Petition for Partial
177270 with G.R. Nos. 174457-59 and G.R. Nos. 175418-20.
Review on Certiorari which was docketed as G.R. Nos.
To avoid conflicting decisions on related cases, the Assistant
The Court of Appeals Decision in CA-G.R. SP No. 89894 174457-59. Said petition, which seeks the reversal of the
Clerk of Court recommended the consolidation of the three
August 18, 2006 Decision of the Court of Appeals insofar as it
cases. By Resolution48 dated July 11, 2007, the Court ordered
dismissed the petition of the secured creditors in CA-G.R. SP
In CA-G.R. SP No. 89894, the Court of Appeals rendered the the consolidation of G.R. No. 177270 with G.R. Nos. 174457-
No. 87203, essentially proffers the following issues for
assailed Decision dated October 27, 2006 declaring null and 59 and G.R. Nos. 175418-20.
resolution: (1) whether the claims of secured and unsecured
void the November 9, 2004 and March 15, 2005 Orders of the
creditors should be treated pari passu during rehabilitation;
Rehabilitation Court insofar as they defined the powers and
(2) whether the pari passu treatment of creditors during The Parties Arguments In G.R. Nos. 174457-59
functions of the Monitoring Committee.
rehabilitation impairs the Assignment Agreement between
respondent and petitioners; (3) whether an impairment in the
The petitioners/secured creditors argue primarily that the pari
The appellate court found grave abuse of discretion on the security position of petitioners can be justified as a valid
passu treatment of creditors during rehabilitation has no basis
part of the Rehabilitation Court for conferring upon the exercise of police power.
in law. According to petitioners, all that Presidential Decree
Monitoring Committee the power to modify, reverse or
No. 902-A49 (PD 902-A) provides is the suspension of all claims
overrule the proposals of Bayantels Board of Directors
On the other hand, The Bank of New York and the Avenue Asia against the debtor corporation during rehabilitation so that
relative to operations. It stressed that the Committees
Capital Group filed a Petition for Review on Certiorari the Receiver can exercise his powers free from judicial or
functions are confined to monitoring and overseeing the
docketed as G.R. Nos. 175418-20, to question the appellate extrajudicial interference. If the equity policy is to be
operations of Bayantel to ensure its compliance with the
courts August 18, 2006 Decision as well as its November 8, considered at all, they believe that the equity policy should be
terms and conditions of the Rehabilitation Plan. To conform
2006 Resolution in CA-G.R. SP Nos. 87100 and 87111. This construed to accord creditors with similar rights or uniform
therewith, the appellate court restated the Committees
second consolidated petition raises the following issues: (1) treatment. In line with this, petitioners assert priority under
powers as follows:
whether the Court of Appeals erred in setting Bayantels the Assignment Agreement to receive from Bayantels surplus
sustainable debt at US$325 million, payable in 19 years; (2) cash flow and to be paid in full, ahead of all other creditors.
The Monitoring Committee shall participate with the Receiver whether a debtor may submit a rehabilitation plan in a
in monitoring and overseeing the operations of Bayantel to creditor-initiated rehabilitation; (3) whether the conversion of
The petitioners/secured creditors contend that the pari
ensure compliance by Bayantel with the terms and conditions debt to equity in excess of 40% of the outstanding capital
passu treatment of claims impairs the Omnibus Agreement
of the Rehabilitation Plan. In the event Bayantel fails to meet stock in favor of petitioners violates the constitutional limit on
and the Assignment Agreement. Such impairment, they posit,
any of the milestones under the Rehabilitation Plan or fails to foreign ownership of a public utility; (4) whether the write-off
cannot be justified as a proper exercise of police power for
comply with any material provision thereunder, the of respondents penalties and default interest and
three reasons: first, there is no law which authorizes the equal
Monitoring Committee may, by majority recomputation of its past due interest violate the pari
treatment of claims; second, there is no enabling law;
vote, recommend modifications, revisions and substitutions passu principle; and (5) whether petitioners are entitled to
and third, it is not reasonably necessary for the success of the
of the following items: costs.
rehabilitation.

x x x x43 (Emphasis supplied)

CORPORATION LAW: 7. captial structure Page 22 of 201

Petitioners point out that the Interim Rules mandates instead They stress that the state of the telecommunications industry add that the fact that Bayantels actual revenues are lower
that the rehabilitation plan shall give due regard to the is not among those which the court may take judicial notice of than its cash flow projections belies any scheme to avoid
interest of the secured creditors. For petitioners, the by discretion. paying its debts in full. The secured creditors agree with the
preservation of Bayantels chattels alone is inadequate to appellate court in limiting the conversion of the unsustainable
meet said requirement since the value thereof depreciates debt to a maximum of 40% shares in Bayantel as more in
Petitioners maintain that converting the unsustainable debt to
over time. They go on to invoke international practices on keeping with the Constitution.
77.7% equity in Bayantel will not violate the nationality
bankruptcy and rehabilitation which purportedly recognize the
requirement of the 1987 Constitution. They aver that the
distinction between the rights of secured and unsecured
debts to domestic bank creditors51 account is US$473 million Further, the secured creditors point out that there is nothing
creditors. Petitioners warn of dire consequences to the
or 70.18% of Bayantels total liabilities. Considering the in the Interim Rules which prohibits a debtor company from
international credit standing of the Philippines, the financial
substantial write-off of penalties and default interest in the submitting an alternative rehabilitation plan in creditor-
market, and the influx of foreign investments if the pari
amount of US$34,044,553.00 and past due interest of initiated proceedings. In support of this, they cite Section
passu principle would be upheld. Finally, petitioners maintain
US$25,243,381.07, petitioners believe that it is only fair to 22,53 Rule 4 of said rules which permits the debtor to modify
that a "Trigger Event"50 had occurred which rendered
accord the Financial Creditors greater equity in Bayantel to its proposed plan or submit a revised or substitute plan.
respondents obligations due and demandable. Thus, despite
compensate for said losses. According to them, Bayantels suggestion as to the terms of
their failure to notify respondent of the alleged Events of
payment does not constitute a potestative condition that
Default, petitioners believe that they can rightfully proceed
would render the obligation void.
against the securities. Moreover, it is the petitioners view that the write-off
contravenes the pari passu principle because they would
suffer greater losses than the Omnibus Creditors. According to The secured creditors, however, join petitioners in protesting
For its part, respondent Bayantel reasons that enforcing
petitioners, approximately 82% of the penalties and interests the condonation of penalties and default interest. Rather than
preference in payment at this stage of the rehabilitation
shall be borne by the unsecured creditors and the Holders of observing absolute equality, they insist that the pari
would only disrupt the progress it has made so far. It assures
Notes. In the same vein, petitioners protest the passu principle should be applied such that creditors within
petitioners that their security rights are adequately protected
recomputation of past due interest in accordance with the the same class are treated alike.
in case the collateral assets are disposed. Respondent adds
rate proposed by the Receiver. They claim that recomputation
that no single payment scheme is applicable in all
would result in the condonation of 89% of the accrued
rehabilitation proceedings and the peculiar circumstances of In response, respondent Bayantel submitted on May 21, 2009,
interest owing them. The Receivers report shows that as of
its case warrant the pari passu treatment of its creditors. a Consolidated Memorandum54 in G.R. Nos. 175418-20 and
the filing of the present petition, the total accrued interest
G.R. No. 177270. It practically echoed the ratio decidendi of
amounts to US$106,054,197.66, of which, US$91,100,000 are
the Court of Appeals in dismissing both petitions.
In G.R. Nos. 175418-20 due the Holders of Notes.

In G.R. Nos. 175418-20, Bayantel defends the Rehabilitation

Mainly, petitioners Bank of New York and Avenue Asia Capital Finally, petitioners reiterate their claim for costs. In its Order
Court for adopting the sustainable debt level it proposed.
Group impute error on the Court of Appeals for affirming the dated March 15, 2005, the Rehabilitation Court awarded costs
Such approval by the court alone, Bayantel reasons, did not
Rehabilitation Courts decision which adopted the sustainable of suit to petitioner Bank of New York. In particular, it granted
make the payment of its debt a condition whose fulfillment
debt level Bayantel proposed. The court a quo fixed the latters prayer for the payment of filing fees, costs of
rests on its sole will, as to render the obligation void under
respondents sustainable debt at US$325 million payable publication and professional fees. Even then, petitioner bank
Article 118255 of the Civil Code. Respondent maintains that
within 19 years against the Receivers proposal of US$370 claims that a huge amount of its expenses for the
among the stakeholders, it is in the best position to determine
million payable in 15 years. Petitioners dispute Bayantels professional fees of counsels and advisers remain unpaid.
the level of debt that it can pay. Moreover, it believes that a
financial projections as unreliable and contrived, designed to More importantly, it asserts precedence in payment over the
majority of the secured creditors are comfortable with the
bear out a reduced level of sustainable debt and justify a preferred creditors. In the alternative, the Bank of New York
approved sustainable debt since only two of them appealed.
substantial write-off of its debts. In order to arrive at a prays that the costs of suit be incorporated in the award to
Respondent insists that altering the sustainable debt at this
reasonable level of sustainable debt, they believe that the the nonfinancial or trade creditors. Similarly, the Avenue Asia
point would be counterproductive.
prospective cash flow of Bayantel must be reckoned against Capital Group seeks reimbursement for the docket fees,
industry standards. Petitioners point out that the Interim publication expenses and the professional fees it has paid its
Rules only allows the debtor, in a creditor-initiated petition for counsels and financial adviser. It invokes Article 2208 of the Respondent equally opposes the Bondholders proposal to
corporate rehabilitation, to file a comment or opposition but Civil Code and the provisions of the Indenture as legal bases reduce the companys capital expenditures to between 9%
not to submit its own rehabilitation plan. They warn that if the therefor. and 11% to make more funds available for debt servicing.
fulfillment of the obligation would be made to depend on the This approach, according to Bayantel, ignores its need to
sole will of Bayantel, the entire obligation would be void. make significant investments in new infrastructure in order to
Meanwhile, the secured creditors in G.R. Nos. 174457-59 filed
cope with competitors. Respondent disputes the value of
a Memorandum52 dated April 30, 2009 with a prayer for the
petitioners projections which were derived by benchmarking
Petitioners fault the trial court for basing the sustainable debt dismissal of the bondholders petition in G.R. Nos. 175418-20.
Bayantels income, as a company under rehabilitation,
on the state of the telecommunications industry in the For the secured creditors, the sustainable debt set by the
against those of the major players, PLDT and Digitel.
country rather than consulting the financial projections and Courts of Appeals is a more manageable and realistic
business models submitted by petitioners and the Receiver. undertaking compared to herein petitioners proposal. They

CORPORATION LAW: 7. captial structure Page 23 of 201

Furthermore, respondent maintains that its rehabilitation plan Rehabilitation Court. Petitioner explains that the Monitoring dispute resolution through which creditors can enforce
was based on accurate financial data and operation reports. It Committees powers do not in any way supplant those of the compliance.
insists that the Interim Rules allows a debtor, in creditor- Board of Directors. The Bank of New York claims that it is
initiated rehabilitation proceedings, to submit an alternative customary to allow creditors to monitor and supervise the
Penultimately, respondent assails the validity of the Order
plan. It agrees with the Rehabilitation Courts decision to debtors operations as demonstrated by the restructuring
dated November 9, 2004 for lack of notice. Allegedly,
restrict conversion of the unsustainable debt to 40% of fully experiences of certain Asian countries.
Bayantel learned of said Order only after petitioner furnished
paid-up capital in Bayantel. Respondent believes that the
it a copy of its Compliance to which the same was made an
waiver of penalties and default interest and the
Petitioner submits that the Rehabilitation Court did not intend attachment. Thus, respondent insists that the reglementary
recomputation of past due interest will not violate the pari
to give the Monitoring Committee powers that are concurrent period to file an appeal or a petition for certiorari did not run
passu principle because said measures shall apply equally to
with those of the Receiver on account of the differing against it.
all creditors. Lastly, respondent admits limited liability for
interests that they represent in rehabilitation. It argues that if
costs pursuant to the Assignment Agreement but not for
at all, the court a quo committed a mere error of judgment
those incurred by petitioners under "non-consensual The Courts Ruling In G.R. Nos. 174457-59
not correctible by certiorari. Petitioner adds that even if a
scenarios."
petition for certiorari was proper, the 60-day reglementary
period provided by the Rules of Court had already lapsed Rehabilitation is an attempt to conserve and administer the
In G.R. No. 177270 when Bayantel filed its petition on May 27, 2005. It contends assets of an insolvent corporation in the hope of its eventual
that Bayantels Manifestation and Motion for Clarification return from financial stress to solvency. 58 It contemplates the
dated December 15, 2004 was in truth a motion for continuance of corporate life and activities in an effort to
In this petition for review, the Bank of New York, as trustee for
reconsideration which is a prohibited pleading under Section restore and reinstate the corporation to its former position of
the holders of the 13.5% Senior Notes of respondent
1,57 Rule 3 of the Interim Rules. Petitioner concludes that such successful operation and liquidity. The purpose of
Bayantel, challenges the Court of Appeals decision nullifying
pleadings did not toll the period for filing a petition and, rehabilitation proceedings is precisely to enable the company
the Monitoring Committees power to modify, reverse or
therefore, the Rehabilitation Courts decision had become to gain a new lease on life and thereby allow creditors to be
overrule the decision of Bayantels Board of Directors on
56 final. paid their claims from its earnings.59
certain matters. It invokes Section 23, Rule 4 of the Interim
Rules as legal basis to justify the Rehabilitation Courts grant
of extensive powers to the Monitoring Committee. The In its Consolidated Memorandum dated May 21, 2009, Rehabilitation shall be undertaken when it is shown that the
pertinent portion of said Rule states: Bayantel counters that Section 23, Rule 4 of the Interim Rules continued operation of the corporation is economically
should be understood as delineating the purpose of the feasible and its creditors can recover, by way of the present
courts orders and processes to mere implementation and value of payments projected in the plan, more, if the
In approving the rehabilitation plan, the court shall issue the
monitoring of the plan. Respondent opposes any corporation continues as a going concern than if it is
necessary orders or processes for its immediate and
interpretation of said provision which authorizes the immediately liquidated.60
successful implementation. It may impose such terms,
Committee to substitute its judgment for those of the Board
conditions, or restrictions as the effective implementation and
or vest it with powers greater than those of the Receiver. It The law governing rehabilitation and suspension of actions for
monitoring thereof may reasonably require, or for the
argues that vesting the Committee with veto power over claims against corporations is PD 902-A, as amended. On
protection and preservation of the interests of the creditors
certain decisions of the Board would effectively give it control December 15, 2000, the Court promulgated A.M. No. 00-8-10-
should the plan fail.
and management over Bayantels operations. The necessary SC or the Interim Rules of Procedure on Corporate
effect, according to Bayantel, is that every disagreement Rehabilitation, which applies to petitions for rehabilitation
Petitioner contends that the magnitude and complexity of between the Committee and the Board would have to be
filed by corporations, partnerships and associations pursuant
respondents business necessitate close monitoring of its settled in court. Respondent points out that petitioner failed
to PD 902-A.
operations to ensure successful rehabilitation. Specifically, to cite proof of its claim that it is customary among Asian
the Bank of New York expresses concern over Bayantels countries to allow the Monitoring Committee active
taciturn disposition as regards its budget and expansion participation during rehabilitation. In January 2004, Republic Act No. 8799 (RA 8799), otherwise
costs. Petitioner believes that such lack of transparency can known as the Securities Regulation Code, amended Section 5
be addressed by empowering the Monitoring Committee to of PD 902-A, and transferred to the Regional Trial Courts the
Bayantel perceive the instant petition as an underhanded jurisdiction of the Securities and Exchange Commission (SEC)
approve measures that will ultimately affect respondents
attempt by petitioner to create a Management Committee over petitions of corporations, partnerships or associations to
ability to settle its debts.
without satisfying the requisites therefor. It reiterates that the be declared in the state of suspension of payments in cases
functions of the Monitoring Committee are confined to where the corporation, partnership or association possesses
Moreover, petitioner assures that the Implementing Term ensuring that Bayantel meets the debt reduction milestones
property to cover all its debts but foresees the impossibility of
Sheet provides safeguards against the improvident under the plan. Respondent avers that even without a
meeting them when they respectively fall due or in cases
disapproval by the Monitoring Committee of proposed Monitoring Committee, it is obliged under the Plan to comply
where the corporation, partnership or association has no
measures. Petitioner is of the view that the functions of the with certain information covenants and reportorial sufficient assets to cover its liabilities, but is under the
Monitoring Committee would be rendered illusory if all requirements. It adds that the Plan provides a mechanism for
management of a rehabilitation receiver or a management
disagreements on key areas would have to be heard by the
committee.

CORPORATION LAW: 7. captial structure Page 24 of 201

In order to effectively exercise such jurisdiction, Section 6(c), rehabilitation of the debtor because of failure to achieve the (v) Each of the Accounts (as the term is defined by the
PD 902-A empowers the Regional Trial Court to appoint one or desired targets or goals as set forth therein, or the failure of Omnibus Agreement);
more receivers of the property, real and personal, which is the the said debtor to perform its obligations under the said plan,
subject of the pending action before the Commission or a determination that the rehabilitation plan may no longer
(vi) All amounts maintained in the Accounts and all
whenever necessary in order to preserve the rights of the be implemented in accordance with its terms, conditions,
monies, securities and instruments deposited or required
parties-litigants and/or protect the interest of the investing restrictions, or assumptions, the court shall upon
to be deposited in the Accounts;
public and creditors. motion, motu proprio, or upon the recommendation of the
Rehabilitation Receiver, terminate the proceedings. The
proceedings shall also terminate upon the successful (vii) All other Chattel Paper and Documents;
Under Section 6, Rule 4 of the Interim Rules, if the court finds
implementation of the rehabilitation plan. (Emphasis
the petition to be sufficient in form and substance, it shall
supplied) (viii) All other property, assets and revenues of Bayantel,
issue, not later than five (5) days from the filing of the
petition, an Order with the following pertinent effects: whether tangible or intangible;
Hence, unless the petition is dismissed for any reason, the
stay order shall be effective until the rehabilitation plan has (ix) All General Intangibles; and
(a) appointing a Rehabilitation Receiver and fixing his bond;
been successfully implemented. In the meantime, the debtor
is prohibited from paying any of its outstanding liabilities as of
(b) staying enforcement of all claims, whether for the date of the filing of the petition except those authorized in (x) All proceeds and products of any and all of the
money or otherwise and whether such enforcement is the plan under Section 24(c), Rule 4 of the Interim Rules. foregoing.64
by court action or otherwise, against the debtor, its
guarantors and sureties not solidarily liable with the In particular, petitioners refer to Section 4.02 of the
In this case, in an Order dated April 19, 2004, the
debtor; Assignment Agreement as basis for demanding full payment,
Rehabilitation Court held that "[t]he creditors of Bayantel,
ahead of other creditors, out of respondents revenue from
whether secured or unsecured, should be treated equally and
(c) prohibiting the debtor from selling, encumbering, on the same footing or pari passu until the rehabilitation operations during rehabilitation. The relevant provision reads:
transferring, or disposing in any manner any of its properties proceedings is terminated in accordance with the Interim
except in the ordinary course of business; Rules."63 The court reiterated this pronouncement in its Section 4.02. Payments Under Contracts and Receivables.
Decision dated June 28, 2004.
(d) prohibiting the debtor from making any payment of its If during the continuance of a Trigger Event the Company
liabilities outstanding as at the date of filing of the petition; x
Before us, petitioners contend that such pari passu treatment shall receive directly from any party to any Assigned
xx of claims violates not only the "due regard" provision in the Agreement or from any account debtor or other obligor under
Interim Rules but also the Contract Clause in the 1987 any Receivable, any payments under such agreements or the
(Emphasis supplied) Constitution. Petitioners assert precedence in the payment of Receivables, the Company shall receive such payments
claims during rehabilitation by virtue of the Assignment in a constructive trust for the benefit of the Secured
Agreement dated September 19, 1995. Under said Parties, shall segregate such payments from its other funds,
The stay order shall be effective from the date of its issuance
Agreement, Bayantel assigned, charged, conveyed and and shall forthwith transmit and deliver such payments to the
until the dismissal of the petition or the termination of the
61
transferred to a Collateral Agent, the following properties as Collateral Agent in the same form as so received (with any
rehabilitation proceedings. Under the Interim Rules, the
collateral for the prompt and complete payment of its necessary endorsement) along with a description of the
petition shall be dismissed if no rehabilitation plan is
obligations to secured creditors: sources of such payments. All amounts received by the
approved by the court upon the lapse of 180 days from the
Collateral Agent pursuant to this Section 4.02 shall be applied
date of the initial hearing. The court may grant an extension
as set forth in Part L and in the [Inter-creditor]
beyond this period only if it appears by convincing and (i) All land, buildings, machinery and equipment currently
Agreement.65(Underscoring in the original; emphasis supplied)
compelling evidence that the debtor may successfully be owned, and to be acquired in the future by Bayantel;
rehabilitated. In no instance, however, shall the period for
approving or disapproving a rehabilitation plan exceed 18 The resolution of the issue at hand rests on a determination of
(ii) All monies payable to Bayantel under the Project
months from the date of filing of the petition.62 whether secured creditors may enforce preference in
Documents (as the term is defined by the Omnibus
payment during rehabilitation by virtue of a contractual
Agreement);
agreement.
On the other hand, Section 27, Rule 4 of the Interim Rules
provides when the rehabilitation proceedings is deemed (iii) All Project Documents and all Contract Rights arising
terminated: Section 6(c), PD 902-A provides that upon the appointment of
thereunder;
a management committee, rehabilitation receiver, board or
body, all actions for claims against corporations, partnerships
SEC. 27. Termination of Proceedings. In case of the (iv) All receivables; or associations under management or receivership pending
failure of the debtor to submit the rehabilitation plan, or the
before any court, tribunal, board or body shall be suspended
disapproval thereof by the court, or the failure of the

CORPORATION LAW: 7. captial structure Page 25 of 201

accordingly.66 The suspension of action for claims against the out of the same fund without any precedence over each We perceive no good reason to depart from established
corporation under a rehabilitation receiver or management other.72 jurisprudence. While Section 24(d), Rule 4 of the Interim Rules
committee embraces all phases of the suit, be it before the states that contracts and other arrangements between the
trial court or any tribunal or before this Court. 67 debtor and its creditors shall be interpreted as continuing to
In Rizal Commercial Banking Corporation v. Intermediate
apply, this holds true only to the extent that they do not
Appellate Court, 73 the Court disallowed the foreclosure of the
conflict with the provisions of the plan.
The justification for suspension of actions for claims is to debtor companys property after the latter had filed a Petition
enable the management committee or rehabilitation receiver for Rehabilitation and Declaration of Suspension of Payments
to effectively exercise its/his powers free from any judicial or with the SEC. We ruled that whenever a distressed Here, the stipulation in the Assignment Agreement to the
extrajudicial interference that might unduly hinder or prevent corporation asks the SEC for rehabilitation and suspension of effect that respondent Bayantel shall pay petitioners in full
the "rescue" of the debtor company. 68 It is intended to give payments, preferred creditors may no longer assert and ahead of other creditors out of its cash flow during
enough breathing space for the management committee or preference but shall stand on equal footing with other rehabilitation directly impinges on the provision of the
rehabilitation receiver to make the business viable again creditors. Foreclosure shall be disallowed so as not to approved Rehabilitation Plan that "[t]he creditors of Bayantel,
without having to divert attention and resources to litigation prejudice other creditors, or cause discrimination among whether secured or unsecured, should be treated equally and
in various fora.69 them. In 1999, the Court qualified this ruling by stating that on the same footing or pari passu until the rehabilitation
preferred creditors of distressed corporations shall stand on proceedings is terminated in accordance with the Interim
equal footing with all other creditors only after a rehabilitation Rules."
In the 1990 case of Alemars Sibal & Sons, Inc. v. Judge
receiver or management committee has been
Elbinias,70 the Court first enunciated the prevailing principle
appointed. 74 More importantly, the Court laid the guidelines
which governs the relationship among creditors during During rehabilitation, the only payments sanctioned by the
for the treatment of claims against corporations undergoing
rehabilitation. In said case, G.A. Yupangco sought the Interim Rules are those made to creditors in accordance with
rehabilitation:
issuance of a writ of execution to implement a final and the provisions of the plan. Pertinent to this is Section 5(b),
executory default judgment in its favor and after Alemars Rule 4 of the Interim Rules which states that the terms and
Sibal & Sons, Inc. was placed under rehabilitation. In ordering 1. All claims against corporations, partnerships, or conditions of the rehabilitation plan shall include the manner
the stay of execution, the Court held: associations that are pending before any court, tribunal, of its implementation, giving due regard to the interests of
or board, without distinction as to whether or not a secured creditors. This very phrase is what petitioners invoke
creditor is secured or unsecured, shall be suspended as basis for demanding priority in payment out of
During rehabilitation receivership, the assets are held
effective upon the appointment of a management respondents cash flow.
in trust for the equal benefit of all creditors to
committee, rehabilitation receiver, board, or body in
preclude one from obtaining an advantage or
accordance with the provisions of Presidential Decree No.
preference over another by the expediency of an But petitioners reliance thereon is misplaced.
902-A.
attachment, execution or otherwise. For what would
prevent an alert creditor, upon learning of the receivership,
By definition, due regard means consideration in a degree
from rushing posthaste to the courts to secure judgments for 2. Secured creditors retain their preference over
appropriate to the demands of a particular case. 76 On the
the satisfaction of its claims to the prejudice of the less alert unsecured creditors, but enforcement of such
other hand, security interest is a form of interest in property
creditors. preference is equally suspended upon the
which provides that the property may be sold on default in
appointment of a management committee,
order to satisfy the obligation for which the security interest is
rehabilitation receiver, board, or body. In the event
As between the creditors, the key phrase is "equality given. Often, the term "lien" is used as a synonym, although
that the assets of the corporation, partnership, or
is equity." When a corporation threatened by lien most commonly refers only to interests providing security
association are finally liquidated, however, secured and
bankruptcy is taken over by a receiver, all the creditors that are created by operation of law, not through agreement
preferred credits under the applicable provisions of the
should stand on equal footing. Not anyone of them of the debtor and creditor. In contrast, the term "security
Civil Code will definitely have preference over unsecured
should be given any preference by paying one or some interest" means any interest in property acquired by contract
ones.75 (Emphasis supplied)
of them ahead of the others. This is precisely the reason for the purpose of securing payment or performance of an
for the suspension of all pending claims against the obligation or indemnifying against loss or liability. 77
corporation under receivership. Instead of creditors vexing Basically, once a management committee or rehabilitation
the courts with suits against the distressed firm, they are receiver has been appointed in accordance with PD 902-A, no
Under the Interim Rules, the only pertinent reference to
directed to file their claims with the receiver who is a duly action for claims may be initiated against a distressed
creditor security is found in Section 12, Rule 4 on relief from,
appointed officer of the SEC.71 (Emphasis supplied) corporation and those already pending in court shall be
modification or termination of stay order. Said provision states
suspended in whatever stage they may be. Notwithstanding,
that the creditor is regarded as lacking adequate protection if
secured creditors shall continue to have preferred status but
Since then, the principle of equality in equity has been cited it can be shown that: (a) the debtor fails or refuses to honor a
the enforcement thereof is likewise held in abeyance.
as the basis for placing secured and unsecured creditors in pre-existing agreement with the creditor to keep the property
However, if the court later determines that the rehabilitation
equal footing or in pari passu with each other during insured; (b) the debtor fails or refuses to take commercially
of the distressed corporation is no longer feasible and its
rehabilitation. In legal parlance, pari passu is used especially reasonable steps to maintain the property; or (c) the property
assets are liquidated, secured claims shall enjoy priority in
of creditors who, in marshaling assets, are entitled to receive
payment.

CORPORATION LAW: 7. captial structure Page 26 of 201

has depreciated to an extent that the creditoris indemnifying against loss or liability. Lastly, the addition of respondents fixed assets is P18.7 billion while its Forced
undersecured. the phrase "but not limited" in the amendment shuns a rigid Liquidation Value is P9.3 billion. Together with cash and
application of the provision by recognizing that "giving due receivables in the amount of P911 million, respondents total
regard to the interest of secured creditors" may be rendered liquidation assets are valued at P10.2 billion. From this
Upon a showing that the creditor is lacking in protection, the
in other ways than taking care that the security liens and amount, the estimated liquidation return to the Omnibus
court shall order the rehabilitation receiver to take steps to
interests of secured creditors are adequately protected. Creditors is P6,102,150,000 or approximately 52.9% of their
ensure that the property is insured or maintained or to make
claims in the amount of P11,539,776,000. Meanwhile, Chattel
payment or provide replacement security such that the
Creditors can recoup 61% of its claims. As regards the
obligation is fully secured. If such arrangements are not In this case, petitioners Express Investments III Private Ltd.
Unsecured Creditors, they will share in the pool of assets that
feasible, the court may allow the secured creditor to enforce And Export Development Canada are concerned, not so much
respondents have acquired since 1998, which were not
its claim against the debtor. Nonetheless, the court may deny with the adequacy of the securities offered by respondent,
specifically registered under the Omnibus Agreement
the creditor the foregoing remedies if allowing so would but with the devaluation of such securities over time.
Mortgage Supplements. Said assets are estimated to have a
prevent the continuation of the debtor as a going concern or Petitioners fear that the proceeds of respondents collateral
value of P3.5 Billion. This accounts for 10.7% of the
otherwise prevent the approval and implementation of a would be insufficient to cover their claims in the event of
Unsecured Creditors claims.
rehabilitation plan.78 liquidation.

Reckoned from these figures, the Receiver concluded that the

In the context of the foregoing provisions, "giving due regard
On this point, suffice it to state that petitioners are not
shareholders shall receive nothing on respondents liquidation
to the interests of secured creditors" primarily entails without any remedy to address a deficiency in securities, if
while the latters creditors can expect significantly less than
ensuring that the property comprising the collateral is and when it comes about. Under Section 12, Rule 4 of the
full repayment. Moreover, regardless of whether the
insured, maintained or replacement security is provided such Interim Rules, a secured creditor may file a motion with the
shareholders will lose at least their controlling interest as a
that the obligation is fully secured. The reason for this rule is
Rehabilitation Court for the modification or termination of the
result of the plan, petitioners, in their Memorandum dated
simple, in the event that the court terminates the proceedings
stay order. If petitioners can show that arrangements to
April 30, 2009, have signified their conformity with the Court
for reasons other than the successful implementation of the insure or maintain the property or to make payment or
of Appeals decision to limit the conversion of the
plan, the secured creditors may foreclose the securities and provide additional security therefor is not feasible, the court
unsustainable debt to a maximum of 40% of the fully-paid up
the proceeds thereof applied to the satisfaction of their shall modify the stay order to allow petitioners to enforce
capital of respondent corporation. Lastly, the Receiver not
preferred claims. their claim that is, to foreclose the mortgage and apply the
only recommended the approval of the Plan by the
proceeds thereof to their claims. Be that as it may, the court
Rehabilitation Court, he, himself, prepared it. The concurrence
may deny the creditor this remedy if allowing so would
When the Rules of Procedure on Corporate Rehabilitation took of these conditions renders the opposition of petitioners
prevent the continuation of the debtor as a going concern or
effect on January 16, 2009, the "due regard" provision was manifestly unreasonable.
otherwise prevent the approval and implementation of a
amended to read:
rehabilitation plan.
As regards the second issue, petitioners submit that the pari
SEC. 18. Rehabilitation Plan. The rehabilitation plan shall passu treatment of claims offends the Contract Clause under
Indeed, neither the "due regard provision" nor contractual
include (a) the desired business targets or goals and the the 1987 Constitution. Article III, Section 10 of the
arrangements can shackle the Rehabilitation Court in
duration and coverage of the rehabilitation; (b) the terms and Constitution mandates that no law impairing the obligation of
determining the best means of rehabilitating a distressed
conditions of such rehabilitation which shall include the contracts shall be passed. Any law which enlarges, abridges,
corporation. Truth be told, the Rehabilitation Court may
manner of its implementation, giving due regard to the or in any manner changes the intention of the parties,
approve a rehabilitation plan even over the opposition of
interests of secured creditors such as, but not limited, to necessarily impairs the contract itself. And even when the
creditors holding a majority of the total liabilities of the debtor
the non-impairment of their security liens or interests; change in the contract is done by indirection, there is
if, in its judgment, the rehabilitation of the debtor is feasible
x x x. (Emphasis supplied) impairment nonetheless.81
and the opposition of the creditors is manifestly
unreasonable. In determining whether or not the opposition of
Despite the additional phrase, however, it is our view that the the creditors is manifestly unreasonable, the court shall At this point, it bears stressing that the non-impairment
amendment simply amplifies the meaning of the "due regard consider the following: (a) That the plan would likely provide clause is a limitation on the exercise of legislative power and
provision" in the Interim Rules. First, the amendment the objecting class of creditors with compensation greater not of judicial or quasijudicial power. In Lim, Sr. v. Secretary of
exemplifies what giving "due regard to the interests of than that which they would have received if the assets of the Agriculture & Natural Resources, et al.,82 we held:
secured creditors" contemplates, mainly, the nonimpairment debtor were sold by a liquidator within a three-month period;
of securities. At the same time, the specific reference to (b) That the shareholders or owners of the debtor lose at least
x x x. For it is well-settled that a law within the meaning of
"security liens" and "interests," separated by the disjunctive their controlling interest as a result of the plan; and (c) The
this constitutional provision has reference primarily to
"or," describes what "the interests of secured creditors" Rehabilitation Receiver has recommended approval of the
statutes and ordinances of municipal corporations. Executive
consist of. Again, lien pertains only to interests providing plan.79
orders issued by the President whether derived from his
security that are created by operation of law while security
constitutional powers or valid statutes may likewise be
interests include those acquired by contract for the purpose
According to the Liquidation Analysis80 prepared by KPMG at considered as such. It does not cover, therefore, the exercise
of securing payment or performance of an obligation or
the request of the Receiver, the Fair Market Value of of the quasi-judicial power of a department head even if

CORPORATION LAW: 7. captial structure Page 27 of 201

affirmed by the President. The administrative process in such factual issues is the function of lower courts, whose findings Next, petitioners contest the admission of respondents
a case partakes more of an adjudicatory character. It is bereft on these matters are received with respect.87 This is rehabilitation plan for being filed in violation of the Interim
of any legislative significance. It falls outside the scope of the especially true in rehabilitation proceedings where certain Rules. It is petitioners view that in a creditor-initiated petition
non-impairment clause. x x x.83 courts are designated to hear the case on account of their for rehabilitation, the debtor may only submit either a
expertise and specialized knowledge on the subject matter. comment or opposition but not its own rehabilitation plan.
Though this doctrine admits of several exceptions, 88 none is
The prohibition embraces enactments of a governmental law-
applicable in the case at bar
making body pertaining to its legislative functions. Strictly We cannot agree.
speaking, it does not cover the exercise by such law-making
body of quasi-judicial power. Notably, the Interim Rules is silent on the manner by which
Rule 4 of the Interim Rules treats of rehabilitation in general,
the sustainable debt of the debtor shall be determined. Yet,
without distinction as to who between the debtor and the
Section 2 of the Interim Rules prescribe that the Rules shall be
Verily, the Decision dated June 28, 2004 of the Rehabilitation creditor initiated the petition. Nowhere in said Rule is there
liberally construed to carry out the objectives of Sections
Court is not a proper subject of the Non-impairment Clause. any provision that prohibits the debtor in a creditor-initiated
5(d),89 6(c)90 and 6(d)91 of PD 902-A.
petition to file its own rehabilitation plan for consideration by
the court. Quite the reverse, one of the functions and powers
In view of the foregoing, we find no need to discuss the third
Section 5(d), PD 902-A vested jurisdiction upon the SEC over of the rehabilitation receiver under Section 14(m) of said Rule
issue posed in this petition
petitions for rehabilitation. Later, RA 8799 or the Securities is to study the rehabilitation plan proposed by the debtor or
Regulation Code, amended Section 5(d) of PD 902-A by any rehabilitation plan submitted during the proceedings,
In G.R. Nos. 175418-20 transferring SECs jurisdiction over said petitions to the RTC. together with any comments made thereon. This provision
Meanwhile, Section 6(c) of PD 902-A provides for the makes particular reference to a debtor-initiated proceeding in
Prefatorily, we restate the time honored principle that in a appointment of a receiver of the subject property whenever which the debtor principally files a rehabilitation plan. In such
petition for review on certiorari under Rule 45 of the Rules of necessary in order to preserve the rights of the parties and to case, the receiver is tasked, among other things, to study the
Court, only questions of law may be raised. Thus, in a petition protect the interest of the investing public and the creditors. rehabilitation plan presented by the debtor along with any
for review on certiorari, the scope of the Supreme Court's Upon the appointment of such receiver, all actions for claims rehabilitation plan submitted during the proceedings. This
judicial review is limited to reviewing only errors of law, not of against the corporation pending before any court, tribunal, implies that the creditors of the distressed corporation, and
fact.84 It is not our function to weigh all over again evidence board or body shall be suspended accordingly. On the other even the receiver, may file their respective rehabilitation
already considered in the proceedings below, our jurisdiction hand, Section 5(d), PD 902-A expands the power of the plans. We perceive no good reason why the same option
is limited to reviewing only errors of law that may have been Commission to allow the creation and appointment of a should not be available, by analogy, to a debtor in creditor-
committed by the lower court.85 management committee to undertake the management of initiated proceedings, which is also found in Rule 4 of the
the corporation when there is imminent danger of dissipation, Interim Rules.
loss, wastage or destruction of assets or other properties or
Before us, petitioners Bank of New York and Avenue Asia
paralyzation of the business of the corporation which may be
Capital Group raise a question of fact which is not proper in a Third, petitioners fault the Court of Appeals for ruling that the
prejudicial to the interest of minority stockholders, parties-
petition for review on certiorari. A question of law arises when debt-toequity conversion rate of 77.7%, as proposed by The
litigants or the general public.
there is doubt as to what the law is on a certain state of facts, Bank of New York, violates the Filipinization provision of the
while there is a question of fact when the doubt arises as to Constitution. Petitioners explain that the acquisition of shares
the truth or falsity of the alleged facts. For a question to be The underlying objective behind these provisions is to foster by foreign Omnibus and Financial Creditors shall be done,
one of law, the same must not involve an examination of the the rehabilitation of the debtor by insulating it against claims, both directly and indirectly in order to meet the control test
probative value of the evidence presented by the litigants or preserving its assets and taking steps to ensure that the principle under RA 7042 93 or the Foreign Investments Act of
any of them. The resolution of the issue must rest solely on rights of all parties concerned are adequately protected. 1991. Under the proposed structure, said creditors shall own
what the law provides on the given set of circumstances. 40% of the outstanding capital stock of the
Once it is clear that the issue invites a review of the evidence telecommunications company on a direct basis, while the
This Court is convinced that the Court of Appeals ruled in
presented, the question posed is one of fact.86 remaining 40% of shares shall be registered to a holding
accord with this policy when it upheld the Rehabilitation
company that shall retain, on a direct basis, the other 60%
Courts determination of respondents sustainable debt. We
equity reserved for Filipino citizens.
Whether the Court of Appeals erred in affirming the find the sustainable debt of US$325 million, spread over 19
sustainable debt fixed by the Rehabilitation Court is a years, to be a more realistically achievable amount
question of fact that calls for a recalibration of the evidence considering respondents modest revenue projections. Moreover, petitioners maintain that it is only fair to impose
presented by the parties before the trial court. In order to Bayantel projected a constant rise in its revenues at the upon the Omnibus and Financial Creditors a bigger equity
resolve said issue, petitioners would have this Court reassess range of 1.16%-4.91% with periodic reverses every two conversion in Bayantel considering that petitioners will bear
the state of respondent Bayantels finances at the onset of years.92 On the other hand, petitioners proposal of a the bulk of the accrued interests and penalties to be written
rehabilitation and gauge the practical value of the plans sustainable debt of US$471 million to be paid in 12 years and off. Initially, the Rehabilitation Court approved the Receivers
submitted by the parties vis--vis the financial models the Receivers proposal of US$370 million to be paid in 15 recommendation to write-off interests and penalties in the
prepared by the experts engaged by them. These tasks are years betray an over optimism that could leave Bayantel with amount of US$34,044,553.00. The Rehabilitation Court
certainly not for this Court to accomplish. The resolution of nothing to spend for its operations. likewise ordered a re-computation of past due interest in

CORPORATION LAW: 7. captial structure Page 28 of 201

accordance with the rate proposed by the Receiver. Following Applying this, two steps must be followed in order to equity in respondent company, modification of interest rates
this, petitioners estimate the total unpaid accrued interest of determine whether the conversion of debt to equity in excess on the restructured debt and accrued interest and a write-off
Bayantel as of July 30, 2003 to be at US$140,098,750.66 of 40% of the outstanding capital stock violates the or relief from penalties and default interest. These
while the Rehabilitation Court arrived at the total amount of constitutional limit on foreign ownership of a public recommendations by the Receiver are perfectly within the
past due interest and penalties of US$114,855,369.59 upon utility: First, identify into which class of shares the debt shall powers of the Rehabilitation Court to adopt and approve, as it
recomputation. This makes for a difference of be converted, whether common shares, preferred shares that did adopt and approve. In so doing, no reversible error can be
US$25,243,381.07 which, petitioners claim, represents an have the right to vote in the election of directors or non- attributed to the Rehabilitation Court.
additional write-off to be borne by them for a total write-off of voting preferred shares; Second, determine the number of
US$59,287,934.07. shares with voting right held by foreign entities prior to
The pertinent portion of the fallo of said courts Decision
conversion. If upon conversion, the total number of shares
dated June 28, 2004 states:
held by foreign entities exceeds 40% of the capital stock with
The provision adverted to is Article XII, Section 11 of the 1987
voting rights, the constitutional limit on foreign ownership is
Constitution which states:
violated. Otherwise, the conversion shall be respected. 1. The ruling on the pari passu treatment of all
creditors whose claims are subject to restructuring shall be
SEC. 11. No franchise, certificate, or any other form of maintained and shall extend to all payment terms and
In its Rehabilitation Plan, 96 among the material financial
authorization for the operation of a public utility shall be treatment of past due interest.[98 (Emphasis supplied)
commitments made by respondent Bayantel is that its
granted except to citizens of the Philippines or to corporations
shareholders shall "relinquish the agreed-upon amount of
or associations organized under the laws of the Philippines at
common stock[s] as payment to Unsecured Creditors as per Thus, the court a quo provided for a uniform application of
least sixty per centum of whose capital is owned by such
the Term Sheet." 97 Evidently, the parties intend to convert the pari passu principle among creditor claims and the terms
citizens, nor shall such franchise, certificate or authorization
the unsustainable portion of respondent's debt into common by which they shall be paid, including past due interest. This
be exclusive in character or for a longer period than fifty
stocks, which have voting rights. If we indulge petitioners on is consistent with the interpretation accorded by
years. Neither shall any such franchise or right be granted
their proposal, the Omnibus Creditors which are foreign jurisprudence to the pari passu principle that during
except under the condition that it shall be subject to
corporations, shall have control over 77.7% of Bayantel, a rehabilitation, the assets of the distressed corporation are
amendment, alteration, or repeal by the Congress when the
public utility company. This is precisely the scenario held in trust for the equal benefit of all creditors to preclude
common good so requires. The State shall encourage equity
proscribed by the Filipinization provision of the Constitution. one from obtaining an advantage or preference over another.
participation in public utilities by the general public. The
Therefore, the Court of Appeals acted correctly in sustaining All creditors should stand on equal footing. Not any one of
participation of foreign investors in the governing body of any
the 40% debt-to-equity ceiling on conversion. them should be given preference by paying one or some of
public utility enterprise shall be limited to their proportionate
them ahead of the others.99
share in its capital, and all the executive and managing
officers of such corporation or association must be citizens of As to the fourth issue, petitioners insist that the write-off of
the Philippines. the default interest and penalties along with the re- As applied to this case, the pari passu treatment of claims
computation of past due interest violate the pari during rehabilitation entitles all creditors, whether secured or
passu treatment of creditors. unsecured, to receive payment out of Bayantels cash flow.
This provision explicitly reserves to Filipino citizens control
Despite their preferred position, therefore, the secured
over public utilities, pursuant to an overriding economic goal
creditors shall not be paid ahead of the unsecured creditors
of the 1987 Constitution: to "conserve and develop our Petitioners argument lacks merit.
but shall receive payment only in the proportion owing to
patrimony" and ensure "a selfreliant and independent
them.
national economy effectively controlled by Filipinos."94
Section 5(d), Rule 4 of the Interim Rules provides that the
rehabilitation plan shall include the means for the execution
In any event, the debt restructuring schemes complained of
In the recent case of Gamboa v. Teves,95 the Court settled of the rehabilitation plan, which may include conversion of
shall be implemented among all creditors regardless of class.
once and for all the meaning of "capital" in the above-quoted the debts or any portion thereof to equity, restructuring of the
Both secured and unsecured creditors shall suffer a write-off
Constitutional provision limiting foreign ownership in public debts, dacion en pago, or sale of assets or of the controlling
of penalties and default interest and the escalating interest
utilities. In said case, we held that considering that common interest.
rates shall be equally imposed on them. We repeat, the
shares have voting rights which translate to control as
commitment embodied in the pari passu principle only goes
opposed to preferred shares which usually have no voting
Debt restructuring may involve conversion of the debt or any so far as to ensure that the assets of the distressed
rights, the term "capital" in Section 11, Article XII of the
portion thereof to equity, sale of the assets of the distressed corporation are held in trust for the equal benefit of all
Constitution refers only to common shares. However, if the
company and application of the proceeds to the creditors. It does not espouse absolute equality in all aspects
preferred shares also have the right to vote in the election of
obligation, dacion en pago, debt relief or reduction, of debt restructuring.
directors, then the term "capital" shall include such preferred
modification of the terms of the loan or a combination of
shares because the right to participate in the control or
these schemes.
management of the corporation is exercised through the right As regards petitioners claims for costs, petitioner Bank of
to vote in the election of directors. In short, the term "capital" New York filed before the Rehabilitation Court a Notice of
in Section 11, Article XII of the Constitution refers only to In this case, the approved Rehabilitation Plan provided for a Claim100 dated February 19, 2004 for the payment of
shares of stock that can vote in the election of directors. longer period of payment, the conversion of debt to 40% US$1,255,851.30, representing filing fee, deposit for

CORPORATION LAW: 7. captial structure Page 29 of 201

expenses and the professional fees of its counsels and Rehabilitation Court was promulgated on March 15, 2005 or The pertinent portion of the fallo of the Decision dated June
financial advisers. Earlier, said bank had filed a claim for the four (4) months after petitioners had appealed the Decision 28, 2004 provides:
payment of US$863,829.98 for professional fees of its dated June 28, 2004 to the Court of Appeals on November 16,
counsels and professional advisers and P2,850,305.00 for 2004. Evidently, the appellate court could not have acquired
6. A Monitoring Committee shall be formed composed of
docket fees and publication expenses. On its end, the Avenue jurisdiction to review said Order.
representatives from all classes of the restructured debt. The
Asia Capital Group claims a total of US$535,075.64 to defray
Rehabilitation Receivers role shall be limited to the powers of
the professional fees of its financial adviser, Price Waterhouse
Nonetheless, we doubt the propriety of the Rehabilitation monitoring and oversight as provided in the Interim Rules. All
& Cooper and the Bondholder Communications Group.
Courts award for costs. A perusal of the Order dated March powers provided for in the Report and Recommendations,
15, 2005 reveals that the award to petitioner Bank of New which exceed the monitoring and oversight functions
In an Order101 dated March 15, 2005, the Rehabilitation Court York was made pursuant to Section 1, Rule 142 of the Rules of mandated by the Interim Rules shall be amended
approved the claims for costs of petitioner Bank of New York Court, which states: accordingly.110
as follows:
SECTION 1. Costs ordinarily follow results of suit.- Unless On October 15, 2004, petitioner Bank of New York filed a
i. filing fees of P2,701,750.00 as evidenced by O.R. Nos. otherwise provided in these Rules, costs shall be allowed Manifestation with the Rehabilitation Court for the creation of
18463998, 18466286 and 0480246 all dated August 13, to the prevailing party as a matter of course, but the court a monitoring committee in accordance with the aforequoted
2003 of the Regional Trial Court (of Pasig City); shall have power, for special reasons, to adjudge that either pronouncement. Petitioner espouses the view that it is
party shall pay the costs of an action, or that the same be essential to "provide for a strong and effective Monitoring
divided, as may be equitable. No costs shall be allowed Committee x x x which gives the Financial Creditors
ii. costs of publication of the Stay Order in the amount of
against the Republic of the Philippines unless otherwise meaningful and substantial participation in Bayantel." 111 It
P47,550.00 as evidenced by O.R. No. 86384 dated August
provided by law. (Emphasis supplied) went on to propose the powers that the Monitoring
13, 2003 of the Peoples Independent Media, Inc., the
Committee should possess, specifically:
same being judicial costs authorized under Sec. 1, Rule
142 of the Rules of Court; However, there is no prevailing party in rehabilitation
proceedings which is non-adversarial in nature. 106 Unlike in The role of the Monitoring Committee shall be to work with
adversarial proceedings, the court in rehabilitation the Receiver (on precise terms to be agreed as discussed
iii. payments of professional fees to its Philippine Counsel,
proceedings appoints a receiver to study the best means to below) to Oversee the actions of the BTI New Board of
Belo Gozon Elma Parel Asuncion & Lucila, in the total
revive the debtor and to ensure that the value of the debtors Directors, making key Decisions and approving, amongst
amount of US$152,784.32 as evidenced by the Affidavit of
property is reasonably maintained pending the determination other things,
Atty. Roberto Rafael V. Lucila and the Statements of
of whether or not the debtor should be rehabilitated, as well
Account attached thereto;
as implement the rehabilitation plan after its approval. 107 The
(i) Any proposed Events of Rescheduling;
main thrust of rehabilitation is not to adjudicate opposing
which the Court considers to be reasonable and finds claims but to restore the debtor to a position of successful
authorized under Sec. 6.11 and 6.12 of the Indenture operation and solvency. Under the Interim Rules, reasonable (ii) Any other proposed actions by the receiver on a
attached as Annex "E" to the Petition; fees and expenses are allowed the Receiver and the persons payment default;
hired by him,108 for those expenses incurred in the ordinary
The Receiver is hereby directed to cause the settlement of course of business of the debtor after the issuance of the stay (iii) Operating Expenses Budgets;
109
payment of the accounts within a period of sixteen (16) order but excluding interest to creditors.
months from receipt of this Order.102
(iv) Capital Expenditure Budgets;
Moreover, while it is true that the Indenture between
The trial court made no pronouncement on the claims for cost petitioners and respondent corporation authorizes the Trustee
(v) Asset Sales Programs; and
of petitioner Avenue Asia Capital Group, either in the same to file proofs of claim for the payment of reasonable expenses
Order or in a subsequent order. and disbursements of the Trustee, its agents and counsel,
accountants and experts, such remedy is available only in (vi) Terms of Incentive Scheme for New Management and
cases where the Trustee files a collection suit against Management Targets.112
Before us, petitioners reiterate their claims for costs based on
respondent company. Indubitably, the rehabilitation
Sections 6.11103 and 6.12104 of the Indenture105dated July 22,
proceedings in the case at bar is not a collection suit, which is Subsequently, in an Order113 dated November 9, 2004, the
1999, which was executed by respondent in their favor.
adversarial in nature. Rehabilitation Court adopted petitioners proposal by
constituting a Monitoring Committee that
It bears stressing at this point that the subject of petitioners
In G.R. No. 177270
appeal before the Court of Appeals was the Rehabilitation
Courts Decision dated June 28, 2004. Said Decision, however, shall participate with the Receiver in monitoring and
bore no discussion on either petitioners claim for costs from At issue in this petition for review on certiorari is the extent of overseeing the actions of the Board of Directors of Bayantel
which they may appeal. Notably, the assailed Order of the power that the Monitoring Committee can exercise.

CORPORATION LAW: 7. captial structure Page 30 of 201

and may, by majority vote, adopt, modify, revise or receipt of this Order. Costs, expenses and taxes that may be Rehabilitation Receiver's power relating to matters of
substitute any of the following items: due on the execution of the convertible debt instrument shall Bayantels budget.
be charged to Bayantel as costs of the rehabilitation
proceedings;
(1) any proposed Annual OPEX Budgets; The [c]ourt wishes to stress that the Interim Rules prohibit the
Rehabilitation Receiver from taking over the management
xxxx and control of the company under rehabilitation, and limit his
(2) any proposed Annual CAPEX Budgets;
role to merely overseeing and monitoring the operations of
the company (Section 14, Rule 4, Interim Rules). However, the
iv. the Receiver shall devise a mode or procedure
(3) any proposed Reschedule; [c]ourt also appreciates that the Rehabilitation Receiver must
whereby the Monitoring Committee can have immediate
oversee the implementation of the rehabilitation plan as
and direct access to any information that the Receiver
(4) any proposed actions by the Receiver on a payment approved by the [c]ourt. In line with petitioners proposal, the
has obtained or received from Bayantel or the Monitoring
default; creation of a Monitoring Committee composed of
Accountant in regard to the management and business
representatives from all classes of the restructured
operations of Bayantel;
debt addresses the concerns raised by the
(5) terms of Management Incentivisation Scheme and
creditors.117 (Emphasis supplied)
Management Targets; v. the trading of debt mentioned in the Implementing Term
Sheet shall be governed by the pre-petition documents which
It can be gleaned from the foregoing that the Rehabilitation
(6) the EBITDA/Revenue ratios set by the Bayantel do not conflict with the Decision of this Court and provided
Courts decision to form a monitoring committee was borne
Board of Directors; and, that no transfer shall be made to the Bayantel Group
out of creditors concerns over the possession of vast powers
Companies, or any controlling shareholders thereof including
by the Receiver. While the Rehabilitation Court was quick to
Bayan Telecommunications Holdings Corporation ("BTHC");
(7) any other proposed actions by the Bayantel delineate the Receivers authority, it nevertheless,
however, any "buy back" scheme as may be approved by
Board of Directors including, without limitation, underscored the value of his role in overseeing the
the Monitoring Committee and Bayantel shall be open to
issuance of new shares, sale of core and non-core implementation of the Plan. It was on this premise that the
all creditors whether secured or unsecured; 116 (Emphasis
assets, change of business, etc. that will materially Rehabilitation Court appointed the Monitoring Committee - to
supplied)
affect the terms and conditions of the rehabilitation "[address] the concerns raised by the creditors." Yet, in its
plan and its implementation.114(Emphasis supplied) Orders dated November 9, 2004 and March 15, 2005, the
On appeal, the Court of Appeals nullified the Orders dated Rehabilitation Court equipped the Monitoring Committee with
November 9, 2004 and March 15, 2005 insofar as they powers well beyond those of the Receivers. Apart from
From said Order, respondent Bayantel filed a Manifestation
defined the powers and functions of the Monitoring control over respondents budget, the Monitoring Committee
and Motion for Clarification while the secured creditors moved
Committee. The appellate court ruled that the Rehabilitation may also adopt, modify, revise or even substitute any other
for an increase in the membership of the monitoring
Court committed grave abuse of discretion in vesting the proposed actions by respondents Board of Directors,
committee from three to five members. For his part, the
Monitoring Committee with powers beyond monitoring and including, without limitation issuance of new shares, sale of
Receiver submitted a Compliance and Manifestation dated
overseeing Bayantels operations. core and non-core assets, change of business and others that
January 10, 2005.
will materially affect the terms and conditions of the
Before us, petitioner contends that the Rehabilitation Court rehabilitation plan and its implementation. Ironically, the
In an Order115 dated March 15, 2005, the Rehabilitation Court
intended for the Monitoring Committee to exercise powers court a quo diluted the seeming concentration of power in the
affirmed the creation of a monitoring committee but denied hands of the Receiver but appointed a Committee possessed
greater than those of the Receiver.
the motion for the appointment of additional members of even wider discretion over respondents operations.
therein. It also made the following dispositions relative to the
functions of the Monitoring Committee: We find no merit in petitioners argument.
From all indications, however, the tenor of the Rehabilitation
Courts Decision dated June 28, 2004 does not contemplate
(d) to approve the Implementing Term Sheet submitted by the In the Decision dated June 28, 2004, the Rehabilitation Court
the creation of a Monitoring Committee with broader powers
Receiver subject to the following conditions: discussed the circumstances surrounding the creation of the
than the Receiver. As the name of the Monitoring Committee
monitoring committee, thus:
itself suggests, its job is "to watch, observe or check
xxxx especially for a special purpose."118In the context of the
Both Bayantel and the Opposing Creditors contend that the Decision dated June 28, 2004, the fundamental task of the
Rehabilitation Receiver, under his Report and Monitoring Committee herein is to oversee the
ii. the Receiver shall design and formulate with the
Recommendations, appear to be vested with too much implementation of the rehabilitation plan as approved by the
participation of the Monitoring Committee and
discretion in the implementation of his proposed rehabilitation court. This should not be confused with the functions of the
Bayantel the convertible debt instrument, as directed of
plan. Bayantel and the Opposing Creditors for one, argue Receiver under the Interim Rules or a management
him in the earlier Order of November 9, 2004, for the
against the power of the Rehabilitation Receiver to be able to committee under PD 902-A.
unsustainable portion of the restructured debt of Bayantel
further restructure Restructured Debt as well as the
and submit the same to the Court within thirty (30) days from

CORPORATION LAW: 7. captial structure Page 31 of 201

Under Section 14, Rule 4 of the Interim Rules, the Receiver interest of the minority stockholders, the creditors or the
shall not take over the management and control of the debtor public. Unless petitioner satisfies these requisites, we cannot
but shall closely oversee and monitor its operations during sanction the exercise by the Monitoring Committee of powers
the pendency of the rehabilitation proceeding. The that will amount to management of respondents operations.
Rehabilitation Receiver shall be considered an officer of the
court and his core duty is to assess how best to rehabilitate
WHEREFORE, the Court hereby RESOLVES to dispose of
the debtor and to preserve its assets pending the
these consolidated petitions, as follows:
determination of whether or not it should be rehabilitated and
to implement the approved plan.
(1) The petition for review on certiorari in G.R. Nos.
174457-59 is DENIED. The Decision dated August 18,
It is a basic precept in Corporation Law that the corporate
2006 of the Court of Appeals in CA-G.R. SP No. 87203
powers of all corporations formed under Batas Pambansa
is AFFIRMED;
Blg. 68 or the Corporation Code shall be exercised, all
business conducted and all property of such corporations
controlled and held by the board of directors or trustees. (2) The petition for review on certiorari in G.R. Nos.
Nonetheless, PD 902-A presents an exception to this rule. 175418-20 is DENIED. The Decision dated August 18,
2006 and Resolution dated November 8, 2006 of the Court
of Appeals in CA-G.R. SP Nos. 87100 and 87111
Section 6(d)119 of PD 902-A empowers the Rehabilitation Court
are AFFIRMED; and
to create and appoint a management committee to undertake
the management of corporations when there is imminent
danger of dissipation, loss, wastage or destruction of assets (3) The petition for review on certiorari in G.R. No. 177270
or other properties or paralyzation of business operations of is DENIED. The Decision dated October 27, 2006 and
such corporations which may be prejudicial to the interest of Resolution dated March 23, 2007 of the Court of Appeals
minority stockholders, parties-litigants or the general public. in CA-G.R. SP No. 89894 are AFFIRMED.
In the case of corporations supervised or regulated by
government agencies, such as banks and insurance No pronouncement as to costs.
companies, the appointment shall be made upon the request
of the government agency concerned. Otherwise, the
SO ORDERED.
Rehabilitation Court may, upon petition or motu proprio,
appoint such management committee.

The management committee or rehabilitation receiver, board

or body shall have the following powers: (1) to take custody
of, and control over, all the existing assets and property of
the distressed corporation; (2) to evaluate the existing assets
and liabilities, earnings and operations of the corporation; (3)
to determine the best way to salvage and protect the interest
of the investors and creditors; (4) to study, review and G.R. No. 195580 April 21, 2014
evaluate the feasibility of continuing operations and
restructure and rehabilitate such entities if determined to be
NARRA NICKEL MINING AND DEVELOPMENT CORP.,
feasible by the Rehabilitation Court; and (5) it may overrule or
TESORO MINING AND DEVELOPMENT, INC., and
revoke the actions of the previous management and board of
MCARTHUR MINING, INC., Petitioners, vs. REDMONT
directors of the entity or entities under management
CONSOLIDATED MINES CORP., Respondent.
notwithstanding any provision of law, articles of incorporation
or by-laws to the contrary.1wphi1
DECISION

In this case, petitioner neither filed a petition for the

appointment of a management committee nor presented VELASCO, JR., J.:
evidence to show that there is imminent danger of
dissipation, loss, wastage or destruction of assets or other Before this Court is a Petition for Review on Certiorari under
properties or paralyzation of business operations of Rule 45 filed by Narra Nickel and Mining Development Corp.
respondent corporation which may be prejudicial to the (Narra), Tesoro Mining and Development, Inc. (Tesoro), and

CORPORATION LAW: 7. captial structure Page 32 of 201

McArthur Mining Inc. (McArthur), which seeks to reverse the the denial of petitioners applications for MPSA designated as shares of MBMI will not make it the owner of at least 60% of
October 1, 2010 Decision 1 and the February 15, 2011 AMA-IVB-153, AMA-IVB-154 and MPSA IV-1-12. the capital stock of each of petitioners. They added that the
Resolution of the Court of Appeals (CA). best tool used in determining the nationality of a corporation
is the "control test," embodied in Sec. 3 of RA 7042 or the
In the petitions, Redmont alleged that at least 60% of the
Foreign Investments Act of 1991. They also claimed that the
The Facts capital stock of McArthur, Tesoro and Narra are owned and
POA of DENR did not have jurisdiction over the issues in
controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian
Redmonts petition since they are not enumerated in Sec. 77
corporation. Redmont reasoned that since MBMI is a
Sometime in December 2006, respondent Redmont of RA 7942. Finally, they stressed that Redmont has no
considerable stockholder of petitioners, it was the driving
Consolidated Mines Corp. (Redmont), a domestic corporation personality to sue them because it has no pending claim or
force behind petitioners filing of the MPSAs over the areas
organized and existing under Philippine laws, took interest in application over the areas applied for by petitioners.
covered by applications since it knows that it can only
mining and exploring certain areas of the province of
participate in mining activities through corporations which are
Palawan. After inquiring with the Department of Environment
deemed Filipino citizens. Redmont argued that given that On December 14, 2007, the POA issued a Resolution
and Natural Resources (DENR), it learned that the areas
petitioners capital stocks were mostly owned by MBMI, they disqualifying petitioners from gaining MPSAs. It held:
where it wanted to undertake exploration and mining
were likewise disqualified from engaging in mining activities
activities where already covered by Mineral Production
through MPSAs, which are reserved only for Filipino citizens.
Sharing Agreement (MPSA) applications of petitioners Narra, [I]t is clearly established that respondents are not qualified
Tesoro and McArthur. applicants to engage in mining activities. On the other hand,
In their Answers, petitioners averred that they were qualified [Redmont] having filed its own applications for an EPA over
persons under Section 3(aq) of Republic Act No. (RA) 7942 or the areas earlier covered by the MPSA application of
Petitioner McArthur, through its predecessor-in-interest Sara
the Philippine Mining Act of 1995 which provided: respondents may be considered if and when they are qualified
Marie Mining, Inc. (SMMI), filed an application for an MPSA
under the law. The violation of the requirements for the
and Exploration Permit (EP) with the Mines and Geo-Sciences
issuance and/or grant of permits over mining areas is clearly
Bureau (MGB), Region IV-B, Office of the Department of Sec. 3 Definition of Terms. As used in and for purposes of this
established thus, there is reason to believe that the
Environment and Natural Resources (DENR). Act, the following terms, whether in singular or plural, shall
cancellation and/or revocation of permits already issued
mean:
under the premises is in order and open the areas covered to
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering other qualified applicants.
an area of over 1,782 hectares in Barangay Sumbiling, x x x x
Municipality of Bataraza, Province of Palawan and EPA-IVB-44
xxxx
which includes an area of 3,720 hectares in Barangay
(aq) "Qualified person" means any citizen of the Philippines
Malatagao, Bataraza, Palawan. The MPSA and EP were then
with capacity to contract, or a corporation, partnership,
transferred to Madridejos Mining Corporation (MMC) and, on WHEREFORE, the Panel of Arbitrators finds the Respondents,
2
association, or cooperative organized or authorized for the
November 6, 2006, assigned to petitioner McArthur. McArthur Mining Inc., Tesoro Mining and Development, Inc.,
purpose of engaging in mining, with technical and financial
and Narra Nickel Mining and Development Corp. as,
capability to undertake mineral resources development and
DISQUALIFIED for being considered as Foreign Corporations.
Petitioner Narra acquired its MPSA from Alpha Resources and duly registered in accordance with law at least sixty per cent
Their Mineral Production Sharing Agreement (MPSA) are
Development Corporation and Patricia Louise Mining & (60%) of the capital of which is owned by citizens of the
hereby x x x DECLARED NULL AND VOID.6
Development Corporation (PLMDC) which previously filed an Philippines: Provided, That a legally organized foreign-owned
application for an MPSA with the MGB, Region IV-B, DENR on corporation shall be deemed a qualified person for purposes
January 6, 1992. Through the said application, the DENR of granting an exploration permit, financial or technical The POA considered petitioners as foreign corporations being
issued MPSA-IV-1-12 covering an area of 3.277 hectares in assistance agreement or mineral processing permit. "effectively controlled" by MBMI, a 100% Canadian company
barangays Calategas and San Isidro, Municipality of Narra, and declared their MPSAs null and void. In the same
Palawan. Subsequently, PLMDC conveyed, transferred and/or Resolution, it gave due course to Redmonts EPAs. Thereafter,
Additionally, they stated that their nationality as applicants is
assigned its rights and interests over the MPSA application in on February 7, 2008, the POA issued an Order 7 denying the
immaterial because they also applied for Financial or
favor of Narra. Motion for Reconsideration filed by petitioners.
Technical Assistance Agreements (FTAA) denominated as
AFTA-IVB-09 for McArthur, AFTA-IVB-08 for Tesoro and AFTA-
Another MPSA application of SMMI was filed with the DENR IVB-07 for Narra, which are granted to foreign-owned Aggrieved by the Resolution and Order of the POA, McArthur
Region IV-B, labeled as MPSA-AMA-IVB-154 (formerly EPA-IVB- corporations. Nevertheless, they claimed that the issue on and Tesoro filed a joint Notice of Appeal 8 and Memorandum of
47) over 3,402 hectares in Barangays Malinao and Princesa nationality should not be raised since McArthur, Tesoro and Appeal9 with the Mines Adjudication Board (MAB) while Narra
Urduja, Municipality of Narra, Province of Palawan. SMMI Narra are in fact Philippine Nationals as 60% of their capital is separately filed its Notice of Appeal10 and Memorandum of
subsequently conveyed, transferred and assigned its rights owned by citizens of the Philippines. They asserted that Appeal.11
and interest over the said MPSA application to Tesoro. though MBMI owns 40% of the shares of PLMC (which owns
5,997 shares of Narra),3 40% of the shares of MMC (which
In their respective memorandum, petitioners emphasized that
owns 5,997 shares of McArthur) 4and 40% of the shares of
On January 2, 2007, Redmont filed before the Panel of 5
they are qualified persons under the law. Also, through a
SLMC (which, in turn, owns 5,997 shares of Tesoro), the
Arbitrators (POA) of the DENR three (3) separate petitions for letter, they informed the MAB that they had their individual

CORPORATION LAW: 7. captial structure Page 33 of 201

MPSA applications converted to FTAAs. McArthurs FTAA was Reconsideration, Redmont filed before the RTC a the CA used the "grandfather rule" to determine the
denominated as AFTA-IVB-09 12 on May 2007, while Tesoros Supplemental Complaint21 in Civil Case No. 08-63379. nationality of petitioners. It provided:
MPSA application was converted to AFTA-IVB-08 13 on May 28,
2007, and Narras FTAA was converted to AFTA-IVB-07 14 on
On October 6, 2008, the RTC issued an Order 22 granting the Shares belonging to corporations or partnerships at least 60%
March 30, 2006.
issuance of a writ of preliminary injunction enjoining the MAB of the capital of which is owned by Filipino citizens shall be
from finally disposing of the appeals of petitioners and from considered as of Philippine nationality, but if the percentage
Pending the resolution of the appeal filed by petitioners with resolving Redmonts Motion for Reconsideration and of Filipino ownership in the corporation or partnership is less
the MAB, Redmont filed a Complaint15 with the Securities and Supplement Motion for Reconsideration of the MABs than 60%, only the number of shares corresponding to such
Exchange Commission (SEC), seeking the revocation of the September 10, 2008 Resolution. percentage shall be counted as of Philippine nationality. Thus,
certificates for registration of petitioners on the ground that if 100,000 shares are registered in the name of a corporation
they are foreign-owned or controlled corporations engaged in or partnership at least 60% of the capital stock or capital,
On July 1, 2009, however, the MAB issued a second Order
mining in violation of Philippine laws. Thereafter, Redmont respectively, of which belong to Filipino citizens, all of the
denying Redmonts Motion for Reconsideration and
filed on September 1, 2008 a Manifestation and Motion to shares shall be recorded as owned by Filipinos. But if less
Supplemental Motion for Reconsideration and resolving the
Suspend Proceeding before the MAB praying for the than 60%, or say, 50% of the capital stock or capital of the
appeals filed by petitioners.
suspension of the proceedings on the appeals filed by corporation or partnership, respectively, belongs to Filipino
McArthur, Tesoro and Narra. citizens, only 50,000 shares shall be recorded as belonging to
Hence, the petition for review filed by Redmont before the CA, aliens.24 (emphasis supplied)
assailing the Orders issued by the MAB. On October 1, 2010,
Subsequently, on September 8, 2008, Redmont filed before
the CA rendered a Decision, the dispositive of which reads:
the Regional Trial Court of Quezon City, Branch 92 (RTC) a In determining the nationality of petitioners, the CA looked
16
Complaint for injunction with application for issuance of a into their corporate structures and their corresponding
temporary restraining order (TRO) and/or writ of preliminary WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed common shareholders. Using the grandfather rule, the CA
injunction, docketed as Civil Case No. 08-63379. Redmont Orders, dated September 10, 2008 and July 1, 2009 of the discovered that MBMI in effect owned majority of the common
prayed for the deferral of the MAB proceedings pending the Mining Adjudication Board are reversed and set aside. The stocks of the petitioners as well as at least 60% equity
resolution of the Complaint before the SEC. findings of the Panel of Arbitrators of the Department of interest of other majority shareholders of petitioners through
Environment and Natural Resources that respondents joint venture agreements. The CA found that through a "web
McArthur, Tesoro and Narra are foreign corporations is upheld of corporate layering, it is clear that one common controlling
But before the RTC can resolve Redmonts Complaint and
and, therefore, the rejection of their applications for Mineral investor in all mining corporations involved x x x is
applications for injunctive reliefs, the MAB issued an Order on
Product Sharing Agreement should be recommended to the MBMI."25 Thus, it concluded that petitioners McArthur, Tesoro
September 10, 2008, finding the appeal meritorious. It held:
Secretary of the DENR. and Narra are also in partnership with, or privies-in-interest
of, MBMI.
WHEREFORE, in view of the foregoing, the Mines Adjudication
With respect to the applications of respondents McArthur,
Board hereby REVERSES and SETS ASIDE the Resolution
Tesoro and Narra for Financial or Technical Assistance Furthermore, the CA viewed the conversion of the MPSA
dated 14 December 2007 of the Panel of Arbitrators of Region
Agreement (FTAA) or conversion of their MPSA applications to applications of petitioners into FTAA applications suspicious in
IV-B (MIMAROPA) in POA-DENR Case Nos. 2001-01, 2007-02
FTAA, the matter for its rejection or approval is left for nature and, as a consequence, it recommended the rejection
and 2007-03, and its Order dated 07 February 2008 denying
determination by the Secretary of the DENR and the President of petitioners MPSA applications by the Secretary of the
the Motions for Reconsideration of the Appellants. The Petition
of the Republic of the Philippines. DENR.
filed by Redmont Consolidated Mines Corporation on 02
January 2007 is hereby ordered DISMISSED.17
SO ORDERED.23 With regard to the settlement of disputes over rights to
mining areas, the CA pointed out that the POA has jurisdiction
Belatedly, on September 16, 2008, the RTC issued an
In a Resolution dated February 15, 2011, the CA denied the over them and that it also has the power to determine the of
Order18 granting Redmonts application for a TRO and setting
Motion for Reconsideration filed by petitioners. nationality of petitioners as a prerequisite of the Constitution
the case for hearing the prayer for the issuance of a writ of
prior the conferring of rights to "co-production, joint venture
preliminary injunction on September 19, 2008.
or production-sharing agreements" of the state to mining
After a careful review of the records, the CA found that there
rights. However, it also stated that the POAs jurisdiction is
Meanwhile, on September 22, 2008, Redmont filed a Motion was doubt as to the nationality of petitioners when it realized
limited only to the resolution of the dispute and not on the
for Reconsideration19 of the September 10, 2008 Order of the that petitioners had a common major investor, MBMI, a
approval or rejection of the MPSAs. It stipulated that only the
MAB. Subsequently, it filed a Supplemental Motion for corporation composed of 100% Canadians. Pursuant to the
Secretary of the DENR is vested with the power to approve or
Reconsideration20 on September 29, 2008. first sentence of paragraph 7 of Department of Justice (DOJ)
reject applications for MPSA.
Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules
which implemented the requirement of the Constitution and
Before the MAB could resolve Redmonts Motion for
other laws pertaining to the exploitation of natural resources, Finally, the CA upheld the findings of the POA in its December
Reconsideration and Supplemental Motion for 14, 2007 Resolution which considered petitioners McArthur,

CORPORATION LAW: 7. captial structure Page 34 of 201

Tesoro and Narra as foreign corporations. Nevertheless, the Thus, the instant petition for review against the October 1, not deter the courts from trying a case when there is a valid
CA determined that the POAs declaration that the MPSAs of 2010 Decision of the CA. Petitioners put forth the following reason to do so. In David v. Macapagal-Arroyo (David), the
McArthur, Tesoro and Narra are void is highly improper. errors of the CA: Court provided four instances where courts can decide an
otherwise moot case, thus:
While the petition was pending with the CA, Redmont filed I. The Court of Appeals erred when it did not dismiss the
with the Office of the President (OP) a petition dated May 7, case for mootness despite the fact that the subject matter 1.) There is a grave violation of the Constitution;
2010 seeking the cancellation of petitioners FTAAs. The OP of the controversy, the MPSA Applications, have already
rendered a Decision26 on April 6, 2011, wherein it canceled been converted into FTAA applications and that the same
2.) The exceptional character of the situation and
and revoked petitioners FTAAs for violating and have already been granted.
paramount public interest is involved;
circumventing the "Constitution x x x[,] the Small Scale
Mining Law and Environmental Compliance Certificate as well
II. The Court of Appeals erred when it did not dismiss the
as Sections 3 and 8 of the Foreign Investment Act and E.O. 3.) When constitutional issue raised requires formulation
case for lack of jurisdiction considering that the Panel of
584."27 The OP, in affirming the cancellation of the issued of controlling principles to guide the bench, the bar, and
Arbitrators has no jurisdiction to determine the nationality
FTAAs, agreed with Redmont stating that petitioners the public; and
of Narra, Tesoro and McArthur.
committed violations against the abovementioned laws and
failed to submit evidence to negate them. The Decision 4.) The case is capable of repetition yet evading review. 34
further quoted the December 14, 2007 Order of the POA III. The Court of Appeals erred when it did not dismiss the
focusing on the alleged misrepresentation and claims made case on account of Redmonts willful forum shopping.
All of the exceptions stated above are present in the instant
by petitioners of being domestic or Filipino corporations and
case. We of this Court note that a grave violation of the
the admitted continued mining operation of PMDC using their IV. The Court of Appeals ruling that Narra, Tesoro and
Constitution, specifically Section 2 of Article XII, is being
locally secured Small Scale Mining Permit inside the area McArthur are foreign corporations based on the
committed by a foreign corporation right under our countrys
earlier applied for an MPSA application which was eventually "Grandfather Rule" is contrary to law, particularly the
nose through a myriad of corporate layering under different,
transferred to Narra. It also agreed with the POAs estimation express mandate of the Foreign Investments Act of 1991,
allegedly, Filipino corporations. The intricate corporate
that the filing of the FTAA applications by petitioners is a clear as amended, and the FIA Rules.
layering utilized by the Canadian company, MBMI, is of
admission that they are "not capable of conducting a large
exceptional character and involves paramount public interest
scale mining operation and that they need the financial and
V. The Court of Appeals erred when it applied the since it undeniably affects the exploitation of our Countrys
technical assistance of a foreign entity in their operation, that
exceptions to the res inter alios acta rule. natural resources. The corresponding actions of petitioners
is why they sought the participation of MBMI Resources,
during the lifetime and existence of the instant case raise
Inc."28 The Decision further quoted:
questions as what principle is to be applied to cases with
VI. The Court of Appeals erred when it concluded that the
similar issues. No definite ruling on such principle has been
conversion of the MPSA Applications into FTAA
The filing of the FTAA application on June 15, 2007, during the pronounced by the Court; hence, the disposition of the issues
Applications were of "suspicious nature" as the same is
pendency of the case only demonstrate the violations and or errors in the instant case will serve as a guide "to the
based on mere conjectures and surmises without any
lack of qualification of the respondent corporations to engage bench, the bar and the public." 35 Finally, the instant case is
shred of evidence to show the same. 31
in mining. The filing of the FTAA application conversion which capable of repetition yet evading review, since the Canadian
is allowed foreign corporation of the earlier MPSA is an company, MBMI, can keep on utilizing dummy Filipino
admission that indeed the respondent is not Filipino but rather We find the petition to be without merit. corporations through various schemes of corporate layering
of foreign nationality who is disqualified under the laws. and conversion of applications to skirt the constitutional
Corporate documents of MBMI Resources, Inc. furnished its This case not moot and academic prohibition against foreign mining in Philippine soil.
stockholders in their head office in Canada suggest that they
are conducting operation only through their local
The claim of petitioners that the CA erred in not rendering the Conversion of MPSA applications to FTAA applications
counterparts.29
instant case as moot is without merit.
We shall discuss the first error in conjunction with the sixth
The Motion for Reconsideration of the Decision was further
Basically, a case is said to be moot and/or academic when it error presented by petitioners since both involve the
denied by the OP in a Resolution 30 dated July 6, 2011.
"ceases to present a justiciable controversy by virtue of conversion of MPSA applications to FTAA applications.
Petitioners then filed a Petition for Review on Certiorari of the
supervening events, so that a declaration thereon would be of Petitioners propound that the CA erred in ruling against them
OPs Decision and Resolution with the CA, docketed as CA-
no practical use or value."32 Thus, the courts "generally since the questioned MPSA applications were already
G.R. SP No. 120409. In the CA Decision dated February 29,
decline jurisdiction over the case or dismiss it on the ground converted into FTAA applications; thus, the issue on the
2012, the CA affirmed the Decision and Resolution of the OP.
of mootness."33 prohibition relating to MPSA applications of foreign mining
Thereafter, petitioners appealed the same CA decision to this
corporations is academic. Also, petitioners would want us to
Court which is now pending with a different division.
correct the CAs finding which deemed the aforementioned
The "mootness" principle, however, does accept certain
conversions of applications as suspicious in nature, since it is
exceptions and the mere raising of an issue of "mootness" will

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based on mere conjectures and surmises and not supported On October 1, 2010, the CA rendered a Decision which and interest in the petitioner "holding companies" to DMCI,
with evidence. partially granted the petition, reversing and setting aside the only proves that they were in fact not Filipino corporations
September 10, 2008 and July 1, 2009 Orders of the MAB. In from the start. The recent divesting of interest by MBMI will
the said Decision, the CA upheld the findings of the POA of not change the stand of this Court with respect to the
We disagree.
the DENR that the herein petitioners are in fact foreign nationality of petitioners prior the suspicious change in their
corporations thus a recommendation of the rejection of their corporate structures. The new documents filed by petitioners
The CAs analysis of the actions of petitioners after the case MPSA applications were recommended to the Secretary of the are factual evidence that this Court has no power to verify.
was filed against them by respondent is on point. The DENR. With respect to the FTAA applications or conversion of
changing of applications by petitioners from one type to the MPSA applications to FTAAs, the CA deferred the matter
The only thing clear and proved in this Court is the fact that
another just because a case was filed against them, in truth, for the determination of the Secretary of the DENR and the
the OP declared that petitioner corporations have violated
would raise not a few sceptics eyebrows. What is the reason President of the Republic of the Philippines.37
several mining laws and made misrepresentations and
for such conversion? Did the said conversion not stem from
falsehood in their applications for FTAA which lead to the
the case challenging their citizenship and to have the case
In their Motion for Reconsideration dated October 26, 2010, revocation of the said FTAAs, demonstrating that petitioners
dismissed against them for being "moot"? It is quite obvious
petitioners prayed for the dismissal of the petition asserting are not beyond going against or around the law using shifty
that it is petitioners strategy to have the case dismissed
that on April 5, 2010, then President Gloria Macapagal-Arroyo actions and strategies. Thus, in this instance, we can say that
against them for being "moot."
signed and issued in their favor FTAA No. 05-2010-IVB, which their claim of mootness is moot in itself because their defense
rendered the petition moot and academic. However, the CA, of conversion of MPSAs to FTAAs has been discredited by the
Consider the history of this case and how petitioners in a Resolution dated February 15, 2011 denied their motion OP Decision.
responded to every action done by the court or appropriate for being a mere "rehash of their claims and
government agency: on January 2, 2007, Redmont filed three defenses."38 Standing firm on its Decision, the CA affirmed the
Grandfather test
separate petitions for denial of the MPSA applications of ruling that petitioners are, in fact, foreign corporations. On
petitioners before the POA. On June 15, 2007, petitioners filed April 5, 2011, petitioners elevated the case to us via a Petition
a conversion of their MPSA applications to FTAAs. The POA, in for Review on Certiorari under Rule 45, questioning the The main issue in this case is centered on the issue of
its December 14, 2007 Resolution, observed this suspect Decision of the CA. Interestingly, the OP rendered a Decision petitioners nationality, whether Filipino or foreign. In their
change of applications while the case was pending before it dated April 6, 2011, a day after this petition for review was previous petitions, they had been adamant in insisting that
and held: filed, cancelling and revoking the FTAAs, quoting the Order of they were Filipino corporations, until they submitted their
the POA and stating that petitioners are foreign corporations Manifestation and Submission dated October 19, 2012 where
they stated the alleged change of corporate ownership to
The filing of the Financial or Technical Assistance Agreement since they needed the financial strength of MBMI, Inc. in order
reflect their Filipino ownership. Thus, there is a need to
application is a clear admission that the respondents are not to conduct large scale mining operations. The OP Decision
determine the nationality of petitioner corporations.
capable of conducting a large scale mining operation and that also based the cancellation on the misrepresentation of facts
they need the financial and technical assistance of a foreign and the violation of the "Small Scale Mining Law and
entity in their operation that is why they sought the Environmental Compliance Certificate as well as Sections 3 Basically, there are two acknowledged tests in determining
39
participation of MBMI Resources, Inc. The participation of and 8 of the Foreign Investment Act and E.O. 584." On July the nationality of a corporation: the control test and the
MBMI in the corporation only proves the fact that it is the 6, 2011, the OP issued a Resolution, denying the Motion for grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series
Canadian company that will provide the finances and the Reconsideration filed by the petitioners. of 2005, adopting the 1967 SEC Rules which implemented the
resources to operate the mining areas for the greater benefit requirement of the Constitution and other laws pertaining to
and interest of the same and not the Filipino stockholders who Respondent Redmont, in its Comment dated October 10, the controlling interests in enterprises engaged in the
only have a less substantial financial stake in the corporation. 2011, made known to the Court the fact of the OPs Decision exploitation of natural resources owned by Filipino citizens,
and Resolution. In their Reply, petitioners chose to ignore the provides:
xxxx OP Decision and continued to reuse their old arguments
claiming that they were granted FTAAs and, thus, the case Shares belonging to corporations or partnerships at least 60%
was moot. Petitioners filed a Manifestation and Submission of the capital of which is owned by Filipino citizens shall be
x x x The filing of the FTAA application on June 15, 2007,
dated October 19, 2012,40 wherein they asserted that the considered as of Philippine nationality, but if the percentage
during the pendency of the case only demonstrate the
present petition is moot since, in a remarkable turn of events, of Filipino ownership in the corporation or partnership is less
violations and lack of qualification of the respondent
MBMI was able to sell/assign all its shares/interest in the than 60%, only the number of shares corresponding to such
corporations to engage in mining. The filing of the FTAA
"holding companies" to DMCI Mining Corporation (DMCI), a percentage shall be counted as of Philippine nationality. Thus,
application conversion which is allowed foreign corporation of
Filipino corporation and, in effect, making their respective if 100,000 shares are registered in the name of a corporation
the earlier MPSA is an admission that indeed the respondent
corporations fully-Filipino owned. or partnership at least 60% of the capital stock or capital,
is not Filipino but rather of foreign nationality who is
respectively, of which belong to Filipino citizens, all of the
disqualified under the laws. Corporate documents of MBMI
shares shall be recorded as owned by Filipinos. But if less
Resources, Inc. furnished its stockholders in their head office Again, it is quite evident that petitioners have been trying to
than 60%, or say, 50% of the capital stock or capital of the
in Canada suggest that they are conducting operation only have this case dismissed for being "moot." Their final act,
wherein MBMI was able to allegedly sell/assign all its shares corporation or partnership, respectively, belongs to Filipino
through their local counterparts.36

CORPORATION LAW: 7. captial structure Page 36 of 201

citizens, only 50,000 shares shall be counted as owned by the statute preclude the court from construing it and prevent capital is owned by such citizens." The deliberations in the
Filipinos and the other 50,000 shall be recorded as belonging the courts use of discretion in applying the law. They said Records of the 1986 Constitutional Commission shed light on
to aliens. that the plain, literal meaning of the statute meant the how a citizenship of a corporation will be determined:
application of the control test is obligatory.
The first part of paragraph 7, DOJ Opinion No. 020, stating Mr. BENNAGEN: Did I hear right that the Chairmans
"shares belonging to corporations or partnerships at least We disagree. "Corporate layering" is admittedly allowed by interpretation of an independent national economy is freedom
60% of the capital of which is owned by Filipino citizens shall the FIA; but if it is used to circumvent the Constitution and from undue foreign control? What is the meaning of undue
be considered as of Philippine nationality," pertains to the pertinent laws, then it becomes illegal. Further, the foreign control?
control test or the liberal rule. On the other hand, the second pronouncement of petitioners that the grandfather rule has
part of the DOJ Opinion which provides, "if the percentage of already been abandoned must be discredited for lack of basis.
MR. VILLEGAS: Undue foreign control is foreign control which
the Filipino ownership in the corporation or partnership is less
sacrifices national sovereignty and the welfare of the Filipino
than 60%, only the number of shares corresponding to such
Art. XII, Sec. 2 of the Constitution provides: in the economic sphere.
percentage shall be counted as Philippine nationality,"
pertains to the stricter, more stringent grandfather rule.
Sec. 2. All lands of the public domain, waters, minerals, coal, MR. BENNAGEN: Why does it have to be qualified still with the
petroleum and other mineral oils, all forces of potential word "undue"? Why not simply freedom from foreign control?
Prior to this recent change of events, petitioners were
energy, fisheries, forests or timber, wildlife, flora and fauna, I think that is the meaning of independence, because as
constant in advocating the application of the "control test"
and other natural resources are owned by the State. With the phrased, it still allows for foreign control.
under RA 7042, as amended by RA 8179, otherwise known as
exception of agricultural lands, all other natural resources
the Foreign Investments Act (FIA), rather than using the
shall not be alienated. The exploration, development, and
stricter grandfather rule. The pertinent provision under Sec. 3 MR. VILLEGAS: It will now depend on the interpretation
utilization of natural resources shall be under the full control
of the FIA provides: because if, for example, we retain the 60/40 possibility in the
and supervision of the State. The State may directly
cultivation of natural resources, 40 percent involves some
undertake such activities, or it may enter into co-production,
control; not total control, but some control.
SECTION 3. Definitions. - As used in this Act: joint venture or production-sharing agreements with Filipino
citizens, or corporations or associations at least sixty per
centum of whose capital is owned by such citizens. Such MR. BENNAGEN: In any case, I think in due time we will
a.) The term Philippine national shall mean a citizen of the
agreements may be for a period not exceeding twenty-five propose some amendments.
Philippines; or a domestic partnership or association wholly
years, renewable for not more than twenty-five years, and
owned by the citizens of the Philippines; a corporation
under such terms and conditions as may be provided by law. MR. VILLEGAS: Yes. But we will be open to improvement of the
organized under the laws of the Philippines of which at least
sixty percent (60%) of the capital stock outstanding and phraseology.
entitled to vote is wholly owned by Filipinos or a trustee of x x x x
funds for pension or other employee retirement or separation Mr. BENNAGEN: Yes.
benefits, where the trustee is a Philippine national and at
The President may enter into agreements with Foreign-owned
least sixty percent (60%) of the fund will accrue to the benefit
corporations involving either technical or financial assistance Thank you, Mr. Vice-President.
of Philippine nationals: Provided, That were a corporation and
for large-scale exploration, development, and utilization of
its non-Filipino stockholders own stocks in a Securities and
minerals, petroleum, and other mineral oils according to the
Exchange Commission (SEC) registered enterprise, at least xxxx
general terms and conditions provided by law, based on real
sixty percent (60%) of the capital stock outstanding and
contributions to the economic growth and general welfare of
entitled to vote of each of both corporations must be owned MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated
the country. In such agreements, the State shall promote the
and held by citizens of the Philippines and at least sixty local or Filipino equity and foreign equity; namely, 60-40 in
development and use of local scientific and technical
percent (60%) of the members of the Board of Directors, in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
resources. (emphasis supplied)
order that the corporation shall be considered a Philippine
national. (emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State MR. VILLEGAS: That is right.
entering into different types of agreements for the
The grandfather rule, petitioners reasoned, has no leg to
exploration, development, and utilization of natural resources MR. NOLLEDO: In teaching law, we are always faced with the
stand on in the instant case since the definition of a
with entities who are deemed Filipino due to 60 percent question: Where do we base the equity requirement, is it on
"Philippine National" under Sec. 3 of the FIA does not provide
ownership of capital is pertinent to this case, since the issues the authorized capital stock, on the subscribed capital stock,
for it. They further claim that the grandfather rule "has been
are centered on the utilization of our countrys natural or on the paid-up capital stock of a corporation? Will the
abandoned and is no longer the applicable rule." 41 They also
resources or specifically, mining. Thus, there is a need to Committee please enlighten me on this?
opined that the last portion of Sec. 3 of the FIA admits the
ascertain the nationality of petitioners since, as the
application of a "corporate layering" scheme of corporations.
Constitution so provides, such agreements are only allowed
Petitioners claim that the clear and unambiguous wordings of
corporations or associations "at least 60 percent of such

CORPORATION LAW: 7. captial structure Page 37 of 201

MR. VILLEGAS: We have just had a long discussion with the (Investing Corporation). The said rules thus provide for the petitioners. Also, as found by the CA, doubt is present in the
members of the team from the UP Law Center who provided determination of nationality depending on the ownership of 60-40 Filipino equity ownership of petitioners Narra, McArthur
us with a draft. The phrase that is contained here which we the Investee Corporation and, in certain instances, the and Tesoro, since their common investor, the 100% Canadian
adopted from the UP draft is 60 percent of the voting stock. Investing Corporation. corporationMBMI, funded them. However, petitioners also
claim that there is "doubt" only when the stockholdings of
Filipinos are less than 60%.43
MR. NOLLEDO: That must be based on the subscribed capital Under the above-quoted SEC Rules, there are two cases in
stock, because unless declared delinquent, unpaid capital determining the nationality of the Investee Corporation. The
stock shall be entitled to vote. first case is the liberal rule, later coined by the SEC as the The assertion of petitioners that "doubt" only exists when the
Control Test in its 30 May 1990 Opinion, and pertains to the stockholdings are less than 60% fails to convince this Court.
portion in said Paragraph 7 of the 1967 SEC Rules which DOJ Opinion No. 20, which petitioners quoted in their petition,
MR. VILLEGAS: That is right.
states, (s)hares belonging to corporations or partnerships at only made an example of an instance where "doubt" as to the
least 60% of the capital of which is owned by Filipino citizens ownership of the corporation exists. It would be ludicrous to
MR. NOLLEDO: Thank you. shall be considered as of Philippine nationality. Under the limit the application of the said word only to the instances
liberal Control Test, there is no need to further trace the where the stockholdings of non-Filipino stockholders are more
With respect to an investment by one corporation in another ownership of the 60% (or more) Filipino stockholdings of the than 40% of the total stockholdings in a corporation. The
corporation, say, a corporation with 60-40 percent equity Investing Corporation since a corporation which is at least corporations interested in circumventing our laws would
invests in another corporation which is permitted by the 60% Filipino-owned is considered as Filipino. clearly strive to have "60% Filipino Ownership" at face value.
Corporation Code, does the Committee adopt the grandfather It would be senseless for these applying corporations to state
rule? in their respective articles of incorporation that they have less
The second case is the Strict Rule or the Grandfather Rule
than 60% Filipino stockholders since the applications will be
Proper and pertains to the portion in said Paragraph 7 of the
denied instantly. Thus, various corporate schemes and
MR. VILLEGAS: Yes, that is the understanding of the 1967 SEC Rules which states, "but if the percentage of Filipino
layerings are utilized to circumvent the application of the
Committee. ownership in the corporation or partnership is less than 60%,
Constitution.
only the number of shares corresponding to such percentage
shall be counted as of Philippine nationality." Under the Strict
MR. NOLLEDO: Therefore, we need additional Filipino capital?
Rule or Grandfather Rule Proper, the combined totals in the Obviously, the instant case presents a situation which exhibits
Investing Corporation and the Investee Corporation must be a scheme employed by stockholders to circumvent the law,
MR. VILLEGAS: Yes.42 (emphasis supplied) traced (i.e., "grandfathered") to determine the total creating a cloud of doubt in the Courts mind. To determine,
percentage of Filipino ownership. therefore, the actual participation, direct or indirect, of MBMI,
It is apparent that it is the intention of the framers of the the grandfather rule must be used.
Constitution to apply the grandfather rule in cases where Moreover, the ultimate Filipino ownership of the shares must
corporate layering is present. first be traced to the level of the Investing Corporation and McArthur Mining, Inc.
added to the shares directly owned in the Investee
Elementary in statutory construction is when there is conflict Corporation x x x. To establish the actual ownership, interest or participation of
between the Constitution and a statute, the Constitution will MBMI in each of petitioners corporate structure, they have to
prevail. In this instance, specifically pertaining to the x x x x be "grandfathered."
provisions under Art. XII of the Constitution on National
Economy and Patrimony, Sec. 3 of the FIA will have no place
In other words, based on the said SEC Rule and DOJ Opinion, As previously discussed, McArthur acquired its MPSA
of application. As decreed by the honorable framers of our
the Grandfather Rule or the second part of the SEC Rule application from MMC, which acquired its application from
Constitution, the grandfather rule prevails and must be
applies only when the 60-40 Filipino-foreign equity ownership SMMI. McArthur has a capital stock of ten million pesos (PhP
applied.
is in doubt (i.e., in cases where the joint venture corporation 10,000,000) divided into 10,000 common shares at one
with Filipino and foreign stockholders with less than 60% thousand pesos (PhP 1,000) per share, subscribed to by the
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 Filipino stockholdings [or 59%] invests in other joint venture following:44
provides: corporation which is either 60-40% Filipino-alien or the 59%
less Filipino). Stated differently, where the 60-40 Filipino-
Name Nationali Nu Amoun Amount Paid
The above-quoted SEC Rules provide for the manner of foreign equity ownership is not in doubt, the Grandfather Rule ty mb t
calculating the Filipino interest in a corporation for purposes, will not apply. (emphasis supplied) er Subscri
among others, of determining compliance with nationality of bed
requirements (the Investee Corporation). Such manner of After a scrutiny of the evidence extant on record, the Court Sha
computation is necessary since the shares in the Investee finds that this case calls for the application of the grandfather res
Corporation may be owned both by individual stockholders rule since, as ruled by the POA and affirmed by the OP, doubt Madride Filipino 5,99 PhP PhP
(Investing Individuals) and by corporations and partnerships prevails and persists in the corporate ownership of jos 7 5,997,0 825,000.00

CORPORATION LAW: 7. captial structure Page 38 of 201

Mining 00.00 Resource n 3,331,000. 2,803,900 holds directly and indirectly an initial 60% interest in the joint
Corpora s, 00 .00 venture. Under certain circumstances and upon achieving
tion certain milestones, the Company may earn up to a 100%
MBMI Canadian 3,99 PhP PhP interest, subject to a 2.5% net revenue royalty. 47 (emphasis
Inc.
Resour 8 3,998,0 1,878,174.60 supplied)
ces, 00.0
Inc. Amanti Filipino 1 PhP PhP
Limson 1,000.00 1,000.00 Thus, as demonstrated in this first corporation, McArthur,
Lauro L. Filipino 1 PhP PhP 1,000.00
Fernando Filipino 1 PhP PhP when it is "grandfathered," company layering was utilized by
Salazar 1,000.0
B. 1,000.00 1,000.00 MBMI to gain control over McArthur. It is apparent that MBMI
0
has more than 60% or more equity interest in McArthur,
Fernand Filipino 1 PhP PhP 1,000.00
making the latter a foreign corporation.
o B. 1,000.0 Esguerra
Esguerr 0
a Tesoro Mining and Development, Inc.
Manuel Filipino 1 PhP PhP 1,000.00 Lauro Filipino 1 PhP PhP
A. 1,000.0 Salazar 1,000.00 1,000.00
Emmanue Filipino 1 PhP PhP Tesoro, which acquired its MPSA application from SMMI, has a
Agcaoili 0
l G. 1,000.00 1,000.00 capital stock of ten million pesos (PhP 10,000,000) divided
Michael American 1 PhP PhP 1,000.00
into ten thousand (10,000) common shares at PhP 1,000 per
T. 1,000.0
share, as demonstrated below:
Mason 0 Hernando
Kenneth Canadian 1 PhP PhP 1,000.00
Cawkell 1,000.0 [[reference = [Link]
Michael America 1 PhP PhP
0 file=/jurisprudence/2014/april2014/[Link]]]
T. Mason n 1,000.00 1,000.00
Total 10,0 PhP PhP
Kenneth Canadia 1 PhP PhP
00 10,000, 2,708,174.60
Cawkell n 1,000.00 1,000.00
000.00 (emphasis Total 10,00 PhP PhP
supplied) Name Nationa Numb Amount Amount
0 10,000,000 2,809,900
lity er of Paid
.00 .00
Interestingly, looking at the corporate structure of MMC, we Subscribe
take note that it has a similar structure and composition as Share d
(emphasis
McArthur. In fact, it would seem that MBMI is also a major s
supplied)
45
investor and "controls" MBMI and also, similar nominal Sara Filipino 5,997 PhP PhP
shareholders were present, i.e. Fernando B. Esguerra Marie 5,997,000. 825,000.0
(Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason 00 0
(Mason) and Kenneth Cawkell (Cawkell): Noticeably, Olympic Mines & Development Corporation Mining,
(Olympic) did not pay any amount with respect to the number Inc.
Madridejos Mining Corporation of shares they subscribed to in the corporation, which is quite
absurd since Olympic is the major stockholder in MMC. MBMIs
MBMI Canadia 3,998 PhP PhP
2006 Annual Report sheds light on why Olympic failed to pay
Name Nation Num Amount Amount n 3,998,000. 1,878,174.
any amount with respect to the number of shares it
ality ber Subscribe Paid 00 60
subscribed to. It states that Olympic entered into joint venture Resourc
of d agreements with several Philippine companies, wherein it es, Inc.
Shar holds directly and indirectly a 60% effective equity interest in
es the Olympic Properties.46 Quoting the said Annual report: Lauro L. Filipino 1 PhP PhP
Olympic Filipino 6,663 PhP
Salazar 1,000.00 1,000.00
Mines & 6,663,000.
PhP 0 Fernando Filipino 1 PhP PhP
00 On September 9, 2004, the Company and Olympic Mines &
Development Corporation ("Olympic") entered into a series of B. 1,000.00 1,000.00
Develop
agreements including a Property Purchase and Development
ment
Agreement (the Transaction Documents) with respect to three Esguerra
nickel laterite properties in Palawan, Philippines (the "Olympic
Corp. Properties"). The Transaction Documents effectively establish
Manuel Filipino 1 PhP PhP
a joint venture between the Company and Olympic for
A. 1,000.00 1,000.00
MBMI Canadia 3,331 PhP PhP purposes of developing the Olympic Properties. The Company

CORPORATION LAW: 7. captial structure Page 39 of 201

 Narra Nickel Mining and Development Corporation
Agcaoili Inc.
Moving on to the last petitioner, Narra, which is the transferee
Michael America 1 PhP PhP Amanti Filipino 1 PhP PhP and assignee of PLMDCs MPSA application, whose corporate
T. Mason n 1,000.00 1,000.00 Limson 1,000.00 1,000.00 structures arrangement is similar to that of the first two
Kenneth Canadia 1 PhP PhP Fernando Filipino 1 PhP PhP petitioners discussed. The capital stock of Narra is ten million
Cawkell n 1,000.00 1,000.00 B. 1,000.00 1,000.00 pesos (PhP 10,000,000), which is divided into ten thousand
Total 10,00 PhP PhP common shares (10,000) at one thousand pesos (PhP 1,000)
0 10,000,000 2,708,174. per share, shown as follows:
Esguerra
.00 60
[[reference = [Link]
Lauro Filipino 1 PhP PhP
(emphasis file=/jurisprudence/2014/april2014/[Link]]]
Salazar 1,000.00 1,000.00
supplied) Emmanue Filipino 1 PhP PhP
l G. 1,000.00 1,000.00
Name Nation Num Amount Amount
Except for the name "Sara Marie Mining, Inc.," the table Hernando ality ber Paid
above shows exactly the same figures as the corporate of
Subscribe
structure of petitioner McArthur, down to the last centavo. All Michael T. America 1 PhP PhP d
the other shareholders are the same: MBMI, Salazar, Mason n 1,000.00 1,000.00 Shar
Esguerra, Agcaoili, Mason and Cawkell. The figures under Kenneth Canadia 1 PhP PhP es
"Nationality," "Number of Shares," "Amount Subscribed," and Cawkell n 1,000.00 1,000.00 Patricia Filipino 5,997 PhP PhP
"Amount Paid" are exactly the same. Delving deeper, we Total 10,00 PhP PhP Louise 5,997,000. 1,677,000
scrutinize SMMIs corporate structure: 0 10,000,000 2,809,900 00 .00
.00 .00
Mining &
Sara Marie Mining, Inc.
(emphasis
Developm
[[reference = [Link] supplied)
ent
file=/jurisprudence/2014/april2014/[Link]]]

Corp.
After subsequently studying SMMIs corporate structure, it is
Name Nation Num Amount Amount not farfetched for us to spot the glaring similarity between
MBMI Canadia 3,998 PhP PhP
ality ber Paid SMMI and MMCs corporate structure. Again, the presence of
n 3,996,000. 1,116,000
of identical stockholders, namely: Olympic, MBMI, Amanti
Subscribe 00 .00
Limson (Limson), Esguerra, Salazar, Hernando, Mason and Resource
d Cawkell. The figures under the headings "Nationality," s, Inc.
Shar "Number of Shares," "Amount Subscribed," and "Amount
es Paid" are exactly the same except for the amount paid by Higinio C. Filipino 1 PhP PhP
Olympic Filipino 6,663 PhP PhP 0 MBMI which now reflects the amount of two million seven 1,000.00 1,000.00
Mines & 6,663,000. hundred ninety four thousand pesos (PhP 2,794,000). Oddly,
00 Mendoza,
the total value of the amount paid is two million eight
Jr.
Develop hundred nine thousand nine hundred pesos (PhP 2,809,900).
ment
Henry E. Filipino 1 PhP PhP
Accordingly, after "grandfathering" petitioner Tesoro and
1,000.00 1,000.00
Corp. factoring in Olympics participation in SMMIs corporate
structure, it is clear that MBMI is in control of Tesoro and owns Fernandez
60% or more equity interest in Tesoro. This makes petitioner
MBMI Canadia 3,331 PhP PhP
Tesoro a non-Filipino corporation and, thus, disqualifies it to Manuel A. Filipino 1 PhP PhP
Resource n 3,331,000. 2,794,000
participate in the exploitation, utilization and development of 1,000.00 1,000.00
s, 00 .00
our natural resources.

CORPORATION LAW: 7. captial structure Page 40 of 201

 Tesoro Mining & Development, Inc. (Tesoro) 60.0%
Agcaoili Inc.
Pursuant to the Olympic joint venture agreement the
Ma. Elena Filipino 1 PhP PhP Higinio C. Filipino 1 PhP PhP Company holds directly and indirectly an effective equity
A. 1,000.00 1,000.00 Mendoza, 1,000.00 1,000.00 interest in the Olympic Property of 60.0%. Pursuant to a
Jr. shareholders agreement, the Company exercises joint control
Fernando Filipino 1 PhP PhP over the companies in the Olympic Group.
Bocalan
B. 1,000.00 1,000.00
Esguerra (b) Alpha Group
Bayani H. Filipino 1 PhP PhP Henry E. Filipino 1 PhP PhP
Agabin 1,000.00 1,000.00 Fernandez 1,000.00 1,000.00
Robert L. America 1 PhP PhP Lauro L. Filipino 1 PhP PhP The Philippine companies holding the Alpha Property, and the
n 1,000.00 1,000.00 Salazar 1,000.00 1,000.00 ownership interests therein, are as follows:

McCurdy Manuel A. Filipino 1 PhP PhP

Agcaoili 1,000.00 1,000.00 Alpha- Philippines (the "Alpha Group")
Bayani H. Filipino 1 PhP PhP
Kenneth Canadia 1 PhP PhP Agabin 1,000.00 1,000.00
Cawkell n 1,000.00 1,000.00 Michael T. America 1 PhP PhP Patricia Louise Mining Development Inc. ("Patricia") 34.0%
Total 10,00 PhP PhP Mason n 1,000.00 1,000.00
0 10,000,000 2,800,000 Kenneth Canadia 1 PhP PhP Narra Nickel Mining & Development Corporation (Narra)
.00 .00 Cawkell n 1,000.00 1,000.00 60.4%
(emphasis Total 10,00 PhP PhP
supplied) 0 10,000,000 2,708,174
.00 .60 Under a joint venture agreement the Company holds directly
(emphasis and indirectly an effective equity interest in the Alpha
Again, MBMI, along with other nominal stockholders, i.e.,
supplied) Property of 60.4%. Pursuant to a shareholders agreement,
Mason, Agcaoili and Esguerra, is present in this corporate
the Company exercises joint control over the companies in
structure.
the Alpha Group.48 (emphasis supplied)
Yet again, the usual players in petitioners corporate
Patricia Louise Mining & Development Corporation structures are present. Similarly, the amount of money paid
by the 2nd tier majority stock holder, in this case, Palawan Concluding from the above-stated facts, it is quite safe to say
Alpha South Resources and Development Corp. (PASRDC), is that petitioners McArthur, Tesoro and Narra are not Filipino
Using the grandfather method, we further look and examine zero. since MBMI, a 100% Canadian corporation, owns 60% or more
PLMDCs corporate structure: of their equity interests. Such conclusion is derived from
grandfathering petitioners corporate owners, namely: MMI,
Studying MBMIs Summary of Significant Accounting Policies SMMI and PLMDC. Going further and adding to the picture,
Name Nation Amount Amount dated October 31, 2005 explains the reason behind the MBMIs Summary of Significant Accounting Policies
ality Subscribe Paid intricate corporate layering that MBMI immersed itself in:
Num statement regarding the "joint venture" agreements that it
d
ber entered into with the "Olympic" and "Alpha" groupsinvolves
of JOINT VENTURES The Companys ownership interests in SMMI, Tesoro, PLMDC and Narra. Noticeably, the ownership of
Shar various mining ventures engaged in the acquisition, the "layered" corporations boils down to MBMI, Olympic or
es exploration and development of mineral properties in the corporations under the "Alpha" group wherein MBMI has joint
Palawan Filipino 6,596 PhP PhP 0 Philippines is described as follows: venture agreements with, practically exercising majority
Alpha 6,596,000. control over the corporations mentioned. In effect, whether
South 00 looking at the capital structure or the underlying relationships
Resources (a) Olympic Group
between and among the corporations, petitioners are NOT
Developm Filipino nationals and must be considered foreign since 60%
ent The Philippine companies holding the Olympic Property, and or more of their capital stocks or equity interests are owned
Corporatio the ownership and interests therein, are as follows: by MBMI.
n
MBMI Canadia 3,396 PhP PhP
Olympic- Philippines (the "Olympic Group") Application of the res inter alios acta rule
Resource n 3,396,000. 2,796,000
s, 00 .00
Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%

CORPORATION LAW: 7. captial structure Page 41 of 201

Petitioners question the CAs use of the exception of the res A partnership is defined as two or more persons who bind We affirm the ruling of the CA in declaring that the POA has
inter alios acta or the "admission by co-partner or agent" rule themselves to contribute money, property, or industry to a jurisdiction over the instant case. The POA has jurisdiction to
and "admission by privies" under the Rules of Court in the common fund with the intention of dividing the profits among settle disputes over rights to mining areas which definitely
instant case, by pointing out that statements made by MBMI themselves.50 On the other hand, joint ventures have been involve the petitions filed by Redmont against petitioners
should not be admitted in this case since it is not a party to deemed to be "akin" to partnerships since it is difficult to Narra, McArthur and Tesoro. Redmont, by filing its petition
the case and that it is not a "partner" of petitioners. distinguish between joint ventures and partnerships. Thus: against petitioners, is asserting the right of Filipinos over
mining areas in the Philippines against alleged foreign-owned
mining corporations. Such claim constitutes a "dispute" found
Secs. 29 and 31, Rule 130 of the Revised Rules of Court [T]he relations of the parties to a joint venture and the nature
in Sec. 77 of RA 7942:
provide: of their association are so similar and closely akin to a
partnership that it is ordinarily held that their rights, duties,
and liabilities are to be tested by rules which are closely Within thirty (30) days, after the submission of the case by
Sec. 29. Admission by co-partner or agent.- The act or
analogous to and substantially the same, if not exactly the the parties for the decision, the panel shall have exclusive
declaration of a partner or agent of the party within the scope
same, as those which govern partnership. In fact, it has been and original jurisdiction to hear and decide the following:
of his authority and during the existence of the partnership or
said that the trend in the law has been to blur the distinctions
agency, may be given in evidence against such party after
between a partnership and a joint venture, very little law
the partnership or agency is shown by evidence other than (a) Disputes involving rights to mining areas
being found applicable to one that does not apply to the
such act or declaration itself. The same rule applies to the act
other.51
or declaration of a joint owner, joint debtor, or other person
(b) Disputes involving mineral agreements or
jointly interested with the party.
permits
Though some claim that partnerships and joint ventures are
totally different animals, there are very few rules that
Sec. 31. Admission by privies.- Where one derives title to
differentiate one from the other; thus, joint ventures are We held in Celestial Nickel Mining Exploration Corporation v.
property from another, the act, declaration, or omission of the 53
deemed "akin" or similar to a partnership. In fact, in joint Macroasia Corp.:
latter, while holding the title, in relation to the property, is
venture agreements, rules and legal incidents governing
evidence against the former.
partnerships are applied.52 The phrase "disputes involving rights to mining areas" refers
to any adverse claim, protest, or opposition to an application
Petitioners claim that before the above-mentioned Rule can
Accordingly, culled from the incidents and records of this for mineral agreement. The POA therefore has the jurisdiction
be applied to a case, "the partnership relation must be shown,
case, it can be assumed that the relationships entered to resolve any adverse claim, protest, or opposition to a
and that proof of the fact must be made by evidence other
between and among petitioners and MBMI are no simple "joint pending application for a mineral agreement filed with the
than the admission itself." 49 Thus, petitioners assert that the
venture agreements." As a rule, corporations are prohibited concerned Regional Office of the MGB. This is clear from Secs.
CA erred in finding that a partnership relationship exists
from entering into partnership agreements; consequently, 38 and 41 of the DENR AO 96-40, which provide:
between them and MBMI because, in fact, no such
corporations enter into joint venture agreements with other
partnership exists.
corporations or partnerships for certain transactions in order Sec. 38.
to form "pseudo partnerships."
Partnerships vs. joint venture agreements
xxxx
Obviously, as the intricate web of "ventures" entered into by
Petitioners claim that the CA erred in applying Sec. 29, Rule and among petitioners and MBMI was executed to circumvent
130 of the Rules by stating that "by entering into a joint the legal prohibition against corporations entering into Within thirty (30) calendar days from the last date of
venture, MBMI have a joint interest" with Narra, Tesoro and partnerships, then the relationship created should be deemed publication/posting/radio announcements, the authorized
McArthur. They challenged the conclusion of the CA which as "partnerships," and the laws on partnership should be officer(s) of the concerned office(s) shall issue a
pertains to the close characteristics of certification(s) that the publication/posting/radio
applied. Thus, a joint venture agreement between and among
announcement have been complied with. Any adverse claim,
corporations may be seen as similar to partnerships since the
protest, opposition shall be filed directly, within thirty (30)
"partnerships" and "joint venture agreements." Further, they elements of partnership are present.
calendar days from the last date of publication/posting/radio
asserted that before this particular partnership can be
announcement, with the concerned Regional Office or through
formed, it should have been formally reduced into writing Considering that the relationships found between petitioners
any concerned PENRO or CENRO for filing in the concerned
since the capital involved is more than three thousand pesos and MBMI are considered to be partnerships, then the CA is
Regional Office for purposes of its resolution by the Panel of
(PhP 3,000). Being that there is no evidence of written justified in applying Sec. 29, Rule 130 of the Rules by stating
Arbitrators pursuant to the provisions of this Act and these
agreement to form a partnership between petitioners and that "by entering into a joint venture, MBMI have a joint
implementing rules and regulations. Upon final resolution of
MBMI, no partnership was created. interest" with Narra, Tesoro and McArthur. any adverse claim, protest or opposition, the Panel of
Arbitrators shall likewise issue a certification to that effect
We disagree. Panel of Arbitrators jurisdiction within five (5) working days from the date of finality of
resolution thereof. Where there is no adverse claim, protest or

CORPORATION LAW: 7. captial structure Page 42 of 201

opposition, the Panel of Arbitrators shall likewise issue a Sec. 43. Publication/Posting of Mineral Agreement.- Sec. 43. Publication/Posting of Mineral Agreement
Certification to that effect within five working days therefrom. Application.-
xxxx
xxxx xxxx
The Regional Director or concerned Regional Director shall
No Mineral Agreement shall be approved unless the also cause the posting of the application on the bulletin The Regional Director or concerned Regional Director shall
requirements under this Section are fully complied with and boards of the Bureau, concerned Regional office(s) and in the also cause the posting of the application on the bulletin
any adverse claim/protest/opposition is finally resolved by the concerned province(s) and municipality(ies), copy furnished boards of the Bureau, concerned Regional office(s) and in the
Panel of Arbitrators. the barangays where the proposed contract area is located concerned province(s) and municipality(ies), copy furnished
once a week for two (2) consecutive weeks in a language the barangays where the proposed contract area is located
generally understood in the locality. After forty-five (45) days once a week for two (2) consecutive weeks in a language
Sec. 41.
from the last date of publication/posting has been made and generally understood in the locality. After forty-five (45) days
no adverse claim, protest or opposition was filed within the from the last date of publication/posting has been made and
xxxx said forty-five (45) days, the concerned offices shall issue a no adverse claim, protest or opposition was filed within the
certification that publication/posting has been made and that said forty-five (45) days, the concerned offices shall issue a
Within fifteen (15) working days form the receipt of the no adverse claim, protest or opposition of whatever nature certification that publication/posting has been made and that
Certification issued by the Panel of Arbitrators as provided in has been filed. On the other hand, if there be any adverse no adverse claim, protest or opposition of whatever nature
Section 38 hereof, the concerned Regional Director shall claim, protest or opposition, the same shall be filed within has been filed. On the other hand, if there be any adverse
initially evaluate the Mineral Agreement applications in areas forty-five (45) days from the last date of publication/posting, claim, protest or opposition, the same shall be filed within
outside Mineral reservations. He/She shall thereafter endorse with the Regional Offices concerned, or through the forty-five (45) days from the last date of publication/posting,
his/her findings to the Bureau for further evaluation by the Departments Community Environment and Natural Resources with the Regional offices concerned, or through the
Director within fifteen (15) working days from receipt of Officers (CENRO) or Provincial Environment and Natural Departments Community Environment and Natural Resources
forwarded documents. Thereafter, the Director shall endorse Resources Officers (PENRO), to be filed at the Regional Office Officers (CENRO) or Provincial Environment and Natural
the same to the secretary for consideration/approval within for resolution of the Panel of Arbitrators. However previously Resources Officers (PENRO), to be filed at the Regional Office
fifteen working days from receipt of such endorsement. published valid and subsisting mining claims are exempted for resolution of the Panel of Arbitrators. However, previously
from posted/posting required under this Section. published valid and subsisting mining claims are exempted
from posted/posting required under this Section.
In case of Mineral Agreement applications in areas with
Mineral Reservations, within fifteen (15) working days from No mineral agreement shall be approved unless the
receipt of the Certification issued by the Panel of Arbitrators requirements under this section are fully complied with and No mineral agreement shall be approved unless the
as provided for in Section 38 hereof, the same shall be any opposition/adverse claim is dealt with in writing by the requirements under this section are fully complied with and
evaluated and endorsed by the Director to the Secretary for Director and resolved by the Panel of Arbitrators. (Emphasis any opposition/adverse claim is dealt with in writing by the
consideration/approval within fifteen days from receipt of supplied.) Director and resolved by the Panel of Arbitrators. (Emphasis
such endorsement. (emphasis supplied) supplied.)
It has been made clear from the aforecited provisions that the
It has been made clear from the aforecited provisions that the "disputes involving rights to mining areas" under Sec. 77(a) These provisions lead us to conclude that the power of the
"disputes involving rights to mining areas" under Sec. 77(a) specifically refer only to those disputes relative to the POA to resolve any adverse claim, opposition, or protest
specifically refer only to those disputes relative to the applications for a mineral agreement or conferment of mining relative to mining rights under Sec. 77(a) of RA 7942 is
applications for a mineral agreement or conferment of mining rights. confined only to adverse claims, conflicts and oppositions
rights. relating to applications for the grant of mineral rights.
The jurisdiction of the POA over adverse claims, protest, or
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right application is further elucidated POAs jurisdiction is confined only to resolutions of such
oppositions to a mining right application is further elucidated by Secs. 219 and 43 of DENRO AO 95-936, which reads: adverse claims, conflicts and oppositions and it has no
by Secs. 219 and 43 of DENR AO 95-936, which read: authority to approve or reject said applications. Such power is
vested in the DENR Secretary upon recommendation of the
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.-
MGB Director. Clearly, POAs jurisdiction over "disputes
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of Sections 28, 43 and 57
involving rights to mining areas" has nothing to do with the
Notwithstanding the provisions of Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in
cancellation of existing mineral agreements. (emphasis ours)
above, any adverse claim, protest or opposition specified in said sections may also be filed directly with the Panel of
said sections may also be filed directly with the Panel of Arbitrators within the concerned periods for filing such claim,
Arbitrators within the concerned periods for filing such claim, protest or opposition as specified in said Sections. Accordingly, as we enunciated in Celestial, the POA
protest or opposition as specified in said Sections. unquestionably has jurisdiction to resolve disputes over MPSA
applications subject of Redmonts petitions. However, said

CORPORATION LAW: 7. captial structure Page 43 of 201

jurisdiction does not include either the approval or rejection of respective MPSA applications. Since respondent filed 3 petitioners, allegedly a Philippine-owned corporation due to
the MPSA applications, which is vested only upon the separate petitions for the denial of said applications, then a the sale of MBMI's shareholdings to DMCI, are allowed to
Secretary of the DENR. Thus, the finding of the POA, with controversy has developed between the parties and it is enter into FTAAs with the State is a non-issue in this case.
respect to the rejection of petitioners MPSA applications POAs jurisdiction to resolve said disputes.
being that they are foreign corporation, is valid.
In ending, the "control test" is still the prevailing mode of
Moreover, the jurisdiction of the RTC involves civil actions determining whether or not a corporation is a Filipino
Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts while what petitioners filed with the DENR Regional Office or corporation, within the ambit of Sec. 2, Art. II of the 1987
that it is the regular courts, not the POA, that has jurisdiction any concerned DENRE or CENRO are MPSA applications. Thus Constitution, entitled to undertake the exploration,
over the MPSA applications of petitioners. POA has jurisdiction. development and utilization of the natural resources of the
Philippines. When in the mind of the Court there is doubt,
based on the attendant facts and circumstances of the case,
This postulation is incorrect. Furthermore, the POA has jurisdiction over the MPSA
in the 60-40 Filipino-equity ownership in the corporation, then
applications under the doctrine of primary jurisdiction. Euro-
it may apply the "grandfather rule."
med Laboratories v. Province of Batangas 55 elucidates:
It is basic that the jurisdiction of the court is determined by
the statute in force at the time of the commencement of the
WHEREFORE, premises considered, the instant petition is
action.54 The doctrine of primary jurisdiction holds that if a case is such
DENIED. The assailed Court of Appeals Decision dated
that its determination requires the expertise, specialized
October 1, 2010 and Resolution dated February 15, 2011 are
training and knowledge of an administrative body, relief must
Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary hereby AFFIRMED.
first be obtained in an administrative proceeding before resort
Reorganization
to the courts is had even if the matter may well be within
their proper jurisdiction. SO ORDERED.
Act of 1980" reads:

Whatever may be the decision of the POA will eventually

Sec. 19. Jurisdiction in Civil [Link] Trial Courts shall reach the court system via a resort to the CA and to this Court
exercise exclusive original jurisdiction: as a last recourse. G.R. No. 195580 January 28, 2015

1. In all civil actions in which the subject of the litigation is Selling of MBMIs shares to DMCI NARRA NICKEL MINING AND DEVELOPMENT CORP.,
incapable of pecuniary estimation.
TESORO MINING AND DEVELOPMENT, INC., and
As stated before, petitioners Manifestation and Submission McARTHUR MINING, INC., Petitioners, vs. REDMONT
On the other hand, the jurisdiction of POA is unequivocal from dated October 19, 2012 would want us to declare the instant CONSOLIDATED MINES CORP., Respondent.
Sec. 77 of RA 7942: petition moot and academic due to the transfer and
conveyance of all the shareholdings and interests of MBMI to R E S O L U T I O N
Section 77. Panel of Arbitrators. DMCI, a corporation duly organized and existing under
Philippine laws and is at least 60% Philippine-
owned.56 Petitioners reasoned that they now cannot be VELASCO, JR., J.:
x x x Within thirty (30) days, after the submission of the
considered as foreign-owned; the transfer of their shares
case by the parties for the decision, the panel shall have
supposedly cured the "defect" of their previous nationality. Before the Court is the Motion for Reconsideration of its April
exclusive and original jurisdiction to hear and decide the
They claimed that their current FTAA contract with the State 21, 2014 Decision, which denied the Petition for Review on
following:
should stand since "even wholly-owned foreign corporations Certiorari under Rule 45 jointly interposed by petitioners
can enter into an FTAA with the State." 57Petitioners stress that Narra Nickel and Mining Development Corp. (Narra), Tesoro
(c) Disputes involving rights to mining areas there should no longer be any issue left as regards their Mining and Development, Inc. (Tesoro), and McArthur Mining
qualification to enter into FTAA contracts since they are Inc. (McArthur), and affirmed the October 1, 2010 Decision
(d) Disputes involving mineral agreements or permits qualified to engage in mining activities in the Philippines. and February 15, 2011 Resolution of the Court of Appeals (CA)
Thus, whether the "grandfather rule" or the "control test" is in CA-G.R. SP No. 109703.
used, the nationalities of petitioners cannot be doubted since
It is clear that POA has exclusive and original jurisdiction over it would pass both tests.
any and all disputes involving rights to mining areas. One Very simply, the challenged Decision sustained the appellate
such dispute is an MPSA application to which an adverse court's ruling that petitioners, being foreign corporations, are
claim, protest or opposition is filed by another interested The sale of the MBMI shareholdings to DMCI does not have not entitled to Mineral Production Sharing Agreements
applicant.1wphi1 In the case at bar, the dispute arose or any bearing in the instant case and said fact should be (MPSAs). In reaching its conclusion, this Court upheld with
originated from MPSA applications where petitioners are disregarded. The manifestation can no longer be considered approval the appellate court's finding that there was doubt as
asserting their rights to mining areas subject of their by us since it is being tackled in G.R. No. 202877 pending to petitioners' nationality since a 100% Canadian-owned firm,
before this Court.1wphi1 Thus, the question of whether MBMI Resources, Inc. (MBMI), effectively owns 60% of the

CORPORATION LAW: 7. captial structure Page 44 of 201

common stocks of the petitioners by owning equity interest of itself has already cancelled and revoked the FTAA thusissued establish a controlling principle that will "guide the bench, the
petitioners' other majority corporate shareholders. to petitioners. Petitioners curiously have omitted this critical bar, and the public."
factin their motion for reconsideration. Furthermore, the
supposed sale by MBMI of its shares in the petition
In a strongly worded Motion for Reconsideration dated June 5, Lastly, the petitioners actions during the lifetime and
ercorporations and in their holding companies is not only a
2014, petitioners-movants argued, in the main, that the existence of the instant case that gave rise to the present
question of fact that this Court is without authority toverify, it
Court's Decision was not in accord with law and logic. In its controversy are capable of repetition yet evading review
also does not negate any violation of the Constitutional
September 2, 2014 Comment, on the other hand, respondent because, as shown by petitioners actions, foreign
provisions previously committed before any such sale.
Redmont Consolidated Mines Corp. (Redmont) countered that corporations can easily utilize dummy Filipino corporations
petitioners motion for reconsideration is nothing but a rehash through various schemes and stratagems to skirt the
of their arguments and should, thus, be denied outright for We can assume for the nonce that the controversy had indeed constitutional prohibition against foreign mining in Philippine
being pro-forma. Petitioners have interposed on September been rendered moot by these two events. Asthis Court has soil.
30, 2014 their Reply to the respondents Comment. time and again declared, the "moot and academic" principle
is not a magical formula that automatically dissuades courts
II.
in resolving a case.1 The Court may still take cognizance of an
After considering the parties positions, as articulated in their
otherwise moot and academic case, if it finds that (a) there is
respective submissions, We resolve to deny the motion for
a grave violation of the Constitution;(b) the situation is of The application of the Grandfather Ruleis justified by the
reconsideration.
exceptional character and paramount public interest is circumstances of the case to determine the nationality of
involved; (c) the constitutional issue raised requires petitioners.
I. formulation of controlling principles to guide the bench, the
bar, and the public; and (d) the case is capable of repetition To petitioners, the Courts application of the Grandfather Rule
The case has not been rendered moot and academic yet evading review.2 The Courts April 21, 2014 Decision to determine their nationality is erroneous and allegedly
explained in some detail that all four (4) of the foregoing without basis in the Constitution, the Foreign Investments Act
circumstances are present in the case. If only to stress a of 1991 (FIA), the Philippine Mining Act of 1995,3 and the
Petitioners have first off criticized the Court for resolving in its
point, we will do so again. First, allowing the issuance of Rules issued by the Securities and Exchange Commission
Decision a substantive issue, which,as argued, has
MPSAs to applicants that are owned and controlled by a 100% (SEC). These laws and rules supposedly espouse the
supposedly been rendered moot by the fact that petitioners
foreign-owned corporation, albeit through an intricate web of application of the Control Test in verifying the Philippine
applications for MPSAs had already been converted to an
corporate layering involving alleged Filipino corporations, is nationality of corporate entities for purposes of determining
application for a Financial Technical Assistance Agreement
tantamount to permitting a blatant violation of Section 2, compliance withSec. 2, Art. XII of the Constitution that only
(FTAA), as petitioners have in fact been granted an FTAA.
Article XII of the Constitution. The Court simply cannot allow "corporations or associations at least sixty per centum of
Further, the nationality issue, so petitioners presently claim,
this breach and inhibit itself from resolving the controversy on whose capital is owned by such [Filipino] citizens" may enjoy
had been rendered moribund by the fact that MBMI had
the facile pretext that the case had already been rendered certain rights and privileges, like the exploration and
already divested itself and sold all its shareholdings in the
academic. development of natural resources.
petitioners, as well as in their corporate stockholders, to a
Filipino corporationDMCI Mining Corporation (DMCI).
Second, the elaborate corporate layering resorted to by The application of the Grandfather Rule in the present case
petitioners so as to make it appear that there is compliance does not eschew the Control Test.
As a counterpoint, respondent Redmontavers that the present
with the minimum Filipino ownership in the Constitution is
case has not been rendered moot by the supposed issuance
deftly exceptional in character. More importantly, the case is
of an FTAA in petitioners favor as this FTAA was subsequently Clearly, petitioners have misread, and failed to appreciate the
of paramount public interest, as the corporate layering
revoked by the Office of the President (OP) and is currently a clear import of, the Courts April 21, 2014 Decision. Nowhere
employed by petitioners was evidently designed to
subject of a petition pending in the Courts First Division. in that disposition did the Court foreclose the application of
circumvent the constitutional caveat allowing only Filipino
Redmont likewise contends that the supposed sale of MBMIs the Control Test in determining which corporations may be
citizens and corporations 60%-owned by Filipino citizens to
interest in the petitioners and in their "holding companies" is considered as Philippine nationals. Instead, to borrow Justice
explore, develop, and use the countrys natural resources.
a question of fact that is outside the Courts province to verify Leonens term, the Court used the Grandfather Rule as a
in a Rule 45 certiorari proceedings. In any case, assuming "supplement" to the Control Test so that the intent underlying
that the controversy has been rendered moot, Redmont Third, the facts of the case, involving as they do a web of the averted Sec. 2, Art. XII of the Constitution be given effect.
claims that its resolution on the merits is still justified by the corporate layering intended to go around the Filipino The following excerpts of the April 21, 2014 Decision cannot
fact that petitioners have violated a constitutional provision, ownership requirement in the Constitution and pertinent laws, be clearer:
the violation is capable of repetition yet evading review, and requirethe establishment of a definite principle that will
the present case involves a matter of public concern. ensure that the Constitutional provision reserving to Filipino
In ending, the "control test" is still the prevailing mode of
citizens or "corporations at least sixty per centum of whose
determining whether or not a corporation is a Filipino
capital is owned by such citizens" be effectively enforced and
Indeed, as the Court clarified in its Decision, the conversion of corporation, within the ambit of Sec. 2, Art. XII of the 1987
complied with. The case, therefore, is an opportunity to
the MPSA application to one for FTAAs and the issuance by Constitution, entitled to undertake the exploration,
the OP of an FTAA in petitioners favor are irrelevant. The OP development and utilization of the natural resources of the

CORPORATION LAW: 7. captial structure Page 45 of 201

Philippines. When in the mind of the Court, there is doubt, MR. VILLEGAS: Yes, that is the understanding of the xxxx
based on the attendant facts and circumstances of the case, Committee.
in the 60-40 Filipino equity ownership in the corporation, then
We note that the Constitution and the statute use the concept
it may apply the "grandfather rule." (emphasis supplied)
As further defined by Dean Cesar Villanueva, the Grandfather "Philippine citizens." Article III, Section 1 of the Constitution
Rule is "the method by which the percentage of Filipino equity provides who are Philippine citizens: x x x This enumeration is
With that, the use of the Grandfather Rule as a "supplement" in a corporation engaged in nationalized and/or partly exhaustive. In other words, there can be no other Philippine
to the Control Test is not proscribed by the Constitution or the nationalized areas of activities, provided for under the citizens other than those falling within the enumeration
Philippine Mining Act of 1995. Constitution and other nationalization laws, is computed, in provided by the Constitution. Obviously, only natural persons
cases where corporate shareholders are present, by are susceptible of citizenship. Thus, for purposes of the
attributing the nationality of the second or even subsequent Constitutional and statutory restrictions on foreign
The Grandfather Rule implements the intent of the
tier of ownership to determine the nationality of the corporate participation in the exploitation of mineral resources, a
Filipinization provisions of the Constitution.
shareholder."4 Thus, to arrive at the actual Filipino ownership corporation investing in a mining joint venture can never be
and control in a corporation, both the direct and indirect considered as a Philippine citizen.
To reiterate, Sec. 2, Art. XII of the Constitution reserves the shareholdings in the corporation are determined.
exploration, development, and utilization of natural resources
The Supreme Court En Banc confirms this [in] Pedro R.
to Filipino citizens and "corporations or associations at least
This concept of stock attribution inherent in the Grandfather Palting, vs. San Jose Petroleum [Inc.]. The Court held that a
sixty per centum of whose capital is owned by such citizens."
Rule to determine the ultimate ownership in a corporation is corporation investing in another corporation engaged ina
Similarly, Section 3(aq) of the Philippine Mining Act of 1995
observed by the Bureau of Internal Revenue (BIR) in applying nationalized activity cannot be considered as a citizen for
considers a "corporation x x x registered in accordance with
Section 127 (B)5 of the National Internal Revenue Code on purposes of the Constitutional provision restricting foreign
law at least sixty per cent of the capital of which is owned by
taxes imposed on closely held corporations, in relation to exploitation of natural resources:
citizens of the Philippines" as a person qualified to undertake
Section 96 of the Corporation Code6 on close corporations.
a mining operation. Consistent with this objective, the
Thus, in BIR Ruling No. 148-10, Commissioner Kim Henares
Grandfather Rulewas originally conceived to look into the xxxx
held:
citizenshipof the individuals who ultimately own and control
the shares of stock of a corporation for purposes of
Accordingly, we opine that we must look into the citizenship
determining compliance with the constitutional requirement In the case of a multi-tiered corporation, the stock attribution
of the individual stockholders, i.e. natural persons, of that
of Filipino ownership. It cannot, therefore, be denied that the
rule must be allowed to run continuously along the chain of
investor-corporation in order to determine if the Constitutional
framers of the Constitution have not foreclosed the ownership until it finally reaches the individual stockholders.
and statutory restrictions are complied with. If the shares of
Grandfather Rule as a tool in verifying the nationality of This is in consonance with the "grandfather rule" adopted in
stock of the immediate investor corporation is in turn held
corporations for purposes of ascertaining their right to the Philippines under Section 96 of the Corporation
and controlled by another corporation, then we must look into
participate in nationalized or partly nationalized [Link](Batas Pambansa Blg. 68) which provides that
the citizenship of the individual stockholders of the latter
The following excerpts from the Record of the 1986 notwithstanding the fact that all the issued stock of a
corporation. In other words, if there are layers of intervening
Constitutional Commission suggest as much: corporation are held by not more than twenty persons, among
corporations investing in a mining joint venture, we must
others, a corporation is nonetheless not to be deemed a close
delve into the citizenship of the individual stockholders of
corporation when at least two thirds of its voting stock or
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated each corporation. This is the strict application of the
voting rights is owned or controlled by another corporation
local or Filipino equity and foreign equity; namely, 60-40 in grandfather rule, which the Commission has been
which is not a close corporation.7
Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15. consistently applying prior to the 1990s. Indeed, the framers
of the Constitution intended for the "grandfather rule" to
In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC apply in case a 60%-40% Filipino-Foreign equity corporation
MR. VILLEGAS: That is right.
Opinion 10-31), the SEC applied the Grandfather Rule even if invests in another corporation engaging in an activity where
the corporation engaged in mining operation passes the 60- the Constitution restricts foreign participation.
xxxx 40 requirement of the Control Test, viz:
xxxx
MR. NOLLEDO: Thank you. You allege that the structure of MMLs ownership in PHILSAGA
is as follows: (1) MML owns 40% equity in MEDC, while the
Accordingly, under the structure you represented, the joint
With respect to an investment by one corporation in another 60% is ostensibly owned by Philippine individual citizens who
mining venture is 87.04 % foreign owned, while it is only
corporation, say, a corporation with 60-40 percent equity are actually MMLs controlled nominees; (2) MEDC, in turn,
12.96% owned by Philippine citizens. Thus, the constitutional
invests in another corporation which is permitted by the owns 60% equity in MOHC, while MML owns the remaining
requirement of 60% ownership by Philippine citizens
Corporation Code, does the Committee adopt the grandfather 40%; (3) Lastly, MOHC owns 60% of PHILSAGA, while MML
isviolated. (emphasis supplied)
rule? owns the remaining 40%. You provide the following figure to
illustrate this structure:
Similarly, in the eponymous Redmont Consolidated Mines
Corporation v. McArthur Mining Inc., et al., 8 the SEC en

CORPORATION LAW: 7. captial structure Page 46 of 201

bancapplied the Grandfather Rule despite the fact that the the rule that the "beneficial ownership" of corporations entity holding the concession, or to acquire rights in the
subject corporations ostensibly have satisfied the 60-40 engaged in nationalized activities must reside in the hands of processing and marketing stages. x x x (emphasis supplied)
Filipino equity requirement. The SEC en bancheld that to Filipino citizens. Thus, even if the 60-40 Filipino equity
attain the Constitutional objective of reserving to Filipinos the requirement appears to have been satisfied, the Department
The "beneficial ownership" requirement was subsequently
utilization of natural resources, one should not stop where the of Justice (DOJ), in its Opinion No. 144, S. of 1977, stated that
used in tandem with the "situs of control" todetermine the
percentage of the capital stock is 60%.Thus: an agreement that may distort the actual economic or
nationality of a corporation in DOJ Opinion No. 84, [Link] 1988,
beneficial ownership of a mining corporation may be struck
through the Grandfather Rule, despite the fact that both the
down as violative of the constitutional requirement, viz:
[D]oubt, we believe, exists in the instant case because the investee and investor corporations purportedly satisfy the 60-
foreign investor, MBMI, provided practically all the funds of 40 Filipino equity requirement:9
the remaining appellee-corporations. The records disclose In this connection, you raise the following specific questions:
that: (1) Olympic Mines and Development Corporation
This refers to your request for opinion on whether or not there
("OMDC"), a domestic corporation, and MBMI subscribed to
1. Can a Philippine corporation with 30% equity owned by may be an investment in real estate by a domestic
6,663 and 3,331 shares, respectively, out of the authorized
foreigners enter into a mining service contract with a foreign corporation (the investing corporation) seventy percent (70%)
capital stock of Madridejos; however, OMDC paid nothing for
company granting the latter a share of not morethan 40% of the capital stock of which is owned by another domestic
this subscription while MBMI paid P2,803,900.00 out of its
from the proceeds of the operations? corporation withat least 60%-40% Filipino-Foreign Equity,
total subscription cost of P3,331,000.00; (2) Palawan Alpha
while the remaining thirty percent (30%) of the capital stock
South Resource Development Corp. ("Palawan Alpha"), also a
is owned by a foreign corporation.
domestic corporation, and MBMI subscribed to 6,596 and xxxx
3,996 shares, respectively, out of the authorized capital stock
of PatriciaLouise; however, Palawan Alpha paid nothing for xxxx
By law, a mining lease may be granted only to a Filipino
this subscription while MBMI paid P2,796,000.00 out of its citizen, or to a corporation or partnership registered with the
total subscription cost of P3,996,000.00; (3) OMDC and MBMI [SEC] at least 60% of the capital of which is owned by Filipino This Department has had the occasion to rule in several
subscribed to 6,663 and 3,331 shares, respectively, out of the citizens and possessing x x [Link] sixty percent Philippine opinions that it is implicit in the constitutional provisions,
authorized capital stock of Sara Marie; however, OMDC paid equity requirement in mineral resource exploitation x x xis even if it refers merely to ownership of stock in the
nothing for this subscription while MBMI paid P2,794,000.00 intended to insure, among other purposes, the conservation corporation holding the land or natural resource concession,
out of its total subscription cost of P3,331,000.00; and (4) of indigenous natural resources, for Filipino posterityx x x. I that the nationality requirement is not satisfied unless it
Falcon Ridge Resources Management Corp. ("Falcon Ridge"), think it is implicit in this provision, even if it refers merely to meets the criterion of beneficial ownership, i.e. Filipinos are
another domestic corporation, and MBMI subscribed to 5,997 ownership of stock in the corporation holding the mining the principal beneficiaries in the exploration of natural
and 3,998 shares, respectively, out of the authorized capital concession, that beneficial ownership of the right to dispose, resources(Op. No. 144, s. 1977; Op. No. 130, s. 1985), and
stock of San Juanico; however, Falcon Ridge paid nothing for exploit, utilize, and develop natural resources shall pertain to that in applying the same "the primordial consideration is
this subscription while MBMI paid P2,500,000.00 out of its Filipino citizens, and that the nationality requirementis not situs of control, whether in a stock or nonstock
total subscription cost of P3,998,000.00. Thus, pursuant to satisfied unless Filipinos are the principal beneficiaries in the corporation"(Op. No. 178, s. 1974). As stated in the Register
the afore-quoted DOJ Opinion, the Grandfather Rule must be exploitation of the countrys natural resources. This criterion of Deeds vs. Ung Sui Si Temple (97 Phil. 58), obviously
used. of beneficial ownership is tacitly adopted in Section 44 of P.D. toinsure that corporations and associations allowed to acquire
No. 463, above-quoted, which limits the service fee in service agricultural land or to exploit natural resources "shall be
xxxx contracts to 40% of the proceeds of the operation, thereby controlled by Filipinos." Accordingly, any arrangement which
implying that the 60-40 benefit-sharing ration is derived from attempts to defeat the constitutional purpose should be
the 60-40 equity requirement in the Constitution. eschewed (Op. No 130, s. 1985).
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 xxxx We are informed that in the registration of corporations with
provision should not diminish that right through the legal the [SEC], compliance with the sixty per centum requirement
fiction of corporate ownership and control. But the is being monitored by SEC under the "Grandfather Rule" a
It is obvious that while payments to a service contractor may
constitutional provision, as interpreted and practicedvia the method by which the percentage of Filipino equity in
be justified as a service fee, and therefore, properly
1967 SEC Rules, has favored foreigners contrary to the corporations engaged in nationalized and/or partly
deductible from gross proceeds, the service contract could be
command of the Constitution. Hence, the Grandfather Rule nationalized areas of activities provided for under the
employed as a means of going about or circumventing the
must be applied to accurately determine the actual Constitution and other national laws is accurately computed,
constitutional limit on foreign equity participation and the
participation, both direct and indirect, of foreigners in a and the diminution if said equity prevented (SEC Memo, S.
obvious constitutional policy to insure that Filipinos retain
corporation engaged in a nationalized activity or business. 1976). The "Grandfather Rule" is applied specifically in cases
beneficial ownership of our mineral resources. Thus, every
where the corporation has corporate stockholders with alien
service contract scheme has to be evaluated in its entirety,
stockholdings, otherwise, if the rule is not applied, the
The method employed in the Grandfather Rule of attributing on a case to case basis, to determine reasonableness of the
presence of such corporate stockholders could diminish the
the shareholdings of a given corporate shareholder to the total "service fee" x x x like the options available tothe
effective control of Filipinos.
second or even the subsequent tier of ownership hews with contractor to become equity participant in the Philippine

CORPORATION LAW: 7. captial structure Page 47 of 201

Applying the "Grandfather Rule" in the instant case, the result [Link] the proposed structure, the foreign creditors would activities, as the mining operation involved in this case or the
is as follows: x x x the total foreign equity in the investing own 40% of the outstanding capital stock of the operation of public utilities as in Gamboa or Bayantel.
corporation is 58% while the Filipino equity is only 42%, in the telecommunications company on a direct basis, while the
investing corporation, subject of your query, is disqualified remaining 40% of shares would be registered to a holding
The Grandfather Rule, standing alone, should not be used to
from investing in real estate, which is a nationalized activity, company that shall retain, on a direct basis, the other 60%
determine the Filipino ownership and control in a corporation,
as it does not meet the 60%-40% Filipino-Foreign equity equity reserved for Filipino citizens. Nonetheless, the Court
as it could result in an otherwise foreign corporation rendered
requirement under the Constitution. found the proposal non-compliant with the Constitutional
qualified to perform nationalized or partly nationalized
requirement of Filipino ownership as the proposed structure
activities. Hence, it is only when the Control Test is first
would give more than 60% of the ownership of the common
This pairing of the concepts "beneficial ownership" and the complied with that the Grandfather Rule may be applied. Put
shares of Bayantel to the foreign corporations, viz:
"situs of control" in determining what constitutes"capital" has in another manner, if the subject corporations Filipino equity
been adopted by this Court in Heirs of Gamboa v. Teves. 10 In falls below the threshold 60%, the corporation is immediately
its October 9, 2012 Resolution, the Court clarified, thus: In its Rehabilitation Plan, among the material financial considered foreign-owned, in which case, the needto resort to
commitments made by respondent Bayantelis that its the Grandfather Rule disappears.
shareholders shall relinquish the agreed-upon amount of
This is consistent with Section 3 of the FIA which provides that
common stock[s] as payment to Unsecured Creditors as per
where 100% of the capital stock is heldby "a trustee of funds On the other hand, a corporation that complies with the 60-40
the Term Sheet. Evidently, the parties intend to convert the
for pension or other employee retirement or separation Filipino to foreign equity requirement can be considered a
unsustainable portion of respondents debt into common
benefits," the trustee is a Philippine national if "at least sixty Filipino corporation if there is no doubtas to who has the
stocks, which have voting rights. If we indulge petitioners on
percent (60%) of the fund will accrue to the benefit of "beneficial ownership" and "control" of the corporation. In
their proposal, the Omnibus Creditors which are foreign
Philippine nationals." Likewise, Section 1(b) of the that instance, there is no need fora dissection or further
corporations, shall have control over 77.7% of Bayantel, a
Implementing Rules of the FIA provides that "for stocks to be inquiry on the ownership of the corporate shareholders in
public utility company. This is precisely the scenario
deemed owned and held by Philippine citizens or Philippine both the investing and investee corporation or the application
proscribed by the Filipinization provision of the
nationals, mere legal title is not enough to meet the required of the Grandfather Rule. 12 As a corollary rule, even if the 60-
[Link], the Court of Appeals acted correctly in
Filipino equity. Full beneficial ownership of the stocks, coupled 40 Filipino to foreign equity ratio is apparently met by the
sustaining the 40% debt-to-equity ceiling on conversion.
with appropriate voting rights, is essential." (emphasis subject or investee corporation, a resort to the Grandfather
(emphasis supplied) As shown by the quoted legislative
supplied) Rule is necessary if doubt existsas to the locusof the
enactments, administrative rulings, opinions, and this Courts
"beneficial ownership" and "control." In this case, a further
decisions, the Grandfather Rule not only finds basis, but more
investigation as to the nationality of the personalities with the
In emphasizing the twin requirements of "beneficial importantly, it implements the Filipino equity requirement, in
beneficial ownership and control of the corporate
ownership" and "control" in determining compliance with the the Constitution.
shareholders in both the investing and investee corporations
required Filipino equity in Gamboa, the en bancCourt explicitly
is necessary.
cited with approval the SEC en bancs application in Redmont
Application of the Grandfather
Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. of
the Grandfather Rule, to wit: As explained in the April 21,2012 Decision, the "doubt" that
Rule with the Control Test. demands the application of the Grandfather Rule in addition
to or in tandem with the Control Test is not confined to, or
Significantly, the SEC en banc, which is the collegial body
more bluntly, does not refer to the fact that the apparent
statutorily empowered to issue rules and opinions on behalf of Admittedly, an ongoing quandary obtains as to the role of the
Filipino ownership of the corporations equity falls below the
SEC, has adopted the Grandfather Rulein determining Grandfather Rule in determining compliance with the
60% threshold. Rather, "doubt" refers to various indicia that
compliance with the 60-40 ownership requirement in favor of minimum Filipino equity requirement vis--vis the Control
the "beneficial ownership" and "control" of the corporation do
Filipino citizens mandated by the Constitution for certain Test. This confusion springs from the erroneous assumption
not in fact reside in Filipino shareholders but in foreign
economic activities. This prevailing SEC ruling, which the SEC that the use of one method forecloses the use of the other.
stakeholders. As provided in DOJ Opinion No. 165, Series of
correctly adopted to thwart any circumvention of the required
1984, which applied the pertinent provisions of the Anti-
Filipino "ownership and control," is laid down in the 25 March
As exemplified by the above rulings, opinions, decisions and DummyLaw in relation to the minimum Filipino equity
2010 SEC en banc ruling in Redmont Consolidated Mines,
this Courts April 21, 2014 Decision, the Control Test can be, requirement in the Constitution, "significant indicators of the
Corp. v. McArthur Mining, Inc., et al. x x x (emphasis supplied)
as it has been, applied jointly withthe Grandfather Rule to dummy status" have been recognized in view of reports "that
determine the observance of foreign ownership restriction in some Filipino investors or businessmen are being utilized or
Applying Gamboa, the Court, in Express Investments III nationalized economic activities. The Control Test and the [are] allowing themselves to be used as dummies by foreign
Private Ltd. v. Bayantel Communications, Inc., 11 denied the Grandfather Rule are not, as it were, incompatible ownership- investors" specifically in joint ventures for national resource
foreign creditors proposal to convert part of Bayantels debts determinant methods that canonly be applied alternative to exploitation. These indicators are:
to common shares of the company at a rate of 77.7%. each other. Rather, these methodscan, if appropriate, be used
Supposedly, the conversion of the debts to common shares by cumulatively in the determination of the ownership and
1. That the foreign investors provide practically all the
the foreign creditors would be done, both directly and control of corporations engaged in fully or partly nationalized
funds for the joint investment undertaken by these Filipino
indirectly, in order to meet the control test principle under the
businessmen and their foreign partner;

CORPORATION LAW: 7. captial structure Page 48 of 201

 2. That the foreign investors undertake to provide contrary to the equality of shares based on the articles of Tesoro
practically all the technological support for the joint incorporation.
venture;
Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara
With this in mind, we find it proper for the EPD to investigate Marie) holds 59.97% of the 10,000 commonshares of
3. That the foreign investors, while being minority the subject corporation. The EPD is advised to avail of the petitioner Tesoro while the Canadian-owned company, MBMI,
stockholders, manage the company and prepare all Commissions subpoena powers in order to gather sufficient holds 39.98% of its shares.
economic viability studies. evidence, and file the necessary complaint.
Name National Numb Amount Amount
Thus, In the Matter of the Petition for Revocation of the As will be discussed, even if atfirst glance the petitioners ity er of Subscribed Paid
Certificate of Registration of Linear Works Realty comply with the 60-40 Filipino to foreign equity ratio, doubt Share
Development Corporation,13 the SEC held that when exists in the present case that gives rise to a reasonable s
foreigners contribute more capital to an enterprise, doubt suspicion that the Filipino shareholders do not actually have Sara Filipino 5,997 P5,997,000. P825,000.0
exists as to the actual control and ownership of the subject the requisite number of control and beneficial ownership in Marie 00 0
corporation even if the 60% Filipino equity threshold is met. petitioners Narra, Tesoro, and McArthur. Hence, a further Mining,
Hence, the SEC in that one ordered a further investigation, investigation and dissection of the extent of the ownership of Inc.
viz: the corporate shareholders through the Grandfather Rule is MBMI Canadia 3,998 P3,998,000. P1,878,174
justified. Resourc n 00 .60
es, Inc.16
x x x The [SEC Enforcement and Prosecution Department
Lauro L. Filipino 1 P1,000.00 P1,000.00
(EPD)] maintained that the basis for determining the level of Parenthetically, it is advanced that the application of the
Salazar
foreign participation is the number of shares subscribed, Grandfather Rule is impractical as tracing the shareholdings Fernand Filipino 1 P1,000.00 P1,000.00
regardless of the par value. Applying such an interpretation, to the point when natural persons hold rights to the stocks o B.
the EPD rules that the foreign equity participation in Linear may very well lead to an investigation ad infinitum. Suffice it Esguerra
works Realty Development Corporation amounts to 26.41% of to say in this regard that, while the Grandfather Rule was Manuel Filipino 1 P1,000.00 P1,000.00
the corporations capital stock since the amount of shares originally intended to trace the shareholdings to the point A.
subscribed by foreign nationals is 1,795 only out of the 6,795 where natural persons hold the shares, the SEC had already Agcaoili
shares. Thus, the subject corporation is compliant with the set up a limit as to the number of corporate layers the Michael America 1 P1,000.00 P1,000.00
40% limit on foreign equity participation. Accordingly, the EPD attribution of the nationality of the corporate shareholders T. Mason n
dismissed the complaint, and did not pursue any investigation may be applied. Kenneth Canadia 1 P1,000.00 P1,000.00
against the subject corporation. Cawkel n
In a 1977 internal memorandum, the SEC suggested applying Total 10,00 P10,000,00 P2,708,174
0 0.00 .60
xxxx the Grandfather Rule on two (2) levels of corporate relations
for publicly-held corporations or where the shares are traded
in the stock exchanges, and to three (3) levels for closely held In turn, the Filipino corporation Olympic Mines & Development
x x x [I]n this respect we find no error in the assailed order
corporations or the shares of which are not traded in the Corp. (Olympic) holds 66.63% of Sara Maries shares while the
made by the EPD. The EPD did not err when it did not take
stock exchanges.14 These limits comply with the requirement same Canadian company MBMI holds 33.31% of Sara Maries
into account the par value of shares in determining
in Palting v. San Jose Petroleum, Inc. 15 that the application of shares. Nonetheless, it is admitted that Olympic did not pay a
compliance with the constitutional and statutory
the Grandfather Rule cannot go beyond the level of what is single peso for its shares. On the contrary, MBMI paid for 99%
restrictionson foreign equity.
reasonable. of the paid-up capital of Sara Marie.

However, we are aware that some unscrupulous individuals

A doubt exists as to the extent of control and beneficial Name Nationa Numb Amount Amount
employ schemes to circumvent the constitutional and
ownership of MBMI over the petitioners and their investing lity er of Subscribed Paid
statutory restrictions on foreign equity. In the present case,
corporate stockholders. Share
the fact that the shares of the Japanese nationals have a
s
greater par value but only have similar rights to those held by
Olympic Filipino 6,663 P6,663,000. P0.00
Philippine citizens having much lower par value, is highly In the Decision subject of this recourse, the Court applied the
Mines & 00
suspicious. This is because a reasonable investor would Grandfather Rule to determine the matter of true ownership
Developm
expect to have greater control and economic rights than other and control over the petitioners as doubt exists as to the
ent
investors who invested less capital than him. Thus, it is actual extent of the participation of MBMI in the equity of the
Corp.17
reasonable to suspectthat there may be secret arrangements petitioners and their investing corporations.
MBMI Canadia 3,331 P3,331,000. P2,794,00
between the corporation and the stockholders wherein the
Resources n 00 0.00
Japanese nationals who subscribed to the shares with greater
We considered the following membership and control , Inc.
par value actually have greater control and economic rights Amanti Filipino 1 P1,000.00 P1,000.00
structures and like nuances:

CORPORATION LAW: 7. captial structure Page 49 of 201

Limson With only 40.01% Filipino ownership in petitioner Tesoro, as Developm
Fernando Filipino 1 P1,000.00 P1,000.00 compared to 59.99% foreign ownership of its shares, it is ent
B. clear that petitioner Tesoro does not comply with the Corp.19
Esguerra minimum Filipino equity requirement imposed in Sec. 2, Art. MBMI Canadia 3,331 P3,331,000. P2,803,90
Lauro Filipino 1 P1,000.00 P1,000.00 XII of the Constitution. Hence, the appellate courts Resources n 00 0.00
Salazar observation that Tesoro is a foreign corporation not entitled to , Inc.
Emmanue Filipino 1 P1,000.00 P1,000.00 an MPSA is apt. Amanti Filipino 1 P1,000.00 P1,000.00
l G. Limson
Fernando Filipino 1 P1,000.00 P1,000.00
McArthur
B.
Hernando
Esguerra
Petitioner McArthur follows the corporate layering structure of Lauro Filipino 1 P1,000.00 P1,000.00
Michael T. America 1 P1,000.00 P1,000.00 Tesoro, as 59.97% of its 10, 000 common shares is owned by Salazar
Mason n supposedly Filipino Madridejos Mining Corporation Emmanue Filipino 1 P1,000.00 P1,000.00
Kenneth Canadia 1 P1,000.00 P1,000.00 (Madridejos), while 39.98% belonged to the Canadian MBMI. l G.
Cawkel n Hernando
Total 10,00 P10,000,00 P2,800,00 Michael T. America 1 P1,000.00 P1,000.00
0 0.00 0.00 Name National Numb Amount Amount Mason n
ity er of Subscribed Paid Kenneth Canadia 1 P1,000.00 P1,000.00
Share Cawkel n
The fact that MBMI had practically provided all the
s Total 10,00 P10,000,00 P2,809,90
funds in Sara Marie and Tesoro creates serious doubt
Madridej Filipino 5,997 P5,997,000. P825,000. 0 0.00 0.00
as to the true extent of its (MBMI) control and
os Mining 00 00
ownership over both Sara Marie and Tesoro since, as
Corporati
observed by the SEC, "a reasonable investor would expect to Again, the fact that MBMI had practically provided all the
on
have greater control and economic rights than other investors funds in Madridejos and McArthur creates serious doubt as to
MBMI Canadia 3,998 P3,998,000. P1,878,17
who invested less capital than him." The application of the the true extent of its control and ownership of MBMI over both
Resource n 0 4.60
Grandfather Rule is clearly called for, and as shown below, Madridejos and McArthur. The application of the Grandfather
s, Inc.18
the Filipinos control and economic benefits in petitioner Lauro L. Filipino 1 P1,000.00 P1,000.00 Rule is clearly called for, and as will be shown below, MBMI,
Tesoro (through Sara Marie) fallbelow the threshold 60%, viz: Salazar along with the other foreign shareholders, breached the
Fernando Filipino 1 P1,000.00 P1,000.00 maximum limit of 40% ownership in petitioner McArthur,
Filipino participation in petitioner Tesoro: B. rendering the petitioner disqualified to an MPSA:
40.01% Manuel Filipino 1 P1,000.00 P1,000.00
A. Filipino participation in petitioner McArthur:
Agcaoili 40.01%
66.6 (Filipino equity in Sara Marie) x 59.97 (Sara Maries Michael America 1 P1,000.00 P1,000.00
7 share in Tesoro) = 39.98% T. Mason n
Kenneth Canadia 1 P1,000.00 P1,000.00 66.6 (Filipino equity in Madridejos) x 59.97 (Madridejos
100 Cawkel n 7 share in McArthur) = 39.98%
39.98% + .03% (shares of individual Filipino shareholders Total 10,00 P10,000,00 P2,708,17
[SHs] in Tesoro) 0 0.00 4.60
100
=40.01% 39.98% + .03% (shares of individual Filipino SHs in
In turn, 66.63% of Madridejos shares were held by Olympic McArthur)
Foreign participation in petitioner Tesoro: while 33.31% of its shares belonged to MBMI. Yet again, =40.01%
59.99% Olympic did not contribute to the paid-up capital of
Madridejos and it was MBMI that provided 99.79% of the paid- Foreign participation in petitioner McArthur:
up capital of Madridejos. 59.99%
33.33 (Foreign equity in Sara Marie) x 59.97 (Sara
Maries share in Tesoro) = 19.99%
Name Nationa Numb Amount Amount 33.33 (Foreign equity in Madridejos) x 59.97
100
lity er of Subscribed Paid (Madridejos share in McArthur) = 19.99%
19.99% + 39.98% (MBMIs direct participation in Tesoro)
Share
+ .02% (shares of foreign individual SHs in Tesoro) 19.99% + 39.98% (MBMIs direct participation inMcArthur)
s
= 59.99% + .02% (shares of foreign individual SHs in McArthur)
Olympic Filipino 6,663 P6,663,000. P0.00
Mines & 00 = 59.99%

CORPORATION LAW: 7. captial structure Page 50 of 201

As with petitioner Tesoro, with only 40.01% Filipino ownership lity er of Subscribed Paid 100
in petitioner McArthur, as compared to 59.99% foreign Share 39.59% + .05% (shares of individual Filipino SHs in
ownership of its shares, it is clear that petitioner McArthur s McArthur)
does not comply with the minimum Filipino equity Palawan Filipino 6,596P6,596,000. P0 =39.64%
Alpha
requirement imposed in Sec. 2, Art. XII of the Constitution. 00
South
Thus, the appellate court did not err in holding that petitioner Foreign participation in petitioner Narra:
McArthur is a foreign corporation not entitled to an [Link] 60.36%
Developm
ent Corp.
Narra 33.98 (Foreign equity in PLMDC) x 59.97 (PLMDCs
MBMI Canadia 3,396 P3,396,000. P2,796,00
Resources n 00 0.00 share in Narra) = 20.38%
As for petitioner Narra, 59.97% of its shares belonged to , Inc.21 100
Patricia Louise Mining & Development Corporation (PLMDC), Higinio C. Filipino 1 P1,000.00 P1,000.00 20.38% + 39.96% (MBMIs direct participation in Narra) + .
while Canadian MBMI held 39.98% of its shares. Mendoza, 02% (shares of foreign individual SHs in McArthur)
Jr. = 60.36%
Fernando Filipino 1 P1,000.00 P1,000.00
Name Nationa Numb Amount Amount
B.
lity er of Subscribed Paid With 60.36% foreign ownership in petitioner Narra, as
Esguerra
Share compared to only 39.64% Filipino ownership of its shares, it is
Henry E. Filipino 1 P1,000.00 P1,000.00
s clear that petitioner Narra does not comply with the minimum
Fernande
Patricia Filipino 5,997 P5,997,000. P1,677,00 Filipino equity requirement imposed in Section 2, Article XII of
z
Lousie 00 0.00 the Constitution. Hence, the appellate court did not err in
Ma. Elena Filipino 1 P1,000.00 P1,000.00
Mining holding that petitioner McArthur is a foreign corporation not
A.
and entitled to an MPSA.
Bocalan
Developm Michael T. America 1 P1,000.00 P1,000.00
ent Corp. Mason n It must be noted that the foregoing determination and
MBMI Canadia 3,996 P3,996,000. P1,116,00 Robert L. Canadia 1 P1,000.00 P1,000.00 computation of petitioners Filipino equity composition was
Resources n 00 0.00 McCurdy n based on their common shareholdings, not preferred or
, Inc.20 Manuel A. Filipino 1 P1,000.00 P1,000.00 redeemable shares. Section 6 of the Corporation Code of the
Higinio C. Filipino 1 P1,000.00 P1,000.00 Agcaoili Philippines explicitly provides that "no share may be deprived
Mendoza, Bayani H, Filipino 1 P1,000.00 P1,000.00 of voting rights except those classified as preferred or
Henry E. Filipino 1 P1,000.00 P1,000.00 Agabin redeemable shares." Further, as Justice Leonen puts it, there
Fernande Total 10,00 P10,000,00 P2,804,00 is "no indication that any of the shares x x x do not have
z 0 0.00 0.00
Ma. Elena Filipino 1 P1,000.00 P1,000.00 voting rights, [thus] it must be assumed that all such shares
A. have voting rights." 22 It cannot therefore be gain said that the
Bocalan Yet again, PASRDC did not pay for any of its subscribed foregoing computation hewed with the pronouncements of
Michael T. America 1 P1,000.00 P1,000.00 shares, while MBMI contributed 99.75% of PLMDCs paid-up Gamboa, as implemented by SEC Memorandum Circular No.
Mason n capital. This fact creates serious doubt as to the true extent of 8, Series of 2013, (SEC Memo No. 8)23 Section 2 of which
Robert L. Canadia 1 P1,000.00 P1,000.00 MBMIs control and ownership over both PLMDC and Narra states:
McCurdy n since "a reasonable investor would expect to have greater
Manuel A. Filipino 1 P1,000.00 P1,000.00 control and economic rights than other investors who
Section 2. All covered corporations shall, at all times, observe
Agcaoili invested less capital than him." Thus, the application of the
the constitutional or statutory requirement.1wphi1 For
Bayani H. Filipino 1 P1,000.00 P1,000.00 Grandfather Rule is justified. And as will be shown, it is clear
purposes of determining compliance therewith, the required
Agabin that the Filipino ownership in petitioner Narra falls below the
percentage of Filipino ownership shall be applied to BOTH (a)
Total 10,00 P10,000,00 P2,800,00 limit prescribed in both the Constitution and the Philippine
the total outstanding shares of stock entitled to vote in the
0 0.00 0.00 Mining Act of 1995.
election of directors; AND (b) the total number of outstanding
shares of stock, whether or not entitled to vote in the election
PLMDCs shares, in turn, were held by Palawan Alpha South Filipino participation in petitioner Narra: of directors.
Resources Development Corporation (PASRDC), which 39.64%
subscribed to 65.96% of PLMDCs shares, and the Canadian
In fact, there is no indication that herein petitioners issued
MBMI, which subscribed to 33.96% of PLMDCs shares.
66.0 (Filipino equity in PLMDC) x 59.97 (PLMDCs share any other class of shares besides the 10,000 common shares.
2 in Narra) = 39.59% Neither is it suggested that the common shares were further
Name Nationa Numb Amount Amount divided into voting or non-voting common shares. Hence, for

CORPORATION LAW: 7. captial structure Page 51 of 201

purposes of this case, items a) and b) in SEC Memo No. 8 both incident of its disposition of the mining dispute presented
refer to the 10,000 common shares of each of the petitioners, before it, which is whether the petitioners are entitled to
and there is no need to separately apply the 60-40 ratio to MPSAs.
any segment or part of the said common shares.
Indeed, as the POA has jurisdiction to entertain "disputes
III. involving rights to mining areas," it necessarily follows that
the POA likewise wields the authority to pass upon the G.R. No. 155001 January 21, 2004
nationality issue involving petitioners, since the resolution of
In mining disputes, the POA has jurisdiction to pass upon the DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE
this issue is essential and indispensable in the resolution of
nationality of applications for MPSAs MARI B. REUNILLA, MANUEL ANTONIO B. BOE,
the main issue, i.e., the determination of the petitioners' right
MAMERTO S. CLARA, REUEL E. DIMALANTA, MORY V.
to the mining areas through MPSAs. DOMALAON, CONRADO G. DIMAANO, LOLITA R. HIZON,
Petitioners also scoffed at this Courts decision to uphold the
REMEDIOS P. ADOLFO, BIENVENIDO C. HILARIO,
jurisdiction of the Panel of Arbitrators (POA) of the MIASCOR WORKERS UNION-NATIONAL LABOR UNION
WHEREFORE, We DENY the motion for reconsideration WITH
Department of Environment and Natural Resources (DENR) (MWU-NLU), and PHILIPPINE AIRLINES EMPLOYEES
FINALITY. No further pleadings shall be entertained. Let entry
since the POAs determination of petitioners nationalities is ASSOCIATION (PALEA),petitioners, vs. PHILIPPINE
of judgment be made in due course. INTERNATIONAL AIR TERMINALS CO., INC., MANILA
supposedly beyond its limited jurisdiction, as defined in
24
Gonzales v. Climax Mining Ltd. and Philex Mining Corp. v. INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT OF
TRANSPORTATION AND COMMUNICATIONS and
Zaldivia.25 SO ORDERED.
SECRETARY LEANDRO M. MENDOZA, in his capacity as
Head of the Department of Transportation and
The April 21, 2014 Decision did not dilute, much less Communications, respondents,
overturn, this Courts pronouncements in either Gonzales or x-------------------------x
Philex Mining that POAs jurisdiction "is limited only to mining
G.R. No. 218787, December 08, 2015 RESOLUTION
disputes which raise questions of fact," and not judicial
questions cognizable by regular courts of justice. However, to LEO Y. QUERUBIN, MARIA CORAZON M. AKOL, AND PUNO, J.:
properly recognize and give effect to the jurisdiction vested in AUGUSTO C. LAGMAN, Petitioners, v. COMMISSION ON Before this Court are the separate Motions for
the POA by Section 77 of the Philippine Mining Act of ELECTIONS EN BANC, REPRESENTED BY CHAIRPERSON Reconsideration filed by respondent Philippine International
1995,26 and in parallel with this Courts ruling in Celestial J. ANDRES D. BAUTISTA, AND JOINT VENTURE OF Air Terminals Co., Inc. (PIATCO), respondents-intervenors
SMARTMATIC-TIM CORPORATION, TOTAL INFORMATION Jacinto V. Paras, Rafael P. Nantes, Eduardo C. Zialcita, Willie
Nickel Mining Exploration Corporation v. Macroasia
MANAGEMENT CORPORATION, SMARTMATIC Buyson Villarama, Prospero C. Nograles, Prospero A. Pichay,
Corp.,27 the Court has recognized in its Decision that in INTERNATIONAL HOLDING B.V. AND JARLTECH Jr., Harlin Cast Abayon and Benasing O. Macaranbon, all
resolving disputes "involving rights to mining areas" and INTERNATIONAL CORPORATION, REPRESENTED BY members of the House of Representatives (Respondent
"involving mineral agreements or permits," the POA has PARTNER WITH BIGGEST EQUITY SHARE, SMARTMATIC- Congressmen),1 respondents-intervenors who are employees
jurisdiction to make a preliminary finding of the required TIM CORPORATION, ITS GENERAL MANAGER ALASTAIR of PIATCO and other workers of the Ninoy Aquino International
nationality of the corporate applicant in order to determine its JOSEPH JAMES WELLS, SMARTMATIC CHAIRMAN LORD Airport International Passenger Terminal III (NAIA IPT III)
MALLOCH-BROWN, SMARTMATIC-ASIA PACIFIC (PIATCO Employees)2 and respondents-intervenors
right to a mining area or a mineral agreement.
PRESIDENT CESAR FLORES, AND ANY OR ALL PERSONS Nagkaisang Maralita ng Taong Association, Inc., (NMTAI) 3 of
ACTING FOR AND ON BEHALF OF THE JOINT VENTURE, the Decision of this Court dated May 5, 2003 declaring the
There is certainly nothing novel or aberrant in this approach. Respondent. contracts for the NAIA IPT III project null and void.
In ejectment and unlawful detainer cases, where the subject see cases on 1.D. articles of incorporation Briefly, the proceedings. On October 5, 1994, Asias Emerging
of inquiry is possession de facto, the jurisdiction of the
Dragon Corp. (AEDC) submitted an unsolicited proposal to the
municipal trial courts to make a preliminary adjudication Philippine Government through the Department of
regarding ownership of the real property involved is allowed, Transportation and Communication (DOTC) and Manila
but only for purposes of ruling on the determinative issue of International Airport Authority (MIAA) for the construction and
material possession. development of the NAIA IPT III under a build-operate-and-
transfer arrangement pursuant to R.A. No. 6957, as amended
by R.A. No. 7718 (BOT Law). 4In accordance with the BOT Law
The present case arose from petitioners' MPSA applications, in and its Implementing Rules and Regulations (Implementing
which they asserted their respective rights to the mining Rules), the DOTC/MIAA invited the public for submission of
areas each applied for. Since respondent Redmont, itself an competitive and comparative proposals to the unsolicited
applicant for exploration permits over the same mining areas, proposal of AEDC. On September 20, 1996 a consortium
composed of the Peoples Air Cargo and Warehousing Co., Inc.
filed petitions for the denial of petitioners' applications, it
(Paircargo), Phil. Air and Grounds Services, Inc. (PAGS) and
should be clear that there exists a controversy between the Security Bank Corp. (Security Bank) (collectively, Paircargo
parties and it is POA's jurisdiction to resolve the said dispute. Consortium), submitted their competitive proposal to the
POA's ruling on Redmont's assertion that petitioners are Prequalification Bids and Awards Committee (PBAC).
foreign corporations not entitled to MPSA is but a necessary

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After finding that the Paircargo Consortium submitted a bid We are not persuaded. Respondent PIATCO stands pat with its argument that
superior to the unsolicited proposal of AEDC and after failure petitioners lack legal personality to file the cases at bar as
There is a question of fact when doubt or difference arises as
by AEDC to match the said bid, the DOTC issued the notice of 5 they are not real parties in interest who are bound principally
to the truth or falsity of the facts alleged. Even a cursory
award for the NAIA IPT III project to the Paircargo Consortium, or subsidiarily to the PIATCO Contracts. Further, respondent
reading of the cases at bar will show that the Court decided
which later organized into herein respondent PIATCO. Hence, PIATCO contends that petitioners failed to show any legally
them by interpreting and applying the Constitution, the BOT
on July 12, 1997, the Government, through then DOTC demandable or enforceable right to justify their standing to
Law, its Implementing Rules and other relevant legal
Secretary Arturo T. Enrile, and PIATCO, through its President, file the cases at bar.
principles on the basis of clearly undisputed facts. All
Henry T. Go, signed the "Concession Agreement for the Build-
the operative facts were settled, hence, there is no need for These arguments are not difficult to deflect. The
Operate-and-Transfer Arrangement of the Ninoy Aquino
a trial type determination of their truth or falsity by a trial determination of whether a person may institute an action or
International Airport Passenger Terminal III" (1997 Concession
court. become a party to a suit brings to fore the concepts of real
Agreement). On November 26, 1998, the 1997 Concession
party in interest, capacity to sue and standing to sue. To the
Agreement was superseded by the Amended and Restated We reject the unyielding insistence of PIATCO Employees that
legally discerning, these three concepts are different although
Concession Agreement (ARCA) containing certain revisions the following factual issues are critical and beyond the
commonly directed towards ensuring that only certain parties
and modifications from the original contract. A series of capability of this Court to resolve, viz: (a) whether the
can maintain an action. 8 As defined in the Rules of Court, a
supplemental agreements was also entered into by the National Economic Development Authority- Investment
real party in interest is the party who stands to be benefited
Government and PIATCO. The First Supplement was signed on Coordinating Committee (NEDA-ICC) approved the
or injured by the judgment in the suit or the party entitled to
August 27, 1999, the Second Supplement on September 4, Supplements; (b) whether the First Supplement created ten
the avails of the suit. 9Capacity to sue deals with a situation
2000, and the Third Supplement on June 22, 2001 (10) new financial obligations on the part of the government;
where a person who may have a cause of action is
(collectively, Supplements) (the 1997 Concession Agreement, and (c) whether the 1997 Concession Agreement departed
disqualified from bringing a suit under applicable law or is
ARCA and the Supplements collectively referred to as the from the draft Concession Agreement contained in the Bid
incompetent to bring a suit or is under some legal disability
PIATCO Contracts). Documents.6
that would prevent him from maintaining an action unless
On September 17, 2002, various petitions were filed before The factual issue of whether the NEDA-ICC approved the represented by a guardian ad litem. Legal standing is relevant
this Court to annul the 1997 Concession Agreement, Supplements is hardly relevant. It is clear in our Decision that in the realm of public law. In certain instances, courts have
the ARCA and the Supplements and to prohibit the public the PIATCO contracts were invalidated on other and more allowed private parties to institute actions challenging the
respondents DOTC and MIAA from implementing them. substantial grounds. It did not rely on the presence or validity of governmental action for violation of private rights
10
absence of NEDA-ICC approval of the Supplements. On the or constitutional principles. In these cases, courts apply the
In a decision dated May 5, 2003, this Court granted the said
other hand, the last two issues do not involve disputed facts. doctrine of legal standing by determining whether the party
petitions and declared the 1997 Concession Agreement, the
Rather, they involve contractual provisions which are clear has a direct and personal interest in the controversy
ARCA and the Supplements null and void.
and categorical and need only to be interpreted. The and whether such party has sustained or is in
Respondent PIATCO, respondent-Congressmen and interpretation of contracts and the determination of whether imminent danger of sustaining an injury as a result of
respondents-intervenors now seek the reversal of the May 5, their provisions violate our laws or contravene any the act complained of, a standard which is distinct from the
11
2003 decision and pray that the petitions be dismissed. In the public policy is a legal issue which this Court may concept of real party in interest. Measured by this yardstick,
alternative, PIATCO prays that the Court should not strike properly pass upon. the application of the doctrine on legal standing necessarily
down the entire 1997 Concession Agreement, the ARCA and involves a preliminary consideration of the merits of the case
Respondents corollary contention that this Court violated and is not purely a procedural issue.12
its supplements in light of their separability clause.
the hierarchy of courts when it entertained the cases at bar
Respondent-Congressmen and NMTAI also pray that in the
must also fail. The rule on hierarchy of courts in cases falling Considering the nature of the controversy and the issues
alternative, the cases at bar should be referred to arbitration
within the concurrent jurisdiction of the trial courts and raised in the cases at bar, this Court affirms its ruling that the
pursuant to the provisions of the ARCA. PIATCO-Employees
appellate courts generally applies to cases involving warring petitioners have the requisite legal standing. The petitioners
pray that the petitions be dismissed and remanded to the trial
factual allegations. For this reason, litigants are required to in G.R. Nos. 155001 and 155661 are employees of service
courts for trial on the merits or in the alternative that the
repair to the trial courts at the first instance to determine the providers operating at the existing international airports and
1997 Concession Agreement, the ARCA and the Supplements
truth or falsity of these contending allegations on the basis of employees of MIAA while petitioners-intervenors are service
be declared valid and binding.
the evidence of the parties. Cases which depend on disputed providers with existing contracts with MIAA and they will all
I Procedural Matters facts for decision cannot be brought immediately before sustain direct injury upon the implementation of the PIATCO
appellate courts as they are not triers of facts. Contracts. The 1997 Concession Agreement and the ARCA
a. Lack of Jurisdiction both provide that upon the commencement of operations at
It goes without saying that when cases brought before the the NAIA IPT III, NAIA Passenger Terminals I and II will cease to
Private respondents and respondents-intervenors reiterate a
appellate courts do not involve factual but legal questions, be used as international passenger terminals. 13 Further, the
number of procedural issues which they insist deprived this
a strict application of the rule of hierarchy of courts is not ARCA provides:
Court of jurisdiction to hear and decide the instant cases on
necessary. As the cases at bar merely concern the
its merits. They continue to claim that the cases at bar raise (d) For the purpose of an orderly transition, MIAA shall not
construction of the Constitution, the interpretation of the BOT
factual questions which this Court is ill-equipped to resolve, renew any expired concession agreement relative to any
Law and its Implementing Rules and Regulations on
hence, they must be remanded to the trial court for reception service or operation currently being undertaken at the
undisputed contractual provisions and government actions,
of evidence. Further, they allege that although designated as Ninoy Aquino International Airport Passenger Terminal I, or
and as the cases concern public interest, this Court resolved
petitions for certiorari and prohibition, the cases at bar are extend any concession agreement which may expire
to take primary jurisdiction over them. This choice of action
actually actions for nullity of contracts over which the trial subsequent hereto, except to the extent that the
follows the consistent stance of this Court to settle any
courts have exclusive jurisdiction. Even assuming that the continuation of the existing services and operations shall
controversy with a high public interest component in a single
cases at bar are special civil actions for certiorari and lapse on or before the In-Service Date. 14
proceeding and to leave no root or branch that could bear the
prohibition, they contend that the principle of hierarchy of
seeds of future litigation. The suggested remand of the cases
courts precludes this Court from taking primary jurisdiction Beyond iota of doubt, the implementation of the PIATCO
at bar to the trial court will stray away from this policy. 7
over them. Contracts, which the petitioners and petitioners-intervenors
b. Legal Standing denounce as unconstitutional and illegal, would deprive them

CORPORATION LAW: 7. captial structure Page 53 of 201

of their sources of livelihood. Under settled jurisprudence, PIATCOs allegations are inaccurate. The petitions clearly bear (US$350,000,000.00) while maintaining a debt-to-equity
one's employment, profession, trade, or calling is a property out that public respondents DOTC and MIAA were impleaded ratio of 70:30, provided that if the actual Project costs
right and is protected from wrongful interference. 15 It is also as parties to the PIATCO Contracts and not merely as should exceed the aforesaid amount, Concessionaire shall
self evident that the petitioning service providers stand in their implementors. The separate petitions filed by the MIAA ensure that the debt-to-equity ratio is maintained;24
imminent danger of losing legitimate business investments in employees19 and members of the House of
Under the debt-to-equity restriction, a bidder may only seek
the event the PIATCO Contracts are upheld. Representatives20 alleged that "public respondents are
financing of the NAIA IPT III Project up to 70% of the project
impleaded herein because they either executed the PIATCO
Over and above all these, constitutional and other legal issues cost. Thirty percent (30%) of the cost must come in the form
Contracts or are undertaking acts which are related to the
with far-reaching economic and social implications are of equity or investment by the bidder itself. It cannot be
PIATCO Contracts. They are interested and indispensable
embedded in the cases at bar, hence, this Court liberally overly emphasized that the rules require a minimum amount
parties to this Petition." 21 Thus, public respondents DOTC and
granted legal standing to the petitioning members of the of equity to ensure that a bidder is not merely an operator or
MIAA were impleaded as parties to the case for
House of Representatives. First, at stake is the build-operate- implementor of the project but an investor with a
having executed the contracts.
andtransfer contract of the countrys premier international substantial interest in its success. The minimum equity
airport with a projected capacity of 10 million passengers a More importantly, it is also too late in the day for PIATCO to requirement also guarantees the Philippine government and
year. Second, the huge amount of investment to complete the raise this issue. If PIATCO seriously views the non-inclusion of the general public, who are the ultimate beneficiaries of the
project is estimated to be P13,000,000,000.00. Third, the the Republic of the Philippines as an indispensable party as project, that a bidder will not be indifferent to the completion
primary issues posed in the cases at bar demand a discussion fatal to the petitions at bar, it should have raised the issue at of the project. The discontinuance of the project will
and interpretation of the Constitution, the BOT Law and its the onset of the proceedings as a ground to dismiss. PIATCO irreparably damage public interest more than private interest.
implementing rules which have not been passed upon by this cannot litigate issues on a piecemeal basis, otherwise,
In the cases at bar, after applying the investment ceilings
Court in previous cases. They can chart the future inflow of litigations shall be like a shore that knows no end. In any
provided under the General Banking Act and considering the
investment under the BOT Law. event, the Solicitor General, the legal counsel of the Republic,
maximum amounts that each member of the consortium may
appeared in the cases at bar in representation of the interest
Before writing finis to the issue of legal standing, the Court validly invest in the project, it is daylight clear that the
of the government.
notes the bid of new parties to participate in the cases at bar Paircargo Consortium, at the time of pre-qualification, had a
as respondents-intervenors, namely, (1) the PIATCO II Pre-qualification of PIATCO net worth equivalent to only 6.08% of the total estimated
Employees and (2) NMTAI (collectively, the New Respondents- project cost.25 By any reckoning, a showing by a bidder that
The Implementing Rules provide for the unyielding standards
Intervenors). After the Courts Decision, the New at the time of pre-qualification its maximum funds available
the PBAC should apply to determine the financial capability of
Respondents-Intervenors filed separate Motions for for investment amount to only 6.08% of the project cost is
a bidder for pre-qualification purposes: (i) proof of the ability
Reconsideration-In-Intervention alleging prejudice and direct insufficient to satisfy the requirement prescribed by the
of the project proponent and/or the consortium to provide a
injury. PIATCO employees claim that "they have a direct and Implementing Rules that the project proponent must have the
minimum amount of equity to the project and (ii) a letter
personal interest [in the controversy]... since they stand to ability to provide at least 30% of the total estimated project
testimonial from reputable banks attesting that the project
lose their jobs should the governments contract with PIATCO cost. In peso and centavo terms, at the time of pre-
proponent and/or members of the consortium are
be declared null and void." 16 NMTAI, on the other hand, qualification, the Paircargo Consortium had maximum funds
banking with them, that they are in good financial
represents itself as a corporation composed of responsible available for investment to the NAIA IPT III Project only in the
standing, and that they have adequate resources.22 The
tax-paying Filipino citizens with the objective of "protecting amount of P558,384,871.55, when it had to show that it had
evident intent of these standards is to protect the integrity
and sustaining the rights of its members to civil liberties, the ability to provide at least P2,755,095,000.00. The huge
and insure the viability of the project by seeing to it that the
decent livelihood, opportunities for social advancement, and disparity cannot be dismissed as of de minimis importance
proponent has the financial capability to carry it out. As a
to a good, conscientious and honest government." 17 considering the high public interest at stake in the project.
further measure to achieve this intent, it maintains a
The Rules of Court govern the time of filing a Motion to certain debt-to-equity ratio for the project. PIATCO nimbly tries to sidestep its failure by alleging that it
Intervene. Section 2, Rule 19 provides that a Motion to submitted not only audited financial statements but also
At the pre-qualification stage, it is most important for a bidder
Intervene should be filed "before rendition of judgment...." testimonial letters from reputable banks attesting to the good
to show that it has the financial capacity to undertake the
The New Respondents-Intervenors filed their separate financial standing of the Paircargo Consortium. It contends
project by proving that it can fulfill the requirement on
motions after a decision has been promulgated in the present that in adjudging whether the Paircargo Consortium is a pre-
minimum amount of equity. For this purpose, the Bid
cases. They have not offered any worthy explanation to justify qualified bidder, the PBAC should have considered not only its
Documents require in no uncertain terms:
their late intervention. Consequently, their Motions for financial statements but other factors showing its financial
Reconsideration-In-Intervention are denied for the rules The minimum amount of equity to which the proponents capability.
cannot be relaxed to await litigants who sleep on their rights. financial capability will be based shall be thirty percent
Anent this argument, the guidelines provided in the Bid
In any event, a sideglance at these late motions will show (30%) of the project cost instead of the twenty
Documents are instructive:
that they hoist no novel arguments. percent (20%) specified in Section 3.6.4 of the Bid
Documents. This is to correlate with the required debt-to- 3.3.4 FINANCING AND FINANCIAL PREQUALIFICATIONS
c. Failure to Implead an Indispensable Party
equity ratio of 70:30 in Section 2.01a of the draft REQUIREMENTS
PIATCO next contends that petitioners should have impleaded concession agreement. The debt portion of the project
Minimum Amount of Equity
the Republic of the Philippines as an indispensable party. It financing should not exceed 70% of the actual project
alleges that petitioners sued the DOTC, MIAA and the DPWH cost.23 Each member of the proponent entity is to
in their own capacities or as implementors of the PIATCO provide evidence of networth in cash and assets
In relation thereto, section 2.01 (a) of the ARCA provides:
Contracts and not as a contract party or as representatives of representing the proportionate share in the proponent
the Government of the Republic of the Philippines. It then Section 2.01 Project Scope. entity. Audited financial statements for the past five (5)
leapfrogs to the conclusion that the "absence of an years as a company for each member are to be provided.
indispensable party renders ineffectual all the proceedings The scope of the project shall include:
subsequent to the filing of the complaint including the Project Loan Financing
(a) Financing the project at an actual Project cost of not less
judgment."18 than Three Hundred Fifty Million United States Dollars

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 Testimonial letters from reputable banks attesting amendment as these fees are not really public utility fees. In "full regulatory powers to ensure that PIATCO is charging
that each of the members of the ownership entity are other words, PIATCO justifies the re-classification under the non-public utility revenues at judicious rates."32 To the trained
banking with them, in good financial standing and having 1997 Concession Agreement on the ground that these eye, the argument will not fly for it is obviously non sequitur.
adequate resources are to be provided.26 fees are non-public utility revenues. Fairly read, it is PIATCO that wields the power to determine
the judiciousness of the said fees and charges. In the draft
It is beyond refutation that Paircargo Consortium failed to We disagree. The removal of groundhandling fees, airline
Concession Agreement the power was expressly lodged with
prove its ability to provide the amount of at least office rentals and porterage fees from the category of "Public
the MIAA and any adjustment can only be done once every
P2,755,095,000.00, or 30% of the estimated project Utility Revenues" under the draft Concession Agreement and
two years. The changes are not insignificant specks as
cost. Its submission of testimonial letters attesting to its good
its re-classification to "Non-Public Utility Revenues" under the
interpreted by PIATCO.
financial standing will not cure this failure. At best, the said1997 Concession Agreement is significant and has far
letters merely establish its credit worthiness or its ability toreaching consequence. The 1997 Concession Agreement PIATCO further argues that there is no substantial change in
obtain loans to finance the project. They do not, however, provides that with respect to Non-Public Utility Revenues, the 1997 Concession Agreement with respect to fees and
prove compliance with the aforesaid requirement of minimum which include groundhandling fees, airline office rentals and charges PIATCO is allowed to impose which are not covered
amount of equity in relation to the prescribed debt-to-equity porterage fees,27 "[PIATCO] may make any adjustments it by Administrative Order No. 1, Series of 1993 33 as the
ratio. This equity cannot be satisfied through possible loans. deems appropriate without need for the consent of GRP "relevant provision of the 1997 Concession Agreement is
or any government agency."28 In contrast, the draft practically identical with the draft Concession Agreement." 34
In sum, we again hold that given the glaring gap between the
Concession Agreement specifies these fees as part of Public
net worth of Paircargo and PAGS combined with the amount of We are not persuaded. Under the draft Concession
Utility Revenues and can be adjusted "only once every two
maximum funds that Security Bank may invest by equity in a Agreement, PIATCO may impose fees and charges other than
years and in accordance with the Parametric Formula" and
non-allied undertaking, Paircargo Consortium, at the time of those fees and charges previously imposed or collected at the
"the adjustments shall be made effective only after the
pre-qualification, failed to show that it had the ability to Ninoy Aquino International Airport Passenger Terminal I,
written express approval of the MIAA."29 The Bid
provide 30% of the project cost and necessarily, its financial subject to the written approval of MIAA. 35 Further, the draft
Documents themselves clearly provide:
capability for the project cannot pass muster. Concession Agreement provides that MIAA reserves the
4.2.3 Mechanism for Adjustment of Fees and Charges right to regulate these new fees and charges if in its
III Concession Agreement
judgment the users of the airport shall be deprived of a free
[Link] Periodic Adjustment in Fees and Charges
Again, we brightline the principle that in public bidding, bids option for the services they cover.36 In contrast, under the
are submitted in accord with the prescribed terms, conditions Adjustments in the fees and charges enumerated 1997 Concession Agreement, the MIAA merely retained
and parameters laid down by government and pursuant to hereunder, whether or not falling within the the right to approve any imposition of new fees and
the requirements of the project bidded upon. In light of these purview of public utility revenues, shall be allowed charges which were not previously collected at the Ninoy
parameters, bidders formulate competing proposals which are only once every two years in accordance with the Aquino International Airport Passenger Terminal I. The
evaluated to determine the bid most favorable to the parametric formula attached hereto as Annex 4.2f. agreement did not contain an equivalent provision
government. Once the contract based on the bid most Provided that the adjustments shall be made effective allowing MIAA to reserve the right to regulate the
favorable to the government is awarded, all that is left to be only after the written express approval of MIAA. Provided, adjustments of these new fees and charges.37 PIATCO
done by the parties is to execute the necessary agreements further, that MIAAs approval, shall be contingent only on justifies the amendment by arguing that MIAA can establish
and implement them. There can be no substantial or material conformity of the adjustments to the said parametric terms before approval of new fees and charges, inclusive of
change to the parameters of the project, including the formula. the mode for their adjustment.
essential terms and conditions of the contract bidded upon,
The fees and charges to be regulated in the above manner PIATCOs stance is again a strained one. There would have
after the contract award. If there were changes and the
shall consist of the following: been no need for an amendment if there were no change in
contracts end up unfavorable to government, the public
the power to regulate on the part of MIAA. The deletion of
bidding becomes a mockery and the modified contracts must .... MIAAs reservation of its right to regulate the price
be struck down.
c) groundhandling fees; adjustments of new fees and charges can have no other
Respondents insist that there were no substantial or material purpose but to dilute the extent of MIAAs regulation in the
amendments in the 1997 Concession Agreement as to the d) rentals on airline offices; collection of these fees. Again, the amendment diminished
technical aspects of the project, i.e., engineering design, .... the authority of MIAA to protect the public interest in case of
technical soundness, operational and maintenance methods abuse by PIATCO.
and procedures of the project or the technical proposal of (f) porterage fees;
b. Assumption by the Government of the liabilities of
PIATCO. Further, they maintain that there was no modification . . . .30 PIATCO in the event of the latters default
of the financial features of the project, i.e., minimum project
cost, debt-to-equity ratio, the operations and maintenance The plain purpose in re-classifying groundhandling fees, PIATCO posits the thesis that the new provisions in the 1997
budget, the schedule and amount of annual guaranteed airline office rentals and porterage fees as non-public utility Concession Agreement in case of default by PIATCO on its
payments, or the financial proposal of PIATCO. A discussion fees is to remove them from regulation by the MIAA. In loans were merely meant to prescribe and limit the rights of
of some of these changes to determine whether they altered excluding these fees from government regulation, the danger PIATCOs creditors with regard to the NAIA Terminal III. PIATCO
the terms and conditions upon which the bids were made is to public interest cannot be downplayed. alleges that Section 4.04 of the 1997 Concession Agreement
again in order. We are not impressed by the effort of PIATCO to depress this simply provides that PIATCOs creditors have no right to
foreclose the NAIA Terminal III.
a. Modification on Fees and Charges to be collected by prejudice to public interest by its contention that in the 1997
PIATCO Concession Agreement governing Non-Public Utility Revenues, We cannot concur. The pertinent provisions of the 1997
it is provided that "[PIATCO] shall at all times be judicious in Concession Agreement state:
PIATCO clings to the contention that the removal of the fixing fees and charges constituting Non-Public Utility
groundhandling fees, airline office rentals and porterage fees Revenues in order to ensure that End Users are not Section 4.04 Assignment.
from the category of fees subject to MIAA regulation in the unreasonably deprived of services."31 PIATCO then peddles
....
1997 Concession Agreement does not constitute a substantial the proposition that the said provision confers upon MIAA

CORPORATION LAW: 7. captial structure Page 55 of 201

 (b) In the event Concessionaire should default in the the bidding. Such a public bidding will not inure to the public Concessionaire as owing to Unpaid Creditors who
payment of an Attendant Liability, and the default has good. The resulting contracts cannot be given half a life but have provided, loaned or advanced funds actually used for
resulted in the acceleration of the payment due date of the must be struck down as totally lawless. the Project, including all interests, penalties,
Attendant Liability prior to its stated date of maturity, the associated fees, charges, surcharges, indemnities,
IV. Direct Government Guarantee
Unpaid Creditors and Concessionaire shall immediately reimbursements and other related expenses, and
inform GRP in writing of such default. GRP shall, within one The respondents further contend that the PIATCO Contracts further including amounts owed by Concessionaire to its
hundred eighty (180) Days from receipt of the joint written do not contain direct government guarantee provisions. They suppliers, contractors and sub-contractors.47
notice of the Unpaid Creditors and Concessionaire, either (i) assert that section 4.04 of the ARCA, which superseded
These provisions reject respondents contention that what the
take over the Development Facility and assume the sections 4.04(b) and (c), Article IV of the 1997 Concession
Government is obligated to pay, in the event that respondent
Attendant Liabilities, or (ii) allow the Unpaid Creditors, if Agreement, is but a "clarification and explanation" 39 of the
PIATCO defaults in the payment of its loans, is merely
qualified, to be substituted as concessionaire and operator securities allowed in the bid documents. They allege that
termination payment or just compensation for its takeover of
of the Development Facility in accordance with the terms these provisions merely provide for "compensation to
NAIA IPT III. It is clear from said section 1.06 that what the
and conditions hereof, or designate a qualified operator PIATCO"40 in case of a government buy-out or takeover of
Government would pay is the sum total of all the
acceptable to GRP to operate the Development Facility, NAIA IPT III. The respondents, particularly respondent PIATCO,
debts, including all interest, fees and charges, that
likewise under the terms and conditions of this Agreement; also maintain that the guarantee contained in the contracts, if
respondent PIATCO incurred in pursuance of the NAIA IPT III
Provided that if at the end of the 180-day period GRP shall any, is an indirect guarantee allowed under the BOT Law, as
Project. This reading is consistent with section 4.04 of the
not have served the Unpaid Creditors and Concessionaire amended.41
ARCA itself which states that the Government "shall make a
written notice of its choice, GRP shall be deemed to have
We do not agree. Section 4.04(c), Article IV 42 of the ARCA termination payment to Concessionaire [PIATCO] equal to the
elected to take over the Development Facility with the
should be read in conjunction with section 1.06, Article I, 43 in Appraised Value (as hereinafter defined) of the Development
concomitant assumption of Attendant Liabilities.
the same manner that sections 4.04(b) and (c), Article IV of Facility [NAIA Terminal III] or the sum of the Attendant
(c) If GRP should, by written notice, allow the Unpaid the 1997 Concession Agreement should be related to Article Liabilities, if greater." For sure, respondent PIATCO will
Creditors to be substituted as concessionaire, the latter 1.06 of the same contract. Section 1.06, Article I of the ARCA not receive any amount less than sufficient to cover its
shall form and organize a concession company qualified to and its counterpart provision in the 1997 Concession debts, regardless of whether or not the value of NAIA
take over the operation of the Development Facility. If the Agreement define in no uncertain terms the meaning of IPT III, at the time of its turn over to the Government,
concession company should elect to designate an operator "attendant liabilities." They tell us of the amounts that the may actually be less than the amount of PIATCOs
for the Development Facility, the concession company shall Government has to pay in the event respondent PIATCO debts. The scheme is a form of direct government guarantee
in good faith identify and designate a qualified operator defaults in its loan payments to its Senior Lenders and no for it is undeniable that it leaves the government no option
acceptable to GRP within one hundred eighty (180) days qualified transferee or nominee is chosen by the Senior but to pay the "attendant liabilities" in the event that the
from receipt of GRPs written notice. If the concession Lenders or is willing to take over from respondent PIATCO. Senior Lenders are unable or unwilling to appoint a qualified
company, acting in good faith and with due diligence, is nominee or transferee as a result of PIATCOs default in the
unable to designate a qualified operator within the A reasonable reading of all these relevant provisions would payment of its Senior Loans. As we stressed in our Decision,
aforesaid period, then GRP shall at the end of the 180-day reveal that the ARCA made the Government liable to pay "all this Court cannot depart from the legal maxim that "those
period take over the Development Facility and assume amounts ... from time to time owed or which may become that cannot be done directly cannot be done indirectly."
Attendant Liabilities. owing by Concessionaire [PIATCO] to Senior Lenders or
any other persons or entities who have provided, This is not to hold, however, that indirect government
A plain reading of the above provision shows that it spells out loaned, or advanced funds or provided financial guarantee is not allowed under the BOT Law, as amended.
in limpid language the obligation of government in case of facilities to Concessionaire [PIATCO] for the Project [NAIA The intention to permit indirect government guarantee is
default by PIATCO on its loans. There can be no blinking from Terminal 3]."44 These amounts include "without limitation, evident from the Senate deliberations on the amendments to
the fact that in case of PIATCOs default, the government will all principal, interest, associated fees, charges, the BOT Law. The idea is to allow for reasonable government
assume PIATCOs Attendant Liabilities as defined in the 1997 reimbursements, and other related expenses... whether undertakings, such as to authorize the project proponent to
Concession Agreement.38 This obligation is not found in the payable at maturity, by acceleration or otherwise." 45 They undertake related ventures within the project area, in order to
draft Concession Agreement and the change runs roughshod further include amounts owed by respondent PIATCO to its encourage private sector participation in development
to the spirit and policy of the BOT Law which was crafted "professional consultants and advisers, suppliers, contractors projects.48 An example cited by then Senator Gloria
precisely to prevent government from incurring financial risk. and sub-contractors" as well as "fees, charges and expenses Macapagal-Arroyo, one of the sponsors of R.A. No. 7718, is the
of any agents or trustees" of the Senior Lenders or any other Mandaluyong public market which was built under the Build-
In any event, PIATCO pleads that the entire
persons or entities who have provided loans or financial and-Transfer ("BT") scheme wherein instead of the
agreement should not be struck down as the 1997
facilities to respondent PIATCO in relation to NAIA IPT III. 46 The government paying for the transfer, the project proponent
Concession Agreement contains a separability clause.
counterpart provision in the 1997 Concession Agreement was allowed to operate the upper floors of the structure as a
The plea is bereft of merit. The contracts at bar which made a specifying the attendant liabilities that the Government would commercial mall in order to recoup their investments. 49 It was
mockery of the bidding process cannot be upheld and must be obligated to pay should PIATCO default in its loan repeatedly stressed in the deliberations that in allowing
be annulled in their entirety for violating law and public policy. obligations is equally onerous to the Government as those indirect government guarantee, the law seeks to encourage
As demonstrated, the contracts were substantially amended contained in the ARCA. According to the 1997 Concession both the government and the private sector to formulate
after their award to the successful bidder on terms more Agreement, in the event the Government is forced to reasonable and innovative government undertakings in
beneficial to PIATCO and prejudicial to public interest. If this prematurely take over NAIA IPT III as a result of respondent pursuance of BOT projects. In no way, however, can the
flawed process would be allowed, public bidding will cease to PIATCOs default in the payment of its loan obligations to its government be made liable for the debts of the project
be competitive and worse, government would not be favored Senior Lenders, it would be liable to pay the following proponent as this would be tantamount to a direct
with the best bid. Bidders will no longer bid on the basis of amounts as "attendant liabilities": government guarantee which is prohibited by the law. Such
the prescribed terms and conditions in the bid documents but liability would defeat the very purpose of the BOT Law which
Section 1.06. Attendant Liabilities is to encourage the use of private sector resources in the
will formulate their bid in anticipation of the execution of a
future contract containing new and better terms and Attendant Liabilities refer to all amounts recorded and construction, maintenance and/or operation of development
conditions that were not previously available at the time of from time to time outstanding in the books of the

CORPORATION LAW: 7. captial structure Page 56 of 201

projects with no, or at least minimal, capital outlay on the unjustly enrich itself at the expense of PIATCO and its so requires. Monopolies are not per se prohibited. Given its
part of the government. investors. susceptibility to abuse, however, the State has the bounden
duty to regulate monopolies to protect public interest. Such
The respondents again urge that should this Court affirm its II. Temporary takeover of business affected with public
regulation may be called for, especially in sensitive areas
ruling that the PIATCO Contracts contain direct government interest in times of national emergency
such as the operation of the countrys premier international
guarantee provisions, the whole contract should not be
Section 17, Article XII of the 1987 Constitution grants the airport, considering the public interest at stake.
nullified. They rely on the separability clause in the PIATCO
State in times of national emergency the right to temporarily
Contracts. By virtue of the PIATCO contracts, NAIA IPT III would be the
take over the operation of any business affected with public
only international passenger airport operating in the Island of
We are not persuaded. interest. This right is an exercise of police power which is one
Luzon, with the exception of those already operating in Subic
of the inherent powers of the State.
The BOT Law and its implementing rules provide that there Bay Freeport Special Economic Zone ("SBFSEZ"), Clark Special
are three (3) essential requisites for an unsolicited proposal to Police power has been defined as the "state authority to enact Economic Zone ("CSEZ") and in Laoag City. Undeniably, the
be accepted: (1) the project involves a new concept in legislation that may interfere with personal liberty or property contracts would create a monopoly in the operation of an
technology and/or is not part of the list of priority projects, (2) in order to promote the general welfare." 54 It consists of two international commercial passenger airport at the NAIA in
no direct government guarantee, subsidy or equity is essential elements. First, it is an imposition of restraint upon favor of PIATCO.
required, and (3) the government agency or local liberty or property. Second, the power is exercised for the
The grant to respondent PIATCO of the exclusive right to
government unit has invited by publication other interested benefit of the common good. Its definition in elastic terms
operate NAIA IPT III should not exempt it from regulation by
parties to a public bidding and conducted the same. 50 The underscores its all-encompassing and comprehensive
55 the government. The government has the right, indeed the
failure to fulfill any of the requisites will result in the denial of embrace. It is and still is the "most essential, insistent, and
duty, to protect the interest of the public. Part of this duty is
the proposal. Indeed, it is further provided that a direct illimitable"56 of the States powers. It is familiar knowledge
to assure that respondent PIATCOs exercise of its right does
government guarantee, subsidy or equity provision will that unlike the power of eminent domain, police power
not violate the legal rights of third parties. We reiterate our
"necessarily disqualify a proposal from being treated and is exercised without provision for just
ruling that while the service providers presently operating at
accepted as an unsolicited proposal."51 In fine, the mere compensation for its paramount consideration is public
57 NAIA Terminals I and II do not have the right to demand for
inclusion of a direct government guarantee in an unsolicited welfare.
the renewal or extension of their contracts to continue their
proposal is fatal to the proposal. There is more reason to
It is also settled that public interest on the occasion of a services in NAIA IPT III, those who have subsisting contracts
invalidate a contract if a direct government guarantee
national emergency is the primary consideration when the beyond the In-Service Date of NAIA IPT III can not be
provision is inserted later in the contract via a backdoor
government decides to temporarily take over or direct the arbitrarily or unreasonably treated.
amendment. Such an amendment constitutes a crass
operation of a public utility or a business affected with public
circumvention of the BOT Law and renders the entire contract Finally, the Respondent Congressmen assert that at least two
interest. The nature and extent of the emergency is the
void. (2) committee reports by the House of Representatives found
measure of the duration of the takeover as well as the terms
the PIATCO contracts valid and contend that this Court, by
Respondent PIATCO likewise claims that in view of the fact thereof. It is the State that prescribes such reasonable terms
taking cognizance of the cases at bar, reviewed an action of a
that other BOT contracts such as the JANCOM contract, the which will guide the implementation of the temporary
co-equal body.61 They insist that the Court must respect the
Manila Water contract and the MRT contract had been takeover as dictated by the exigencies of the time. As we
findings of the said committees of the House of
considered valid, the PIATCO contracts should be held valid as ruled in our Decision, this power of the State can not be
Representatives.62 With due respect, we cannot subscribe to
well.52 There is no parity in the cited cases. For instance, a negated by any party nor should its exercise be a source of
their submission. There is a fundamental difference between
reading of Metropolitan Manila Development Authority obligation for the State.
a case in court and an investigation of a congressional
v. JANCOM Environmental Corporation 53 will show that its
Section 5.10(c), Article V of the ARCA provides that committee. The purpose of a judicial proceeding is to settle
issue is different from the issues in the cases at bar. In the
respondent PIATCO "shall be entitled to reasonable the dispute in controversy by adjudicating the legal rights and
JANCOM case, the main issue is whether there is a perfected
compensation for the duration of the temporary takeover by obligations of the parties to the case. On the other hand, a
contract between JANCOM and the Government. The
GRP, which compensation shall take into account the congressional investigation is conducted in aid of
resolution of the issue hinged on the following: (1) whether 63
reasonable cost for the use of the Terminal and/or Terminal legislation. Its aim is to assist and recommend to the
the conditions precedent to the perfection of the contract 58
Complex." It clearly obligates the government in the legislature a possible action that the body may take with
were complied with; (2) whether there is a valid notice of
exercise of its police power to compensate respondent PIATCO regard to a particular issue, specifically as to whether or not
award; and (3) whether the signature of the Secretary of the
and this obligation is offensive to the Constitution. Police to enact a new law or amend an existing one. Consequently,
Department of Environment and Natural Resources is
power can not be diminished, let alone defeated by any this Court cannot treat the findings in a congressional
sufficient to bind the Government. These issue and sub-issues
contract for its paramount consideration is public welfare and committee report as binding because the facts elicited in
are clearly distinguishable and different. For one, the issue of
interest.59 congressional hearings are not subject to the rigors of the
direct government guarantee was not considered by this
Rules of Court on admissibility of evidence. The Court in
Court when it held the JANCOM contract valid, yet, it is a key Again, respondent PIATCOs reliance on the case of Heirs of assuming jurisdiction over the petitions at bar simply
reason for invalidating the PIATCO Contracts. It is a basic 60
Suguitan v. City of Mandaluyong to justify its claim for performed its constitutional duty as the arbiter of legal
principle in law that cases with dissimilar facts cannot have reasonable compensation for the Governments temporary disputes properly brought before it, especially in this instance
similar disposition. takeover of NAIA IPT III in times of national emergency is when public interest requires nothing less.
erroneous. What was involved in Heirs of Suguitan is the
This Court, however, is not unmindful of the reality that the
exercise of the states power of eminent domain and not of WHEREFORE, the motions for reconsideration filed by the
structures comprising the NAIA IPT III facility are almost
police power, hence, just compensation was awarded. The respondent PIATCO, respondent Congressmen and the
complete and that funds have been spent by PIATCO in their
cases at bar will not involve the exercise of the power of respondents-in-intervention are DENIED with finality.
construction. For the government to take over the said
eminent domain.
facility, it has to compensate respondent PIATCO as builder of SO ORDERED.
the said structures. The compensation must be just and in III. Monopoly
accordance with law and equity for the government can not
Section 19, Article XII of the 1987 Constitution mandates that
the State prohibit or regulate monopolies when public interest

CORPORATION LAW: 7. captial structure Page 57 of 201

 CLASS NO. OF SHARES PAR VALUE b. Stockholders derivative suit challenging the validity of
"A" 1,000 P1,000.00 a contract entered into by the Board of Directors of MCPI
"B" 4,000 P1,000.00 for the operation of the ultrasound unit.5
Only holders of Class A shares have the right to vote and Subsequently, the complaint was amended to implead MCPI
the right to be elected as directors or as corporate as party-plaintiff for purposes only of the second cause of
officers.3 (Emphasis supplied) action.
The foregoing amendment was approved by the SEC on June Before the trial court, the herein petitioners alleged that they
G.R. No. 150976 October 18, 2004 7, 1983. While the amendment granted the right to vote and were deprived of their right to vote and to be voted on as
CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO S. to be elected as directors or corporate officers only to holdersdirectors at the annual stockholders meeting held on
FLORES, XERXES NAVARRO, MARIA ANTONIA TEMPLO of Class "A" shares, holders of Class "B" stocks were granted February 9, 2001, because respondents had erroneously
and MEDICAL CENTER PARAAQUE, INC., petitioners, vs. the same rights and privileges as holders of Class "A" stocks relied on Article VII of the Articles of Incorporation of MCPI,
ANGELES BALINGHASAY, RENATO BERNABE, ALODIA with respect to the payment of dividends. despite Article VII being contrary to the Corporation Code,
DEL ROSARIO, ROMEO FUNTILA, TERESITA GAYANILO,
RUSTICO JIMENEZ, ARACELI** JO, ESMERALDA MEDINA, On September 9, 1992, Article VII was again amended to thus null and void. Additionally, respondents were in estoppel,
provide as follows: because in the past, petitioners were allowed to vote and to
CECILIA MONTALBAN, VIRGILIO OBLEPIAS, CARMENCITA
be elected as members of the board. They further claimed
PARRENO, CESAR REYES, REYNALDO SAVET, SERAPIO SEVENTH: That the authorized capital stock of the that the privilege granted to the Class "A" shareholders was
TACCAD, VICENTE VALDEZ, SALVACION VILLAMORA, corporation is THIRTY TWO MILLION PESOS more in the nature of a right granted to founders shares.
and HUMBERTO VILLAREAL, respondents. (P32,000,000.00) divided as follows:
In their Answer, the respondents averred that the provisions
DECISION CLASS NO. OF SHARES PAR VALUE of Article VII clearly and categorically state that only holders
QUISUMBING, J.: "A" 1,000 P1,000.00 of Class "A" shares have the exclusive right to vote and be
"B" 31,000 1,000.00 elected as directors and officers of the corporation. They
For review on certiorari is the Partial Judgment1 dated Except when otherwise provided by law, only holders of denied that the exclusivity was intended only as a privilege
November 26, 2001 in Civil Case No. 01-0140, of the Regional Class "A" shares have the right to vote and the right to be granted to founders shares, as no such proviso is found in the
Trial Court (RTC) of Paraaque City, Branch 258. The trial elected as directors or as corporate officers 4 (Stress and Articles of Incorporation. The respondents further claimed
court declared the February 9, 2001, election of the board of underscoring supplied). that the exclusivity of the right granted to Class "A" holders
directors of the Medical Center Paraaque, Inc. (MCPI) valid. cannot be defeated or impaired by any subsequent legislative
The Partial Judgment dismissed petitioners first cause of The SEC approved the foregoing amendment on September
enactment, e.g. the New Corporation Code, as the Articles of
action, specifically, to annul said election for depriving 22, 1993.
Incorporation is an intra-corporate contract between the
petitioners their voting rights and to be voted on as members
On February 9, 2001, the shareholders of MCPI held their corporation and its members; between the corporation and its
of the board.
annual stockholders meeting and election for directors. stockholders; and among the stockholders. They submit that
The facts, as culled from records, are as follows: During the course of the proceedings, respondent Rustico to allow Class "B" shareholders to vote and be elected as
Jimenez, citing Article VII, as amended, and notwithstanding directors would constitute a violation of MCPIs franchise or
Petitioners and the respondents are stockholders of MCPI, MCPIs history, declared over the objections of herein charter as granted by the State.
with the former holding Class "B" shares and the latter petitioners, that no Class "B" shareholder was qualified to run
owning Class "A" shares. At the pre-trial, the trial court ruled that a partial judgment
or be voted upon as a director. In the past, MCPI had seen
could be rendered on the first cause of action and required
MCPI is a domestic corporation with offices at Dr. A. Santos holders of Class "B" shares voted for and serve as members
the parties to submit their respective position papers or
Avenue, Sucat, Paraaque City. It was organized sometime in of the corporate board and some Class "B" share owners were
memoranda.
September 1977. At the time of its incorporation, Act No. in fact nominated for election as board members.
1459, the old Corporation Law was still in force and effect. Nonetheless, Jimenez went on to announce that the On November 26, 2001, the RTC rendered the Partial
Article VII of MCPIs original Articles of Incorporation, as candidates holding Class "A" shares were the winners of all Judgment, the dispositive portion of which reads:
approved by the Securities and Exchange Commission (SEC) seats in the corporate board. The petitioners protested,
WHEREFORE, viewed in the light of the foregoing, the
on October 26, 1977, reads as follows: claiming that Article VII was null and void for depriving them,
election held on February 9, 2001 is VALID as the holders
as Class "B" shareholders, of their right to vote and to be
SEVENTH. That the authorized capital stock of the of CLASS "B" shares are not entitled to vote and be voted
voted upon, in violation of the Corporation Code (Batas
corporation is TWO MILLION (P2,000,000.00) PESOS, for and this case based on the First Cause of Action is
Pambansa Blg. 68), as amended.
Philippine Currency, divided into TWO THOUSAND (2,000) DISMISSED.
SHARES at a par value of P100 each share, whereby the On March 22, 2001, after their protest was given short shrift,
SO ORDERED.6
ONE THOUSAND SHARES issued to, and subscribed by, the herein petitioners filed a Complaint for Injunction, Accounting
incorporating stockholders shall be classified as Class A and Damages, docketed as Civil Case No. CV-01-0140 before In finding for the respondents, the trial court ruled that
shares while the other ONE THOUSAND unissued shares the RTC of Paraaque City, Branch 258. Said complaint was corporations had the power to classify their shares of stocks,
shall be considered as Class B shares. Only holders of founded on two (2) principal causes of action, namely: such as "voting and non-voting" shares, conformably with
Class A shares can have the right to vote and the right to Section 67 of the Corporation Code of the Philippines. It
a. Annulment of the declaration of directors of the MCPI
be elected as directors or as corporate officers. 2 (Stress pointed out that Article VII of both the original and amended
made during the February 9, 2001 Annual Stockholders
supplied) Articles of Incorporation clearly provided that only Class "A"
Meeting, and for the conduct of an election whereat all
shareholders could vote and be voted for to the exclusion of
On July 31, 1981, Article VII of the Articles of Incorporation of stockholders, irrespective of the classification of the
Class "B" shareholders, the exception being in instances
MCPI was amended, to read thus: shares they hold, should be afforded their right to vote
provided by law, such as those enumerated in Section 6,
and be voted for; and
SEVENTH. That the authorized capital stock of the paragraph 6 of the Corporation Code. The RTC found merit in
corporation is FIVE MILLION (P5,000,000.00) PESOS, the respondents theory that the Articles of Incorporation,
divided as follows: which defines the rights and limitations of all its shareholders,

CORPORATION LAW: 7. captial structure Page 58 of 201

is a contract between MCPI and its shareholders. It is thus the grant of voting powers to Class "A" shareholders. This to the prejudice of Class "B" shareholders, without running
law between the parties and should be strictly enforced as to particular amendment is relevant for it speaks of a law afoul of the letter and spirit of the Corporation Code.
them. It brushed aside the petitioners claim that the Class providing for exceptions to the exclusive grant of voting rights
The respondents then take the tack that the phrase "except
"A" shareholders were in estoppel, as the election of Class "B" to Class "A" stockholders. Which law was the amendment
when otherwise provided by law" found in the amended
shareholders to the corporate board may be deemed as a referring to? The determination of which law to apply is
Articles is only a handwritten insertion and could have been
mere act of benevolence on the part of the officers. Finally, necessary. There are two laws being cited and relied upon by
inserted by anybody and that no board resolution was ever
the court brushed aside the "founders shares" theory of the the parties in this case. In this instance, the law in force at the
passed authorizing or approving said amendment.
petitioners for lack of factual basis. time of the 1992 amendment was the Corporation Code (B.P.
Blg. 68), not the Corporation Law (Act No. 1459), which had Said contention is not for this Court to pass upon, involving as
Hence, this petition submitting the sole legal issue of whether
been repealed by then. it does a factual question, which is not proper in this petition.
or not the Court a quo, in rendering the Partial Judgment
In an appeal via certiorari, only questions of law may be
dated November 26, 2001, has decided a question of We find and so hold that the law referred to in the
reviewed.13 Besides, respondents did not adduce persuasive
substance in a way not in accord with law and jurisprudence amendment to Article VII refers to the Corporation Code and
evidence, but only bare allegations, to support their
considering that: no other law. At the time of the incorporation of MCPI in 1977,
suspicion. The presumption that in the amendment process,
the right of a corporation to classify its shares of stock was
1. Under the Corporation Code, the exclusive voting right the ordinary course of business has been followed 14 and that
sanctioned by Section 5 of Act No. 1459. The law repealing
and right to be voted granted by the Articles of official duty has been regularly performed 15 on the part of the
Act No. 1459, B.P. Blg. 68, retained the same grant of right of
Incorporation of the MCPI to Class A shareholders is null SEC, applies in this case.
classification of stock shares to corporations, but with a
and void, or already extinguished;
significant change. Under Section 6 of B.P. Blg. 68, the WHEREFORE, the petition is GRANTED. The Partial
2. Hence, the declaration of directors made during the requirements and restrictions on voting rights were explicitly Judgment dated November 26, 2001 of the Regional Trial
February 9, 2001 Annual Stockholders Meeting on the provided for, such that "no share may be deprived of voting Court of Paraaque City, Branch 258, in Civil Case No. 01-
basis of the purported exclusive voting rights is null and rights except those classified and issued as "preferred" or 0140 is REVERSED AND SET ASIDE. No pronouncement as
void for having been done without the benefit of an "redeemable" shares, unless otherwise provided in this Code" to costs.
election and in violation of the rights of plaintiffs and Class and that "there shall always be a class or series of shares
which have complete voting rights." Section 6 of the SO ORDERED.
B shareholders; and
Corporation Code being deemed written into Article VII of the
3. Perforce, another election should be conducted to elect Articles of Incorporation of MCPI, it necessarily follows that
the directors of the MCPI, this time affording the holders of unless Class "B" shares of MCPI stocks are clearly categorized G.R. No. L-54330 January 13, 1989
Class B shares full voting right and the right to be voted. 8 to be "preferred" or "redeemable" shares, the holders of said JULIO E. T. SALES and GEORGE V. AGONIAS, in their
The issue for our resolution is whether or not holders of Class Class "B" shares may not be deprived of their voting rights. own behalf, and in behalf of SIPALAY MINING
"B" shares of the MCPI may be deprived of the right to vote Note that there is nothing in the Articles of Incorporation nor EXPLORATION CORPORATION, as minority stockholders
and be voted for as directors in MCPI. an iota of evidence on record to show that Class "B" shares thereof, and SIPALAY MINING EXPLORATION
were categorized as either "preferred" or "redeemable" CORPORATION, petitioners, vs. SECURITIES AND
Before us, petitioners assert that Article VII of the Articles of shares. The only possible conclusion is that Class "B" shares
EXCHANGE COMMISSION, STATE INVESTMENT HOUSE,
Incorporation of MCPI, which denied them voting rights, is null fall under neither category and thus, under the law, are
INC., represented by its President, ANSELMO
and void for being contrary to Section 6 of the Corporation allowed to exercise voting rights.
TRINIDAD; ANSELMO TRINIDAD CO., INC., represented
Code. They point out that Section 6 prohibits the deprivation
by its President, ANSELMO TRINIDAD; and VULCAN
of voting rights except as to preferred and redeemable shares One of the rights of a stockholder is the right to participate in
INDUSTRIAL AND MINING CORP., represented by its
only. Hence, under the present law on corporations, all the control and management of the corporation that is
President, WALTER W. BROWN; AFREDO C. RAMOS,
shareholders, regardless of classification, other than holders exercised through his vote. The right to vote is a right
ANNABELLE P. BROWN, WALTER W. BROWN, MANUEL C.
of preferred or redeemable shares, are entitled to vote and to inherent in and incidental to the ownership of corporate stock,
DIAZ, and AUGUSTO B. SUNICO, respondents.
be elected as corporate directors or officers. Since the Class and as such is a property right. The stockholder cannot be
"B" shareholders are not classified as holders of either deprived of the right to vote his stock nor may the right be see cases on 5. Meetings of stockholders and BOD
preferred or redeemable shares, then it necessarily follows essentially impaired, either by the legislature or by the
that they are entitled to vote and to be voted for as directors corporation, without his consent, through amending the
or officers. charter, or the by-laws.11 G.R. No. 51765 March 3, 1997
The respondents, in turn, maintain that the grant of exclusiveNeither do we find merit in respondents position that Section REPUBLIC PLANTERS BANK, petitioner, vs. HON.
voting rights to Class "A" shares is clearly provided in the 6 of the Corporation Code cannot apply to MCPI without ENRIQUE A. AGANA, SR., as Presiding Judge, Court of
running afoul of the non-impairment clause of the Bill of
Articles of Incorporation and is in accord with Section 5 9 of the First Instance of Rizal, Branch XXVIII, Pasay City,
Corporation Law (Act No. 1459), which was the prevailing law Rights. Section 14812 of the Corporation Code expressly ROBES-FRANCISCO REALTY & DEVELOPMENT
when MCPI was incorporated in 1977. They likewise submit provides that it shall apply to corporations in existence at the CORPORATION and ADALIA F. ROBES, respondents.
time of the effectivity of the Code. Hence, the non-impairment
that as the Articles of Incorporation of MCPI is in the nature of
a contract between the corporation and its shareholders and clause is inapplicable in this instance. When Article VII of the see cases on 3. Powers of Corps
Section 6 of the Corporation Code could not retroactively Articles of Incorporation of MCPI were amended in 1992, the
apply to it without violating the non-impairment clause 10 of board of directors and stockholders must have been aware of
the Constitution. Section 6 of the Corporation Code and intended that Article
VII be construed in harmony with the Code, which was then
We find merit in the petition. already in force and effect. Since Section 6 of the Corporation [G.R. No. L-28398. August 6, 1975.]
When Article VII of the Articles of Incorporation of MCPI was Code expressly prohibits the deprivation of voting rights, COMMISSIONER OF INTERNAL REVENUE, Petitioner, v.
amended in 1992, the phrase "except when otherwise except as to "preferred" and "redeemable" shares, then JOHN L. MANNING, W.D. McDONALD, E.E. SIMMONS and
provided by law" was inserted in the provision governing the Article VII of the Articles of Incorporation cannot be construed THE COURT OF TAX APPEALS, Respondents.
as granting exclusive voting rights to Class "A" shareholders,

CORPORATION LAW: 7. captial structure Page 59 of 201

see cases on 3. powers of corps On April 7, 1986, the Presidential Commission on Good They likewise agreed to pay an "arbitration fee" of
Government (PCGG) then led by the former President of the 5,500,000 SMC shares composed of 3,858,831 "A" shares and
Senate, the Honorable Jovito R. Salonga, sequestered the 1,641,169 "B" shares to the PCGG to be held in trust for the
shares of stock subject of the sale.3 Due to the sequestration, Comprehensive Agrarian Reform Program.9
the SMC Group (hereinafter referred to as the petitioners)
suspended payment of the balance of the purchase price of
On March 23, 1990, the petitioners and the UCPB Group filed
the subject stocks. In retaliation, the UCPB Group rescinded
with the Sandiganbayan a Joint Petition for Approval of
the sale.
the Compromise Agreement and Amicable
Settlement. The petition was docketed as Civil Case No.
On June 2, 1986, UCPB and CIIF Holding Companies went to 0102.10
court. They filed a complaint with the Regional Trial Court of
Makati against the petitioners for confirmation of rescission of
On March 29, 1990, the Sandiganbayan motu proprio directed
sale with damages.4 On June 5, 1986, the petitioners assailed
that copies of the Joint Petition be furnished to E. Cojuangco,
in this Court the jurisdiction of the Makati RTC on the ground
Jr., M. Lobregat and others who are defendants in Civil Case
that primary jurisdiction was vested with the PCGG since the
No. 0033. The same SMC shares are the subject of Civil Case
SMC shares were sequestered shares.5 On August 10, 1988,
No. 0033 and alleged as part of the alleged ill-gotten wealth
we upheld the petitioners. We ordered, among others, the
of former President Marcos and his "cronies."11
dismissal of the rescission case filed in the Makati RTC without
prejudice to the ventilation of the parties' claims before the
Sandiganbayan.6 On April 25, 1990, the Republic of the Philippines, through
G.R. Nos. 104637-38 September 14, 2000 the Office of the Solicitor General (OSG), opposed12the
Compromise Agreement and Amicable Settlement. It
The record shows that the petitioners and the UCPB Group
contended that the involved coco-levy funds, whether in the
SAN MIGUEL CORPORATION, NEPTUNIA CORPORATION were able to thresh out their dispute extra-judicially. In March
form of earnings or dividends therefrom, or in the form of the
LIMITED, ANDRES SORIANO III AND ANSCOR- 1990, they signed a Compromise Agreement and Amicable
value of liquidated corporate assets represented by all
HAGEDORN SECURITIES, INC., petitioners, vs. Settlement.7 Its pertinent provisions state:
sequestered shares (like the value of assets sold/mortgaged
SANDIGANBAYAN (FIRST DIVISION), PHILIPPINE
to finance the P500M first installment), or in the form of cash,
COCONUT PRODUCERS FEDERATION, INC. (COCOFED),
"3.1. The sale of the shares covered by and corresponding to or, as in the case of subject "Settlement," in the form of
MARIA CLARA L. LOBREGAT, BIENVENIDO MARQUEZ,
the first installment of the 1986 Stock Purchase Agreement "proceeds" of sale or of "payments" of certain alleged
JOSE R. ELEAZAR, JR., DOMINGO ESPINA, JOSE GOMEZ,
consisting of Five Million SMC Shares is obligations are public funds. As public funds, the coco-levy
CELESTINO SABATE, MANUEL DEL ROSARIO, JOSE
hereby recognized by the parties as valid and effective as funds, in any form or transformation, are beyond or "outside
MARTINEZ, JR., JOSE REYNALDO MORENTE AND ELADIO
of 1 April 1986. Accordingly, said shares and all stock and the commerce," and perforce not within the private
CHATTO, respondents.
cash dividends declared thereon after 1 April 1986 shall disposition of private individuals.13
pertain, and are hereby assigned, to SMC. x x x
x-----------------------x
The reliefs prayed for by the Solicitor General state:
3.2. The First Installment Shares shall revert to the
DECISION SMC treasury for dispersal pursuant to the SMC Stock
"1. That the "Settlement" be stricken off the record or at most
Dispersal Plan attached as Annex "A-1" hereof. The parties are
referred back to the PCGG for serious study and
PUNO, J.: aware that these First Installment Shares shall be sold to raise
consideration. While the PCGG under its legal mandate (as
funds at the soonest possible time for the expansion program
sustained in G.R. No. 84895, "Republic v. Campos") in
of SMC. x x x
It appears that on March 26, 1986, the Coconut Industry principle encourages settlement agreements on ill-gotten
Investment Fund Holding Companies1 ("CIIF" for brevity) sold wealth to expedite recovery thereof for the benefit of the
33,133,266 shares of the outstanding capital stock of San 3.3. The sale of the shares covered by and corresponding to Government, the herein privately proposed "Settlement"
Miguel Corporation to Andres Soriano III of the SMC Group the second, third and fourth installments of the 1986 subject of the petition contains private proposals of
payable in four (4) installments.2 Stock Purchase Agreement is hereby rescinded effective 1 "utilization and management of" public funds that are
April 1986 and deemed null and void, and of no force and prejudicial to the Government, without "full disclosures"
effect. Accordingly, all stock and cash dividends declared as normally required by PCGG and over which in respect of
On April 1, 1986, Andres Soriano III paid the initial P500
after 1 April 1986 corresponding to the second, third and declarant immunity may even be granted.
million to the UCPB as administrator of the CIIF. The sale was
fourth installments shall pertain to CIIF Holding
transacted through the stock exchange and the shares were
Corporations. xxx"8 (emphasis supplied)
registered in the name of Anscor-Hagedorn Securities, Inc. 2. That this Petition be consolidated with, or treated as a
(AHSI). premature motion or incident in Civil Case No. 0033, and
brought by improper parties. To repeat, the plaintiff Republic

CORPORATION LAW: 7. captial structure Page 60 of 201

through PCGG is not a party to what in effect will be a judicial as feasible in accordance with a plan to be agreed upon by repetition of the national plunder. It is not to be construed as
compromise in Civil Case No. 0033. Nowhere does the the Commission and SMC; provided, that SMC shall not indicating any recognition of the legality or sufficiency of any
"Settlement" mention that its terms are subject to the judicial unreasonably withhold its consent to a sales plan approved by act of any of the parties."21
outcome of this Civil Case No. 0033. It is to be emphasized PCGG.
that even in the "Pepsi-Cola Settlement" cited by the
The petitioners and the UCPB Group filed their Joint
petitioners, the alleged loan payments therein to liquidate
The P500 million paid by SMC as first installment shall be Manifestation22 accepting the conditions imposed by PCGG.
alleged obligations are subject in no uncertain terms to the
accounted for by UCPB and the CIIF companies to the extent They also opposed the intervention of COCOFED, et al.
final outcome of the main Civil Case No. 0033 pending before
respectively received by them, and any portion thereof in
this Honorable Court,
excess of the usual business needs of the possessor shall be
On October 12, 1990, the petitioners moved for early
delivered by it to the Commission, to be held in escrow for the
resolution of the Joint Petition for Approval of the Compromise
'The concern of the Court in matters such as this has always ultimate owner.
Agreement and Amicable Settlement together with its
been to see to it that the properties in sequestration would be
pending incidents.23
well (and profitably, if possible) preserved either for the
2. On Delivery Date, the stock certificates for the balance of
government, if the plaintiff proves the 'crony' and 'ill-gotten'
the SHARES in the name of the 14 holding companies shall be
character of the property, or for the defendants if not,' On October 16, 1990, the Sandiganbayan issued an
delivered to PCGG and deposited with the Central Bank for
Order24 integrating Case No. 0102 as an incident of Civil Case
safekeeping to await their sale in accordance with the plan of
No. 0033, thus:
considering that one of the reliefs prayed for or one of causes dispersal that PCGG and UCPB shall agree to establish for
of action in the Republic's Complaint in Civil Case No. 0033 is them. As soon as practicable, but with proper account of
precisely for Accounting and/or Damages. In the instant market conditions, all those shares shall be sold, and the "Considering the interest expressed by the different parties in
"Settlement," the "crony" and "ill-gotten character of the proceeds thereof disposed as provided below. UCPB shall not Civil Case No. 0033, and considering further that the subject
property" involved is a matter of public record if not public unreasonably withhold its consent to a sales plan approved by matter of the amicable settlement which is presented before
notoriety. Plaintiff Republic need not prove the public PCGG in accordance with this paragraph. this Court for approval, the Court has deemed it best that Civil
character of the coco-levy funds. This is a matter of settled Case No. 0102 be integrated with, and be made an incident
law and jurisprudence, a "given" fact, to quote the Honorable to, Civil Case No. 0033. xxx"25
3. So much of the proceeds of the sale as may be necessary
Supreme Court."14 (emphasis supplied)
shall be used a) to finance the obligations of the CIIF
Companies under the COMPROMISE, and b) to liquidate the The petitioners did not challenge the Order.
On April 18, 1990, Mr. Eduardo M. Cojuangco, Jr. moved to obligations of the CIIF Companies to UCPB for the purchase
intervene alleging legal interest in the approval or disapproval price of the SHARES. The balance shall be kept by the PCGG In its Manifestation26 dated November 19, 1990, the Solicitor
of the Compromise Agreement and Amicable Settlement.15 in escrow to await final judicial determination of the General maintained his Opposition to the Compromise
ownership of the various coconut-related companies and of all Agreement and Amicable Settlement.
the other assets involved here. The cash dividends that have
On May 24, 1990, the Philippine Coconut Producers'
been declared on the SHARES may be applied for the above
Federation, Inc. (COCOFED), et al.16 filed an "Omnibus Class On November 23, 1990, Sandiganbayan deferred
purposes before proceeds from the sale of shares are
Action Motion for Leave to Intervene and to Admit: consideration of the Compromise Agreement "until the parties
realized. The balance of such cash dividends shall be held in
(1) Opposition-in-Intervention, and (2) Compulsory thereto take the initiative to restore the same in the Court's
escrow in the same manner as the sales proceeds.
Counter-Petition and Counterclaim for calendar."27 On February 5, 1991, it also deferred resolution of
Damages."17 They alleged that they are the Cojuangco's Motion to Intervene.
ultimate beneficial owners of the SMC shares subject of the 4. All SHARES shall continue to be sequestered even beyond
Compromise Agreement. Delivery Date. Sequestration on them shall be lifted as they
On February 21, 1991, the UCPB Group filed a Motion to set
are sold consequent to approval of the sale by the
the Joint Petition for hearing. 28 In its Order dated February 27,
Sandiganbayan, and in accordance with the dispersal plan
On June 18, 1990, the PCGG filed its Manifestation 18 attaching 1991, the Sandiganbayan required the parties to comment on
19 approved by the Commission. All of the SHARES that are
a copy of the Resolution of the Commission en banc dated the propriety of the said court's continuing to entertain the
unsold will continue to be voted by PCGG while still unsold.
June 15, 1990. PCGG joined the Solicitor General in praying Compromise Agreement.29 In compliance with the said Order,
that the Joint Petition for Approval of Compromise Agreement the petitioners filed its Manifestation dated March 15, 1991
should be treated as an incident of Case No. 0033. 20 PCGG, 5. The consent of PCGG to the transfer of the sequestered expressly recognizing the jurisdiction of the Sandiganbayan to
however, interposed no objection to the implementation of shares of stock in accordance with the COMPROMISE, and to rule on the petition for the approval of the compromise
the Compromise Agreement subject to the incorporation of the lifting of the sequestration thereon to permit such agreement.31
the following provisions: transfer, shall be effective only when approved by the
Sandiganbayan. The Commission makes no determination of
On June 3, 1991, the Sandiganbayan issued the following
the legal rights of the parties as against each other. The
"1. As stated in the COMPROMISE, the 5 million SMC shares Resolution:31
consent it gives here conforms to its duty to care for the
(now 26,450,000) paid for by the P500 million first installment
sequestered assets, and to its purpose to prevent the
shall be delivered to SMC, kept in treasury, and sold as soon

CORPORATION LAW: 7. captial structure Page 61 of 201

"It appearing that the sequestered character of the shares of iii) Certificates for 5,500,000 SMC shares were registered in On August 5, 1991, the Sandiganbayan issued an order
stock subject of the instant petition for the approval of the the name of the PCGG. requiring SMC to deliver the certificates of stock representing
compromise agreement, which are shares of stock in the San the subject matter of the Compromise Agreement to the
Miguel Corporation in the name of the CIIF Corporations, is PCGG in view of the oral manifestations of Commissioner
c. The UCPB Group has delivered to the SMC Group the
independent of the transaction involving the contracting Maceren seeking clarification of portions of Sandiganbayan's
amount of P500,000,000.00 in full payment of the UCPB
parties in the Compromise Agreement between what may be July 23, 1991 Resolution.41
preferred shares.
labeled as the "SMC Group" and the "UCPB Group," and it
appearing further that the said sequestered SMC shares of
On August 9, 1991, the UCPB Group filed a Motion to Allow it
stock have not been physically seized nor taken over by the d. The SMC Group delivered to the UCPB Group the amount of
to Utilize Dividends on SMC shares for the payment of the
PCGG, so much so that the reversions contemplated in said P481,628,055.99 representing accumulated dividends (from
loans of CIIF Companies to UCPB. 42 The motion was granted
Compromise Agreement are without prejudice to the April 1, 1986) on the shares reverted to the CIIF Holding
on September 2, 1991.43
perpetuation of the sequestration thereon, until such time as Companies."33
a judgment might be rendered on said sequestration (which
issue is not before this Court as (sic) this time), and it On August 15, 1991, COCOFED, et al. filed their Urgent Motion
The PCGG manifested that it has no objection to the action
appearing finally that the PCGG has not interposed any to Compel Surrender of the Cash Dividends pertaining to (a)
taken by the petitioners and the UCPB Group. 34COCOFED, et
objection to the contractual resolution of the problems the 4.5 million SMC shares allegedly delivered to PCGG in
al. and Cojuangco, Jr. filed their respective
confronting the "SMC Group" and the "UCPB Group" to the trust for the Comprehensive Agrarian Reform Program and (b)
motions,35 both dated July 4, 1991 to nullify the
extent that the sequestered character of the shares in the SMC shares allegedly delivered to SMC as treasury
implementation of the compromise agreement.
question is not affected, this Court will await the pleasure shares.44
of the Presidential Commission on Good Government
Acting on the Joint Manifestation of Implementation of
before consideration of the Compromise Agreement is On August 22, 1991, petitioners filed a Manifestation and
Compromise Agreement and of Withdrawal of Petition, the
reinstated in the Court's calendar. Motion stating that the SMC shares have reverted to the SMC
Sandiganbayan on July 5, 1991 noted the same "with
treasury as treasury shares and are not entitled to
the observation that the PCGG, the UCPB Group and the
While this is, in effect, a denial of the "UCPB Group's" dividends.45
SMC Group shall always act with due regard to the
Motion to set consideration of the Compromise sequestered character of the shares of stock involved
Agreement herein, this denial is without prejudice to a herein as well as the fruits thereof, more particularly to On October 1, 1991, the Sandiganbayan issued a Resolution
reiteration of the motion or any other action by the prevent the loss or dissipation of their value" and "without allowing COCOFED, et al. to intervene.46 On March 30, 1992, it
parties should developments hereafter justify the prejudice to whatever might be the resolution of this Court denied the separate motions for reconsideration filed by the
same." on the Motion to Nullify the Compromise Agreement filed by petitioners and the UCPB Group.47
Eduardo Cojuangco, Jr."36
On July 4, 1991, the petitioners and the UCPB Group filed a On October 25, 1991, the Sandiganbayan issued another
Joint Manifestation that they have implemented the On July 8, 1991, the Sandiganbayan issued two (2) Orders. Resolution requiring SMC to deliver the 25.45 million SMC
Compromise Agreement and Amicable Settlement with the The first was to hear the defendants in Civil Case No. 0033 on treasury shares to the PCGG.48 On March 18, 1992, it denied
conditions set by the PCGG and accordingly, withdrew the matter of the Compromise Agreement whether under Civil petitioners' Motion for Reconsideration and further ordered
their Joint Petition.32 They informed that they have Case No. 0102 or as an incident to Civil Case No. 0033. 37 The SMC to pay dividends on the said treasury shares and to
executed the following corporate acts: second required the petitioners and the UCPB Group as well deliver them to the PCGG.49
as PCGG to formally state in writing the different holders of
"a. On instructions of the SMC Group, the certificates of stock the SMC shares subject of the compromise agreement. The On April 13, 1992, petitioners filed a Motion to Dismiss
registered in the name of Anscor-Hagedorn Securities, Inc. Sandiganbayan further ordered PCGG to indicate on the face Intervention and/or Motion for Clarification with Ad Cautelam
38
(AHSI) representing 175,274,960 SMC shares were of the subject shares their sequestered character. Motion to Suspend Time.50 The motion was denied in the
surrendered to the SMC corporate secretary. Sandiganbayan's Resolution dated March 17, 1993. 51
On July 16, 1991, petitioners filed their Manifestation where
b. The said SMC shares were reissued and registered in the they declared that Stock Certificate Nos. A 0004129 and A Before this Court now are two (2) consolidated petitions
record books of SMC in the following manner: 0015556 representing 25,450,000 shares were issued in the
for certiorari under Rule 65 of the Rules of Court filed by
name of SMC as treasury stocks.39
petitioners San Miguel Corporation, Neptunia Corporation
i) Certificates for 25,450,000 SMC shares were registered in Limited, Andres Soriano III and Anscor-Hagedorn Securities,
the name of SMC, as treasury; On July 23, 1991, the Sandiganbayan noted the Inc. They seek to annul the following resolutions of the
Manifestations of the PCGG, the petitioners and the UCPB Sandiganbayan:
group that the certificates of stock for the subject SMC shares
ii) Certificates for 144,324,960 SMC shares were registered in
which are intended to form part of the corporation's treasury
the name of the CIIF Holding Companies; In G.R. No. 104637-38:
shares have been marked "sequestered" by SMC and are in
40
the custody of the PCGG.

CORPORATION LAW: 7. captial structure Page 62 of 201

1. The Resolution dated October 25, 1991 reiterating 52 that all reasons why the treasury shares and any "dividends" thereon 2. COCOFED, et al. are estopped from claiming to act for the
Certificates of Stock representing sequestered shares in the should remain with SMC. UCPB Group.
SMC be physically deposited with the PCGG and requiring
SMC to pay the cash dividends due or actually earned by
2. The purported issue of ownership does not justify the IV COCOFED, et al. are bound by the business judgment of the
the said shares and deliver them to PCGG;53
dispossession of SMC of these shares. UCPB Group that the compromise is to the best interest of the
UCPB Group.
2. The Resolution dated March 18, 1992 54 requiring SMC to
C The PCGG is the entity primarily charged with the duty and
deliver to the PCGG the 25.45 million shares as well as the
responsibility of preserving sequestered assets. Absent any V In violation of the public policy that frowns on litigation and
cash and/or stock dividends which have accrued thereto from
showing that the PCGG betrayed this duty when it allowed encourages fair compromise, the questioned resolutions
March 26, 1986 to date and which might have further accrued
SMC to keep the shares already paid for in treasury, the foment litigation on issues settled by the compromise.
thereto had not said shares of stock been declared treasury
Sandiganbayan has no jurisdiction to over-rule the PCGG's
shares.55
judgment.
VI COCOFED, et al. paid no docket fees for the counter-
petition. The Sandiganbayan acquired no jurisdiction over the
In G.R. No. 109797:
D The questioned orders will foment litigation, in violation of counter-petition."60
the clear policy of the law that compromise is encouraged.
1. The Resolution dated September 30,
Vis--vis these arguments, private respondents COCOFED, et
1991 allowing COCOFED and other private respondents to
E The sequestered (sic) assets threaten and put the al. contend:
intervene in Case No. 0102 and admitting their Counter-
sequestered assets at risk.
Petition;56
In G.R. No. 104637-38:
F The Sandiganbayan gravely abused its discretion when it
2. The Resolution dated March 27, 1992 denying the motions
treated the contracting parties to the compromise agreement
of petitioners and the UCPB Group for reconsideration of the I. That the Sandiganbayan has not yet resolved the matter of
differently."59
Resolution dated September 30, 1991; and57 the compromise agreement. By insisting that it has
implemented the compromise agreement and thus need not
In G. R. No. 109797: turn over the SMC shares corresponding to the P500 million
3. The Resolution dated March 17, 1993 denying petitioners'
first installment and the dividends thereon to the PCGG, the
motion to dismiss the Counter-Petition filed by COCOFED,
SMC Group is preempting the Sandiganbayan.
et al.58 "GROUNDS TO GRANT PETITION

II. The Order of the Sandiganbayan to turn over the SMC

Petitioners contend: The Sandiganbayan acted without or in excess of jurisdiction
shares corresponding to the P500 million first installment and
or with grave abuse of discretion in issuing the questioned
the dividends thereon is proper because the SMC Group is not
Resolutions in that:
In G.R. No. 104637-38: entitled thereto, having forfeited the first installment as
liquidated damages for its refusal and failure to make
I Civil Case No. 0102 has been withdrawn. COCOFED, et al. subsequent installment payments.
"GROUNDS FOR CERTIORARI
cannot intervene in a withdrawn case.

III. At any rate, the transformation of the SMC shares into

The questioned orders of the Sandiganbayan were issued
II The Sandiganbayan's motu proprio consolidation of Case
treasury shares is but part and parcel of the compromise
without or in excess of its jurisdiction, and with grave abuse
102 with Case 33 did not make the SMC Group parties to Case
agreement which has not yet been approved. Thus, it is
of discretion amounting to lack of jurisdiction. They should be
33. It did not result in a merger of the two cases which
premature for the SMC Group to treat these shares as such
set aside as null and void.
preserved their separate identity. and to refuse to turn over the same as well as the accrued
dividends thereon to the PCGG, as ordered by the
A The questioned orders would deprive SMC of property
III By their own allegations, COCOFED, et al. have no cause of Sandiganbayan. Moreover, the transformation is extremely
already paid for. They unduly protect the claimants of disadvantageous to the CIIF Companies.
action.
sequestered companies, at the expense of SMC.

1. COCOFED, et al. are not real parties in interest. They deny IV. The PCGG appointed directors of UCPB, the CIIF
B The Sandiganbayan over-reached its jurisdiction in issuing Companies, and SMC cannot enter into a compromise
the Sandiganbayan's basis for finding that they are real
the questioned orders. agreement which is tantamount to a disposition or dissipation
parties in interest, i.e., that the SMC shares were acquired
with coco-levy funds. of sequestered assets. Moreover, the PCGG is not entitled to
1. The fact of sequestration, by itself, does not mean that the any arbitration fee.
possessor of the sequestered assets must be dispossessed
thereof at all costs. In the present case, there are weighty

CORPORATION LAW: 7. captial structure Page 63 of 201

V. While the law encourages amicable settlements, the law grave abuse of discretion. To justify the issuance of the writ approved by the Commission. All of the SHARES that are
likewise provides that any compromise should not only be of certiorari, the abuse of discretion must be grave, as when unsold will continue to be voted by PCGG while still unsold.
legal but must also be fair. In this case, the proposed the power is exercised in an arbitrary or despotic manner by
compromise is contrary to law and grossly disadvantageous reason of passion or personal hostility, and it must be so
5. The consent of PCGG to the transfer of the sequestered
to the CIIF Companies, UCPB and the coconut patent as to amount to an evasion of positive duty or to a
shares of stock in accordance with the COMPROMISE, and to
farmers/producers. virtual refusal to perform the duty enjoined, or to act at all, in
the lifting of the sequestration thereon to permit such
contemplation of law, as to be equivalent to having acted
transfer, shall be effective only when approved by the
without jurisdiction.63 We shall now use this unyielding
VI. The perceived danger of risk on the sequestered assets is Sandiganbayan. The Commission makes no determination
yardstick.
purely speculative and is not supported by adequate proof. of the legal rights of the parties as against each other. The
Moreover, the SMC shares are sufficient to cover the losses consent it gives here conforms to its duty to care for the
which may be sustained in pursuing the recovery of the SMC RE: ISSUE OF DELIVERY OF CERTIFICATES OF STOCK OF SMC sequestered assets, and to its purpose to prevent the
shares. SHARES AND THE DIVIDENDS THEREON TO THE PCGG IN G.R. repetition of the national plunder. It is not to be construed as
NO. 104637-38 indicating any recognition of the legality or sufficiency of any
act of any of the parties."66 (emphasis supplied)
VII. The CIIF Companies, being the disputed owners of the
SMC shares, are entitled to have the dividends on the SMC We find no grave abuse of discretion on the part of
shares applied to its indebtedness to UCPB. On the other Sandiganbayan when it ordered the petitioners to deliver the Thus, the petitioners voluntarily submitted to the
hand, until the question of which entity is entitled thereto is treasury shares to PCGG and pay their corresponding jurisdiction of the Sandiganbayan by asking for the approval
settled, the SMC shares corresponding to the P500 million first dividends for the following reasons: of the said Compromise Agreement. They stated in their
installment and the dividends thereon should be turned over Manifestation dated March 15, 199167 that:
to the PCGG.61
First. The cases at bar do not merely involve a compromise
agreement dealing with private interest. The "1. The Compromise Agreement subject matter of this petition
and in G.R. No. 109797: Compromise Agreement here involves sequestered categorically states that `(a)ll the terms of th(e) Agreement
shares of stock now worth more than nine (9) billions of are subject to approval by the Presidential Commission on
pesos, per estimate given by COCOFED. 64 Their ownership is Good Government (PCGG) as may be required by Executive
I. Civil Case No. 0102 may not be withdrawn sans the
still under litigation. It is not yet known whether the shares Orders numbered 1, 2, 14 and 14-A. (T)he Agreement and
approval of the Sandiganbayan. Further, the filing by COCFED,
are part of the alleged ill-gotten wealth of former President the PCGG approval thereof shall be submitted to the
et al. of the Intervention was in accordance with the ruling
Marcos and his "cronies." Any Compromise Agreement Sandiganbayan. x x x
in Soriano III case which vests on COCOFED, et al. the right
concerning these sequestered shares falls within the
to ventilate its claims over the SMC shares.
unquestionable jurisdiction of and has to be approved by the
PCGG has consented to the Compromise Agreement.
Sandiganbayan. The parties themselves recognized this
But its consent is 'effective only when approved by the
II. The COCOFED case settled with finality that COCOFED, et jurisdiction. In the Compromise Agreement itself,
Sandiganbayan' (PCGG Resolution dated 15 June 1990,
al. are real parties in interest to the coconut levy funds as well the petitioners and the UCPB Group expressly
In Re: Compromise Agreement between San Miguel
as the corporations organized and investments acquired or acknowledged the need to obtain the approval by the
Corporation, et al. and United Coconut Planters Bank, et
funded from out of the coconut levy funds. Sandiganbayan of its terms and conditions, thus:
al.). Petitioners accepted this condition, and
incorporated by reference such condition as an
III. Where the business judgment is unsound and violative of "5. Unless extended by mutual agreement of the parties, the integral part of the Compromise
law or public policy, affected persons may question such 'Delivery Date' shall be on the 10th Day from and after Agreement."68 (emphasis supplied)
decision. receipt by any party of the notice of approval of this
Compromise Agreement and Amicable Settlement by
In fine, the jurisdiction of the Sandiganbayan to pass upon
IV. The admission of the intervention is consistent with the the Sandiganbayan. Upon receipt of such notice, all other
65
the parties Compromise Agreement is beyond dispute.
ruling laid down in the Soriano III case. parties shall be immediately informed." (emphasis supplied)

Second. Given its undisputed jurisdiction, the Sandiganbayan

V. The intervention is in the nature of an Answer with The PCGG Resolution of June 15, 1990 also imposed the
ordered that the treasury shares should be delivered to PCGG
Compulsory Counterclaim. As such, the Sandiganbayan approval of the Sandiganbayan as a condition sine qua
and that their dividends should be paid pending
acquired jurisdiction despite non-payment of docket fees. 62 non for the transfer of these sequestered shares of stock, viz:
determination of their real ownership which is the key to
the question whether they are part of the alleged ill-gotten
We stress at the outset that the instant petitions were brought "4. All SHARES shall continue to be sequestered even beyond wealth of former President Marcos and his "cronies."
to us through a special civil action of certiorari under Rule 65 Delivery Date. Sequestration on them shall be lifted as they
of the Rules of Court to annul and set aside the above are sold consequent to approval of the sale by the
We cannot condemn and annul this order as capricious. In the
mentioned Sandiganbayan resolutions for having been Sandiganbayan, and in accordance with the dispersal plan
exercise of its discretion, the Sandiganbayan can require a
allegedly issued without or in excess of jurisdiction and with party-litigant to deliver a sequestered property to the PCGG.

CORPORATION LAW: 7. captial structure Page 64 of 201

We held in Baseco vs. PCGG69 that "the power of the PCGG These significant changes in the character of the SMC shares agreement will not in any way prejudice the rights of third
to sequester property claimed to be 'ill-gotten' means to cannot be denied. In Commissioner of Internal Revenue persons.
place or cause to be placed under its possession or control vs. Manning,73 we explained the limited nature of treasury
said property, or any building or office wherein any such shares, thus:
In the cases at bar, the record is clear that the Republic of
property and any records pertaining thereto may be found,
the Philippines, through the Office of the Solicitor General,
including 'business enterprises and entities,' - - - for the
"Although authorities may differ on the exact legal and vigorously opposed the Compromise Agreement on legal and
purpose of preventing the destruction, concealment or
accounting status of the so-called 'treasury shares,' they are moral grounds. COCOFED, et al. also opposed and contend
dissipation of, and otherwise conserving and
more or less in agreement that treasury shares are stocks that the conversion of the SMC shares into treasury shares is
preserving the same - - - until it can be determined,
issued and fully paid for and re-acquired by the corporation highly prejudicial to the interests of the coconut farmers. It
through appropriate judicial proceedings, whether the
either by purchase, donation, forfeiture or other means. cannot be gainsaid that if it is later proved that SMC is not the
property was in truth 'ill-gotten,' i.e. acquired through or as a
Treasury shares are therefore issued shares, but being in the lawful owner of the shares in question, what the adjudged
result of improper or illegal use or the conversion of funds
treasury they do not have the status of outstanding shares. lawful owner will receive are treasury shares with diminished
belonging to the government or any of its branches,
Consequently, although a treasury share, not having been value. The impugned order of the Sandiganbayan was issued
instrumentalities, enterprises, banks or financial institutions,
retired by the corporation re-acquiring it, may be re-issued or to avoid this mischief.
or by taking undue advantage of official position, authority,
sold again, such share, as long as it is held by the
relationship, connection or influence, resulting in unjust
corporation as a treasury share, participates neither in
enrichment of the ostensible owner and grave damage and Petitioners also argue that the Sandiganbayan gravely abused
dividends, because dividends cannot be declared by
prejudice to the State."70 its discretion when it treated the contracting parties to the
the corporation to itself, nor in the meetings of the
Compromise Agreement differently. 80 They argue that it
corporation as voting stock, for otherwise equal
should not have allowed the dividend income of the
The order of the Sandiganbayan regarding the subject distribution of voting powers among stockholders will be
sequestered shares in the name of the CIIF Holding
treasury shares is merely preservative in nature. When the effectively lost and the directors will be able to perpetuate
Companies to be applied to their indebtedness to the UCPB.
petitioners and UCPB Group filed their Joint Manifestation of their control of the corporation, though it still represents a
Again, we do not agree for the order of the Sandiganbayan is
Implementation of the Compromise Agreement and of paid-for interest in the property of the corporation. The
consistent with the need to preserve and enhance the value
Withdrawal of Petition, the Sandiganbayan cautioned that foregoing essential features of a treasury stock are lacking in
74
of the sequestered assets. We quote its explanation:
"the PCGG, the UCPB and the SMC Group shall always act the questioned shares..." (emphasis supplied)
with due regard to the sequestered character of the shares
of stock involved as well as the fruits thereof, more "The application of the dividend income of the CIIF-owned
For another, the payment to the PCGG of an arbitration
particularly to prevent the loss or dissipation of their SMC shares (which remain sequestered) to the debts of these
fee in the form of 5,500,000 of SMC shares 75 is denounced as
value."71 The caution was wisely given in view of the many CIIF companies in favor of the UCPB was meritorious on its
illegal, shocking and unconscionable.76 COCOFED, et al. have
contested provisions of the Compromise Agreement. For one, own account.
assailed the legal right of PCGG to act as arbiter as well as
the Sandiganbayan observed that the conversion of the SMC
the fairness of its acts as arbiter. COCOFED, et al. estimate
shares to treasury shares will result in a change in the The CIIF companies remain sequestered companies; the
that the value of the SMC shares given to PCGG as arbitration
status of the sequestered shares in that: shares of stock in these companies and in the UCPB remain
fee which allegedly is not deserved, can run
to P1,966,635,000.00.77 This is a serious allegation and the sequestered. If the UCPB shares and the CIIF companies (and,
1. When the SMC converts these common shares to treasury Sandiganbayan cannot be charged with grave abuse of therefore, their assets and properties) are adjudged to have
stock, it is converting those outstanding shares into the discretion when it ordered that SMC should been 'ill-gotten' and 'crony-owned,' then all the sequestered
corporation's property for which reason treasury shares do be temporarily dispossessed of the subject treasury properties, including the SMC shares and the resulting
not earn dividends. shares and that SMC should pay their dividends while dividends will go to the government; otherwise, the CIIF
the Compromise Agreement involving them is still companies will go to their registered stockholders, i.e.,
under question. allegedly the coconut farmers, and the debts of the CIIF
2. The retained dividends which would have accrued to
companies to the UCPB will have been duly paid or
those shares if converted to treasury would go into the
diminished. The period of sequestration will not have been
corporation and enhance the corporation as a whole. The Petitioners cannot rely on the case of First Phil. Holdings
unduly prejudicial to these corporations or to the coconut
enhancement to the specific sequestered shares, however, Corp. vs. Sandiganbayan78 to justify their insistence that
farmers.
would be only to the extent aliquot in relation to all the other the P500 million payment made by Soriano III should be
outstanding SMC shares. validated. They contend that the rules encouraging amicable
settlement in civil cases should apply to cases involving Furthermore, if the debts of the CIIF companies to the UCPB
sequestered properties.79 In First Phil. Holdings, this Court had remained unpaid or unserviced at all, the bank itself
3. By converting the 26.45 million shares of stock into
gave due course to the petition and ordered the (which is also heavily sequestered) would also suffer since it
treasury shares, the SMC has altered not only the voting
Sandiganbayan to approve the PCGG Resolution lifting the would, according to the UCPB, be violating the instructions of
power of those shares of stock since treasury shares do not
sequestration of MERALCO shares. We noted that the Republic the Monetary Board (MB) thereon (p. 546, Record III).
vote, but the SMC will have actually enhanced the voting
of the Philippines has agreed to settle the controversy and the Compliance with the MB's instructions would save the UCPB
strength of the other outstanding shares of stock to the
from punitive action from the Central Bank.
extent that these 26.45 million shares no longer vote. 72

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The release of the dividends in this case would, therefore, Unless, therefore, the right of Neptunia, Andres Soriano, III RE: ISSUE Of INTERVENTION OF COCOFED, ET AL. IN CASE NO.
protect the contingent rights of the coconut farmers as well and the Anscor-Hagedorn Securities, Inc. to these 26.45 0102
as of the Republic in the UCPB itself. After all, nobody else is
million shares shall have been transferred to the SMC, the
in contention for the benefits resulting from the payment of SMC cannot be deemed to have 'reacquired' these shares.
We also affirm the resolution of the Sandiganbayan allowing
the debts of the CIIF companies except for the Government They would remain co-owned by all four (4) entities.
the intervention of COCOFED, et al. in Civil Case No. 0102. It
by reason of the sequestrations imposed and the registered
is the posture of the petitioners that intervention is improper
stockholders thereof. Nobody else would suffer the
The SMC Group's claim, therefore, that these 26.45 million since Case No. 0102 has already been withdrawn as of July 4,
consequences if the SMC shares owned by the CIIF companies
shares are now Treasury Shares is unfounded. 1991. They hinge the right to withdraw the Joint Petition to
were seized by the UCPB and/or the UCPB became impaired
approve their Compromise Agreement on section 1, Rule 17 of
should the heavy debts of the CIIF companies not be serviced
the Rules of Court.84 We do not agree.
or partially paid. But even if, indeed, these shares are treasury shares, they
remain sequestered so that any movement of these shares
cannot be of any permanent character that will alter their First. The right of COCOFED, et al. to intervene in cases
2. On the other hand, the SMC Group has not justified its
being sequestered shares and, therefore, in 'custodia legis,' involving these SMC shares has long been recognized by this
desire to retain the custody of the 25.45 million sequestered
that is to say, under the control and disposition of this Court. Court. In Soriano III v. Yuzon,85 we ruled:
shares of stock, which it had converted to Treasury Shares
despite sequestration, and to retain the dividends due
thereon, on its own merits. It must finally be said that the conversion of the 26.45 (or "x x x
25.45) million shares by the SMC Group into Treasury Shares
is of the SMC Group's own making and the SMC Group cannot
The SMC Group's primary justification for non-compliance with The Philippine Coconut Producers Federation (COCOFED) also
perform acts that will, by its own say-so, take property away
the Resolution of this Court requiring it to turn over the came into the picture. A Manifestation dated March 15, 1988
from 'custodia legis.'
certificates of stock for the 25.45 million sequestered shares was filed in its behalf by its President, Ma. Clara Lobregat. The
as well as the cash dividends already accrued thereon is the Manifestation contained a discussion of the laws passed (and
fact that the shares of stock have allegedly now become The position taken by the SMC Group here is self-serving and the official action taken pursuant thereto) establishing the
Treasury Shares. unacceptable. It is also contrary to jurisprudence." 81 coconut levy and providing for the management and
utilization of the funds thereby generated. It advocated the
thesis that the question of whether or not the investments of
The SMC Group, however, forgets two things: The claim of petitioners to fairness hardly impresses. It is
the coconut levy fund constitute public property, essentially
planted on the assumption that their purchase of the subject
involves issues of fact and law which should be resolved in
shares is above board. The assumption begs the question for
'(a) Under the Corporation Code 'Treasury shares are shares of the first instance by a trial court of competent jurisdiction at a
the Sandiganbayan has yet to decide the real ownership of
stock which have been issued and fully paid for, but hearing on the merits, and the COCOFED should be conceded
the subject shares, i.e., whether or not they are part of the
subsequently reacquired by, the issuing corporation by the right to demonstrate at such a hearing that the coconut
alleged illegal wealth of former President Marcos and his
purchase, redemption, donation or through some lawful farmers, through the so-called CIIF companies, and not Mr.
"cronies." Nor have petitioners shown that they will suffer a
means . . .' (Sec. 9, B.P. Blg. 68, Corporation Code). These Cojuangco, Jr. or any of his companies, are the beneficial
legal prejudice if they deliver the shares and the dividends
26.45 million shares of stock or any portion thereof can, owners of the disputed block of SMC shares. Alternatively, the
thereon to the PCGG. It need not be stressed that in the event
therefore, become Treasury Shares, i.e., property of the San COCOFED prayed that it be given the opportunity to
the petitioners are found to be the lawful owners of these
Miguel Corporation, only if the sale between the UCPB Group substantiate the points it thus raises in G.R. No. 74910, or in
shares, they will be awarded the cash and stock dividends
and the SMC Group is allowed; otherwise these shares cannot Civil Case No. 13865 of the Regional Trial Court at Makati, or
which have accrued thereon. We agree with the conclusion of
even begin to be deemed to have been 're-acquired by the in Civil Case No. 0033 of the Sandiganbayan entitled 'Republic
the Sandiganbayan in its assailed Resolution of March 18,
issuing corporation,' i.e., the San Miguel Corporation; v. Eduardo Cojuangco, Jr.. et al.,' or in any other case which
1992 that "the SMC Group has not justified its desire to retain
may hereafter be filed in litigation of the issues." 86
the custody of the 25.45 million sequestered shares of stock,
(b) Even then, under the AGREEMENT between the UCPB which it had converted to treasury shares despite
Group and the SMC Group on March 26, 1986 for the sale of sequestration, and to retain the dividends due thereon, on its In said case, we dismissed all the actions 87 brought to us,
33.1 million shares of SMC, the buyers were not only the San own merits."82 directed the dismissal of cases pending before the Regional
Miguel Corporation but also Andres Soriano, III, the Neptunia Trial Courts and Securities and Exchange Commission, and
Corporation Limited of Hongkong and the Anscor-Hagedorn ruled that:
More unimpressive is petitioners' submission that the
Securities, Inc. Under the letter of the PCGG Commissioner
"delivery of the shares to the PCGG may create legal
Ramon Diaz dated May 19, 1986 (item No. 6, supra), the
problems and may give an impression that these shares are "This dismissal is without prejudice to the assertion and
Corporate Secretary of the San Miguel Corporation was
outstanding and may be sold and transferred, when under the ventilation before the Sandiganbayan by the parties of their
forbidden from recording the transfer, conveyance, and
law, all that can be done is for SMC to reissue the shares respective claims by such appropriate modes as are
encumbrance of these shares without the PCGG's approval.
pursuant to procedures mandated by the applicable prescribed by law. x x x"88
This was by virtue of the PCGG's powers under Sec. 2 of E.O.
laws."83 Such fear is clearly unfounded and needs no
No. 2.'
elaborate refutation.

CORPORATION LAW: 7. captial structure Page 66 of 201

Second. We again emphasize that petitioners and the UCPB point, defendant has hardly been exposed to any kind of 'Sec. 2. Intervention - A person may, before or during a trial
Group voluntarily submitted to and invoked the jurisdiction of damage or prejudice, hence, the plaintiff is unilaterally be permitted by the court, in its discretion, to intervene in an
the Sandiganbayan when they filed their Joint Petition for allowed to withdraw his complaint. In the cases at bar, before action, if he has legal interest in the matter of litigation, or in
Approval of the Compromise Agreement and Amicable the petitioners and the UCPB Group can file their the success of either of the parties, or an interest against
Settlement. The Sandiganbayan then immediately Manifestation of Withdrawal of Joint Petition for Approval of both, or when he is so situated as to be adversely affected by
exercised its jurisdiction as can be gleaned from the Compromise Agreement and Amicable Settlement, COCOFED, a distribution or other disposition of property in the custody of
numerous hearings conducted and orders it issued resolving et al. have already filed their Opposition in Intervention and the court or an officer thereof.'
various incidents of the case. Among others, it ordered Compulsory Counter-Petition and Counterclaim for Damages.
persons and entities with known legal interest on the subject In the same vein, the Republic, thru the OSG, has already filed
xxx xxx xxx
shares to file their comments on the Joint Petition. This order its Opposition. These pleadings of COCOFED, et al. and the
was not seasonably challenged by the Republic assail the legality of the Compromise Agreement.
petitioners. Pursuant thereto, COCOFED, et al., claiming They can be deemed as answers to the Joint Petition, hence, It should be borne in mind that the real subject matter of this
beneficial interests on the shares, intervened. Mr. Eduardo petitioners can no longer unilaterally withdraw their Joint case is the coconut levy fund of which the SMC shares in
Cojuangco, Jr. also manifested his intent to intervene. The Petition. question are claimed to be but a part. xxx
right of these persons and entities to have their claims
heard and resolved cannot be defeated by the To start with, the coconut levy fund came from levies imposed
Fourth. Petitioners further contend that COCOFED, et al.
petitioners by the simple act of withdrawing their Joint upon the sale of copra or equivalent coconut product that was
cannot intervene because Case No. 0102 is not an action or a
Petition for Approval of Compromise Agreement and deducted from the price of copra which, as claimed by
suit and they did not implead any adverse party and set forth
immediately implementing its provisions. To allow movants-farmers, would have gone to them. Thus, starting
no claims. Petitioners' contention cannot merit the assent of
the unilateral withdrawal is to allow the petitioners to make 1971, under the Coconut Investment Fund (CIF), a levy of
the Court. Regardless of its nature as an action or suit, the
a plaything of the jurisdiction of the Sandiganbayan, submit P0.55 was imposed on the first domestic sale of every 100
fault of the Joint Petition precisely lies in the attempt to
to it when it is in their favor and repudiate it when it kilograms of copra or equivalent product. In 1973, under the
bypass parties with legitimate interests on the subject shares.
threatens to turn against their interest. Jurisdiction is Coconut Consumers Stabilization Fund (CCSF), a levy of
The existence of these parties is known to the petitioners yet
vested by law and the all too familiar rule is that once a court P15.00 on the first sale of every 100 kilograms of copra
they were not impleaded. Their failure to be impleaded is bad
has assumed jurisdiction over a case, its jurisdiction shall resecada or equivalent product was imposed. From the CCSF
enough but worse still is petitioners' submission that since
continue until the case is terminated.89 was established yet another fund, the Coconut Industry
they were not impleaded, ergo, they cannot intervene. It is
now a musty principle of justice that a right cannot arise from Development Fund (CIDF) whose initial capital of P100 million
Third. Petitioners cannot invoke section 1, Rule 17 of the a wrong. Moreover, the Sandiganbayan did not treat the Joint and regular allotment equivalent to P.20 per kilogram of copra
Rules of Court which provides "that a complaint may be Petition as an "action or suit" but as a mere incident of Case resecada or its equivalent were contributed by the CCSF. (It is
dismissed by the plaintiff by filing a notice of dismissal at any No. 0033. In any event, section 1, Rule 19 of the Rules of from this Coconut Industry Investment Fund (CIIF) that the so-
time before service of the answer or of a motion for summary Court provides the rule on who can intervene, viz: "A person called CIIF Companies were later established). From 1981,
judgment." The provision contemplates a complaint where who has a legal interest in the matter in litigation, or in the under the Coconut Industry Stabilization Fund which replaced
there is a plaintiff and a defendant with real conflicting success of either of the parties, or an interest against both, or the CCSF and CIDF, a levy of P50.00 for every 100 kilos of
interests. The cases at bar, however, are different. They is so situated as to be adversely affected by a distribution or copra resecada or equivalent product delivered to exporters
started as a Joint Petition for Approval of Compromise other disposition of property in the custody of the court or of and copra users was collected and apportioned among the
Agreement and Amicable Settlement. Known persons and an officer thereof, may, with leave of court, be allowed to CIDF, COCOFED, PCA and the UCPB.
entities claiming adverse interests on the subject shares were intervene in the action." The legal interest of COCOFED, et al.
not impleaded. In other words, no party that can assail the which justifies their intervention is extensively discussed in Through the years, part of the coconut levy fund was used
validity of the Compromise Agreement that involves billions of the impugned resolution of the Sandiganbayan, viz: and applied to various projects and invested or converted into
pesos and substantial state interests was impleaded in any different assets, properties and businesses. xxx
capacity. Yet, petitioners are aware that the subject shares of
"In all fairness, the motion to intervene filed by COCOFED, et
stock are sequestered and their ownership is still under
al. must be granted for the following reasons: xxx [T]he coconut farmers and producers do have a legal
litigation in Case No. 0033. The attempt to bypass these
interest in the SMC shares.1wphi1 That legal interest
persons and entities with interests in the subject shares is
consists of their alleged beneficial ownership of the San
hardly tenable and the withdrawal of the petition and its 1. The coconut planters and producers represented by
Miguel shares, they being the 'registered owners and/or
immediate implementation when they opposed it makes COCOFED do have a legal interest in the matter of litigation
and are so situated as to be adversely affected by the beneficial owners of all, or at least not less than fifty-one
petitioners' posture doubly untenable.
disposition of the sequestered shares of stock subject matter percent (51%), of the capital stock of the CIIF Companies'
of the compromise agreement. some of which wholly own the so-called CIIF Copra Trading
There is another reason why petitioners cannot rely on Companies and the CIIF Holding Companies which are the
section 1, Rule 17 of the Rules of Court. This provision allows registered stockholders of the SMC shares. (p. 3, COCOFED'S
the plaintiff to withdraw his complaint before defendant has The rule on intervention (section 2, Rule 12 of the Rules of Omnibus Class Action xxx). Their claim is based on the
answered it or filed a motion for summary judgment. In fine, Court) states: specific provisions of Section 5, Article III, PD 1468, the
before the defendant has pleaded to the complaint. At that

CORPORATION LAW: 7. captial structure Page 67 of 201

pertinent portion of which states: 'Said fund (Coconut by certiorari nor controlled by mandamus save in instances jurisdiction over all cases regarding 'the funds, moneys,
Consumers Stabilization Fund and the Coconut Industry where such discretion has been so exercised in an arbitrary or assets and properties illegally acquired or misappropriated by
Development Fund) and the disbursements thereof as herein capricious manner.93 former President Ferdinand E. Marcos, Mrs. Imelda Romualdez
authorized for the benefit of the coconut farmers shall be Marcos, their close relatives, subordinates, business
owned by them in their private capacities xxx.' This associates, dummies, agents or nominees.'" 95 (emphasis
Nor are we impressed by petitioners' submission that
Presidential Decree has been assailed by the PCGG as a supplied)
COCOFED, et al. should pay a docket fee for their counter-
'transgression of the basic limitation of the licit exercise of the
petition and counterclaim for damages. We note that it was
state's taxing and police powers', but this is a legal question
the Sandiganbayan itself that ordered COCOFED and the This ruling has stronger application in the cases at bar
yet to be resolved.
other defendants in Civil Case No. 0033 to give their considering that COCOFED, et al. have challenged the legality
comment to the Joint Petition for Approval of Compromise of the consent given by PCGG to the Compromise Agreement
It has been argued that COCOFED, et al. should not be Agreement, etc. In response to this order, COCOFED, et al. on various grounds but especially in light of the "arbitration
allowed to intervene because they have no actual, material, filed their Opposition-in-Intervention and Compulsory Counter- fee" it received in the form of SMC shares of substantial
direct or immediate interest in the subject matter. To be Petition and Counterclaim for Damages. COCOFED, et al. value. COCOFED, et al.'s position that the Compromise
bound entirely by the form and nature of these assets as alleged that the Compromise Agreement is illegal and its Agreement is a sell out of its interest is also a repudiation of
shares of stock subject to the special laws, rules and by-laws approval would bring damages to themselves. In effect, the so called "business judgment" of UCPB which petitioners
of corporations, is to adopt an overly strict, narrow and COCOFED, et al. alleged a compulsory counterclaim for which insist should bind COCOFED, et al.
myopic approach. It has already been alleged that these they need not pay any docket fee.
shares constitute ill-gotten wealth derived from the coconut
A final word. The cases at bar involve shares of stock
levy fund. The form into which part of the coco-levy fund has
Fifth. Petitioners cannot insist on their right to have their estimated to be worth more than P9 billion now. These shares
been converted is not crucial or decisive; otherwise, it would
Compromise Agreement approved on the ground that it bears were sequestered in 1986 and the government filed Civil Case
be so easy to defeat the recovery of ill-gotten wealth by
the imprimatur of the PCGG. To be sure, the consent of the No. 0033 in 1987 to determine whether they are part of the
simply converting those funds, assets and properties from
PCGG is a factor that should be considered in the approval or alleged ill-gotten wealth of former President Marcos and his
one form to another and using legal technicalities to thwart all
disapproval of the subject Compromise Agreement but it is "cronies." We did not set aside the impugned resolutions of
attempts to reach them. The clear intention of the law is to
not the only factor. the Sandiganbayan in the cases at bar for they constitute
recover all assets and properties illegally acquired by former
cautious moves to preserve the character of the sequestered
President Marcos, et al., in whatever form they may be, such
94 shares pending determination of their true owners. Be that as
as, to quote the exact wording of Executive Order No. 2, 'in In Republic vs. Sandiganbayan, this Court had the
it may, we note that Civil Case No. 0033 has remained
the form of bank accounts, deposits, trust accounts, shares occasion to categorically draw the distinctions between (i) the
unresolved by the Sandiganbayan. The delay is no longer
of stocks, buildings, shopping centers, condominium, Sandiganbayan's exclusive jurisdiction to determine the
tolerable for it locks in billions of pesos which could well rev-
mansions, residences, estates, and other kinds of real and judicial question of ownership over sequestered properties
up our sputtering economy. Worse, it constitutes another
personal properties in the Philippines and in various countries and (ii) the incidents of the exercise by the PCGG of its purely
embarassing evidence of snail-paced justice, so long
of the world.' (2nd Whereas Clause, Executive Order No. 2) administrative and executive functions as conservator of
lamented but mostly by our lips alone. The Sandiganbayan
sequestered properties, as follows:
must not be the burial ground of cases of far-reaching
Moreover, at this stage of the proceedings, it has not yet been importance to our people. It is time for it to write finis to Civil
established who the real owners of the SMC shares are, but if "In other words, neither in Pea nor in any other case did this Case No. 0033.
we bar movants from the start, and if it should turn out in the Court ever say that orders of sequestration, seizure or take-
end that they are the beneficial owners and that the over of the PCGG or other acts done in the exercise of its
IN VIEW WHEREOF, the petitions in G.R. Nos. 104637-38
Compromise Agreement did in fact prejudice their rights, then so-called 'primary administrative jurisdiction' are
and in G.R. No. 109797 are DISMISSED. No costs.
we shall have done them an irreparable injustice. Fairness and beyond judicial review, or beyond the power of the courts to
prudence dictate that -- at the risk of the inconvenience of reverse or nullify. It is true, of course, that those acts are
having one more group to be heard on the matter -- We entitled to much respect, the findings and conclusions SO ORDERED.
exercise our discretion in favor of allowing them to motivating and justifying them should be accorded great
intervene."90 weight, 'like the factual findings of the trial and appellate
courts,' and such findings and conclusions of the PCGG may
not be superseded and substituted by the judgment of the
Under the rules on intervention, the allowance or
courts. But obviously the principle does not and cannot
disallowance of a motion to intervene is addressed to the
91
sanction arbitrary, whimsical, capricious or oppressive
sound discretion of the court. Discretion is a faculty of a
exercise of power and discretion on the part of the PCGG, or
court or an official by which he may decide a question
92
its performance of acts without or in excess of its authority
either way, and still be right. The permissive tenor of the
and competence under the law. And in accordance with
rules shows an intention to give to the court the full measure
applicable law, review of those acts, and correction or
of discretion in permitting or disallowing the intervention. The
invalidation thereof, when called for, can only be undertaken
discretion of the court, once exercised, cannot be reviewed
by the Sandiganbayan, which has exclusive original

CORPORATION LAW: 7. captial structure Page 68 of 201

 modification, the decision of the SEC en banc, dated square-meter lot and a 151 square-meter lot. Hence, they felt
September 11, 1998; and (3) motion for issuance of writ of they were justified in setting aside their Pre-Subscription
execution of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Agreement with the Ongs who allegedly refused to comply
Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu with their undertakings.
(the Tius) of our February 1, 2002 Decision.
In their defense, the Ongs said that David S. Tiu and Cely Y.
A brief recapitulation of the facts shows that: Tiu had in fact assumed the positions of Vice-President and
Treasurer of FLADC but that it was they who refused to
In 1994, the construction of the Masagana Citimall in
comply with the corporate duties assigned to them. It was the
Pasay City was threatened with stoppage and
contention of the Ongs that they wanted the Tius to sign the
incompletion when its owner, the First Landlink Asia
checks of the corporation and undertake their management
Development Corporation (FLADC), which was owned by
duties but that the Tius shied away from helping them
the Tius, encountered dire financial difficulties. It was
manage the corporation. On the issue of office space, the
heavily indebted to the Philippine National Bank (PNB) for
Ongs pointed out that the Tius did in fact already have
P190 million. To stave off foreclosure of the mortgage on
existing executive offices in the mall since they owned it
the two lots where the mall was being built, the Tius
100% before the Ongs came in. What the Tius really wanted
invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L.
were new offices which were anyway subsequently provided
Ong, William T. Ong and Julia Ong Alonzo (the Ongs), to
to them. On the most important issue of their alleged failure
invest in FLADC. Under the Pre-Subscription Agreement
to credit the Tius with the FLADC shares commensurate to the
they entered into, the Ongs and the Tius agreed to
Tius' property contributions, the Ongs asserted that, although
maintain equal shareholdings in FLADC: the Ongs were to
the Tius executed a deed of assignment for the 1,902.30
subscribe to 1,000,000 shares at a par value of P100.00
square-meter lot in favor of FLADC, they (the Tius) refused to
each while the Tius were to subscribe to an additional
pay P 570,690 for capital gains tax and documentary stamp
549,800 shares at P100.00 each in addition to their
tax. Without the payment thereof, the SEC would not approve
already existing subscription of 450,200 shares.
the valuation of the Tius' property contribution (as opposed to
Furthermore, they agreed that the Tius were entitled to
cash contribution). This, in turn, would make it impossible to
nominate the Vice-President and the Treasurer plus five
secure a new Transfer Certificate of Title (TCT) over the
directors while the Ongs were entitled to nominate the
property in FLADC's name. In any event, it was easy for the
President, the Secretary and six directors (including the
Tius to simply pay the said transfer taxes and, after the new
chairman) to the board of directors of FLADC. Moreover,
TCT was issued in FLADC's name, they could then be given
the Ongs were given the right to manage and operate the
the corresponding shares of stocks. On the 151 square-meter
mall.
property, the Tius never executed a deed of assignment in
Accordingly, the Ongs paid P100 million in cash for their favor of FLADC. The Tius initially claimed that they could not
subscription to 1,000,000 shares of stock while the Tius as yet surrender the TCT because it was "still being
committed to contribute to FLADC a four-storey building and reconstituted" by the Lichaucos from whom the Tius bought it.
two parcels of land respectively valued at P20 million (for The Ongs later on discovered that FLADC had in reality owned
200,000 shares), P30 million (for 300,000 shares) and P49.8 the property all along, even before their Pre-Subscription
million (for 49,800 shares) to cover their additional 549,800 Agreement was executed in 1994. This meant that the 151
G.R. No. 144476 April 8, 2003 square-meter property was at that time already the corporate
stock subscription therein. The Ongs paid in another P70
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA million3 to FLADC and P20 million to the Tius over and above property of FLADC for which the Tius were not entitled to the
L. ONG, WILLIAM T. ONG, WILLIE T. ONG, and JULIE ONG their P100 million investment, the total sum of which (P190 issuance of new shares of stock.
ALONZO, petitioners, vs. DAVID S. TIU, CELY Y. TIU, MOLY million) was used to settle the P190 million mortgage The controversy finally came to a head when this case was
YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, indebtedness of FLADC to PNB. commenced4 by the Tius on February 27, 1996 at the
LOURDES C. TIU, INTRALAND RESOURCES
The business harmony between the Ongs and the Tius in Securities and Exchange Commission (SEC), seeking
DEVELOPMENT CORP., MASAGANA TELAMART, INC.,
FLADC, however, was shortlived because the Tius, on confirmation of their rescission of the Pre-Subscription
REGISTER OF DEEDS OF PASAY CITY, and the
February 23, 1996, rescinded the Pre-Subscription Agreement. Agreement. After hearing, the SEC, through then Hearing
SECURITIES AND EXCHANGE COMMISSION, respondents.
The Tius accused the Ongs of (1) refusing to credit to them Officer Rolando G. Andaya, Jr., issued a decision on May 19,
x-----------------------------x the FLADC shares covering their real property contributions; 1997 confirming the rescission sought by the Tius, as follows:
(2) preventing David S. Tiu and Cely Y. Tiu from assuming the
RESOLUTION WHEREFORE, judgment is hereby rendered confirming the
positions of and performing their duties as Vice-President and
rescission of the Pre-Subscription Agreement, and
CORONA, J.: Treasurer, respectively, and (3) refusing to give them the
consequently ordering:
office spaces agreed upon.
Before us are the (1) motion for reconsideration, dated March (a) The cancellation of the 1,000,000 shares subscription
15, 2002, of petitioner movants Ong Yong, Juanita Tan Ong, According to the Tius, the agreement was for David S. Tiu and of the individual defendants in FLADC;
Wilson Ong, Anna Ong, William Ong, Willie Ong and Julia Ong Cely S. Tiu to assume the positions and perform the duties of
Alonzo (the Ongs); (2) motion for partial reconsideration, Vice-President and Treasurer, respectively, but the Ongs (b) FLADC to pay the amount of P170,000,000.00 to the
dated March 15, 2002, of petitioner movant Willie Ong prevented them from doing so. Furthermore, the Ongs refused individual defendants representing the return of their
seeking a reversal of this Court's Decision,1 dated February 1, to provide them the space for their executive offices as Vice- contribution for 1,000,000 shares of FLADC;
2002, in G.R. Nos. 144476 and 144629 affirming with President and Treasurer. Finally, and most serious of all, the (c) The plaintiffs to submit with (sic) the Securities and
modification the decision2 of the Court of Appeals, dated Ongs refused to give them the shares corresponding to their Exchange Commission amended articles of incorporation
October 5, 1999, which in turn upheld, likewise with property contributions of a four-story building, a 1,902.30 of FLADC to conform with this decision;

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 (d) The defendants to surrender to the plaintiffs TCT Nos. 1) P45,020,000.00 original cash contribution for they did not commit a substantial and fundamental breach of
132493, 132494, 134066 (formerly 15587), 135325 and 450,200 shares in First Landlink Asia Development their agreement since they did not prevent the Tius from
134204 and any other title or deed in the name of FLADC, Corporation at a par value of P100.00 per share; assuming the positions of Vice-President and Treasurer of
failing in which said titles are declared void; FLADC, and that the failure to credit the 300,000 shares
2) A four-storey building described in Transfer
corresponding to the 1,902.30 square-meter property covered
(e) The Register of Deeds to issue new certificates of titles Certificate of Title No. 15587 in the name of
by TCT No. 134066 (formerly 15587) was due to the refusal of
in favor of the plaintiffs and to cancel the annotation of Intraland Resources and Development Corporation
the Tius to pay the required transfer taxes to secure the
the Pre-Subscription Agreement dated 15 August 1994 on valued at P20,000,000.00 for 200,000 shares in First
approval of the SEC for the property contribution and,
TCT No. 134066 (formerly 15587); Landlink Asia Development Corporation at a par
thereafter, the issuance of title in FLADC's name. They also
value of P100.00 per share;
(f) The individual defendants, individually and collectively, argued that the liquidation of FLADC may not legally be
their agents and representatives, to desist from exercising 3) A 1,902.30 square-meter parcel of land covered ordered by the appellate court even for so called "practical
or performing any and all acts pertaining to stockholder, by Transfer Certificate of Title No. 15587 in the considerations" or even to prevent "further squabbles and
director or officer of FLADC or in any manner intervene in name of Masagana Telamart, Inc. valued at numerous litigations," since the same are not valid grounds
the management and affairs of FLADC; P30,000,000.00 for 300,000 shares in First Landlink under the Corporation Code. Moreover, the Ongs bewailed the
Asia Development Corporation at a par value of failure of the CA to grant interest on their P70 million and P20
(g) The individual defendants, jointly and severally, to million advances to FLADC and David S. Tiu, respectively, and
P100.00 per share.
return to FLADC interest payment in the amount of to award costs and damages.
P8,866,669.00 and all interest payments as well as any 2) Whatever remains of the assets of the First Landlink
payments on principal received from the P70,000,000.00 Asia Development Corporation and the management In their petition docketed as G.R. No. 144629, Tiu et al. vs.
inexistent loan, plus the legal rate of interest thereon from thereof is (sic) hereby ordered transferred to the Tiu Ong et al., the Tius, on the other hand, contended that the
the date of their receipt of such payment until fully paid; Group. rescission should have been limited to the restitution of the
parties' respective investments and not the liquidation of
(h) The plaintiff David Tiu to pay individual defendants the 3) First Landlink Asia Development Corporation is hereby FLADC based on the erroneous perception by the court that:
sum of P20,000,000.00 representing his loan from said ordered to pay the amount of P70,000,000.00 that was the Masagana Citimall was threatened with incompletion
defendants plus legal interest from the date of receipt of advanced to it by the Ong Group upon the finality of this since FLADC was in financial distress; that the Tius invited the
such amount. decision. Should the former incur in delay in the payment Ongs to invest in FLADC to settle its P190 million loan from
thereof, it shall pay the legal interest thereon pursuant to PNB; that they violated the Pre-Subscription Agreement when
SO ORDERED.5
Article 2209 of the New Civil Code. it was the Lichaucos and not the Tius who executed the deed
On motion of both parties, the above decision was partially
4) The Tius are hereby ordered to pay the amount of of assignment over the 151 square-meter property
reconsidered but only insofar as the Ongs' P70 million was
P20,000,000.00 loaned them by the Ongs upon the finality commensurate to 49,800 shares in FLADC thereby failing to
declared not as a premium on capital stock but an advance
of this decision. Should the former incur in delay in the pay the price for the said shares; that they did not turn over
(loan) by the Ongs to FLADC and that the imposition of
payment thereof, it shall pay the legal interest thereon to the Ongs the entire amount of FLADC funds; that they were
interest on it was correct.6 diverting rentals from lease contracts due to FLADC to their
pursuant to Article 2209 of the New Civil Code.
Both parties appealed7 to the SEC en banc which rendered a 9
own MATTERCO account; that the P70 million paid by the
SO ORDERED. Ongs was an advance and not a premium on capital; and that,
decision on September 11, 1998, affirming the May 19, 1997
decision of the Hearing Officer. The SEC en banc confirmed An interesting sidelight of the CA decision was its description by rescinding the Pre-Subscription Agreement, they wanted to
the rescission of the Pre-Subscription Agreement but reverted of the rescission made by the Tius as the "height of wrestle away the management of the mall and prevent the
to classifying the P70 million paid by the Ongs as premium on ingratitude" and as "pulling a fast one" on the Ongs. The CA Ongs from enjoying the profits of their P190 million
capital and not as a loan or advance to FLADC, hence, not moreover found the Tius guilty of withholding FLADC funds investment in FLADC.
entitled to earn interest.8 from the Ongs and diverting corporate income to their own On February 1, 2002, this Court promulgated its Decision (the
MATTERCO account.10 These were findings later on affirmed in subject of the instant motions), affirming the assailed decision
On appeal, the Court of Appeals (CA) rendered a decision on
our own February 1, 2002 Decision which is the subject of the of the Court of Appeals but with the following modifications:
October 5, 1999, thus:
instant motion for reconsideration.11
WHEREFORE, the Order dated September 11, 1998 issued 1. the P20 million loan extended by the Ongs to the Tius
But there was also a strange aspect of the CA decision. The shall earn interest at twelve percent (12%) per annum to
by the Securities and Exchange Commission En Banc in
CA concluded that both the Ongs and the Tius were in pari be computed from the time of judicial demand which is
SEC AC CASE NOS. 598 and 601 confirming the rescission
delicto (which would not have legally entitled them to from April 23, 1996;
of the Pre-Subscription Agreement dated August 15, 1994
rescission) but, "for practical considerations," that is, their
is hereby AFFIRMED, subject to the following 2. the P70 million advanced by the Ongs to the FLADC
inability to work together, it was best to separate the two
MODIFICATIONS: shall earn interest at ten percent (10%) per annum to be
groups by rescinding the Pre-Subscription Agreement,
1. The Ong and Tiu Groups are ordered to liquidate First returning the original investment of the Ongs and awarding computed from the date of the FLADC Board Resolution
Landlink Asia Development Corporation in accordance practically everything else to the Tius. which is June 19, 1996; and
with the following cash and property contributions of the 3. the Tius shall be credited with 49,800 shares in FLADC
Their motions for reconsideration having been denied, both
parties therein. for their property contribution, specifically, the 151 sq. m.
parties filed separate petitions for review before this Court.
(a) Ong Group P100,000,000.00 cash contribution for parcel of land.
In their petition docketed as G.R. No. 144476, Ong et al. vs.
one (1) million shares in First Landlink Asia This Court affirmed the fact that both the Ongs and the Tius
Tiu et al., the Ongs argued that the Tius may not properly
Development Corporation at a par value of P100.00 per violated their respective obligations under the Pre-
avail of rescission under Article 1191 of the Civil Code
share; Subscription Agreement. The Ongs prevented the Tius from
considering that the Pre-Subscription Agreement did not
(b) Tiu Group: provide for reciprocity of obligations; that the rights over the assuming the positions of Vice-President and Treasurer of the
subject matter of the rescission (capital assets and corporation. On the other hand, the Decision established that
properties) had been acquired by a third party (FLADC); that the Tius failed to turn over FLADC funds to the Ongs and that

CORPORATION LAW: 7. captial structure Page 70 of 201

the Tius diverted rentals due to FLADC to their MATTERCO agreement. At any rate, the Ongs claim that it was the Tius This is not the first time that this Court has reversed itself on
account. Consequently, it held that rescission was not who were guilty of fundamental violations in failing to remit a motion for reconsideration. In Philippine Consumers
possible since both parties were in pari delicto. However, this funds due to FLADC and diverting the same to their Foundation, Inc. vs. National Telecommunications
Court agreed with the Court of Appeals that the remedy of MATTERCO account. Commission,13 this Court, through then Chief Justice Felix V.
specific performance, as espoused by the Ongs, was not Makasiar, said that its members may and do change their
The Ongs also allege that, in view of the findings of the Court
practical and sound either and would only lead to further minds, after a re-study of the facts and the law, illuminated
that both parties were guilty of violating the Pre-Subscription
"squabbles and numerous litigations" between the parties. by a mutual exchange of views. 14 After a thorough re-
Agreement, neither of them could resort to rescission under
examination of the case, we find that our Decision of February
On March 15, 2002, the Tius filed before this Court a Motion the principle of pari delicto. In addition, since the cash and
1, 2002 overlooked certain aspects which, if not corrected,
for Issuance of a Writ of Execution on the grounds that: (a) other contributions now sought to be returned already belong
will cause extreme and irreparable damage and prejudice to
the SEC order had become executory as early as September to FLADC, an innocent third party, said remedy may no longer
the Ongs, FLADC and its creditors.
11, 1998 pursuant to Sections 1 and 12, Rule 43 of the Rules be availed of under the law.
of Court; (b) any further delay would be injurious to the rights The procedural rule on pro-forma motions pointed out by the
On their second point (assuming rescission to be proper, the
of the Tius since the case had been pending for more than six Tius should not be blindly applied to meritorious motions for
Ongs should be given their proportionate share of the mall),
years; and (c) the SEC no longer had quasi-judicial jurisdiction reconsideration. As long as the same adequately raises a
movants Ong vehemently take exception to the second item
under RA 8799 (Securities Regulation Code). The Ongs filed valid ground15 (i.e., the decision or final order is contrary to
in the dispositive portion of the questioned Decision insofar as
their opposition, contending that the Decision dated February law), this Court has to evaluate the merits of the arguments
it decreed that whatever remains of the assets of FLADC and
1, 2002 was not yet final and executory; that no good reason to prevent an unjust decision from attaining finality.
the management thereof (after liquidation) shall be
existed to issue a warrant of execution; and that, pursuant to In Security Bank and Trust Company vs. Cuenca,16 we ruled
transferred to the Tius. They point out that the mall itself,
Section 5.2 of RA 8799, the SEC retained jurisdiction over that a motion for reconsideration is not pro-forma for the
which would have been foreclosed by PNB if not for their
pending cases involving intra-corporate disputes already reason alone that it reiterates the arguments earlier passed
timely investment of P190 million in 1994 and which is now
submitted for final resolution upon the effectivity of the said upon and rejected by the appellate court. We explained there
worth about P1 billion mainly because of their efforts, should
law. that a movant may raise the same arguments, if only to
be included in any partition and distribution. They (the Ongs)
convince this Court that its ruling was erroneous. Moreover,
Aside from their opposition to the Tius' Motion for Issuance of should not merely be given interest on their capital
the rule (that a motion is pro-forma if it only repeats the
Writ of Execution, the Ongs filed their own "Motion for investments. The said portion of our Decision, according to
arguments in the previous pleadings) will not apply if said
Reconsideration; Alternatively, Motion for Modification (of the them, amounted to the unjust enrichment of the Tius and ran
arguments were not squarely passed upon and answered in
February 1, 2002 Decision)" on March 15, 2002, raising two contrary to our own pronouncement that the act of the Tius in
the decision sought to be reconsidered. In the case at bar, no
main points: (a) that specific performance and not rescission unilaterally rescinding the agreement was "the height of
ruling was made on some of the petitioner Ongs' arguments.
was the proper remedy under the premises; and (b) that, ingratitude" and an attempt "to pull a fast one" as it would
For instance, no clear ruling was made on why an order
assuming rescission to be proper, the subject decision of this prevent the Ongs from enjoying the fruits of their P190 million
distributing corporate assets and property to the stockholders
Court should be modified to entitle movants to their investment in FLADC. It also contravenes this Court's
would not violate the statutory preconditions for corporate
proportionate share in the mall. assurance in the questioned Decision that the Ongs and Tius
dissolution or decrease of authorized capital stock. Thus, it
"will have a bountiful return of their respective investments
On their first point (specific performance and not rescission would serve the ends of justice to entertain the subject
derived from the profits of the corporation."
was the proper remedy), movants Ong argue that their motion for reconsideration since some important issues
alleged breach of the Pre-Subscription Agreement was, at Willie Ong filed a separate "Motion for Partial Reconsideration" therein, although mere repetitions, were not considered or
most, casual which did not justify the rescission of the dated March 8, 2002, pointing out that there was no violation clearly resolved by this Court.
contract. They stress that providing appropriate offices for of the Pre-Subscription Agreement on the part of the Ongs;
Going now to the merits, we resolve whether the Tius could
David S. Tiu and Cely Y. Tiu as Vice-President and Treasurer, that, after more than seven years since the mall began its
legally rescind the Pre-Subscription Agreement. We rule that
respectively, had no bearing on their obligations under the operations, rescission had become not only impractical but
they could not.
Pre-Subscription Agreement since the said obligation (to would also adversely affect the rights of innocent parties; and
provide executive offices) pertained to FLADC itself. Such that it would be highly inequitable and unfair to simply return FLADC was originally incorporated with an authorized capital
obligation arose from the relations between the said officers the P100 million investment of the Ongs and give the stock of 500,000 shares with the Tius owning 450,200 shares
and the corporation and not any of the individual parties such remaining assets now amounting to about P1 billion to the representing the paid-up capital. When the Tius invited the
as the Ongs. Likewise, the alleged failure of the Ongs to credit Tius. Ongs to invest in FLADC as stockholders, an increase of the
shares of stock in favor of the Tius for their property authorized capital stock became necessary to give each
The Tius, in their opposition to the Ongs' motion for
contributions also pertained to the corporation and not to the group equal (50-50) shareholdings as agreed upon in the Pre-
reconsideration, counter that the arguments therein are a
Ongs. Just the same, it could not be done in view of the Tius' Subscription Agreement. The authorized capital stock was
mere re-hash of the contentions in the Ongs' petition for
refusal to pay the necessary transfer taxes which in turn thus increased from 500,000 shares to 2,000,000 shares with
review and previous motion for reconsideration of the Court of
resulted in the inability to secure SEC approval for the a par value of P100 each, with the Ongs subscribing to
Appeals' decision. The Tius compare the arguments in said
property contributions and the issuance of a new TCT in the 1,000,000 shares and the Tius to 549,800 more shares in
pleadings to prove that the Ongs do not raise new issues,
name of FLADC. addition to their 450,200 shares to complete 1,000,000
and, based on well-settled jurisprudence, 12 the Ongs' present
shares. Thus, the subject matter of the contract was the
Besides, according to the Ongs, the principal objective of both motion is therefore pro-forma and did not prevent the
1,000,000 unissued shares of FLADC stock allocated to the
parties in entering into the Pre-Subscription Agreement in Decision of this Court from attaining finality.
Ongs. Since these were unissued shares, the parties' Pre-
1994 was to raise the P190 million desperately needed for
On January 29, 2003, the Special Second Division of this Court Subscription Agreement was in fact a subscription contract as
the payment of FLADC's loan to PNB. Hence, in this light, the
held oral arguments on the respective positions of the parties. defined under Section 60, Title VII of the Corporation Code:
alleged failure to provide office space for the two corporate
On February 27, 2003, Dr. Willie Ong and the rest of the
officers was no more than an inconsequential infringement. Any contract for the acquisition of unissued stock in
movants Ong filed their respective memoranda. On February
For rescission to be justified, the law requires that the breach an existing corporation or a corporation still to be
28, 2003, the Tius submitted their memorandum.
of contract should be so "substantial or fundamental" as to formed shall be deemed a subscription within the
defeat the primary objective of the parties in making the We grant the Ongs' motions for reconsideration. meaning of this Title, notwithstanding the fact that

CORPORATION LAW: 7. captial structure Page 71 of 201

 the parties refer to it as a purchase or some other can say that. Though FLADC was represented by the Tius in amendment of the Articles of Incorporation to reduce the
contract (Italics supplied). the subscription contract, FLADC had a separate juridical authorized capital stock,24(2) purchase of redeemable shares
personality from the Tius. The case before us does not by the corporation, regardless of the existence of unrestricted
A subscription contract necessarily involves the corporation
warrant piercing the veil of corporate fiction since there is no retained earnings,25 and (3) dissolution and eventual
as one of the contracting parties since the subject matter of
proof that the corporation is being used "as a cloak or cover liquidation of the corporation. Furthermore, the doctrine is
the transaction is property owned by the corporation its
for fraud or illegality, or to work injustice." 18 articulated in Section 41 on the power of a corporation to
shares of stock. Thus, the subscription contract (denominated
acquire its own shares26 and in Section 122 on the prohibition
by the parties as a Pre-Subscription Agreement) whereby the The Tius also argue that, since the Ongs represent FLADC as
against the distribution of corporate assets and property
Ongs invested P100 million for 1,000,000 shares of stock was, its management, breach by the Ongs is breach by FLADC.
unless the stringent requirements therefor are complied
from the viewpoint of the law, one between the Ongs and This must also fail because such an argument disregards the
with.27
FLADC, not between the Ongs and the Tius. Otherwise stated, separate juridical personality of FLADC.
the Tius did not contract in their personal capacities with the The distribution of corporate assets and property cannot be
The Tius allege that they were prevented from participating in
Ongs since they were not selling any of their own shares to made to depend on the whims and caprices of the
the management of the corporation. There is evidence that
them. It was FLADC that did. stockholders, officers or directors of the corporation, or even,
the Ongs did prevent the rightfully elected Treasurer, Cely Tiu,
for that matter, on the earnest desire of the court a quo "to
Considering therefore that the real contracting parties to the from exercising her function as such. The records show that
prevent further squabbles and future litigations" unless the
subscription agreement were FLADC and the Ongs alone, a the President, Wilson Ong, supervised the collection and
indispensable conditions and procedures for the protection of
civil case for rescission on the ground of breach of contract receipt of rentals in the Masagana Citimall; 19 that he ordered
corporate creditors are followed. Otherwise, the "corporate
filed by the Tius in their personal capacities will not prosper. the same to be deposited in the bank;20 and that he held on to
peace" laudably hoped for by the court will remain nothing
Assuming it had valid reasons to do so, only FLADC (and the cash and properties of the corporation. 21 Section 25 of the
but a dream because this time, it will be the creditors' turn to
certainly not the Tius) had the legal personality to file suit Corporation Code prohibits the President from acting
engage in "squabbles and litigations" should the court order
rescinding the subscription agreement with the Ongs concurrently as Treasurer of the corporation. The rationale
an unlawful distribution in blatant disregard of the Trust Fund
inasmuch as it was the real party in interest therein. Article behind the provision is to ensure the effective monitoring of
Doctrine.
1311 of the Civil Code provides that "contracts take effect each officer's separate functions.
only between the parties, their assigns and heirs" In the instant case, the rescission of the Pre-Subscription
However, although the Tius were adversely affected by the
Therefore, a party who has not taken part in the transaction Agreement will effectively result in the unauthorized
Ongs' unwillingness to let them assume their positions,
cannot sue or be sued for performance or for cancellation distribution of the capital assets and property of the
rescission due to breach of contract is definitely the wrong
thereof, unless he shows that he has a real interest affected corporation, thereby violating the Trust Fund Doctrine and the
remedy for their personal grievances. The Corporation
thereby.17 Corporation Code, since rescission of a subscription
Code, SEC rules and even the Rules of Court provide
agreement is not one of the instances when distribution of
In their February 28, 2003 Memorandum, the Tius claim that for appropriate and adequate intra-corporate
capital assets and property of the corporation is allowed.
there are two contracts embodied in the Pre-Subscription remedies, other than rescission, in situations like this.
Agreement: a shareholder's agreement between the Tius and Rescission is certainly not one of them, specially if the party Contrary to the Tius' allegation, rescission will, in the final
the Ongs defining and governing their relationship and a asking for it has no legal personality to do so and the analysis, result in the premature liquidation of the corporation
subscription contract between the Tius, the Ongs and FLADC requirements of the law therefor have not been met. A without the benefit of prior dissolution in accordance with
regarding the subscription of the parties to the corporation. contrary doctrine will tread on extremely dangerous ground Sections 117, 118, 119 and 120 of the Corporation
They point out that these two component parts form one because it will allow just any stockholder, for just about any Code.28 The Tius maintain that rescinding the subscription
whole agreement and that their terms and conditions are real or imagined offense, to demand rescission of his contract is not synonymous to corporate liquidation because
intrinsically related and dependent on each other. Thus, the subscription and call for the distribution of some part of the all rescission will entail would be the simple restoration of
breach of the shareholders' agreement, which was allegedly corporate assets to him without complying with the the status quo ante and a return to the two groups of their
the consideration for the subscription contract, was also a requirements of the Corporation Code. cash and property contributions. We wish it were that simple.
breach of the latter. Very noticeable is the fact that the Tius do not explain why
Hence, the Tius, in their personal capacities, cannot seek the
rescission in the instant case will not effectively result in
Aside from the fact that this is an entirely new angle never ultimate and extraordinary remedy of rescission of the subject
liquidation. The Tius merely refer in cavalier fashion to the
raised in any of their previous pleadings until after the oral agreement based on a less than substantial breach of
end-result of rescission (which incidentally is 100% favorable
arguments on January 29, 2003, we find this argument too subscription contract. Not only are they not parties to the
to them) but turn a blind eye to its unfair, inequitable and
strained for comfort. It is obviously intended to remedy and subscription contract between the Ongs and FLADC; they also
disastrous effect on the corporation, its creditors and the
cover up the Tius' lack of legal personality to rescind an have other available and effective remedies under the law.
Ongs.
agreement in which they were personally not parties-in-
All this notwithstanding, granting but not conceding that the
interest. Assuming arguendo that there were two "sub- In their Memorandum dated February 28, 2003, the Tius claim
Tius possess the legal standing to sue for rescission based on
agreements" embodied in the Pre-Subscription Agreement, that rescission of the agreement will not result in an
breach of contract, said action will nevertheless still not
this Court fails to see how the shareholders agreement unauthorized liquidation of the corporation because their case
prosper since rescission will violate the Trust Fund Doctrine
between the Ongs and Tius can, within the bounds of reason, is actually a petition to decrease capital stock pursuant to
and the procedures for the valid distribution of assets and
be interpreted as the consideration of the subscription Section 38 of the Corporation Code. Section 122 of the law
property under the Corporation Code.
contract between FLADC and the Ongs. There was nothing in provides that "(e)xcept by decrease of capital stock, no
the Pre-Subscription Agreement even remotely suggesting The Trust Fund Doctrine, first enunciated by this Court in the corporation shall distribute any of its assets or property
such alleged interdependence. Be that as it may, however, 1923 case of Philippine Trust Co. vs. Rivera,22provides that except upon lawful dissolution and after payment of all its
the Tius are nevertheless not the proper parties to raise this subscriptions to the capital stock of a corporation constitute a debts and liabilities." The Tius claim that their case for
point because they were not parties to the subscription fund to which the creditors have a right to look for the rescission, being a petition to decrease capital stock, does not
contract between FLADC and the Ongs. Thus, they are not in satisfaction of their claims.23 This doctrine is the underlying violate the liquidation procedures under our laws. All that
a position to claim that the shareholders agreement between principle in the procedure for the distribution of capital assets, needs to be done, according to them, is for this Court to order
them and the Ongs was what induced FLADC and the Ongs to embodied in the Corporation Code, which allows the (1) FLADC to file with the SEC a petition to issue a certificate
enter into the subscription contract. It is the Ongs alone who distribution of corporate capital only in three instances: (1)

CORPORATION LAW: 7. captial structure Page 72 of 201

of decrease of capital stock and (2) the SEC to approve said only against the law but is also prejudicial to corporate Without the Ongs, the Tius would have lost everything they
decrease. This new argument has no merit. creditors who enjoy absolute priority of payment over and originally invested in said mall. If only for this and the fact
above any individual stockholder thereof. that this Resolution can truly pave the way for both groups to
The Tius' case for rescission cannot validly be deemed a
enjoy the fruits of their investments assuming good faith
petition to decrease capital stock because such action never Stripped to its barest essentials, the issue of rescission in this
and honest intentions we cannot allow the rescission of the
complied with the formal requirements for decrease of capital case is not difficult to understand. If rescission is denied, will
subject subscription agreement. The Ongs' shortcomings were
stock under Section 33 of the Corporation Code. No majority injustice be inflicted on any of the parties? The answer is no
far from serious and certainly less than substantial; they were
vote of the board of directors was ever taken. Neither was because the financial interests of both the Tius and the Ongs
in fact remediable and correctable under the law. It would be
there any stockholders meeting at which the approval of will remain intact and safe within FLADC. On the other hand, if
totally against all rules of justice, fairness and equity to
stockholders owning at least two-thirds of the outstanding rescission is granted, will any of the parties suffer an
deprive the Ongs of their interests on petty and tenuous
capital stock was secured. There was no revised treasurer's injustice? Definitely yes because the Ongs will find
grounds.
affidavit and no proof that said decrease will not prejudice the themselves out in the streets with nothing but the money
creditors' rights. On the contrary, all their pleadings contained they had in 1994 while the Tius will not only enjoy a windfall WHEREFORE, the motion for reconsideration, dated March 15,
were alleged acts of violations by the Ongs to justify an order estimated to be anywhere from P450 million to P900 2002, of petitioners Ong Yong, Juanita Tan Ong, Wilson Ong,
of rescission. million31 but will also take over an extremely profitable Anna Ong, William Ong, Willie Ong and Julie Ong Alonzo and
business without much effort at all. the motion for partial reconsideration, dated March 15, 2002,
Furthermore, it is an improper judicial intrusion into the
of petitioner Willie Ong are hereby GRANTED. The Petition for
internal affairs of the corporation to compel FLADC to file at Another very important point follows. The Court of Appeals
Confirmation of the Rescission of the Pre-Subscription
the SEC a petition for the issuance of a certificate of decrease and, later on, our Decision dated February 1, 2002, stated
Agreement docketed as SEC Case No. 02-96-5269 is hereby
of stock. Decreasing a corporation's authorized capital stock that both groups were in pari delicto, meaning, that both the
DISMISSED for lack of merit. The unilateral rescission by the
is an amendment of the Articles of Incorporation. It is a Tius and the Ongs committed breaches of the Pre-
Tius of the subject Pre-Subscription Agreement, dated August
decision that only the stockholders and the directors can Subscription Agreement. This may be true to a certain extent
15, 1994, is hereby declared as null and void.
make, considering that they are the contracting parties but, judging from the comparative gravity of the acts
thereto. In this case, the Tius are actually not just asking for a separately committed by each group, we find that the Ongs' The motion for the issuance of a writ of execution, dated
review of the legality and fairness of a corporate decision. acts were relatively tame vis--vis those committed by the March 15, 2002, of petitioners David S. Tiu, Cely Y. Tiu, Moly
They want this Court to make a corporate decision for FLADC. Tius in not surrendering FLADC funds to the corporation and Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes
We decline to intervene and order corporate structural diverting corporate income to their own MATTERCO account. C. Tiu is hereby DENIED for being moot.
changes not voluntarily agreed upon by its stockholders and The Ongs were right in not issuing to the Tius the shares
Accordingly, the Decision of this Court, dated February 1,
directors. corresponding to the four-story building and the 1,902.30
2002, affirming with modification the decision of the Court of
square-meter lot because no title for it could be issued in
Truth to tell, a judicial order to decrease capital stock without Appeals, dated October 5, 1999, and the SEC en banc, dated
FLADC's name, owing to the Tius' refusal to pay the transfer
the assent of FLADC's directors and stockholders is a violation September 11, 1998, is hereby REVERSED.
taxes. And as far as the 151 square-meter lot was concerned,
of the "business judgment rule" which states that:
why should FLADC issue additional shares to the Tius for Costs against the petitioner Tius.
xxx xxx xxx (C)ontracts intra vires entered into by the property already owned by the corporation and which, in the
board of directors are binding upon the corporation and final analysis, was already factored into the shareholdings of SO ORDERED.
courts will not interfere unless such contracts are so the Tius before the Ongs came in?
unconscionable and oppressive as to amount to wanton
We are appalled by the attempt by the Tius, in the words of
destruction to the rights of the minority, as when plaintiffs
the Court of Appeals, to "pull a fast one" on the Ongs because
aver that the defendants (members of the board), have
that was where the problem precisely started. It is clear that,
concluded a transaction among themselves as will result
when the finances of FLADC improved considerably after the
in serious injury to the plaintiffs stockholders.29
equity infusion of the Ongs, the Tius started planning to take
The reason behind the rule is aptly explained by Dean Cesar over the corporation again and exclude the Ongs from it. It
L. Villanueva, an esteemed author in corporate law, thus: appears that the Tius' refusal to pay transfer taxes might not
have really been at all unintentional because, by failing to pay
Courts and other tribunals are wont to override the that relatively small amount which they could easily afford,
business judgment of the board mainly because, courts the Tius should have expected that they were not going to be
are not in the business of business, and the laissez given the corresponding shares. It was, from every angle, the
faire rule or the free enterprise system prevailing in our perfect excuse for blackballing the Ongs. In other words, the
social and economic set-up dictates that it is better for the Tius created a problem then used that same problem as their
State and its organs to leave business to the pretext for showing their partners the door. In the process,
businessmen; especially so, when courts are ill-equipped they stood to be rewarded with a bonanza of anywhere
to make business decisions. More importantly, the social between P450 million to P900 million in assets (from an
contract in the corporate family to decide the course of investment of only P45 million which was nearly foreclosed by
the corporate business has been vested in the board and PNB), to the extreme and irreparable damage of the Ongs,
not with courts.30 FLADC and its creditors.
Apparently, the Tius do not realize the illegal consequences of After all is said and done, no one can close his eyes to the
seeking rescission and control of the corporation to the fact that the Masagana Citimall would not be what it has
exclusion of the Ongs. Such an act infringes on the law on become today were it not for the timely infusion of P190
reduction of capital stock. Ordering the return and distribution million by the Ongs in 1994. There are no ifs or buts about it.
of the Ongs' capital contribution without dissolving the
corporation or decreasing its authorized capital stock is not

CORPORATION LAW: 7. captial structure Page 73 of 201

 That the subscriber promises to pay personally or by his (a) Que se dejara sin efecto lo aprobado por la Junta
duly authorized agent to the seller at the Municipality of Directiva el 3 de marzo, 1935, art. 11, sec. 162, sobre las
Silang, Province of Cavite, Philippine Islands, the sum of cobranzas que se haran por el Secretario Tesorero de la
one thousand five hundred pesos (P1,500), Philippine Corporacion a los accionistas que habian tomado o
currency, as purchase price of FIFTEEN (15) shares of suscrito nuevas acciones y que se permitia a estos pagar
capital stock, said purchase price to be paid as follows, to 20% del valor de las acciones suscritas en un ao, con
wit: five (5%) per cent upon the execution of the contract, interes de 6% y el pago o jornal que se hara por trimestre.
the receipt whereof is hereby acknowledged and
(b) Se dejara sin efecto, en vista de que aun no esta
confessed, and the remainder in installments of five per
pagado todo el valor de las 123 acciones, tomadas de las
cent, payable within the first month of each and every
acciones no expedidas (unissued stock) de la Corporacion
quarter thereafter, commencing on the 1st day of July,
y que fueron suscritas por los siguienes:
1935, with interest on deferred payments at the rate of
SIX (6%) per cent per annum until paid. Lino Gomez..................... 10 Acciones
Venancio Toledo............. 8 Acciones
That the said subscriber further agrees that if he fails to
Melchor P. Benitez........ 17 Acciones
pay any of said installment when due, or to perform any of
Isaias Videa................. 14 Acciones
the aforesaid conditions, or if said shares shall be
Esteban Velasco............ 10 Acciones
attached or levied upon by creditors of the said
Numeriano S. Aldaba.... 15 Acciones
subscriber, then the said shares are to revert to the seller
Inocencio Cruz................. 8 Acciones
and the payments already made are to be forfeited in
Josefa Naval .................. 15 Acciones
favor of said seller, and the latter may then take
Sofronio Bayla................. 8 Acciones
possession, without resorting to court proceedings.
Dionisio Dungca............. 3 Acciones
The said seller upon receiving full payment, at the time y devolver a las personas arriba descritas toda la cantidad
G.R. Nos. L-48195 and 48196 May 1, 1942 and manner hereinbefore specified, agrees to execute and que estas habian pagado por las 123 acciones.
deliver to said subscriber, or to his heirs and assigns, the
SOFRONIO T. BAYLA, ET AL., petitioners, vs. SILANG (c) Que se dejara sin efecto lo aprobado por la Junta
certificate of title of said shares, free and clear of all
TRAFFIC CO., INC., respondent. Directiva el 3 marzo, 1935, art. V. sec. 165, sobre el
encumbrances.
cambio o trueque de las 31 acciones del Treasury Stock,
SILANG TRAFFIC CO., petitioner, vs. SOFRONIO BAYLA, In testimony whereof, the parties have hereunto set their contra las 32 acciones del Sr. Numeriano Aldaba, en la
ET AL., respondents. hands in the Municipality of Silang, Province of Cavite, corporacion Northern Luzon Transportation Co. y que se
E. A. Beltran for petitioners. Philippine Islands, this 30th day of March, 1935. devuelva al Sr. Numeriano Aldaba las 32 acciones
Conrado V. Sanchez, Melchor C. Benitez, and Enrique M. mencionadas despues que el haya devuelto el certificado
(Sgd.) JOSEFA NAVAL
Fernando for respondent. de las 31 acciones de la Silang Traffic Co., Inc.
SILANG TRAFFIC COMPANY, INC.
OZAETA, J.: Subscriber (d) Permitir al Tesorero de la Corporacion para que
devuelva a las personas arriba indicadas, las cantidades
Petitioners in G.R. No. 48195 instituted this action in the Court By (Sgd.) LINO GOMEZ
pagadas por las 123 acciones. (Exhibit A-1.)
of First Instance of Cavite against the respondent Silang President.
Traffic Co., Inc. (cross-petitioner in G.R. No. 48196), to recover (Exhibit 1. Notarial acknowledgment omitted.) The respondent corporation set up the following defenses: (1)
certain sums of money which they had paid severally to the That the above-quoted resolution is not applicable to the
The agreements signed by the other petitioners were of the petitioners Sofronio T. Bayla, Josefa Naval, and Paz Toledo
corporation on account of shares of stock they individually same date (March 30, 1935) and in identical terms as the because on the date thereof "their subscribed shares of stock
agreed to take and pay for under certain specified terms and foregoing except as to the number of shares and the had already automatically reverted to the defendant, and the
conditions, of which the following referring to the petitioner corresponding purchase price. The petitioners agreed to installments paid by them had already been forfeited"; and
Josefa Naval, is typical: purchase the following number of shares and, up to April 30, (2) that said resolution of August 1, 1937, was revoked and
AGREEMENT FOR INSTALLMENT SALE OF SHARES IN THE 1937, had paid the following sums on account thereof: cancelled by a subsequent resolution of the board of directors
"SILANG TRAFFIC COMPANY, INC.," Sofronio T. Bayla....... 8 shares P360 of the defendant corporation dated August 22, 1937.
Silang, Cavite, P. I. Venancio Toledo........ 8 shares 375 The trial court absolved the defendant from the complaint
Josefa Naval.............. 15 shares 675 and declared canceled (forfeited) in favor of the defendant
THIS AGREEMENT, made and entered into between Mrs. Paz Toledo................ 15 shares 675 the shares of stock in question. It held that the resolution of
Josefa Naval, of legal age, married and resident of the Petitioners' action for the recovery of the sums above August 1, 1937, was null and void, citing Velasco vs.
Municipality of Silang, Province of Cavite, Philippine mentioned is based on a resolution by the board of directors Poizat (37 Phil., 802), wherein this Court held that "a
Islands, party of the First Part, hereinafter called the of the respondent corporation on August 1, 1937, of the corporation has no legal capacity to release an original
subscriber, and the "Silang Traffic Company, Inc.," a following tenor: subscriber to its capital stock from the obligation to pay for
corporation duly organized and existing by virtue of and
A mocion sel Sr. Marcos Caparas y secundado por el Sr. shares; and any agreement to this effect is invalid" Plaintiffs
under the laws of the Philippine Islands, with its principal
Alejandro Bayla, que para el bien de la corporacion y la below appealed to the Court of Appeals, which modified of the
office in the Municipality of Silang, Province of Cavite,
pronta terminacion del asunto civil No. 3125 titulado trial court as follows:
Philippine Islands, party of the Second Part, hereinafter
"Vicente F. Villanueva et al. vs. Lino Gomez et al.," en el That part of the judgment dismissing plaintiff's complaint
called the seller,
Juzgado de Primera Instancia de Cavite, donde se gasto y is affirmed, but that part thereof declaring their
WITNESSETH: se gastara no poca cantidad de la Corporacion, se resolvio subscription canceled is reversed. Defendant is directed to
y se aprobo por la Junta Directiva los siguientes: grant plaintiffs 30 days after final judgment within which

CORPORATION LAW: 7. captial structure Page 74 of 201

 to pay the arrears on their subscription. Without installments when due, the said shares are to revert to the
pronouncement as to costs. seller and the payments already made are to be forfeited in
favor of said seller. The respondent corporation contends that
Both parties appealed to this Court by petition and cross-
when the petitioners failed to pay the installment which fell
petition for certiorari. Petitioners insist that they have the
due on or before July 31, 1937, forfeiture automatically took
right to recover the amounts involved under the resolution of
place, that is to say, without the necessity of any demand
August 1, 1937, while the respondent and cross-petitioner on
from the corporation, and that therefore the resolution of
its part contends that said amounts have been automatically
August 1, 1937, authorizing the refund of the installments
forfeited and the shares of stock have reverted to the
already paid was inapplicable to the petitioners, who had
corporation under the agreement hereinabove quoted.
already lost any and all rights under said contract. The
The parties litigant, the trial court, and the Court of Appeals contention is, we think, untenable. The provision regarding
have interpreted or considered the said agreement as a interest on deferred payments would not have been inserted
contract of subscription to the capital stock of the respondent if it had been the intention of the parties to provide for
corporation. It should be noted, however, that said agreement automatic forfeiture and cancelation of the contract.
is entitled "Agreement for Installment Sale of Shares in the Moreover, the contract did not expressly provide that the
Silang Traffic Company, Inc.,"; that while the purchaser is failure of the purchaser to pay any installment would give rise
designated as "subscriber," the corporation is described as to forfeiture and cancelation without the necessity of any
"seller"; that the agreement was entered into on March 30, demand from the seller; and under article 1100 of the Civil
1935, long after the incorporation and organization of the Code persons obliged to deliver or do something are not in
corporation, which took place in 1927; and that the price of default until the moment the creditor demands of them
the stock was payable in quarterly installments spread over a judicially or extrajudicially the fulfillment of their obligation,
period of five years. It also appears that in civil case No. 3125 unless (1) the obligation or the law expressly provides that
of the Court of First Instance of Cavite mentioned in the demand shall not be necessary in order that default may
resolution of August 1, 1937, the right of the corporation to arise, (2) by reason of the nature and circumstances of the
sell the shares of stock to the person named in said resolution obligation it shall appear that the designation of the time at
(including herein petitioners) was impugned by the plaintiffs which that thing was to be delivered or the service rendered
in said case, who claimed a preferred right to buy said shares. was the principal inducement to the creation of the obligation.
Whether a particular contract is a subscription or a sale of Is the resolution of August 1, 1937, valid? The contract in
stock is a matter of construction and depends upon its terms question being one of purchase and not subscription as we
and the intention of the parties (4 Fletcher, Cyclopedia of have heretofore pointed out, we see no legal impediment to
Corporation [permanent edition], 29, cited in Salmon, Dexter its rescission by agreement of the parties. According to the
& Co. vs. Unson (47 Phil. 649, 652). In the Unson case just resolution of August 1, 1937, the recission was made for the
cited, this Court held that a subscription to stock in an good of the corporation and in order to terminate the then
existing corporation is, as between the subscriber and the pending civil case involving the validity of the sale of the
corporation, simply a contract of purchase and sale. shares in question among others. To that rescission the herein
petitioners apparently agreed, as shown by their demand for
It seems clear from the terms of the contracts in question that the refund of the amounts they had paid as provided in said
they are contracts of sale and not of subscription. The lower resolution. It appears from the record that said civil case was
courts erred in overlooking the distinction between subsequently dismissed, and that the purchasers of shares of
subscription and purchase "A subscription, properly speaking, stock, other than the herein petitioners, who were mentioned
is the mutual agreement of the subscribers to take and pay in said resolution were able to benefit by said resolution. It
for the stock of a corporation, while a purchase is an would be an unjust discrimination to deny the same benefit to
independent agreement between the individual and the the herein petitioners.
corporation to buy shares of stock from it at stipulated price."
(18 C. J. S., 760.) In some particulars the rules governing We may add that there is no intimation in this case that the
subscriptions and sales of shares are different. For instance, corporation was insolvent, or that the right of any creditor of
the provisions of our Corporation Law regarding calls for the same was in any way prejudiced by the rescission.
unpaid subscription and assessment of stock (sections 37-50)
The attempted revocation of said rescission by the resolution
do not apply to a purchase of stock. Likewise the rule that
of August 22, 1937, was invalid, it not having been agreed to
corporation has no legal capacity to release an original
by the petitioners.
subscriber to its capital stock from the obligation to pay for
his shares, is inapplicable to a contract of purchase of shares. Wherefore, the judgment of the court of appeals is hereby
reversed and another judgment will be entered against the
The next question to determine is whether under the contract
defendant Silang Traffic Co., Inc., ordering it to pay to the
between the parties the failure of the purchaser to pay any of
plaintiffs Sofronio T. Bayla, Venancio Toledo, Josefa Naval, and
the quarterly installments on the purchase price
Paz Toledo, the sums of P360, P375, P675, and P675,
automatically gave rise to the forfeiture of the amounts
respectively, with legal interest on each of said sums from
already paid and the reversion of the shares to the
May 28, 1938, the date of the filing of the complaint, until the G.R. No. L-23608 March 17, 1925
corporation. The contract provides for interest of the rate of
date of payment, and with costs in the three instances. So
six per centum per annum on deferred payments. It is also
ordered.
provides that if the purchaser fails to pay any of said

CORPORATION LAW: 7. captial structure Page 75 of 201

SALMON, DEXTER & CO., plaintiff-appellee, vs. TIMOTEO It is understood and agreed that dividends will be prorated contract of purchase and sale. (Bole vs. Fulton [1912], 233
UNSON, defendant-appellant. and payable, only, from the date of actual payment of the Pa., 609; 2 Fletcher, Cyclopedia of Corporations, pp. 1120 et
subscription. seq.)
Felipe Ysmael for appellant.
J.W. Ferrier for appellee. (Sgd.) TIMOTEO UNSON The allegation of the complaint is that defendant is a
"subscriber." Exhibit A, on its face, purports to be a
"subscription for capital stock." The intention of the parties as
MALCOLM, J.: Iloilo, July 28, 1920
gleaned from this contract was undoubtedly to consider it as
P. O. Address:
such.
Timoteo Unson,
The plaintiff seeks to recover of the defendant the sum of
Pontevedra,
P1,000 with legal interest on a subscription for capital stock
Capiz. Admitting, however, that the terminology of the agreement is
contract. The defense is that the defendant is released from
not conclusive, and admitting that it is a contract between a
his obligation on the subscription agreement by virtue of the
subscriber and the corporation, and thus simply a contract of
increase of the capital stock of the plaintiff from P250,000, Even a casual reading of the admitted facts brings
purchase and sale, then under the last hypothesis we have to
the amount mentioned in the agreement, to P500,000, the prominently to notice that the agreement accomplished by
determine if the contract is avoided by misrepresentation.
amount agreed upon the stockholders prior to the defendant's Timoteo Unson on July 28, 1920, was for ten shares of the
signing the agreement. On this issue, judgment in the lower capital stock of C.S. Salmon and Company, "authorized capital
court was with the plaintiff. P250,000," and that two weeks before, on July 14, 1920, the Plaintiff's right of recovery rests exclusively upon the written
stockholders of C.S. Salmon and company, without the agreement. The promise of Unson in this agreement was to
acquiescence or participation of Unson, had authorized an subscribe for ten shares of the capital stock, authorized
The plaintiff is Salmon, Dexter and Company, a domestic
increase of the capital stock of the corporation to P500,000. capital P250,000, of C.S. Salmon and Company. One of the
corporation. It was organized under the name of C.S. Salmon
Three questions arise: Is the contract of Unson a contract of essential conditions of this subscription or contract of sale
and Company on May 28, 1918, with a capital stock of
subscription to the capital stock of C.S. Salmon and Company, was that the authorized capital stock of the company was
P250,000. Thereafter, pursuant to a resolution of the board of
or is it a contract to purchase stock in the corporation? P250,000. As far as we are informed, Unson would have never
directors of the corporation of June 24, 1920, a meeting of the
Whether one or the other, is Unson released from his have put his name to the agreement if he had known that two
stockholders was had on July 14, 1920, at which the capital
obligation on the subscription agreement on account of the weeks before, the capital had been increased to P500,000. If
stock of C.S. Salmon and Company was increased to
increase of the capital stock of C.S. Salmon and Company knowledge of this increase had been brought home to Unson
P500,000. The certificate of increase of capital stock from
from P250,000 to P500,000? Was there present such fraud or before he signed, that would be a different question. But the
P250,000 to P500,000, and articles of incorporation, as
misrepresentation as would permit the defendant to avoid the record is silent on this point. So should the contract be
amended, of Salmon, Dexter and Company were filed with the
contract? enforced. Unson would be required to take and pay for a
Mercantile Registry of the Bureau of Commerce and Industry
1/500 part of the capital stock of Salmon, Dexter and
on September 16, 1920.
Company, whereas his obligation was to take and pay for a
The parties disagree as to the nature of the transaction. The
1/250 part of the capital stock. Paraphrasing the United
appellant considers Exhibit A as a subscription, and relies on
On July 28, 1920, Timoteo Unson, the defendant, to follow the States Supreme Court in the case of Chicago City Railway
the case of Newport Cotton Mill Co. vs. Mims ( [1899], 103
allegation in the third paragraph of the complaint, "became a Company vs. Allerton ( [1874], 18 Wall., 233), a change in the
Tenn., 465). (See also Katama Land Company vs. Jernegan
subscriber of C.S. Salmon and Company, by signing an capital stock without the consent of the stockholder would
[1879], 126 Mass., 155.) Appellee, on the other hand, alleges
agreement in writing and delivering the same to C.S. Salmon make him a member of an association in which he never
that the appellant has failed to take into account the legal
and Company, ... the name of which company was later consented to become such. "It would change the relative
distinction between a subscription to a corporation and a
changed to Salmon, Dexter and Company." Said agreement, influence, control and profit of each member."
purchase from it of its shares, and reaches the conclusion on
Exhibit A, is in words and figures the following:
this premise that the contract in the present case one of
purchase and sale only. In our opinion, a contract different from that which was
SUBSCRIPTION FOR CAPITAL STOCK OF C.S. SALMON AND entered into cannot be made for the parties and imposed
COMPANY upon Unson. Unson has the right to stand upon the contract
After incorporation, one may become a shareholder by
he has made. In our opinion also, there was such a non-
subscription, or by purchasing stock directly from the
Authorized Capital P250,000 Shares P100 each disclosure of a material fact as was equivalent to false
corporation, or from individual owners thereof. A distinction is
representation. This representation was of a character that
drawn by the authorities between a subscription to the capital
the party to whom it was made had a right to rely upon it.
I hereby subscribe for 10 shares of the capital stock of C.S. stock of the corporation after its organization and a sale of
Salmon and Company, at the par value thereof and agree shares by it. Whether a particular contract is a subscription or
to pay for the same on or before Dec. 15, 1920. a sale of stock is a matter of construction, and depends upon For all the foregoing, the judgment must be reversed and
its terms and the intention of the parties. It has been held another entered absolving the defendant from the complaint.
that a subscription to stock in an existing corporation is, as Without special pronouncement as to costs in either instance,
between the subscriber and the corporation, simply a it is so ordered.

CORPORATION LAW: 7. captial structure Page 76 of 201

 Boulevard, Pasay City of which said petitioner is the
Management Body holding title to all the common and limited
common areas. 2

G.R. NO. 52361

The private respondent, Aguilar-Bernares Realty, a sole

proprietorship with business name registered with the Bureau
of Commerce, owned and operated by the spouses Emmanuel
G. Aguilar and Zenaida B. Aguilar, is the assignee of a unit,
"Solana", in the Sunset View Condominium Project with La
Perla Commercial, Incorporated, as assignor. 3 The La Perla
Commercial, Incorporated bought the "Solana" unit on
installment from the Tower Builders, Inc. 4 The petitioner,
Sunset View Condominium Corporation, filed for the collection
of assessments levied on the unit against Aguilar-Bernares
Realty, private respondent herein, a complaint dated June 22,
1979 docketed as Civil Case No. 7303-P of the Court of First
Instance of Pasay City, Branch XXX. The private respondent
filed a Motion to Dismiss the complaint on the grounds (1)
that the complaint does not state a cause of action: (2) that
G.R. No. L-52361 April 27, 1981 the court has no jurisdiction over the subject or nature other
action; and (3) that there is another action pending between
SUNSET VIEW CONDOMINIUM the same parties for the same cause. The petitioner filed its
CORPORATION, petitioner, vs. THE HON. JOSE C. opposition thereto. The motion to dismiss was granted on
CAMPOS, JR., PRESIDING JUDGE OF THE COURT OF December 11, 1979 by the respondent Judge who opined that
FIRST INSTANCE, BRANCH XXX, PASAY CITY and the private respondent is, pursuant to Section 2 of Republic
AGUILAR-BERNARES REALTY, respondents. Act No. 4726, a "holder of a separate interest" and
consequently, a shareholder of the plaintiff condominium
corporation; and that "the case should be properly filed with
G.R. No. L-52524 April 27, 1981
the Securities & Exchange Commission which has exclusive
original jurisdiction on controversies arising between
SUNSET VIEW CONDOMINIUM shareholders of the corporation." the motion for
CORPORATION, petitioner, vs. THE HON. JOSE C. reconsideration thereof having been denied, the petitioner,
CAMPOS, JR., PRESIDING JUDGE OF THE COURT OF alleging grave abuse of discretion on the part of respondent
FIRST INSTANCE, BRANCH XXX, PASAY CITY, and LIM Judge, filed the instant petition for certiorari praying that the
SIU LENG, respondents. said orders be set aside.

G.R. NO. 52524

FERNANDEZ, J.: The petitioner filed its amended complaint dated July 16,
1979 docketed as Civil Case No. 14127 of Branch I of the City
These two cases which involve similar facts and raise Court of Pasay City for the collection of overdue accounts on
Identical questions of law were ordered consolidated by assessments and insurance premiums and the interest
resolution of this Court dated March 17, 1980. 1 thereon amounting to P6,168 06 as of March 31, 1979 against
the private respondent Lim Siu Leng 5to whom was assigned
on July 11, 1977 a unit called "Alegria" of the Sunset. View
The petitioner, Sunset View Condominium Corporation, in Condominium Project by Alfonso Uy 6 who had entered into a
both cases, is a condominium corporation within the meaning "Contract to Buy and Sell" with Tower Builders, Inc. over the
of Republic Act No. 4726 in relation to a duly registered said unit on installment basis. 7
Amended Master Deed with Declaration of Restrictions of the
Sunset View Condominium Project located at 2230 Roxas

CORPORATION LAW: 7. captial structure Page 77 of 201

The private respondent filed a motion to dismiss on the It is admitted that the private respondents in both cases have (d) Astatement of the exact nature of the interest acquired
ground of lack of jurisdiction, alleging that the amount sought not yet fully paid the purchase price of their units. The or to be acquired by the purchaser in the separate units
to be collected is an assessment. The correctness and validity Identical issues raised in both petitions are the following: and in the common areas of the condominium project ...
of which is certain to involve a dispute between her and the
petitioner corporation; that she has automatically become, as
1. Is a purchaser of a condominium unit in the condominium The Amended Master Deeds in these cases, which were duly
a purchaser of the condominium unit, a stockholder of the
project managed by the petitioner, who has not yet fully paid registered in the Register of Deeds, and which contain, by
petitioner pursuant to Section 2 of the Condominium Act,
the purchase price thereof, automaticaly a ,stockholder of the mandate of Section 4, a statement of the exact nature of the
Republic Act No. 4726; that the dispute is intra-corporate and
petitioner Condominium Corporation interest acquired by a purchaser of a unit, provide in Section
is consequently under the exclusive jurisdiction of the
6 of Part 1:
Securities & Exchange Commission as provided in Section 5 of
P.D. No. 902-A. 8 2. Is it the regular court or the Securities & Exchange
Commission that has jurisdiction over cases for collection of (d) Each Unit owner shall, as an essential condition to
assessments assessed by the Condominium Corporation on such ownership, acquire stockholding in the Condominium
The petitioner filed its opposition thereto, alleging that the
condominium units the full purchase price of which has not Corporation herein below provided ... 17
private respondent who had not fully paid for the unit was not
been paid?
the owner thereof, consequently was not the holder of a
separate interest which would make her a stockholder, and The Amended Master Deeds likewise provide in Section 7 (b),
that hence the case was not an intra-corporate dispute. 9 The private respondents in both cases argue that every thus.
purchaser of a condominium unit, regardless of whether or
not he has fully paid the purchase price, is a "holder of a
After the private respondent had filed her answer to the (b) All unit owners shall of necessity become stockholders
separate interest" mentioned in Section 2 of Republic Act No.
opposition to the motion to dismiss 10
of the petitioner, the of the Condominium Corporation. TOWER shall acquire all
4726, otherwise known as "The Condominium Act" and is
trial court issued an order dated August 13, 1979 denying the the shares of stock of SUNSET VIEW and shall allocate the
automatically a shareholder of the condominium corporation.
motion to dismiss. 11 The private respondent's motion for said shares to the units in proportion to the appurtenant
reconsideration thereof was denied by the trial court in its interest in the COMMON AREAS and LIMITED COMMON
Order dated September 19, 1979. 12 The contention has no merit. Section 5 of the Condominium AREAS as provided in Section 6 (b) above. Said shares
Act expressly provides that the shareholding in the allocated are mere appurtenances of each unit, and
Condominium Corporation will be conveyed only in a proper therefore, the same cannot be transferred, conveyed,
The private respondent then appealed pursuant to Section 10
case. Said Section 5 provides: encumbered or otherwise disposed of separately from the
of Rule 40 of the Rules of Court to the Court of First Instance,
Unit ... 18
where the appeal was docketed as Civil Case No. 7530P. The
petitioner filed its "Motion to Dismiss Appeal" on the ground Any transfer or conveyance of a unit or an apartment,
that the order of the trial court appealed from is office or other space therein, shall include the transfer or It is clear from the above-quoted provisions of the Master
interlocutory. 13 conveyance of the undivided interests in the common Deeds that the shareholding in the Condominium Corporation
areas or, in a proper case, the membership or is inseparable from the unit to which it is only an appurtenant
shareholding in the condominium corporation ... and that only the owner of a unit is a shareholder in the
The motion to dismiss the appeal was denied and the parties
Condominium Corporation.
were ordered to submit their respective memorandum on the
issue raised before the trial court and on the disputed order of It is clear then that not every purchaser of a condominium
the trial judge. 14 After the parties had submitted their unit is a shareholder of the condominium corporation. The Subparagraph (a) of Part 1, Section 6, of the Master Deeds
respective memoranda on the matter, the respondent Judge Condominium Act leaves to the Master Deed the determines when and under what conditions ownership of a
issued an order dated December 14, 1979 in which he determination of when the shareholding will be transferred to unit is acquired by a purchaser thus:
directed that "the appeal is hereby dismissed and d the the purchaser of a unit. Thus, Section 4 of said Act provides:
judgment of the lower court is reversed. The case is dismissed (a) The purchaser of a unit shall acquire title or ownership
and the parties are directed to ventilate their controversy The provisions of this Act shall apply to property divided or of such Unit, subject to the terms and conditions of the
with the Securities & Exchange Commission. 15 The to be divided into condominium only if there shall be instrument conveying the unit to such purchaser and to
petitioner's motion for reconsideration thereof was denied in recorded in the Register of Deeds of the province or city in the terms and conditions of any subsequent conveyance
an order dated January 14, 1980. 16 Hence this petition for which the property lies and duly annotated in the under which the purchaser takes title to the Unit, and
certiorari, alleging grave abuse of discretion on the part of the corresponding certificate of title of the land ... an enabling subject further to this MASTER DEED ... 19
respondent Judge. or master deed which shall contain, among others, the
following:
The instrument conveying the unit "Solana" in G.R. NO. 52361
Issues Common to Both Cases is the "Contract to Buy and Sell" dated September 13, 1977,
xxx xxx xxx Annex "D", while that conveying the unit "Alegria" in G.R. NO.
52524 is the "Contract to Buy and Sell" dated May 12, 1976,
Annex "C". In both deeds of conveyance, it is provided:

CORPORATION LAW: 7. captial structure Page 78 of 201

 4. Upon full payment by the BUYER of the total purchase Inasmuch as the private respondents are not shareholders of
price and full compliance by the BUYER of an its the petitioner condominium corporation, the instant case for
obligations herein, the SELLER will convey unto the collection cannot be a "controversy arising out of
BUYER, as soon as practicable after completion of the intracorporate or partnership relations between and among
construction, full and absolute title in and to the subject stockholders, members or associates; between any or all of
unit, to the shares of stock pertaining thereto and to an them and the corporation, partnership or association of which
rights and interests in connection therewith ... 20 they are stockholders, members or associates, respectively" G.R. No. L-11528 March 15, 1918
which controversies are under the original and exclusive
jurisdiction of the Securities & Exchange Commission,
The share of stock appurtenant to the unit win be transferred MIGUEL VELASCO, assignee of The Philippine Chemical
pursuant to Section 5 (b) of P.D. No. 902- A. The subject
accordingly to the purchaser of the unit only upon full Product Co. (Ltd.), plaintiff-appellant, vs. JEAN M.
matters of the instant cases according to the allegations of
payment of the purchase price at which time he will also POIZAT, defendant-appellee.
the complaints are under the jurisdiction of the regular courts:
become the owner of the unit. Consequently, even under the
that of G.R. NO. 52361, which is for the collection of
contract, it is only the owner of a unit who is a shareholder of
P8,335.38 with interest plus attorney's fees equivalent to the Vicente Rodriguez for appellant.
the Condominium Corporation. Inasmuch as owners is
principal or a total of more than P10,000.00 is under the A. J. Burke for appellee.
conveyed only upon full payment of the purchase price, it
jurisdiction of the Court of First Instance; and that of G.R. NO.
necessarily follows that a purchaser of a unit who has not
52524, which is for the collection of P6,168-06 is within the
paid the full purchase price thereof is not The owner of the STREET, J.:
jurisdiction of the City Court.
unit and consequently is not a shareholder of the
Condominium Corporation.
From the amended complaint filed in this cause upon
In view of the foregoing, it is no longer necessary to resolve
February 5, 1915, it appears that the plaintiff, as assignee in
the issue raised in G.R. NO. 52524 of whether an order of the
That only the owner of a unit is a stockholder of the insolvency of "The Philippine Chemical Product Company"
City Court denying a motion to dismiss on the ground of lack
Condominium Corporation is inferred from Section 10 of the (Ltd.) is seeking to recover of the defendant, Jean M. Poizat,
of jurisdiction can be appealed to the Court of First Instance.
Condominium Act which reads: the sum of P1,500, upon a subscription made by him to the
corporate stock of said company. It appears that the
WHEREFORE, the questioned orders of the respondent Judge corporation in question was originally organized by several
SEC. 10. ... Membership in a condominium corporation,
dated December 11, 1979 and January 4, 1980 in Civil Case residents of the city of Manila, where the company had its
regardless of whether it is a stock or non-stock
No. 7303-P, subject matter of the Petition in G.R. No. 52361, principal place of business, with a capital of P50,000, divided
corporation, shall not be transferable separately from the
are set aside and said Judge is ordered to try the case on the into 500 shares. The defendant subscribed for 20 shares of
condominium unit of which it is an appurtenance When a
merits. The orders dated December 14, 1979 and January 14, the stock of the company, an paid in upon his subscription the
member or stockholder ceases is to own a unit in the
1980 in Civil Case No. 7530-P, subject matter of the petition sum of P500, the par value of 5 shares . The action was
project in which the condominium corporation owns or
in G.R. No. 52524 are set aside and the case is ordered brought to recover the amount subscribed upon the
holds the common areas, he shall automatically cease to
remanded to the court a quo, City Court of Pasay City, for trial remaining shares.
be a member or stockholder of the condominium
on the merits, with costs against the private respondents.
corporation.
It appears that the defendant was a stock holder in the
SO ORDERED. company from the inception of the enterprise, and for
Pursuant to the above statutory provision, ownership of a unit
is a condition sine qua non to being a shareholder in the sometime acted as its treasurer and manager. While serving
condominium corporation. It follows that a purchaser of a unit in this capacity he called in and collected all subscriptions to
who is not yet the owner thereof for not having fully paid the the capital stock of the company, except the aforesaid 15
full purchase price, is not a shareholder By necessary shares subscribed by himself and another 15 shares owned
implication, the "separate interest" in a condominium, which by Jose R. Infante.
entitles the holder to become automatically a share holder in
the condominium corporation, as provided in Section 2 of the Upon July 13, 1914, a meeting of the board of directors of the
Condominium Act, can be no other than ownership of a unit. company was held at which a majority of the stock was
This is so because nobody can be a shareholder unless he is presented. Up[on this occasion two resolutions, important to
the owner of a unit and when he ceases to be the owner, he be here noted, were adopted. The first was a proposal that
also ceases automatically to be a shareholder. the directors, or shareholders, of the company should make
good by new subscriptions, in proportion to their respective
The private respondents, therefore, who have not fully paid holdings, 15 shares which had been surrendered by Infante. It
the purchase price of their units and are consequently not seems that this shareholder had already paid 25 per cent of
owners of their units are not members or shareholders of the his subscription upon 20 shares, leaving 15 shares unpaid for,
petitioner condominium corporation, and an understanding had been reached by him and the
management by which he was to be released from the

CORPORATION LAW: 7. captial structure Page 79 of 201

obligation of his subscription, it being understood that what At the hearing of the Court of First Instance, judgment was contained in section 38 to 48, inclusive, of Act No. 1459 can
he had already paid should not be refunded. Accordingly the rendered in favor of the defendant, and the complaint was be permitted to obstruct or impede the action to recover
directors present at this meeting subscribed P1,200 toward dismissed. From this action the plaintiff has appealed. thereon. By virtue of the first subsection of section 36 of the
taking up his shares, leaving a deficiency of P300 to be Insolvency Law (Act No. 1956) the assignee of the insolvent
recovered by voluntary subscriptions from stockholders not corporation succeeds to all the corporate rights of action
We think that Poizat is liable upon this subscription. A stock
present at the meeting. vested in the corporation prior to its insolvency; and the
subscription is a contract between the corporation on one
assignee therefore has the same freedom with respect to
side, and the subscriber on the other, and courts will enforce
suing upon the stock subscription as the directors themselves
The other proposition was o the effect that Juan [Jean] M. it for or against either. It is a rule, accepted by the Supreme
would have had under section 49 above cited.
Poizat, who was absent, should be required to pay the amount Court of the United States, that a subscription for shares of
of his subscription upon the 15 shares for which he was still stock does not require an express promise to pay the amount
indebted to the company. The resolution further provided subscribed, as the law implies a promise to pay on the part of But there is another reason why the present plaintiff must
that, in case he should refuse to make such payment, the the subscriber. (7 Ruling Case Law, sec. 191.) Section 36 of prevail in this case, even supposing that the failure of the
management of the corporation should be authorized to the Corporation Law clearly recognizes that a stock directors to comply with the requirements of the provisions of
undertake judicial proceedings against him. When notification subscription is subsisting liability from the time the sections 38 to 48, inclusive, of Act No. 1459 might have been
of this resolution reached Poizat through the mail it evoked subscription is made, since it requires the subscriber to pay an obstacle to a recovery by the corporation itself. That
from him a manifestation of surprise and pain, which found interest quarterly from that date unless he is relieved from reason is this: When insolvency supervenes upon a
expression in a letter written by him in reply, dated July 27, such liability by the by-laws of the corporation. The subscriber corporation and the court assumes jurisdiction to wind up, all
1914, and addressed to Velasco, as treasurer and is as much bound to pay the amount of the share subscribed unpaid stock subscriptions become payable on demand, and
administrator. In this letter Poizat states that he had been by him as he would be to pay any other debt, and the right of are at once recoverable in an action instituted by the
given to understand by some member of the board of the company to demand payment is no less incontestable. assignee or receiver appointed by the court. This rule
directors that he was to be relieved from his subscription apparently had origin in a recognition of the principle that a
upon the terms conceded to Infante; and he added: court of equity, having jurisdiction of the insolvency
The provisions of the Corporation Law (Act No. 1459) given
proceedings, could, if necessary, make the call itself, in its
recognition of two remedies for the enforcement of stock
capacity as successor to the powers exercised by the board of
My desire to be relieved from the payment of the subscriptions. The first and most special remedy given by the
directors of the defunct company. Later a further rule gained
remaining 75 per cent arises from the poor opinion which I statute consists in permitting the corporation to put up the
recognition to the effect that the receiver or assignee, in an
entertain of the business and the faint hope of ever unpaid stock for sale and dispose of it for the account of the
action instituted by proper authority, could himself proceed to
recovering any money invested. In consequence, I prefer delinquent subscriber. In this case the provisions of section 38
collect the subscription without the necessity of any prior call
to lose the whole of the 25 per cent I have already paid to 48, inclusive , of the Corporation Law are applicable and
whatever. This conclusion is well supported by reference to
rather than to continue investing more money in what I must be followed. The other remedy is by action in court,
the following authorities:
consider to be ruinous proposition. concerning which we find in section 49 the following
provision:
. . . a court of equity may enforce payment of the stock
Within a short while the unfavorable opinion entertained by
subscriptions, although there have been no calls for them
Poizat as to the prospect of the company was found to be fully Nothing in this Act shall prevent the directors from
by the company. (Hatch vs. Dana, 101 U. S., 205.)
justified, as the company soon went into voluntary collecting, by action in any court of proper jurisdiction, the
insolvency, Velasco being named as the assignee. He amount due on any unpaid subscription, together with
qualified at once by giving bond, and was duly inducted into accrued interest and costs and expenses incurred. It is again insisted that the plaintiffs cannot recover
the office of assignee upon November 25, 1914, by virtue of a because the suit was not preceded by a call or
formal transfer executed by the clerk in pursuance of section assessment against no right of action accrues. In a suit by
It is generally accepted doctrine that the statutory right to sell
32 of Act No. 1956. a solvent going corporation to collect a subscription, and
the subscriber's stock is merely a remedy in addition to that
in certain suits provided by the statute this would be true;
which proceeds by action in court; and it has been held that
but it is now quite well settled that when the corporation
The answer of the defendant consisted of a general denial the ordinary legal remedy by action exists even though no
becomes insolvent, with proceedings instituted by
and a so-called special defense, consisting of a concatenation express mention thereof is made in the statute.
creditors to wind up and distribute its assets, no call or
of statements more appropriate for a demurrer than as (Instone vs. Frankfort Bridge Co., 2 Bibb [Ky.], 576; 5 Am.
assessment is necessary before the institution of suits to
material for a special defense. The principal contention is that Dec., 638.)
collect unpaid balances on subscription. (Ross-Meehan
the call made by the board of directors of the company on
Shoe F. Co. vs. Southern Malleable Iron Co., 72 Fed., 957,
July 13, 1914 , was not made pursuant to the requirements of
No attempt is made in the Corporation Law to define the 960; see also Henry vs. Vermillion etc. R. R. Co., 17 Ohio,
sections 37 and 38 of the Corporation Law (Act No. 1459), and
precise conditions under which an action may be maintained 187, and Thompson on Corporations 2d ed., vol. 3, sec.
in particular that the action was instituted before the
upon a stock subscription, as such conditions should be 2697.)
expiration of the 30 days specified in section 38.
determined with reference to the rules governing contract
liability in general; and where it appears as in this case that a
It evidently cannot be permitted that a subscriber should
matured stock subscription is unpaid, none of the provisions
escape from his lawful obligation by reason of the failure of

CORPORATION LAW: 7. captial structure Page 80 of 201

the officers of the corporation to perform their duty in making unpaid shares. Under section 36 of the Corporation Law he is This case is about the offense or offenses that arise from the
a call; and when the original model of making the call also liable for interest at the lawful rate from the date of his reloading of the liquefied petroleum gas cylinder container of
becomes impracticable, the obligation must be treated as due subscription, unless relieved from this liability by the by-laws one brand with the liquefied petroleum gas of another brand.
upon demand. If the corporation must be treated still an of the company. These by-laws have not been introduced in
active entity, and this action should be dismissed for evidence and there is no proof showing the exact date upon
The Facts and the Case
irregularity in the making of the call, other steps could be which the subscription was made, though it is alleged in the
taken by the board to cure the defect and another action original complaint that the company was organized upon
could be brought; but where the company is being wound up, March 23, 1914. This allegation is not admitted in the agreed Respondent Petron Corporation (Petron) sold and distributed
no such procedure would be practicable. The better doctrine statement of facts. The defendant, however, inferentially liquefied petroleum gas (LPG) in cylinder tanks that carried its
is that when insolvency supervenes all unpaid subscriptions admits in his letter of July 27, 1914, that his subscription had trademark "Gasul."1 Respondent Carmen J. Doloiras owned
become at once due and enforceable. been made prior to July 13, 1914. It resulted that in our and operated Kristina Patricia Enterprises (KPE), the exclusive
opinion he should be held liable for interest from that date. distributor of Gasul LPGs in the whole of Sorsogon. 2 Jose
Nelson Doloiras (Jose) served as KPEs manager.
The printed bill of exceptions in this cause does not contain
the original complaint, nor does it state who was plaintiff The judgment of the lower court is therefore reversed, and
therein or the date when the action was instituted. It may, judgment will be rendered in favor of the plaintiff and against Bicol Gas Refilling Plant Corporation (Bicol Gas) was also in
however, be gathered from the papers transmitted to this the defendant for the sum of one thousand five hundred the business of selling and distributing LPGs in Sorsogon but
court that the action was originally instituted in the name of pesos (P1,500), with interest from July 13, 1014, and costs of theirs carried the trademark "Bicol Savers Gas." Petitioner
the Philippine Chemical Product Co. (Ltd.), prior to its both instances. So ordered. Audie Llona managed Bicol Gas.
insolvency, and that later the assignee was substituted as
plaintiff and then filed the amended complaint, with the In the course of trade and competition, any given distributor
permission of the court. Now, if we concede that no right of of LPGs at times acquired possession of LPG cylinder tanks
action existed when the original complaint was filed, a right of belonging to other distributors operating in the same area.
action certainly existed when the assignee filed his amended They called these "captured cylinders." According to Jose,
complaint; and as the bill of exceptions fails to show that any KPEs manager, in April 2001 Bicol Gas agreed with KPE for
G.R. No. 166859 April 12, 2011
exception was taken to the action of the court in allowing the the swapping of "captured cylinders" since one distributor
amended complaint to be filed, no objection would be here REPUBLIC OF THE PHILIPPINES, Petitioner, vs.
could not refill captured cylinders with its own brand of LPG.
entertained on the ground that the action was prematurely SANDIGANBAYAN (FIRST DIVISION), EDUARDO M.
COJUANGCO, JR., et. al., Respondents. At one time, in the course of implementing this arrangement,
brought. KPEs Jose visited the Bicol Gas refilling plant. While there, he
see cases on 2.k. Three-fold duties of BOD noticed several Gasul tanks in Bicol Gas possession. He
The circumstance that the board of directors in their meeting requested a swap but Audie Llona of Bicol Gas replied that he
of July 13, 1914, resolved to release Infante from his first needed to ask the permission of the Bicol Gas owners.
obligation upon a subscription for 15 shares is no wise That permission was given and they had a swap involving
prejudicial to the right of the corporation or its assignee to around 30 Gasul tanks held by Bicol Gas in exchange for
G.R. No. 170891 November 24, 2009 assorted tanks held by KPE.
recover from Poizat upon a subscription made by him. In
releasing Infante the board transcended its powers, and he no
doubt still remained liable on such of his shares as were not MANUEL C. ESPIRITU, JR., AUDIE LLONA, FREIDA F. KPEs Jose noticed, however, that Bicol Gas still had a number
taken up and paid for by other persons. ESPIRITU, CARLO F. ESPIRITU, RAFAEL F. ESPIRITU, of Gasul tanks in its yard. He offered to make a swap for these
ROLANDO M. MIRABUNA, HERMILYN A. MIRABUNA, KIM but Llona declined, saying the Bicol Gas owners wanted to
ROLAND A. MIRABUNA, KAYE ANN A. MIRABUNA, KEN send those tanks to Batangas. Later Bicol Gas told Jose that it
The general doctrine is that the corporation has no legal
RYAN A. MIRABUNA, JUANITO P. DE CASTRO, GERONIMA had no more Gasul tanks left in its possession. Jose observed
capacity to release an original subscriber to its capital
A. ALMONITE and MANUEL C. DEE, who are the officers on almost a daily basis, however, that Bicol Gas trucks which
stock from the obligation of paying for his shares, in whole
and directors of BICOL GAS REFILLING PLANT plied the streets of the province carried a load of Gasul tanks.
or in part, . . . (10 Cyc., 450.)
CORPORATION, Petitioners, vs. PETRON CORPORATION He noted that KPEs volume of sales dropped significantly
and CARMEN J. DOLOIRAS, doing business under the from June to July 2001.
The suggestion contained in Poizat's letter of July 27, 1914, to name "KRISTINA PATRICIA ENTERPRISES," Respondents.
the effect that he understood that he was to be relieved upon
the same terms as Infante is, for the same reason, of no merit On August 4, 2001 KPEs Jose saw a particular Bicol Gas truck
DECISION on the Maharlika Highway. While the truck carried mostly
as matter of defense, even if an agreement to that effect had
been duly proved. Bicol Savers LPG tanks, it had on it one unsealed 50-kg Gasul
ABAD, J.: tank and one 50-kg Shellane tank. Jose followed the truck and
when it stopped at a store, he asked the driver, Jun Leorena,
From what has been said it is manifest that the defendant is
and the Bicol Gas sales representative, Jerome Misal, about
liable for P1,500, the amount of his subscription upon the
the Gasul tank in their truck. They said it was empty but,

CORPORATION LAW: 7. captial structure Page 81 of 201

when Jose turned open its valve, he noted that it was not. Since the Bicol Gas employees presumably acted under the disregarded, they may be deemed substantially complied with
Misal and Leorena then admitted that the Gasul and Shellane direct order and control of its owners, the Court of Appeals under justifiable circumstances. 7 One of these circumstances
tanks on their truck belonged to a customer who had them also ordered the inclusion of the stockholders of Bicol Gas in is where the petitioners filed a collective action in which they
filled up by Bicol Gas. Misal then mentioned that his manager the various charges, bringing to 16 the number of persons to share a common interest in its subject matter or raise a
was a certain Rolly Mirabena. be charged, now including petitioners Manuel C. Espiritu, Jr., common cause of action. In such a case, the certification by
Freida F. Espiritu, Carlo F. Espiritu, Rafael F. Espiritu, Rolando one of the petitioners may be deemed sufficient.8
M. Mirabuna, Hermilyn A. Mirabuna, Kim Roland A. Mirabuna,
Because of the above incident, KPE filed a complaint 3 for
Kaye Ann A. Mirabuna, Ken Ryan A. Mirabuna, Juanito P. de
violations of Republic Act (R.A.) 623 (illegally filling up Here, KPE and Petron shared a common cause of action
Castro, Geronima A. Almonite, and Manuel C. Dee (together
registered cylinder tanks), as amended, and Sections 155 against petitioners Espiritu, et al., namely, the violation of
with Audie Llona), collectively, petitioners Espiritu, et al. The
(infringement of trade marks) and 169.1 (unfair competition) their proprietary rights with respect to the use of Gasul tanks
court denied the motion for reconsideration of these
of the Intellectual Property Code (R.A. 8293). The complaint and trademark. Furthermore, Atty. Cruz said in his certification
employees and stockholders in its Resolution dated January 6,
charged the following: Jerome Misal, Jun Leorena, Rolly that he was executing it "for and on behalf of the Corporation,
2006, hence, the present petition for review 6before this Court.
Mirabena, Audie Llona, and several John and Jane Does, and co-petitioner Carmen J. Doloiras." 9Thus, the object of the
described as the directors, officers, and stockholders of Bicol requirement to ensure that a party takes no recourse to
Gas. These directors, officers, and stockholders were The Issues Presented multiple forums was substantially achieved. Besides, the
eventually identified during the preliminary investigation. failure of KPE to sign the certificate of non-forum shopping
does not render the petition defective with respect to Petron
The petition presents the following issues:
which signed it through Atty. Cruz. 10 The Court of Appeals,
Subsequently, the provincial prosecutor ruled that there was
therefore, acted correctly in giving due course to the petition
probable cause only for violation of R.A. 623 (unlawfully filling
1. Whether or not the certificate of non-forum shopping before it.
up registered tanks) and that only the four Bicol Gas
that accompanied the petition filed with the Court of
employees, Mirabena, Misal, Leorena, and petitioner Llona,
Appeals, signed only by Atty. Cruz on behalf of Petron,
could be charged. The charge against the other petitioners Second. The Court of Appeals held that under the facts of the
complied with what the rules require;
who were the stockholders and directors of the company was case, there is probable cause that petitioners Espiritu, et al.
dismissed. committed all three crimes: (a) illegally filling up an LPG tank
2. Whether or not the facts of the case warranted the registered to Petron without the latters consent in violation of
filing of charges against the Bicol Gas people for: R.A. 623, as amended; (b) trademark infringement which
Dissatisfied, Petron and KPE filed a petition for review with the
consists in Bicol Gas use of a trademark that is confusingly
Office of the Regional State Prosecutor, Region V, which
initially denied the petition but partially granted it on motion a) Filling up the LPG tanks registered to another similar to Petrons registered "Gasul" trademark in violation of
for reconsideration. The Office of the Regional State manufacturer without the latters consent in Section 155 of R.A. 8293; and (c) unfair competition which
violation of R.A. 623, as amended; consists in petitioners Espiritu, et al. passing off Bicol Gas-
Prosecutor ordered the filing of additional informations
produced LPGs for Petron-produced Gasul LPG in violation of
against the four employees of Bicol Gas for unfair
Section 168.3 of R.A. 8293.
competition. It ruled, however, that no case for trademark b) Trademark infringement consisting in Bicol Gas
infringement was present. The Secretary of Justice denied the use of a trademark that is confusingly similar to
appeal of Petron and KPE and their motion for Petrons registered "Gasul" trademark in violation of Here, the complaint adduced at the preliminary investigation
reconsideration. section 155 also of R.A. 8293; and shows that the one 50-kg Petron Gasul LPG tank found on the
Bicol Gas truck "belonged to [a Bicol Gas] customer who had
the same filled up by BICOL GAS." 11In other words, the
Undaunted, Petron and KPE filed a special civil action for c) Unfair competition consisting in passing off Bicol
customer had that one Gasul LPG tank brought to Bicol Gas
certiorari with the Court of Appeals 4 but the Bicol Gas Gas-produced LPGs for Petron-produced Gasul LPG
for refilling and the latter obliged.
employees and stockholders concerned opposed it, assailing in violation of Section 168.3 of R.A. 8293.
the inadequacy in its certificate of non-forum shopping, given
that only Atty. Joel Angelo C. Cruz signed it on behalf of R.A. 623, as amended, 12 punishes any person who, without
The Courts Rulings
Petron. In its Decision5 dated October 17, 2005, the Court of the written consent of the manufacturer or seller of gases
Appeals ruled, however, that Atty. Cruzs certification contained in duly registered steel cylinders or tanks, fills the
constituted sufficient compliance. As to the substantive First. Petitioners Espiritu, et al. point out that the certificate steel cylinder or tank, for the purpose of sale, disposal or
aspect of the case, the Court of Appeals reversed the of non-forum shopping that respondents KPE and Petron trafficking, other than the purpose for which the manufacturer
Secretary of Justices ruling. It held that unfair competition attached to the petition they filed with the Court of Appeals or seller registered the same. This was what happened in this
does not necessarily absorb trademark infringement. was inadequate, having been signed only by Petron, through case, assuming the allegations of KPEs manager to be true.
Consequently, the court ordered the filing of additional Atty. Cruz. Bicol Gas employees filled up with their firms gas the tank
charges of trademark infringement against the concerned registered to Petron and bearing its mark without the latters
Bicol Gas employees as well. But, while procedural requirements such as that of submittal written authority. Consequently, they may be prosecuted for
of a certificate of non-forum shopping cannot be totally that offense.

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But, as for the crime of trademark infringement, Section 155 168.3. In particular, and without in any way limiting the scope Jose claimed in his affidavit that, when he negotiated the
of R.A. 8293 (in relation to Section 170 13 ) provides that it is of protection against unfair competition, the following shall be swapping of captured cylinders with Bicol Gas, its manager,
committed by any person who shall, without the consent of deemed guilty of unfair competition: petitioner Audie Llona, claimed that he would be consulting
the owner of the registered mark: with the owners of Bicol Gas about it. Subsequently, Bicol Gas
declined the offer to swap cylinders for the reason that the
(a) Any person, who is selling his goods and gives them the
owners wanted to send their captured cylinders to Batangas.
1. Use in commerce any reproduction, counterfeit, copy or general appearance of goods of another manufacturer or
The Court of Appeals seized on this as evidence that the
colorable imitation of a registered mark or the same dealer, either as to the goods themselves or in the wrapping
employees of Bicol Gas acted under the direct orders of its
container or a dominant feature thereof in connection with of the packages in which they are contained, or the devices or
owners and that "the owners of Bicol Gas have full control of
the sale, offering for sale, distribution, advertising of any words thereon, or in any other feature of their appearance,
the operations of the business."16
goods or services including other preparatory steps which would be likely to influence purchasers to believe that
necessary to carry out the sale of any goods or services the goods offered are those of a manufacturer or dealer, other
on or in connection with which such use is likely to cause than the actual manufacturer or dealer, or who otherwise The "owners" of a corporate organization are its stockholders
confusion, or to cause mistake, or to deceive; or clothes the goods with such appearance as shall deceive the and they are to be distinguished from its directors and
public and defraud another of his legitimate trade, or any officers. The petitioners here, with the exception of Audie
subsequent vendor of such goods or any agent of any vendor Llona, are being charged in their capacities as stockholders of
2. Reproduce, counterfeit, copy or colorably imitate a
engaged in selling such goods with a like purpose; Bicol Gas. But the Court of Appeals forgets that in a
registered mark or a dominant feature thereof and apply
corporation, the management of its business is generally
such reproduction, counterfeit, copy or colorable imitation
vested in its board of directors, not its
to labels, signs, prints, packages, wrappers, receptacles or Essentially, what the law punishes is the act of giving ones
stockholders.17 Stockholders are basically investors in a
advertisements intended to be used in commerce upon or goods the general appearance of the goods of another, which
corporation. They do not have a hand in running the day-to-
in connection with the sale, offering for sale, distribution, would likely mislead the buyer into believing that such goods
day business operations of the corporation unless they are at
or advertising of goods or services on or in connection belong to the latter. Examples of this would be the act of
the same time directors or officers of the corporation. Before
with which such use is likely to cause confusion, or to manufacturing or selling shirts bearing the logo of an
a stockholder may be held criminally liable for acts
cause mistake, or to deceive. alligator, similar in design to the open-jawed alligator in La
committed by the corporation, therefore, it must be shown
Coste shirts, except that the jaw of the alligator in the former
that he had knowledge of the criminal act committed in the
is closed, or the act of a producer or seller of tea bags with
KPE and Petron have to show that the alleged infringer, the name of the corporation and that he took part in the same or
red tags showing the shadow of a black dog when his
responsible officers and staff of Bicol Gas, used Petrons Gasul gave his consent to its commission, whether by action or
competitor is producing or selling popular tea bags with red
trademark or a confusingly similar trademark on Bicol Gas inaction.
tags showing the shadow of a black cat.
tanks with intent to deceive the public and defraud its
competitor as to what it is selling. 14 Examples of this would be
The finding of the Court of Appeals that the employees "could
the acts of an underground shoe manufacturer in Malabon Here, there is no showing that Bicol Gas has been giving its
not have committed the crimes without the consent,
producing "Nike" branded rubber shoes or the acts of a local LPG tanks the general appearance of the tanks of Petrons
[abetment], permission, or participation of the owners of Bicol
shirt company with no connection to La Coste, producing and Gasul. As already stated, the truckfull of Bicol Gas tanks that
Gas"18 is a sweeping speculation especially since, as
selling shirts that bear the stitched logos of an open-jawed the KPE manager arrested on a road in Sorsogon just
demonstrated above, what was involved was just one Petron
alligator. happened to have mixed up with them one authentic Gasul
Gasul tank found in a truck filled with Bicol Gas tanks.
tank that belonged to Petron.
Although the KPE manager heard petitioner Llona say that he
Here, however, the allegations in the complaint do not show was going to consult the owners of Bicol Gas regarding the
that Bicol Gas painted on its own tanks Petrons Gasul The only point left is the question of the liability of the offer to swap additional captured cylinders, no indication was
trademark or a confusingly similar version of the same to stockholders and members of the board of directors of Bicol given as to which Bicol Gas stockholders Llona consulted. It
deceive its customers and cheat Petron. Indeed, in this case, Gas with respect to the charge of unlawfully filling up a steel would be unfair to charge all the stockholders involved, some
the one tank bearing the mark of Petron Gasul found in a cylinder or tank that belonged to Petron. The Court of Appeals of whom were proved to be minors.19 No evidence was
truck full of Bicol Gas tanks was a genuine Petron Gasul tank, ruled that they should be charged along with the Bicol Gas presented establishing the names of the stockholders who
more of a captured cylinder belonging to competition. No employees who were pointed to as directly involved in overt were charged with running the operations of Bicol Gas. The
proof has been shown that Bicol Gas has gone into the acts constituting the offense. complaint even failed to allege who among the stockholders
business of distributing imitation Petron Gasul LPGs. sat in the board of directors of the company or served as its
Bicol Gas is a corporation. As such, it is an entity separate officers.
As to the charge of unfair competition, Section 168.3 (a) of and distinct from the persons of its officers, directors, and
R.A. 8293 (also in relation to Section 170) describes the acts stockholders. It has been held, however, that corporate The Court of Appeals of course specifically mentioned
constituting the offense as follows: officers or employees, through whose act, default or omission petitioner stockholder Manuel C. Espiritu, Jr. as the registered
the corporation commits a crime, may themselves be owner of the truck that the KPE manager brought to the police
individually held answerable for the crime. 15 for investigation because that truck carried a tank of Petron
Gasul. But the act that R.A. 623 punishes is the unlawful filling

CORPORATION LAW: 7. captial structure Page 83 of 201

up of registered tanks of another. It does not punish the act of 89555) which was originally assigned to the Third Division, Crisostomo, the corporate legal counsel. Upon the
transporting such tanks. And the complaint did not allege that but was later consolidated with G.R. No. 89095. completion of the governmental approval process, shares
the truck owner connived with those responsible for filling up of stock, duly signed by UDMC's authorized officers, were
At first blush, the petitions sound like a patriotic defense of
issued to the Yamadas and Enatsus.
that Gasul tank with Bicol Gas LPG. the Constitution, but, at bottom they are only an artful
scheme to defraud a group of foreign investors who had been This capital infusion not only saved the assets of the
persuaded by the officers of UDMC to invest P57 million to UDMC (especially the hospital) from foreclosure but also
WHEREFORE, the Court REVERSES and SETS ASIDE the save the corporation (its assets as well as those of the freed the Crisostomos from their individual and solidary
Decision of the Court of Appeals in CA-G.R. SP 87711 dated Crisostomo's) from imminent foreclosure by the Development liabilities as sureties for the DBP loan.
October 17, 2005 as well as its Resolution dated January 6, Bank of the Philippines (DBP) to which UDMC was indebted in
As it had been agreed in the Amended Memorandum of
2006, the Resolutions of the Secretary of Justice dated March the sum of P55 million. It is the kind of operation that sullies
Agreement between UDMC and the Japanese group that
11, 2004 and August 31, 2004, and the Order of the Office of our collective image as a people and sets back our upon the latter's acquisition of the controlling interest in
the Regional State Prosecutor, Region V, dated February 19, government's heroic efforts to attract foreign investments to UDMC, the corporation would be reorganized, a special
our country.
2003. The Court REINSTATES the Resolution of the Office of stockholders' meeting and board of directors' meeting
the Provincial Prosecutor of Sorsogon in I.S. 2001-9231 The antecedent facts, culled from the decision of the Court of were scheduled to be held on August 20, 1988.
(inadvertently referred in the Resolution itself as I.S. 2001- Appeals, are as follows: However, on the eve of the meetings, i.e., on August 19,
9234), dated February 26, 2002. The names of petitioners Sixto Crisostomo, Felipe Crisostomo (deceased), Veronica 1988, Sixto Crisostomo, supposedly acting for himself,
Manuel C. Espiritu, Jr., Freida F. Espititu, Carlo F. Espiritu, Palanca, Juanito Crisostomo, Carlos Crisostomo, Ricardo filed SEC Case No. 3420 against Juanito Crisostomo,
Rafael F. Espiritu, Rolando M. Mirabuna, Hermilyn A. Mirabuna, Alfonso, Regino Crisostomo and Ernesto Crisostomo (known Ricardo Alfonso, Shoji Yamada, Michiyo Yamada, Tomotada
Kim Roland A. Mirabuna, Kaye Ann A. Mirabuna, Ken Ryan A. as the Crisostomo group) were the original stockholders of Enatsu and Edita Enatsu, praying, among other things, (1)
the United Doctors Medical Center (UDMC) which was to stop the holding of the stockholder's and board of
Mirabuna, Juanito P. De Castro, Geronima A. Almonite and
organized in 1968 with an authorized capital stock of directors' meetings; (2) to disqualify the Japanese
Manuel C. Dee are ORDERED excluded from the charge. SO P1,000,000 (later increased to P15,000,000 in 1972). They investors from holding a controlling interest in UDMC and
ORDERED. owned approximately 40% of UDMC's outstanding capital from being elected directors or officers of UDMC; and (3)
stock, while the 60% majority belonged to the members of to annul the Memorandum of Agreement and Stock
the United Medical Staff Association (UMSA), numbering Purchase Agreement because they allegedly did not
G.R. Nos. 89095 & 89555 November 6, 1989
approximately 150 doctors and medical personnel of express the true agreement of the parties (pp. 194-203,
SIXTO P. CRISOSTOMO, petitioner, vs. SECURITIES AND UDMC. Rollo).
EXCHANGE COMMISSION, SPOUSES SHOJI YAMADA and
Despite their minority status, the Crisostomo group has Two weeks later, on September 2, 1988, Crisostomo
MICHIYO YAMADA and SPOUSES TOMOTADA ENATSU
managed UDMC from its inception, with Juanito filed Civil Case No. 88-1823 in the Regional Trial Court of
and EDITA ENATSU, respondents.
Crisostomo as president, Ricardo Alfonso, Sr. as chairman Makati, Metro Manila, where he also sought a preliminary
Salma Pir T. Rasul, Rosalinda L. Santos and A.E. Dacanay for of the board, Carlos Crisostomo as corporate secretary injunction and the Identical reliefs prayed for by him in
petitioner. and Sixto Crisostomo as director and legal counsel. SEC Case No. 3420 (pp. 317-335, Rollo). It was dismissed
by the trial court for lack of jurisdiction and is pending
Gonzales, Batiller Law Offices for respondents. In 1988, UDMC defaulted in paying its loan obligation of
appeal in the Court of Appeals where it is docketed as CA-
approximately P55 million to the DBP. In the last quarter of
Quisumbing, Torres and Evangelista for Spouses Tomotada G.R. No. 20285-CV.
1987, UDMC's assets (principally its hospital) and those of
and Edita Enatsu. the Crisostomos which had been given as collateral to the On September 13, 1988, the hearing officer, Antonio
Lino M. Patajo for Spouses Shoji and Michiyo Yamada. DBP, faced foreclosure by the Asset Privatization' rust Esteves, granted the application for a writ of preliminary
(APT), which had taken over UDMC's loan obligation to the injunction enjoining the respondents
GRIO-AQUINO, J.: DBP.
... from holding the special meeting of the stockholders and
In his petition for certiorari, 1 the petitioner seeks to annul To stave off the threatened foreclosure, UDMC, through its of the Board of Directors of United Doctors Medical Center,
and set aside the en banc resolution dated February 14, 1989 principal officers, Ricardo Alfonso and Juanito Crisostomo, [Inc.] (UDMC) scheduled on August 20, 1988 or any
of the Securities and Exchange Commission in SEC EB Case persuaded the Yamadas and Enatsu (Shoji Yamada and subsequent meetings; from adopting resolutions to elect
No. 191 and the concurring opinions thereto (Annexes F, G, Tomotada Enatsu are Japanese doctors) to invest fresh new directors and appoint new officers; from approving
and H, pp. 39-62, Rollo), as well as its orders dated June 27, capital in UDMC. The wife of Tomotada Enatsu, Edita resolutions directly or indirectly affecting the operations,
1989 and July 21, 1989 (Annexes M and 0, pp. 83-86, Rollo) Enatsu, is a Filipina. They invested approximately P57 organizational structure, and financial condition of the
directing the corporate secretary of the United Doctors million in UDMC. corporation, ... and from disbursing funds of the said
Medical Center, Inc. (hereafter "UDMC") to call a special corporation except those ordinary day-to-day expenses
meeting of the stockholders to elect the officers and directors The investment was effected by means of: (1) a Stock
pending the final termination of this case. (p. 30, Rollo.)
in the implementation of the SEC's aforementioned en Purchase Agreement; and (2) an Amended Memorandum
banc resolution of February 14, 1989, which the Court of of Agreement whereby the group subscribed to 82.09% of The private respondents' motion for reconsideration of this
Appeals affirmed in its decision dated June 8, 1989 in CA-G.R. the outstanding shares of UDMC. order was denied by the hearing officer on November 16,
SP No. 17435, entitled "Sixto Crisostomo, petitioner vs. 1988. In the same order, he created a management
Both transactions were duly authorized by the board of
Securities and Exchange Commission, Spouses Dr. Shoji committee to administer UDMC (pp. 32-35, Rollo).
directors and stockholders of UDMC. They were submitted
Yamada and Michiyo Yamada, and Spouses Dr. Tomotada to, scrutinized by, and, finally, approved by the Board of The respondents appealed by certiorari to the SEC en
Enatsu and Edita Enatsu, respondents." On August 1, 1989, Investments, the Central Bank of the Philippines, and the banc. On February 14,1989, Commissioner Jose C.
the Court of Appeals denied Crisostomo's motion for Securities and Exchange Commission. The elaborate Laureta, with whom Commissioners Rosario N. Lopez and
reconsideration of its decision. On August 24, 1989, he filed a governmental approval process was done openly and with Gonzalo T. Santos separately concurred, set aside the
petition for review of said decision in this Court (G.R. No. full knowledge of all concerned, including Sixto preliminary injunction issued by Esteves and the

CORPORATION LAW: 7. captial structure Page 84 of 201

 management committee which he created. The dispositive the secretary of UDMC to call a special stockholders' meeting XII, 1987 Constitution) for they do not practice their
part of the decision reads: to elect a new board of directors and officers of the profession (medicine) in the Philippines, neither have they
corporation (Annex F). Petitioner asked the SEC to recall that applied for a license to do so. They only own shares of stock
Wherefore, premises considered, the instant petition for
order on account of his pending motion for reconsideration in in a corporation that operates a hospital. No law limits the
certiorari is GRANTED and the Commission en banc
the Court of Appeals. The motion was opposed by the private sale of hospital shares of stock to doctors only. The ownership
ORDERS:
respondents. On July 21, 1989, the SEC denied petitioner's of such shares does not amount to engaging (illegally,) in the
1. That the questioned orders of the hearing officer in SEC motion (p. 86, Rollo). Whereupon, he filed this petition for practice of medicine, or, nursing. If it were otherwise, the
Case No. 3420 of September 13, 1988 and November 16, certiorari and prohibition with a prayer for preliminary petitioner's stockholding in UDMC would also be illegal.
1988, be immediately vacated; injunction alleging that the SEC en banc abused its discretion:
The SEC's orders dated June 27, 1989 and July 21, 1989
2. That a special stockholders' meeting of UDMC be held for 1. in setting aside Esteves' orders (directing the secretary of UDMC to call a stockholders'
the purpose of allowing the stockholders of record of the meeting, etc.) are not premature, despite the petitioner's
2. in allowing the Japanese group to have control of UDMC
corporation to elect a new board of directors, which special then pending motion for reconsideration of the decision of the
for it will result in culpable violation of Section 7, Article
meeting is hereby directed to be scheduled within 10 days Court of Appeals. The lifting by the Court of Appeals of its writ
XII of the 1987 Constitution which provides that no private
from receipt of a copy of this resolution by the incumbent of preliminary injunction in CA-G.R. SP No. 17435 cleared the
lands shall be transferred or conveyed except to
corporate secretary or acting corporate secretary of UDMC, way for the implementation by the SEC's en banc resolution in
individuals or corporations qualified to acquire or hold
and to this end, that such officer be, as he hereby is, SEC EB Case No. 191. The SEC need not wait for the Court of
land of the public domain, meaning corporations at least
directed: (a) to issue a call for such special meeting and Appeals to resolve the petitioner's motion for reconsideration
sixty per centum of whose capital is owned by Filipino
serve notice thereof on all stockholders of record of the for a judgment decreeing the dissolution of a preliminary
citizens (Sec. 2, Article XII, 1987 Constitution); and
corporation, in accordance with section 6 of article VII of injunction is immediately executory. It "shall not be stayed
UDMC's by-laws; and (b) to submit to the Commission, 3. in allowing the Japanese investors to own more than after its rendition and before an appeal is taken or during the
through the Commission Secretary, a written report of his 40% of the capital stock of UDMC (which operates a pendency of an appeal." (Sec. 4, Rule 39, Rules of Court;
compliance with this particular order of the Commission, nursing and midwifery school) in violation of Section 4 (2) Marcelo Steel Corp. vs. Court of Appeals, 54 SCRA 89 [1973];
not later than 5 days prior to the scheduled date of the Article XIV of the 1987 Constitution which provides that Aguilar vs. Tan, 31 SCRA 205 [1970]; Sitia Teco vs. Ventura, 1
proposed UDMC special stockholders' meeting; educational institutions ... shall be owned solely by Phil. 497 [1902]; Watson & Co., Ltd. vs. M. Enriquez, I Phil.
citizens of the Philippines or corporations or associations 480 [1902]).
3. That upon the election of a new board of directors of
at least sixty per centum of the capital of which is owned
UDMC, that such board be, as it hereby is, enjoined to meet We now address the public and private respondents' separate
by such citizens.
as promptly as possible for the purpose of electing a new motions to dismiss the petition and to cite Crisostomo and his
set of officers of the corporation in order to ensure its The public and private respondents, in their comments on the counsel for contempt of court for forum-shopping. The records
proper management; petition, asked that the petition be dismissed and that the show that Crisostomo had two actions pending in the Court of
petitioner be cited for contempt for forum-shopping. Appeals (CA-G.R. No. SP 17435 and CA-G.R. No. 20285 CV)
4. That the hearing officer be, as he hereby is, directed to when he filed the petition for certiorari (G.R. No. 89095) in
continue with the proceedings of SEC Case No. 3420, and We find no merit in the petition. The first allegation that the this Court on July 27, 1989. The case docketed as CA-G.R. No.
to do so with all deliberate speed, for the purpose of SEC en banc erred in reversing the orders of the hearing 20285-CV, is his appeal from the decision of the Regional Trial
resolving the alleged violation of certain rights of Sixto officer, Esteves, is the same ground raised by the petitioner in Court of Makati, dismissing his complaint for annulment of the
Crisostomo, as a stockholder of UDMC particularly, his right CA-G.R. No. SP 17435. The issue is frivolous for the authority Memorandum of Agreement and the Stock Purchase
to inspect the corporate books and records of UDMC, his of the SEC en banc to review, revise, reverse, or affirm orders Agreement between UDMC and the Japanese investors. CA-
preemptive right to subscribe to the P60 million increase in of its hearing officers is too elementary to warrant any G.R. No. SP 17435 is his petition for certiorari to review the
the authorized capital of UDMC, and his appraisal rights; debate. SEC's en banc resolution upholding those transactions and
and
Equally unmeritorious are the second and third grounds of the ordering the holding of a stockholders meeting to elect the
5. That the board of directors and officers of UDMC be, as petition that the P57 million investment of the Japanese directors of the UDMC, and of a board of directors meeting to
they hereby are, ordered to submit to the Commission, group in UDMC violates the constitutional provisions elect the officers.
through the Chairman, a written report as to its plans as restricting the transfer or conveyance of private lands (Art. Notwithstanding the pendency of those two cases in the Court
regards its nursing school, such report to be submitted at XIII, Sec. 7, 1987 Constitution) and the ownership of of Appeals, Crisostomo filed this petition for certiorari 1 and
least one month prior to the commencement of the school educational institutions (Art. XVI, Sec. 14[a], 1987 prohibition on July 27, 1989 where he raises the same issues
year 1989-1990. Constitution), to citizens of the Philippines or corporations at that he raised in the Court of Appeals.
least 60% of the capital of which is owned by Filipino citizens.
SO ORDERED. (pp. 49-50, Rollo.)
While 82% of UDMC's capital stock is indeed subscribed by The prayer of his petition in CA-G.R. No. SP 17435 reads thus:
Sixto Crisostomo sought a review of the SEC's en the Japanese group, only 30% (equivalent to 171,721 shares 3) After hearing on the merits, judgment be rendered:
banc resolution in the Court of Appeals (CA-G.R. SP No. or P17,172.00) is owned by the Japanese citizens, namely, the
17435). Yamada spouses and Tomotada Enatsu. 52% is owned by a) Annulling and setting aside the questioned rulings of
Edita Enatsu, who is a Filipino. Accordingly, in its application the respondent COMMISSION 2for having been issued
On June 8, 1989, the Court of Appeals dismissed his petition for approval/registration of the foreign equity investments of with grave abuse of discretion tantamount to lack or
and lifted the temporary restraining order that it had issued these investors, UDMC declared that 70% of its capital stock excess of jurisdiction; and
against the SEC's resolution (Annex K, pp. 65-81, Rollo). is owned by Filipino citizens, including Edita Enatsu. That
Petitioner filed a motion for reconsideration (pp. 418-434, application was approved by the Central Bank on August 3, b) Making permanent the preliminary injunction issued in
Rollo). The Court of Appeals required the private respondents 1988 (p. 249, Rollo,). this case against the respondents. (p. 241, Rollo.)
to comment but it denied the petitioner's motion to reinstate
In his petition for certiorari (G.R. No. 89095), he also prays
the writ of preliminary injunction (Annex L, p. 82, Rollo), The investments in UDMC of Doctors Yamada and Enatsu do
that
not violate the Constitutional prohibition against foreigners
On motion of the private respondents (Annex K, p. 413, Rollo), practising a profession in the Philippines (Section 14, Article
the SEC en banc issued an order on June 27, 1989 directing

CORPORATION LAW: 7. captial structure Page 85 of 201

 1. Upon the filing of this petition, a temporary restraining August 7, 1989 in G.R. No. 89095 is hereby lifted. The Court of VILLA-REAL, J.:
order issue enjoining respondents, their representatives or Appeals is ordered to immediately dismiss CA-G.R. CV No.
This is an appeal taken by the defendant Lim Chu Sing from
agents from implementing or executing the SEC opinions 20285. The petitioner and his counsel are censured for
the judgment rendered by the Court of First Instance of
(Annexes "F", "G" and "H") and its June 27 and July 21,1989 engaging in forum-shopping. The petitioner is further ordered
Manila, the dispositive part of which reads as follows:
orders (Annexes "M" and "O") until further orders from the to pay double costs in this instance.
Honorable Court. Wherefore, judgment is rendered sentencing the
SO ORDERED.
defendant to pay the sum of P9,105.17 with interest
xxx xxx xxx
thereon at the rate of six per cent per annum from
3. After notice, this petition be given due course and a writ September 1, 1932, until fully paid, plus the sum of
of preliminary injunction be issued for the same purpose P910.51, as attorney's fees, with the costs of this suit.
and effect upon such terms and conditions the Honorable
In conformity with the stipulation, this judgment shall be
Court may impose; and thereafter, judgment be rendered
subject to execution after ninety (90) days. So ordered.
granting the writ prayed for and annulling and setting aside
the said opinions rendered by the SEC in their stead, In support of his appeal, the appellant assigns the following
affirming the orders of the Hearing Officer (Annexes "A" alleged errors as committed by the court a quo in its decision,
and "B"). (pp. 27-28, Rollo.) to wit:
Additionally, in his petition for review (G.R. No. 89555) he 1. In denying the motion dated December 27, 1932,
prays this Court to giant "all the reliefs" prayed for by him in praying for the inclusion of Lim Cuan Sy, being the
CA-G.R. SP No. 17435. Here is a clear case of forum-shopping. principal debtor, as party to this suit.
There is forum-shopping whenever as a result of an 2. In holding as improper the compensation of the
adverse opinion in one forum, a party seeks a favorable defendant's debt of P9,106.17, claimed in the complaint,
opinion (other than by appeal or certiorari) in another. The with his credit amounting to P10,000 with the Mercantile
principle applies not only with respect to suits filed in the Bank of China.
courts but also in connection with litigations commenced in
the courts while an administrative proceeding is pending, 3. In not ordering that after the compensation the plaintiff-
as in this case, in order to defeat administrative processes appellee, as receiver of the Mercantile Bank of China,
and in anticipation of an unfavorable administrative ruling should liquidate the dividends of the defendant-
and a favorable court ruling. This is specially so, as in this appellant's shares.
case, where the court in which the second suit was 4. In sentencing the defendant-appellant to pay to the
brought, has no jurisdiction. (Villanueva vs. Adre, G.R. No. plaintiff-appellee the sum of P910.51 as attorney's fees,
8063, April 27, 1989.) (p. 303, Rollo) plus interest at 6 per cent per annum on the sum of
Forum-shopping is prohibited by the Interim Rules of Court for P9,105.17, with costs.
it trifles with the courts and abuses their processes (E. Razon, 5. In denying the motion for a new trial.
Inc. vs. Phil. Port Authority, 101 SCRA 450). Section 17 of the
Interim Rules of Courts provides: When the case was called for hearing, the parties submitted
the following stipulation of facts for the consideration of the
17. Petitions for writs of certiorari, etc., No petition for trial court, to wit:
certiorari, mandamus, prohibition, habeas corpus or quo
warranto may be filed in the Intermediate Appellate Court if Come now both parties and to this Honorable Court
another similar petition has been filed or is still pending in respectfully submit the following stipulation:
the Supreme Court. Nor may such petition be filed in the 1. The defendant admits the facts alleged in the
Supreme Court if a similar petition has been filed or is still complaint.
pending in the Intermediate Appellate Court, unless it be to
review the action taken by the Intermediate Appellate 2. The plaintiff admits the allegations in the answer,
Court on the petition filed with it. A violation of this rule particularly with reference to the fact that the defendant
shall constitute contempt of court and shall be a cause for is the owner of two hundred shares at a par value of fifty
the summary dismissal of both petitions, without prejudice pesos (P50) each, that is (Pl0,000).
to the taking of appropriate action against the counsel or 3. The court may render judgment in accordance with this
party concerned. (Interim Rules of Court.) stipulation, but the same shall be subject to execution
Forum-shopping makes the petitioner subject to disciplinary after ninety (90) days.
action and renders his petitions in this Court and in the Court Wherefore, they respectfully submit this stipulation and
of Appeals dismissible (E. Razon, Inc. vs. Philippine Port pray that judgment be rendered in accordance therewith.
Authority, et al., G.R. No. 75197, Resolution dated July 31, G.R. No. L-39427 February 24, 1934
1986; Buan vs. Lopez, Jr., 145 SCRA 34, 38-39; Collado vs. The facts alleged in the complaint and admitted by both
TIRSO GARCIA, in his capacity as receiver of the parties under the above quoted stipulation of facts are as
Hernando, L-43886, May 30, 1988). For this reason, if not for
their lack of merit, the petitions should be, as they are Mercantile Bank of China, plaintiff-appellee, vs. LIM CHU follows:
hereby, dismissed. SING, defendant-appellant.
On June 20, 1930, the defendant-appellant Lim Chu Sing
WHEREFORE, these petitions are dismissed for lack of merit. Marcelino Lontok for appellant. executed and delivered to the Mercantile Bank of China
The temporary restraining order which this Court issued on Nicolas Santiago for appellee. promissory note for the sum of P19,605.17 with interest

CORPORATION LAW: 7. captial structure Page 86 of 201

thereon at 6 per cent per annum, payable monthly as follows: consideration of the appellate court a ruling deemed cent stipulated for costs and attorney's fees cannot be
P1,000 on July 1, 1930; P500 on August 1, 1930; and P500 on erroneous. (8 Am. Enc. P. and P., 157.)" " `Errors in a judgment considered as interest but an indemnity for damages
the first of every month thereafter until the amount of the or decree will not be noticed on appeal in the absence of occasioned by the collection of the indebtedness through
promissory note together with the interest thereon is fully objections and exceptions taken below, and they should be judicial process. Therefore the two rates in question cannot be
paid (Exhibit A). One of the conditions stipulated in said sufficiently specific to direct the attention of the court to the combined and considered usurious interest.
promissory note is that in case of defendant's default in the alleged defects.' (8 Enc. Pl and Pr., 289.)" (Garcia de Lara vs.
With reference to the costs, the 10 per cent stipulated in the
payment of any of the monthly installments, as they become Gonzales de Lara, 2 Phil., 297.) Inasmuch as an exception is
promissory note is for costs and attorney's fees which may be
due, the entire amount or the unpaid balance thereof an objection taken to the decision of the trial court upon a
incurred in the collection of the indebtedness through judicial
together with interest thereon at 6 per cent per annum, shall matter of law and is a notice that the party taking it will
process. Therefore, the defendant-appellant should not again
become due and payable on demand. The defendant had submit for the consideration of the appellate court the ruling
be made to pay for them (Bank of the Philippine Islands vs.
been, making several partial payments thereon, leaving an deemed erroneous, failure to interpose it deprived the
Yulo, 31 Phil., 476).
unpaid balance of P9,105.17. However, he defaulted in the appellant of the right to raise the question whether or not the
payment of several installments by reason of which the court a quo committed the alleged error attributed to it in its In view of the foregoing, this court is of the opinion and so
unpaid balance of P9,105.17 on the promissory note has ipso ruling which had not been excepted to by the said appellant. holds: (1) That failure to file an exception to a ruling rendered
facto become due and demandable. The inclusion in, or exclusion from an action of a certain party in open court denying a motion for the inclusion of a party as
is a question of law. The herein defendant-appellant, not defendant deprives the petitioner, upon appeal of the right to
The facts alleged in the answer and admitted by both parties
having excepted to the order of the Court of First Instance of raise the question whether such denial proper or improper;
under the same stipulation of facts are as follows:
Manila denying his motion for the inclusion of Lim Cuan Sy as (2) that the shares of a banking corporation do not constitute
The debt which is the subject matter of the complaint was not party defendant, is estopped from raising such question upon an indebtedness of the corporation to the stockholder and,
really an indebtedness of the defendant but of Lim Cuan Sy, appeal (Roman Catholic Bishop of Lipa vs. Municipality of San therefore, the latter is not a creditor of the former for such
who had an account with the plaintiff bank in the form of Jose, 27 Phil., 571; Vergara vs. Laciapag, 28 Phil., 439; shares; (3) that the indebtedness of a shareholder to a
"trust receipts" guaranteed by the defendant as surety and Andrews vs. Morente Rosario, 9 Phil., 634). banking corporation cannot be compensated with the amount
with chattel mortgage securities. The plaintiff bank, without of his shares therein, there being no relation of creditor and
The second question to be decided is whether or not it is
the knowledge and consent of the defendant, foreclosed the debtor with respect to such shares; and (4) that the
proper to compensate the defendant-appellant's
chattel mortgage and privately sold the property covered percentage stipulated in a contract, for costs and attorney's
indebtedness of P9,105.17, which is claimed in the complaint,
thereby. Inasmuch as Lim Cuan Sy failed to comply with his fees for the collection of an indebtedness, includes judicial
with the sum of P10,000 representing the value of his shares
obligations, the plaintiff required the defendant, as surety, to costs.
of stock with the plaintiff entity, the Mercantile Bank of China.
sign a promissory note for the sum of P19,105.17 payable in
Wherefore, with the sole modification that the costs be
the manner hereinbefore stated (Exhibit A). The defendant According to the weight of authority, a share of stock or the
eliminated from the appealed judgment, the same is hereby
had been paying the corresponding installments until the debt certificate thereof is not an indebtedness to the owner nor
affirmed, without special pronouncement as to costs of this
was reduced to the sum of P9,105.17 claimed in the evidence of indebtedness and, therefore, it is not a credit (14
instance. So ordered.
complaint. The defendant is the owner of shares of stock of Corpus Juris, p. 388, see. 511). Stockholders, as such, are not
the plaintiff Mercantile Bank of China amounting to P10,000. creditors of the corporation (14 Corpus Juris, p. 848, Sec.
The plaintiff bank is now under liquidation. 1289). It is the prevailing doctrine of the American courts,
repeatedly asserted in the broadest terms, that the capital
On December 27, 1932, the defendant-appellant Lim Chu
stock of a corporation is a trust fund to be used more
Sing filed a motion praying for the inclusion of the principal
particularly for the security of creditors of the corporation,
debtor Lim Cuan Sy as party defendant so that he could avail
who presumably deal with it on the credit of its capital stock
himself of the benefit of the exhaustion of the property of said
(14 Corpus Juris, p. 383, sec. 505). Therefore, the defendant-
Lim Cuan Sy. Said motion was denied in open court by the
appellant Lim Chu Sing not being a creditor of the Mercantile
presiding judge without the defendant-appellant having
Bank of China, although the latter is a creditor of the former,
excepted to such order of denial.
there is no sufficient ground to justify a compensation (art.
The proceeds of the sale of the mortgaged chattels together 1195, Civil Code; Acua Co Chongco vs. Dievas, 12 Phil., 250).
with other payments made were applied to the amount of the
The third question to be decided in this appeal is whether or
promissory note in question, leaving the balance which the
not the court a quo erred in sentencing the said defendant-
plaintiff now seeks to collect.
appellant to pay the sum of P910.51 as attorney's fees in
The first question to be decided in this appeal is whether or addition to interest at 6 per cent per annum on the amount
not the court a quo erred in denying the motion for inclusion sought in the complaint.
of a party a defendant, filed by the defendant-appellant.
The pertinent clause of the promissory note Exhibit A reads as
According to the provisions of section 141 of the Code of Civil follows: "In case of default of any of the above installments,
Procedure, ". . . Rulings of the court upon minor matters, such the total amount of the balance still unpaid of this note will
as adjournments, postponements of trials, the extension of become due and payable on demand plus interest thereon at
time for filing pleadings or motions, and other matters the rate of 6 per cent per annum from date of this note until
addressed to the discretion of the court in the performance of payment is made. And I further agree to pay an additional
its duty, shall not be subject to exception. But exception may sum equivalent to 10 per cent of the said note to cover cost
be taken to any other ruling, order, or judgment of the court and attorney's fees for collection."
made during the pendency of the action in the Court of First
The stipulation relative to the payment of interest at the rate
Instance." "An `exception' has been defined as an objection
of 6 per cent per annum on the unpaid balance of the
taken to the decision of the trial court upon a matter of law,
promissory note Exhibit A refers to the capital and the 10 per
and is a notice that the party taking it preserves for the

CORPORATION LAW: 7. captial structure Page 87 of 201

 Subic Land Corporation (SUBIC), Filipinas Manufacturer's Bank them with an interest, protected by law, in the matter of
(FILMANBANK) and the Register of Deeds of Zambales. In her litigation.
complaint, she alleged that in 1958, she and her husband
Invoking the principle enunciated in the case of PNB v. Phil.
acquired, thru conjugal funds, a parcel of land with
Veg. Oil Co., 49 Phil. 857,862 & 853 (1927), 3petitioners
improvements, known as "Pequena Island", covered by TCT
strongly argue that their ownership of 41.66% of the entire
No. 3258; that after the death of her husband, she discovered
outstanding capital stock of SUBIC entitles them to a
[a] an annotation at the back of TCT No. 3258 that "the land
significant vote in the corporate affairs; that they are affected
was acquired by her husband from his separate capital;" [b]
by the action of the widow of their late brother for it concerns
the registration of a Deed of Assignment dated June 25, 1976
the only tangible asset of the corporation and that it appears
purportedly executed by the late Senator in favor of SUBIC, as
that they are more vitally interested in the outcome of the
a result of which TCT No. 3258 was cancelled and TCT No.
case than SUBIC.
22431 issued in the name of SUBIC; and [c] the registration of
Deed of Mortgage dated April 28, 1977 in the amount of P Viewed in the light of Section 2, Rule 12 of the Revised Rules
2,700,000.00 executed by SUBIC in favor of FILMANBANK; of Court, this Court affirms the respondent court's holding
that the foregoing acts were void and done in an attempt to that petitioners herein have no legal interest in the subject
defraud the conjugal partnership considering that the land is matter in litigation so as to entitle them to intervene in the
conjugal, her marital consent to the annotation on TCT No. proceedings below. In the case of Batama Farmers'
3258 was not obtained, the change made by the Register of Cooperative Marketing Association, Inc. v. Rosal, 4 we held:
Deeds of the titleholders was effected without the approval of "As clearly stated in Section 2 of Rule 12 of the Rules of Court,
the Commissioner of Land Registration and that the late to be permitted to intervene in a pending action, the party
Senator did not execute the purported Deed of Assignment or must have a legal interest in the matter in litigation, or in the
his consent thereto, if obtained, was secured by mistake, success of either of the parties or an interest against both, or
violence and intimidation. She further alleged that the he must be so situated as to be adversely affected by a
assignment in favor of SUBIC was without consideration and distribution or other disposition of the property in the custody
consequently null and void. She prayed that the Deed of of the court or an officer thereof ."
Assignment and the Deed of Mortgage be annulled and that
the Register of Deeds be ordered to cancel TCT No. 22431 and To allow intervention, [a] it must be shown that the movant
to issue a new title in her favor. has legal interest in the matter in litigation, or otherwise
qualified; and [b] consideration must be given as to whether
On March 7, 1979, herein petitioners, sisters of the late the adjudication of the rights of the original parties may be
senator, filed a motion for intervention on the ground that on delayed or prejudiced, or whether the intervenor's rights may
June 20, 1978, their brother conveyed to them one-half (1/2 ) be protected in a separate proceeding or not. Both
of his shareholdings in SUBIC or a total of 416,566.6 shares requirements must concur as the first is not more important
and as assignees of around 41 % of the total outstanding than the second. 5
G.R. No. 58168 December 19, 1989
shares of such stocks of SUBIC, they have a substantial and
CONCEPCION MAGSAYSAY-LABRADOR, SOLEDAD legal interest in the subject matter of litigation and that they The interest which entitles a person to intervene in a suit
MAGSAYSAY-CABRERA, LUISA MAGSAYSAY-CORPUZ, have a legal interest in the success of the suit with respect to between other parties must be in the matter in litigation and
assisted be her husband, Dr. Jose Corpuz, FELICIDAD P. SUBIC. of such direct and immediate character that the intervenor
MAGSAYSAY, and MERCEDES MAGSAYSAY- will either gain or lose by the direct legal operation and effect
On July 26, 1979, the court denied the motion for of the judgment. Otherwise, if persons not parties of the
DIAZ, petitioners, vs. THE COURT OF APPEALS and
intervention, and ruled that petitioners have no legal interest action could be allowed to intervene, proceedings will become
ADELAIDA RODRIGUEZ-MAGSAYSAY, Special
whatsoever in the matter in litigation and their being alleged unnecessarily complicated, expensive and interminable. And
Administratrix of the Estate of the late Genaro F.
assignees or transferees of certain shares in SUBIC cannot this is not the policy of the law. 6
Magsaysay respondents.
legally entitle them to intervene because SUBIC has a
FERNAN, C.J.: personality separate and distinct from its stockholders. The words "an interest in the subject" mean a direct interest
in the cause of action as pleaded, and which would put the
In this petition for review on certiorari, petitioners seek to On appeal, respondent Court of Appeals found no factual or intervenor in a legal position to litigate a fact alleged in the
reverse and set aside [1] the decision of the Court of Appeals legal justification to disturb the findings of the lower court. complaint, without the establishment of which plaintiff could
dated July l3, 1981, 1 affirming that of the Court of First The appellate court further stated that whatever claims the not recover. 7
Instance of Zambales and Olongapo City which denied petitioners have against the late Senator or against SUBIC for
petitioners' motion to intervene in an annulment suit filed by that matter can be ventilated in a separate proceeding, such Here, the interest, if it exists at all, of petitioners-movants is
herein private respondent, and [2] its resolution dated that with the denial of the motion for intervention, they are indirect, contingent, remote, conjectural, consequential and
September 7, 1981, denying their motion for reconsideration. not left without any remedy or judicial relief under existing collateral. At the very least, their interest is purely inchoate,
law. or in sheer expectancy of a right in the management of the
Petitioners are raising a purely legal question; whether or not corporation and to share in the profits thereof and in the
respondent Court of Appeals correctly denied their motion for Petitioners' motion for reconsideration was denied. Hence, the properties and assets thereof on dissolution, after payment of
intervention. instant recourse. the corporate debts and obligations.
The facts are not controverted. Petitioners anchor their right to intervene on the purported While a share of stock represents a proportionate or aliquot
assignment made by the late Senator of a certain portion of interest in the property of the corporation, it does not vest the
On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow
his shareholdings to them as evidenced by a Deed of Sale owner thereof with any legal right or title to any of the
and special administratix of the estate of the late Senator
dated June 20, 1978. 2 Such transfer, petitioners posit, clothes property, his interest in the corporate property being
Genaro Magsaysay, brought before the then Court of First
equitable or beneficial in nature. Shareholders are in no legal
Instance of Olongapo an action against Artemio Panganiban,

CORPORATION LAW: 7. captial structure Page 88 of 201

sense the owners of corporate property, which is owned by as their rights can be ventilated and amply protected in
the corporation as a distinct legal person. 8 another proceeding.
Petitioners further contend that the availability of other WHEREFORE, the instant petition is hereby DENIED. Costs
remedies, as declared by the Court of appeals, is totally against petitioners.
immaterial to the availability of the remedy of intervention.
SO ORDERED.
We cannot give credit to such averment. As earlier stated,
that the movant's interest may be protected in a separate
proceeding is a factor to be considered in allowing or
disallowing a motion for intervention. It is significant to note
at this juncture that as per records, there are four pending
cases involving the parties herein, enumerated as follows: [1]
Special Proceedings No. 122122 before the CFI of Manila,
Branch XXII, entitled "Concepcion Magsaysay-Labrador, et al.
v. Subic Land Corp., et al.", involving the validity of the
transfer by the late Genaro Magsaysay of one-half of his
shareholdings in Subic Land Corporation; [2] Civil Case No.
2577-0 before the CFI of Zambales, Branch III, "Adelaida
Rodriguez-Magsaysay v. Panganiban, etc.; Concepcion
Labrador, et al. Intervenors", seeking to annul the purported G.R. No. 122857 March 27, 1998
Deed of Assignment in favor of SUBIC and its annotation at
the back of TCT No. 3258 in the name of respondent's
deceased husband; [3] SEC Case No. 001770, filed by ROY NICOLAS, petitioner, vs. THE HONORABLE COURT OF
respondent praying, among other things that she be declared APPEALS (Sixth Division) and BLESILO F.B.
in her capacity as the surviving spouse and administratrix of BUAN, respondents.
the estate of Genaro Magsaysay as the sole subscriber and
stockholder of SUBIC. There, petitioners, by motion, sought to
intervene. Their motion to reconsider the denial of their
motion to intervene was granted; [4] SP No. Q-26739 before
the CFI of Rizal, Branch IV, petitioners herein filing a
ROMERO, J.:
contingent claim pursuant to Section 5, Rule 86, Revised
Rules of Court. 9 Petitioners' interests are no doubt amply
protected in these cases. The issue in this petition is whether the Court of Appeals
Neither do we lend credence to petitioners' argument that committed reversible error in its decision 1 dated August 16,
they are more interested in the outcome of the case than the 1995 overturning the decision 2 dated May 31, 1993 of the
corporation-assignee, owing to the fact that the latter is Regional Trial Court of Pasig, Branch 165, by ordering the
willing to compromise with widow-respondent and since a dismissal of petitioner's complaint against private respondent
compromise involves the giving of reciprocal concessions, the
for lack of merit.
only conceivable concession the corporation may give is a
total or partial relinquishment of the corporate assets. 10
Such claim all the more bolsters the contingent nature of On February 19, 1987, petitioner Roy Nicolas and private
petitioners' interest in the subject of litigation. respondent Blesito Buan entered into a Portfolio Management
Agreement,3 wherein the former was to manage the stock
The factual findings of the trial court are clear on this point.
The petitioners cannot claim the right to intervene on the transactions of the latter for a period of three months with an
strength of the transfer of shares allegedly executed by the automatic renewal clause. However, upon the initiative of the
late Senator. The corporation did not keep books and private respondent the agreement was terminated on August
records. 11 Perforce, no transfer was ever recorded, much less 19, 1987, and thereafter he requested for an accounting of all
effected as to prejudice third parties. The transfer must be transactions made by the petitioner.
registered in the books of the corporation to affect third
persons. The law on corporations is explicit. Section 63 of the
Corporation Code provides, thus: "No transfer, however, shall Three weeks after the termination of the agreement,
be valid, except as between the parties, until the transfer is petitioner demanded from the private respondent the amount
recorded in the books of the corporation showing the names of P68,263.67 representing his alleged management fees
of the parties to the transaction, the date of the transfer, the covering the periods of June 30, July 31 and August 19, 1987
number of the certificate or certificates and the number of
as provided for in the Portfolio Management Agreement. But
shares transferred."
the demands went unheeded, much to the chagrin of the
And even assuming arguendo that there was a valid transfer, petitioner.
petitioners are nonetheless barred from intervening inasmuch

CORPORATION LAW: 7. captial structure Page 89 of 201

Rebuffed, petitioner filed a complaint 4 for collection of sum of respondent herein) liable for the payment of the money 5,000 ATLAS 1,450.00
money against the private respondent before the trial court. demanded by appellee on the basis of self-serving profit
In his answer,5 private respondent contended that petitioner and loss statements submitted as evidence by appellee.
5,000 ATLAS 3,906.25
mismanaged his transactions resulting in losses, thus, he was Other than these pieces of evidence, the trial court offered
not entitled to any management fees. no satisfactory reason why the sum demanded by
appellee be paid. 5,000,000 SEAFRONT 11,487.50

After hearing, the trial court rendered its decision in favor of

plaintiff, herein petitioner, thus: We affirm the ruling of the Court of Appeals. 1,000 SMC 5,247.50

In View Of All The Foregoing, judgment is hereby rendered Under the Portfolio Management Agreement, it was agreed 2,000 SMC 5,895.00
ordering the defendant to pay plaintiff as follows: that private respondent would pay the petitioner 20% of all
realized profits every end of the month as his management 1,000 SMC 12,242.50
fees. The exact wording of the provision reads:
1. The amount of P68,263.67 for the management fees of
plaintiff.
xxx xxx xxx
2. The amount of P8,000.00 as and for attorney's fees and P 36,351.87 P27,229.38
expenses of litigation. 3. For his services, the INVESTOR agrees to pay the
PORTFOLIO MANAGER 20% of all realized profits every end
Trading Profit P 9,122.49
of the month.
3. Costs of suit.

x .2
Evidently, the key word in the provision is "profits." Simply
SO ORDERED.
put, profit has been defined as "the excess of return over
expenditure in a transaction or series of transactions" 7 or the
Dismayed, private respondent appealed the decision to the "series of an amount received over the amount paid for goods
Court of Appeals. Finding merit in his case, the appellate court and services."8 P1,824.5010
reversed the trial court's finding and ruled against the
petitioner, to wit:
To begin with, petitioner has the burden to prove that the Profit & Loss Statement of Atty. Blesilo Buan for the Period
transaction realized gains or profits to entitle him to said Ended July 31, 1987
WHEREFORE, the appealed decision should be, as it is management fees, as provided in the Agreement.
hereby REVERSED and SET ASIDE, and as a consequence Accordingly, petitioner submitted the profit and loss
thereof, appellee's complaint is hereby DISMISSED. No statements9for the period of June 30, July 31 and August 19, Shares Issue Profit Loss
costs. 1987, showing a total profit of P341,318.34, of which 20%
would represent his management fees amounting to 22,300,000 BASIC P222,963.75
SO ORDERED. P68,263.70.

400 PLDT 35,372.50

Petitioner's motion for reconsideration was denied by the For clarity these documents are reproduced hereunder:
Court of Appeals on November 29, 1995.6 5,700 GLO 32,347.50
Profit & Loss Statement of Atty. Blesilo Buan for the Period
Due to the sudden reversal of events, petitioner is now before Ended June 30, 1987
1,700 SMC 9,350.00
us assailing the Court of Appeals' ruling alleging that it
misappreciated the evidence he presented before the trial Shares Issue Profit Loss
court. 27,000 AC 16,216.87

1,500 PLDT P7,265.62

In reversing the trial court's decision, the Court of Appeals
opined that:
5,000 ATLAS 4,609.38
P306,900.62 9,350.00
The lower court simply made a sweeping statement that
2,000 SMC 11,477.50
the profits were generated by appellee's (Petitioner Net Trading Profit P297,550.62
herein) transactions, making appellant (Private

CORPORATION LAW: 7. captial structure Page 90 of 201

 x .2 tabulate the number of shares acquired from each reflective of all pertinent and relevant data. Thus, even
company, a column for profit and the last column for loss. assuming the admissibility of these alleged profit and loss
The statements were not authenticated by an auditor, nor statements, they are devoid of any evidentiary weight, for the

by the person who caused the preparation of the same. 13 amounts are conclusions without premises, its bases left to
speculation, conjectures, assertions and guesswork.
P59,510.1211
The analysis of the evidence made by the Court of Appeals
deserves our concurrence. A cursory reading of these As regards Exhibit "B,"17 We quote with approval the Court of
Profit & Loss Statement of Atty. Blesilo Buan for the Period purported profit and loss statements immediately raises Appeals' finding, thus:
Ended August 19, 1987 doubts as to the veracity of the entries stated therein.
There is no question that appellant secured the services of
Shares Issue Proceeds Cost Profit (Loss) Admittedly, like any services rendered or performed, stock appellee as portfolio manager, evidenced by the Portfolio
brokers are entitled to commercial fees or compensation Management Agreement (Exh. A). Pursuant to the
6,000 BENGUET P754,560.00 706,440.00 P48,120.00 pursuant to the Revised Securities Act Rule 19-13, which Agreement, appellee entered into several transactions
reads: from 19 February 1987 up to 19 August 1987 or a period
of six months. Thereafter, the agreement was not
5,000 GLO 189,131.25 202,606.02 (13,474.77)
renewed by appellant. The ledger of accounts (Exhibit "B")
RSA Rule 19-13. Charges for Services Performed.
presented by appellee as proof of the transactions entered
into only shows the following data: (1) dates in which the
Charges by brokers or dealers, if any, for service stocks were acquired; (2) classified the acquired stocks to
performed, including miscellaneous services such as be in long or short term trading; (3) the price of each
Net Profit P34,645.23
collection of monies due for principal, dividends, interests, stock; (4) which company's stocks were acquired; and, (5)
exchange or transfer of securities, appeals, safekeeping or the total amount paid for each stock. It does not show how
x .2 custody of securities, and other services, shall be much profit was realized from each transaction.
reasonable and not unfairly discriminatory between
customers.14
In sum, we find that petitioner has not proven the amounts
indicated adequately. His testimony explaining the bases for
P 6,929.0512 Moreover, the same law provides that any fee or commission the management fees demanded by him are nothing more
must be with due regard to relevant circumstances. 15 than a self-serving exercise which lacks probative value.
There were no credible documentary evidence (e.g. receipts
In according no probative value to these documents, the
Court of Appeals declared that: Unfortunately, the profit and loss statements presented by of the transactions, order ticket, certificate of deposit;
the petitioner are nothing but bare assertions, devoid of any whether the stock certificates were deposited in a bank or
concrete basis or specifics as to the method of arriving at the professional custodian, and others) to support his claim that
Exhibits "C", "D" and "E" likewise cannot be relied upon to amounts indicated in the documents. In fact, it did not even profits were indeed realized. At best, his assertions are
prove that profits were indeed realized. At most, these are state when the stocks were purchased, the type of stocks founded on mere inferences and generalities. There must be
self serving evidence which do not carry much weight. (whether Class "A" or "B" or common or preferred) bought, more convincing proof which in this case is wanting.
There is no question that the profit and loss statements when the stocks were sold, the acquisition and selling price of
are relevant to the issue at hand. But as to whether or not each stock, when the profits, if any, were delivered to the To our mind, petitioner's complaint is similar to an action for
these statements induce belief as to the existence or non- private respondent, the cost of safekeeping or custody of the damages, wherein the general rule is that for the same to be
existence of profits generated by appellee, call for a stocks, as well as the taxes paid for each transaction. With recoverable it must not only be capable of proof but must
minute examination of these documents. It should be respect to the alleged losses, it has been held that where a actually be proved with a reasonable degree of certainty, and
emphasized that the fees being collected by appellee profit or loss statement shows a loss, the statement must courts, in making the awards, must posit specific facts which
does not only spring from the rendition of services per se. show income and items of expense to explain the method of could afford sufficient basis for measuring compensatory or
The Portfolio Management Agreement requires that determining such loss.16 However, in the instant petition, actual damages.18 Since petitioner could not present any
service fees be based on the profits realized out of the petitioner hardly elucidated the reasons and the factors credible evidence to substantiate his claims, the Court of
stock transactions of appellee in behalf of appellant. The behind the losses incurred in the course of the transactions. Appeals was correct in ordering the dismissal of his complaint.
profit and loss statements presented do not sufficiently
prove the existence of such profits.
In short, no evidentiary value can be attributed to the profit Lastly, the futility of petitioner's action became more
and loss statements submitted by the petitioner. These pronounced by the fact that he traded securities for the
The mere fact that evidence is admissible does not documents can hardly be considered a credible or true
account of others without the necessary license from the
necessarily mean that it is also credible (People vs. reflection of the transactions. It is an incomplete record
Securities and Exchange Commission (SEC). Clearly, such
Agripa, 208 SCRA 589). The statements, covering the yielding easily to the inclusion or deletion of certain matters.
omission was in violation of Section 19 of the Revised
months of June, July and up to 19 August 1987, simply The contents are subject to suspicion since they are not

CORPORATION LAW: 7. captial structure Page 91 of 201

Securities Act which provides that no broker shall sell any This is a petition for review of the Court of Appeals' decision had no cause of action against LLL neither did LLL have a
securities unless he is registered with the SEC. The purpose of dated June 5, 1975, affirming (except the awards for damages cause, of action against him; and that CMS and LLL were in
the statute requiring the registration of brokers selling and attorney's fees) a summary judgment for specific pari delicto, have no right of recourse against each other,
performance promulgated by the Court of First Instance of hence, LLL also has no right of action against him. Finally,
securities and the filing of data regarding securities which
Rizal in favor of the private respondents. Ramos alleged that the shares were ordered by the Alakor
they propose to sell, is to protect the public and strengthen Corporation of which he is only the Vice- President and
the securities mechanism. 19 On August 14 and 26, 1969, CMS Stock Brokerage, Inc. (or
Treasurer, so he is not personally liable on the transaction.
CMS) sold to Lopez, Locsin, Ledesma & Co., Inc. (or LLL) on
the floor of the Makati Stock Exchange (or MSE) 2,650 shares On June 7, 1972, CMS filed a motion for summary judgment.
American jurisprudence emphasizes the principle that: of Benguet Consolidated Corporation for P297,650 on a LLL and the third-party defendants separately opposed the
delayed delivery basis of 10 to 20 days, evidenced by motion. On August 10, 1972, the trial court rendered a
Exchange Contracts Nos. B-11807 and B-11814 both dated summary judgment disposing as follows:
. . . , an unlicensed person may not recover compensation August 14, 1969 and B-13084 dated August 26, 1969. LLL
for services as a broker where a statute or ordinance bought the shares for the account of its clients, the third- WHEREFORE, this Court hereby renders judgment as
follows:
requiring a license is applicable and such statute or party defendants, Rene Ledesma, Jose Maria Lopez, Cesar A.
ordinance is of a regulatory nature, was enacted in the Lopez, Jr. and Alfredo Ramos. CMS failed to deliver the shares 1. In favor of plaintiff on its complaint as follows:
exercise of the police power for the purpose of protecting of stocks within the agreed period, but LLL did not demand (a) Compelling defendant Lopez, Locsin, Ledesma &
delivery.
the public, requires a license as evidence of qualification Co., Inc. to accept delivery from plaintiff of the 2,650
and fitness, and expressly precludes an unlicensed person On January 6, 1970, CMS informed LLL that it would deliver shares of Benguet Consolidated covered by the
from recovering compensation by suit, or at least the shares the next day. LLL wrote CMS that it would not latter's disposal letter of January 9, 1970 and to pay
manifests an intent to prohibit and render unlawful the accept the shares because its principals had cancelled their plaintiff the amount of P297,650.00 representing the
orders. In its reply, CMS insisted that LLL take delivery of the total price for which defendant purchased the said
transaction of business by an unlicensed person. 20
Benguet shares. shares on the trading floor of the Makati Stock
Exchange on August 14 and 26, 1969, plus legal
In CMS's Clearing House Report of January 9, 1970, the
We see no reason not to apply the same rule in our interest thereon from the date of extrajudicial
disposition of the shares in favor of LLL appeared, but the
jurisdiction. Stock market trading, a technical and highly demand on January 9, 1970 until the said amount
latter refused to acknowledge receipt of the covering disposal
specialized institution in the Philippines, must been trusted to shall have been fully paid, it being understood that
letter. CMS then deposited the letter in the Office of the
the interest due from January 9, 1970 up to the filing
individuals with proven integrity, competence and knowledge, Exchange Executive, Secretary with the notation "Refused
of the complaint on March 15, 1971, shall be
who have due regard to the requirements of the law. acceptance pending decision of the Exchange" (p. 7, Record
compounded and shall earn legal interest; and
on Appeal).
(b) Adjudging the defendant to pay plaintiff the
When the controversy was submitted to the Board of
WHEREFORE, in view of the foregoing, the assailed decision of amount of P25,000.00 as and for attorney's fees.
Governors of the Exchange for determination, the Board
the Court of Appeals dated August 16, 1995 as well as the issued Resolution No. 523 on August 10, 1970 advising the
2. In favor of plaintiff on its counterclaims against the
Resolution dated November 29, 1995 are hereby AFFIRMED. parties to litigate the matter in court. counterclaims of third-party defendants Cesar Lopez, Jr.
Costs against petitioner. and Jose Maria Lopez, by condemning them, jointly and
Accordingly, CMS filed in the Court of First Instance of Rizal a
severally with the defendant and third-party plaintiff, to
complaint to compel LLL to accept the Benguet shares, to pay
pay plaintiff-
SO ORDERED. the price of P297,650, as well as P25,000 as attorney's fees
and costs. LLL's motion to dismiss the complaint was denied. (a) By way of moral damages the amount of
P20,000.00;
On June 17, 1971, LLL filed an answer alleging that CMS was
in pari delicto for failing to deliver the shares within the (b) By way of exemplary or corrective damages the
stipulated period; that CMS was in estoppel for submitting the amount of P50,000.00 as an example or correction
dispute to the Board of Governors of the Exchange; and that for public good; and
LLL (lid not violate the contracts nor the rules and regulations
of the Exchange. LLL filed a counterclaim for P25,000 as (c) By way of attorney's fees the amount of
G.R. No. L-41295 December 4, 1989 attorney's fees. P5,000.00.

ALFREDO C. RAMOS, petitioner, vs. THE HON. COURT OF On July 7, 1971, LLL impleaded its four principals: Alfredo 3. In favor of the third-party plaintiff and against the third-
APPEALS, LOPEZ, LOCSIN, LEDESMA & CO., INC. and Ramos, Jose Ma. Lopez, Rene Ledesma and Cesar Lopez, Jr. as party defendants on the third-party complaint by-
CMS STOCK BROKERAGE INC., respondents. third-party defendants. With respect to Ramos, LLL alleged (a) Ordering the third-party defendants, pro rata to
Manahan, Cornago, De Vera, Aquino & Associates Law Offices that as a result of CMS's failure to deliver the shares within reimburse the third-party plaintiff the principal
for petitioner. the agreed time frame, Ramos cancelled his order, amount of P297,650.00 plus legal interest thereon,
disauthorized LLL from accepting a subsequent delivery by referred to in the preceding paragraph 2 of the
Sison, Dominguez & Associates for CMS Stock Brokerage, Inc. CMS and agreed to hold LLL free from any liability for his non- dispositive portion of this decision which it may
acceptance of the shares. have paid to the plaintiff under this judgment; and
Augusto Kalaw for Lopez, Locsin, Ledesma & Co., Inc.
Answering LLL's third-party complaint, Ramos averred that he (b) Dismissing the counterelaims of the third-party
was justified in cancelling his order because both CMS and defendants against the third-party plaintiff for
GRIO-AQUINO, J.: LLL defaulted in delivering the shares to him. He also alleged attorney's fees, moral and exemplary damages, and
that the rules and regulations of the Exchange did not apply the expenses of litigation.'
to him for he is not a member of the Exchange; that as CMS

CORPORATION LAW: 7. captial structure Page 92 of 201

 4. The defendant (third-party plaintiff) and the four third- Fifteen (15) days shall be considered a reasonable period unaccompanied by any facts which would be admissible in
party defendants are jointly and severally liable to of time within which to effect delivery unless otherwise evidence at a hearing, are not sufficient to raise genuine
payment of attorney's fees. moral and exemplary or stated in the sales contract. issue of fact sufficient to defeat a motion for summary
corrective damages awarded to plaintiff under this judgment' (Piantadosi vs. Loew's Inc., 7 Fed. Rules Service,
In the event a Selling Member is unable to make delivery
judgment. 786, June 2, 1943). It was also held that 'Summary
within said period, the Buying Member shall deliver a copy
judgment is proper where there is no genuine issue of
With costs of suit against the defendant. (pp. 72-73, of his letter of demand to the Chairman of the Floor
fact, even though an issue may be raised formally by the
Rollo.) Trading & Arbitration Committee who may purchase the
pleadings' (Fletcher vs. Krise, 4 Fed. Rules Service, 765,
shares for the Selling Member's account. (pp. 4-5, Record
On appeal (CA-G.R. No. 52432-R), the Court of Appeals March 3, 1941). And that 'Where all the facts are within
on Appeals, p. 121, Rollo.)
affirmed the trial court's decision except the awards for the judicial knowledge of the Court, summary judgment
damages and attomey's fees, and remanded the case for the Paragraph 5, Section 1, Article XI of the same Rules provides: may be granted as a matter of law' (Fletcher vs. Evening
reception of evidence on the plaintiff s claims for damages Newspaper Co., 3 Fed. Rules Service, 539, June 28, 1940).
... Delayed Delivery Transactions- (Miranda vs. Malate Garage & Taxicab, Inc., 99 Phil. 670;
and attorney's fees. Motions for reconsideration by LLL and
the third-party defendants were denied. On the agreed day of delivery, notice in writing shall be emphasis supplied.)
given by the selling broker to the buying broker, said Neither is there merit in the petitioner's contention that
In this petition for review, the petitioner alleges that the
notice to reach the buying broker not later than 4:00 because LLL, as third-party plaintiff, did not file a motion for
appellate court erred in rendering a summary judgment, in
p.m. ... . (p. 16, Rollo.) summary judgment against him as third-party defendant, the
failing to find that CMS has no right to damages against the
petitioner there being no privity of contract between them, Section 1, Article V of the Exchange Rules and Regulations trial court and the Court of Appeals may not render a
and in refusing to exonerate the petitioner from personal covers not only contracts without a fixed period, but also summary judgment against him. The argument has no merit
liability for the orders he placed with LLL for the account of those contracts where a period for delayed delivery is for in his Answer to the Third-Party Complaint, he admitted
the Alakor Corporation. stipulated. the material allegations of the Third-Party Complaint and
prayed for "costs against the third- party plaintiff and / or the
The petition is without merit. In the case at bar, the stock purchases of LLL were on a 10-20 plaintif" (p. 83, Record on Appeal). His defenses alleging no
day delayed delivery basis. Accordingly, after that period cause of action and in pari delicto raised pure questions of
Petitioner's contention that the alleged oversight of CMS in
lapsed, the Buying Member (LLL) should have advised the law. His other defense that the Alakor Corporation (not him)
not delivering the shares within the stipulated period should
Selling Member CMS in writing, giving CMS one (1) full was the real party in interest was nullified by the admission in
be determined in a trial is immaterial. Summary judgment in
business day from receipt of said letter of demand to comply. paragraph 5 of his Answer (p. 77, Record on Appeal) of "the
Rule 34 of the Revised Rules of' Court is a procedural device
Since the selling member was unable to make delivery within material allegations in paragraph 12 of the third party
for promptly disposing of actions without genuine issue as to
the stated one (1) full business day from receipt of the complaint (of LLL)" which alleged that he (Ramos) placed the
any material fact. In any stock exchange contract, time is of
demand letter, the buying member should have delivered a order for himself.
the essence. This is why the Exchange and its members
copy of his letter of demand to the Chairman of the Floor
agreed to have a set of rules and regulations governing the 12. That on August 14, 1969, the third-party defendant,
Trading and Arbitration Committee who would have
members in their dealings with one another. LLL and Alfredo C. Ramos, placed an order with the third-party
purchased the shares for the selling member's account.
respondent CMS as members of the Exchange, are bound by plaintiff as stock broker to buy for him (Alfredo C. Ramos)
its Rules and Regulations which are not contrary to law, As observed by the trial court, Section 1, Article V of the in the Makati Stock Exchange one thousand six hundred
morals, good customs, public order or public policy (Art. 1306, Exchange Rules does not vest on the buyer, respondent LLL, a (1,600) shares of Benguet Consolidated, Inc. at the
Civil Code). right to rescind its contract with CMS upon the latter's default. prevailing price for delivery in 'ten (10) to twenty (20)
The Exchange Rules obligate the buyer to make a demand, days. (p. 62, Record on Appeal.)
Petitioner invokes Articles 1191, 1165 and 1169 of the Civil
and if the selling member fails to deliver the ordered shares
Code on the right of a party to rescind a contract in case one
despite the demand, the buyer is further obligated to deliver Furthermore, he agreed in his letter-undertaking of January 7,
of the obligors should not comply with what is incumbent
a copy of his demand letter to the Chairman of the Floor 1970, to hold LLL "free from any liability" (p. 67, Record on
upon him.
Trading and Arbitration Committee so that the latter may Appeal) for rejecting the belated tender of the shares by CMS.
That right, however, may be waived by contract, as in this purchase the shares for the selling member's account. Said As the cause of action in the third-party complaint was
case, where CMS and LLL had agreed to abide with the Rules rules were held binding on members of the Exchange (Lopez, inseparable from that of the complaint, the motion for
and Regulations of the Exchange of which they were Locsin, Ledesma & Co., Inc. vs. Court of Appeals, G.R. No. L- summary judgment filed by CMS to resolve the entire
members, which rules provide for a remedy, other than 41291, December 8, 1988). Inasmuch as petitioner placed his controversy was proper. The action being one to recover a
rescission, when a party fails to deliver on another's order to order for Benguet shares through a member of the Exchange debt or sum of money, it is a proper subject of summary
buy shares. Section 1, Article V of the Rules and Regulations (LLL), he is indirectly bound by the rules of the Exchange. judgment.
of the Exchange provides:
The defendants' lack of knowledge regarding the truth of the The appellate court did not commit a reversible error in
SEC. 1. -In the event of a Selling Member failing to make allegation in the complaint, that the failure of CMS to deliver remanding the case to the trial court for determination of the
delivery within a reasonable period of time of shares sold the Benguet shares on time was due to oversight, did not plaintiffs claims for damages and attorney's fees, for "if
under delayed delivery contract, it shall be the Buying constitute an obstacle to the rendition of a summary judgment is not rendered upon the whole case or for all the
Member's duty to advise the Selling Member in writing, judgment by the trial court, for although an averment of lack relief asked and a trial is necessary" the Court shall direct
giving him one (1) full business day from the time of of knowledge has the effect of a denial, it does not raise a "such further proceedings in the action as are just." (Sec. 4,
receipt of said letter of demand, to make delivery. genuine issue. Rule 34, Rules of Court.)
The Buying Member shall obtain a written receipt from the It is true that under Section 7, Rule 9 'Where the WHEREFORE, the petition is denied and the decision of the
Selling Member on the duplicate copy of the letter of defendant is without knowledge or information sufficient Court of Appeals is AFFIRMED. Costs against the petitioner.
demand. This receipt must state the time of delivery of to form a belief as to the truth of a material averment
the letter of demand to the Selling Member. made in the complaint, he shall so state, and this shall SO ORDERED.
have the effect of a denial,' but 'mere denials

CORPORATION LAW: 7. captial structure Page 93 of 201

CORPORATION LAW: 7. captial structure Page 94 of 201
G.R. No. 90580 April 8, 1991 direct and immediate and not simply contingent or P.D. No. 902-A. In fact, at the time the motion for intervention
expectant." was filed, there was pending between Freeman, Inc. and the
petitioners SEC Case No. 03577 entitled "Dissolution,
RUBEN SAW, DIONISIO SAW, LINA S. CHUA, LUCILA S.
Accounting, Cancellation of Certificate of Registration with
RUSTE AND EVELYN SAW, petitioners, vs. HON. COURT OF It also ruled against the petitioners' argument that because
Restraining Order or Preliminary Injunction and Appointment
APPEALS, HON. BERNARDO P. PARDO, Presiding Judge they had already filed a notice of appeal, the trial judge had
of Receiver." It also avers in its Comment that the
of Branch 43, (Regional Trial Court of Manila), lost jurisdiction over the case and could no longer issue the
intervention of the petitioners could have only caused delay
FREEMAN MANAGEMENT AND DEVELOPMENT writ of execution.
and prejudice to the principal parties.
CORPORATION, EQUITABLE BANKING CORPORATION,
FREEMAN INCORPORATED, SAW CHIAO LIAN, THE
The petitioners are now before this Court, contending that:
REGISTER OF DEEDS OF CALOOCAN CITY, and DEPUTY On the second assignment of error, Equitable maintains that
SHERIFF ROSALIO G. SIGUA, respondents. the petitioners' appeal could only apply to the denial of their
1. The Honorable Court of Appeals erred in holding that motion for intervention and not to the main case because
the petitioners cannot intervene in Civil Case No. 88- their personality as party litigants had not been recognized by
Benito O. Ching, Jr. for petitioners.
44404 because their rights as stockholders of Freeman are the trial court.
William R. Vetor for Equitable Banking Corp.
merely inchoate and not actual, material, direct and
Pineda, Uy & Janolo for Freeman, Inc. and Saw Chiao.
immediate prior to the dissolution of the corporation;
After examining the issues and arguments of the parties, the
Court finds that the respondent court committed no reversible
2. The Honorable Court of Appeals erred in holding that error in sustaining the denial by the trial court of the
the appeal of the petitioners in said Civil Case No. 88- petitioners' motion for intervention.
44404 was confined only to the order denying their
CRUZ, J.: motion to intervene and did not divest the trial court of its
In the case of Magsaysay-Labrador v. Court of Appeals, 3 we
jurisdiction over the whole case.
ruled as follows:
A collection suit with preliminary attachment was filed by
Equitable Banking Corporation against Freeman, Inc. and Saw The petitioners base their right to intervene for the protection
Viewed in the light of Section 2, Rule 12 of the Revised
Chiao Lian, its President and General Manager. The petitioners of their interests as stockholders on Everett v. Asia Banking
2 Rules of Court, this Court affirms the respondent court's
moved to intervene, alleging that (1) the loan transactions Corp. where it was held:
holding that petitioners herein have no legal interest in
between Saw Chiao Lian and Equitable Banking Corp. were
the subject matter in litigation so as to entitle them to
not approved by the stockholders representing at least 2/3 of The well-known rule that shareholders cannot ordinarily intervene in the proceedings below. In the case of Batama
corporate capital; (2) Saw Chiao Lian had no authority to sue in equity to redress wrongs done to the corporation, Farmers' Cooperative Marketing Association, Inc. v. Rosal,
contract such loans; and (3) there was collusion between the but that the action must be brought by the Board of we held: "As clearly stated in Section 2 of Rule 12 of the
officials of Freeman, Inc. and Equitable Banking Corp. in Directors, . . . has its exceptions. (If the corporation [were] Rules of Court, to be permitted to intervene in a pending
securing the loans. The motion to intervene was denied, and under the complete control of the principal action, the party must have a legal interest in the matter
the petitioners appealed to the Court of Appeals. defendants, . . . it is obvious that a demand upon the in litigation, or in the success of either of the parties or an
Board of Directors to institute action and prosecute the interest against both, or he must be so situated as to be
Meanwhile, Equitable and Saw Chiao Lian entered into a same effectively would have been useless, and the law adversely affected by a distribution or other disposition of
compromise agreement which they submitted to and was does not require litigants to perform useless acts. the property in the custody of the court or an officer
approved by the lower court. But because it was not complied thereof."
with, Equitable secured a writ of execution, and two lots Equitable demurs, contending that the collection suit against
owned by Freeman, Inc. were levied upon and sold at public Freeman, Inc, and Saw Chiao Lian is essentially in
To allow intervention, [a] it must be shown that the
auction to Freeman Management and Development Corp. personam and, as an action against defendants in their movant has legal interest in the matter in litigation, or
personal capacities, will not prejudice the petitioners as otherwise qualified; and [b] consideration must be given
The Court of Appeals 1 sustained the denial of the petitioners' stockholders of the corporation. The Everett case is not as to whether the adjudication of the rights of the original
motion for intervention, holding that "the compromise applicable because it involved an action filed by the minority parties may be delayed or prejudiced, or whether the
agreement between Freeman, Inc., through its President, and stockholders where the board of directors refused to bring an intervenor's rights may be protected in a separate
Equitable Banking Corp. will not necessarily prejudice action in behalf of the corporation. In the case at bar, it was proceeding or not. Both requirements must concur as the
petitioners whose rights to corporate assets are at most Freeman, Inc. that was being sued by the creditor bank. first is not more important than the second.
inchoate, prior to the dissolution of Freeman, Inc. . . . And
intervention under Sec. 2, Rule 12 of the Revised Rules of Equitable also argues that the subject matter of the
The interest which entitles a person to intervene in a suit
Court is proper only when one's right is actual, material, intervention falls properly within the original and exclusive
between other parties must be in the matter in litigation
jurisdiction of the Securities and Exchange Commission under and of such direct and immediate character that the

CORPORATION LAW: 7. captial structure Page 95 of 201

 intervenor will either gain or lose by the direct legal It is not an independent proceeding, but an ancillary and
operation and effect of the judgment. Otherwise, if supplemental one which, in the nature of things, unless
persons not parties of the action could be allowed to otherwise provided for by the statute or Rules of Court, must
intervene, proceedings will become unnecessarily be in subordination to the main proceeding. 5 It may be laid
complicated, expensive and interminable. And this is not down as a general rule that an intervenor is limited to the
the policy of the law. field of litigation open to the original parties. 6

The words "an interest in the subject" mean a direct In the case at bar, there is no more principal action to be
interest in the cause of action as pleaded, and which resolved as a writ of execution had already been issued by
would put the intervenor in a legal position to litigate a the lower court and the claim of Equitable had already been
fact alleged in the complaint, without the establishment of satisfied. The decision of the lower court had already become
which plaintiff could not recover. final and in fact had already been enforced. There is therefore
no more principal proceeding in which the petitioners may
intervene.
Here, the interest, if it exists at all, of petitioners-movants
is indirect, contingent, remote, conjectural, consequential
and collateral. At the very least, their interest is purely As we held in the case of Barangay Matictic v. Elbinias:7
inchoate, or in sheer expectancy of a right in the
management of the corporation and to share in the profits
An intervention has been regarded, as merely "collateral
thereof and in the properties and assets thereof on
or accessory or ancillary to the principal action and not an
dissolution, after payment of the corporate debts and
independent proceedings; and interlocutory proceeding
obligations.
dependent on and subsidiary to, the case between the G.R. No. 80039 April 18, 1989
original parties." (Fransisco, Rules of Court, Vol. 1, p. 721).
ERNESTO M. APODACA, petitioner, vs. NATIONAL LABOR
While a share of stock represents a proportionate or With the final dismissal of the original action, the RELATIONS COMMISSION, JOSE M. MIRASOL and
aliquot interest in the property of the corporation, it does complaint in intervention can no longer be acted upon. In INTRANS PHILS., INC., respondents.
not vest the owner thereof with any legal right or title to the case of Clareza v. Resales, 2 SCRA 455, 457-458, it
Diego O. Untalan for petitioner.
any of the property, his interest in the corporate property was stated that:
being equitable or beneficial in nature. Shareholders are in The Solicitor General for public respondent.
no legal sense the owners of corporate property, which is Barcelona, Perlas, Joven & Academia Law Offices for private
That right of the intervenor should merely be in aid of
owned by the corporation as a distinct legal person. respondents.
the right of the original party, like the plaintiffs in this
case. As this right of the plaintiffs had ceased to GANCAYCO, J.:
On the second assignment of error, the respondent court exist, there is nothing to aid or fight for. So the right
Does the National Labor Relations Commission (NLRC) have
correctly noted that the notice of appeal was filed by the of intervention has ceased to exist. jurisdiction to resolve a claim for non-payment of stock
petitioners on October 24, 1988, upon the denial of their subscriptions to a corporation? Assuming that it has, can an
motion to intervene, and the writ of execution was issued by obligation arising therefrom be offset against a money claim
Consequently, it will be illogical and of no useful purpose
the lower court on January 30, 1989. The petitioners' appeal of an employee against the employer? These are the issues
to grant or even consider further herein petitioner's prayer brought to this court through this petition for review of a
could not have concerned the "whole" case (referring to the
for the issuance of a writ of mandamus to compel the decision of the NLRC dated September 18, 1987.
decision) because the petitioners "did not appeal the decision
lower court to allow and admit the petitioner's complaint
as indeed they cannot because they are not parties to the The only remedy provided for by law from such a decision is a
in intervention. The dismissal of the expropriation case
case despite their being stockholders of respondent Freeman, special civil action for certiorari under Rule 65 of the Rules of
has no less the inherent effect of also dismissing the Court based on jurisdictional grounds or on alleged grave
Inc." They could only appeal the denial of their motion for
motion for intervention which is but the unavoidable abuse of discretion amounting to lack or excess of jurisdiction,
intervention as they were never recognized by the trial court
consequence. not by way of an appeal by certiorari. Nevertheless, in the
as party litigants in the main case. interest of justice, this petition is treated as a special civil
action for certiorari.
The Court observes that even with the denial of the
Intervention is "an act or proceeding by which a third person Petitioner was employed in respondent corporation. On
petitioners' motion to intervene, nothing is really lost to
is permitted to become a party to an action or proceeding August 28, 1985, respondent Jose M. Mirasol persuaded
them.1wphi1 The denial did not necessarily prejudice them
between other persons, and which results merely in the petitioner to subscribe to 1,500 shares of respondent
as their rights are being litigated in the case now before the corporation at P100.00 per share or a total of P150,000.00.
addition of a new party or parties to an original action, for the
Securities and Exchange Commission and may be fully He made an initial payment of P37,500.00. On September 1,
purpose of hearing and determining at the same time all
asserted and protected in that separate proceeding. 1975, petitioner was appointed President and General
conflicting claims which may be made to the subject matter in
Manager of the respondent corporation. However, on January
litigation.4 2, 1986, he resigned.
WHEREFORE, the petition is DENIED, with costs against the
petitioners. It is so ordered.

CORPORATION LAW: 7. captial structure Page 96 of 201

On December 19, 1986, petitioner instituted with the NLRC a employer for the amount paid by him as premium on the
complaint against private respondents for the payment of his insurance;
unpaid wages, his cost of living allowance, the balance of his
(b) For union dues, in cases where the right of the worker
gasoline and representation expenses and his bonus
or his union to checkoff has been recognized by the
compensation for 1986. Petitioner and private respondents
employer or authorized in writing by the individual worker
submitted their position papers to the labor arbiter. Private
concerned; and
respondents admitted that there is due to petitioner the
amount of P17,060.07 but this was applied to the unpaid (c) In cases where the employer is authorized by law or
balance of his subscription in the amount of P95,439.93. regulations issued by the Secretary of Labor. 4
Petitioner questioned the set-off alleging that there was no
call or notice for the payment of the unpaid subscription and WHEREFORE, the petition is GRANTED and the questioned
that, accordingly, the alleged obligation is not enforceable. decision of the NLRC dated September 18, 1987 is hereby set
aside and another judgment is hereby rendered ordering
In a decision dated April 28, 1987, the labor arbiter sustained private respondents to pay petitioner the amount of
the claim of petitioner for P17,060.07 on the ground that the P17,060.07 plus legal interest computed from the time of the
employer has no right to withhold payment of wages already filing of the complaint on December 19, 1986, with costs
earned under Article 103 of the Labor Code. Upon the appeal against private respondents.
of the private respondents to public respondent NLRC, the
decision of the labor arbiter was reversed in a decision dated SO ORDERED.
September 18, 1987. The NLRC held that a stockholder who
fails to pay his unpaid subscription on call becomes a debtor
of the corporation and that the set-off of said obligation
against the wages and others due to petitioner is not contrary
to law, morals and public policy.
Hence, the instant petition.
The petition is impressed with merit.
Firstly, the NLRC has no jurisdiction to determine such intra-
corporate dispute between the stockholder and the
corporation as in the matter of unpaid subscriptions. This
controversy is within the exclusive jurisdiction of the
Securities and Exchange Commission. 1
Secondly, assuming arguendo that the NLRC may exercise
jurisdiction over the said subject matter under the
circumstances of this case, the unpaid subscriptions are not
due and payable until a call is made by the corporation for
payment. 2 Private respondents have not presented a
resolution of the board of directors of respondent corporation
calling for the payment of the unpaid subscriptions. It does
not even appear that a notice of such call has been sent to
petitioner by the respondent corporation.
What the records show is that the respondent corporation
deducted the amount due to petitioner from the amount
receivable from him for the unpaid subscriptions. 3 No doubt
such set-off was without lawful basis, if not premature. As
there was no notice or call for the payment of unpaid
subscriptions, the same is not yet due and payable.
Lastly, assuming further that there was a call for payment of
the unpaid subscription, the NLRC cannot validly set it off
against the wages and other benefits due petitioner. Article
113 of the Labor Code allows such a deduction from the
wages of the employees by the employer, only in three
instances, to wit:
ART. 113. Wage Deduction. No employer, in his own
behalf or in behalf of any person, shall make any
deduction from the wages of his employees, except:
(a) In cases where the worker is insured with his consent
by the employer, and the deduction is to recompense the

CORPORATION LAW: 7. captial structure Page 97 of 201

G.R. No. L-19441 March 27, 1923 Fua Cun thereupon brought the present action maintaining Turning now to the rights of the plaintiff in the stock in
that by virtue of the payment of the one-half of the question, it is argued that the interest held by Chua Soco was
FUA CUN (alias Tua Cun), plaintiff-appellee, vs. RICARDO
subscription price of five hundred shares Chua Soco in effect merely an equity which could not be made the subject of a
SUMMERS, in his capacity as Sheriff ex-oficio of the
became the owner of two hundred and fifty shares and chattel mortgage. Though the courts have uniformly held that
City of Manila, and the CHINA BANKING
praying that his, the plaintiff's, lien on said shares, by virtue chattel mortgages on shares of stock and other choses in
CORPORATION, defendants-appellants.
of the chattel mortgage, be declared to hold priority over the action are valid as between the parties, there is still much to
OSTRAND, J.: claim of the defendant Banking Corporation; that the be said in favor of the defendants' contention that the chattel
defendants be ordered to deliver the receipt in question to mortgage here in question would not prevail over liens of
It appears from the evidence that on August 26, 1920, one him; and that he be awarded the sum of P5,000 in damages third parties without notice; an equity in shares of stock is of
Chua Soco subscribed for five hundred shares of stock of the for wrongful attachment. such an intangible character that it is somewhat difficult to
defendant Banking Corporation at a par value of P100 per see how it can be treated as a chattel and mortgaged in such
share, paying the sum of P25,000, one-half of the subscription The trial court rendered judgment in favor of the plaintiff a manner that the recording of the mortgage will furnish
price, in cash, for which a receipt was issued in the following declaring that Chua Soco, through the payment of the constructive notice to third parties. As said by the court in the
terms: P25,000, acquired the right to two hundred and fifty shares
case of Spalding vs. Paine's Adm'r. (81 Ky., 416), in regard to a
fully paid up, upon which shares the plaintiff holds a lien
This is to certify, That Chua Soco, a subscriber for five superior to that of the defendant Banking Corporation and chattel mortgage of shares of stock:
hundred shares of the capital stock of the China Banking ordering that the receipt be returned to said plaintiff. From These certificates of stock are in the pockets of the owner,
Corporation at its par value of P100 per share, has paid this judgment the defendants appeal. and go with him where he may happen to locate, as
into the Treasury of the Corporation, on account of said choses in action, or evidence of his right, without any
subscription and in accordance with its terms, the sum of Though the court below erred in holding that Chua Soco, by means on the part of those with whom he proposes to
twenty-five thousand pesos (P25,000), Philippine currency. paying one-half of the subscription price of five hundred deal on the faith of such a security of ascertaining
shares, in effect became the owner of two hundred and fifty
Upon receipt of the balance of said subscription in shares, the judgment appealed from is in the main correct. whether or not this stock is in pledge or mortgaged to
accordance with the terms of the calls of the Board of others. He finds the name of the owner on the books of
Directors, and surrender of this certificate, duly executed The claim of the defendant Banking Corporation upon which it the company as a subscriber of paid-up stock, amounting
certificates for said five hundred shares of stock will be brought the action in which the writ of attachment was to 180 shares, with the certificates in his possession, pays
issued to the order of the subscriber. issued, was for the non-payment of drafts accepted by Chua for these certificates their full value, and has the transfer
Soco and had no direct connection with the shares of stock in to him made on the books of the company, thereby
It is expressly understood that the total number of shares question. At common law a corporation has no lien upon the obtaining a perfect title. What other inquiry is he to make,
specified in this receipt is subject to sale by the China shares of stockholders for any indebtedness to the so as to make his investment certain and secure? Where is
Banking Corporation for the payment of any unpaid corporation (Jones on Liens, 3d ed., sec. 375) and our he to look, in order to ascertain whether or not this stock
subscriptions, should the subscriber fail to pay the whole attention has not been called to any statute creating such lien has been mortgaged? The chief office of the company
or any part of the balance of his subscription upon 30 here. On the contrary, section 120 of the Corporation Act may be at one place to-day and at another tomorrow. The
days' notice issued therefor by the Board of Directors. provides that "no bank organized under this Act shall make owner may have no fixed or permanent abode, and with
Witness our official signatures at Manila, P. I., this 25th day any loan or discount on the security of the shares of its own his notes in one pocket and his certificates of stock in the
of August, 1920. capital stock, nor be the purchaser or holder of any such other the one evidencing the extent of his interest in
shares, unless such security or purchase shall be necessary to the stock of the corporation, the other his right to money
(Sgd.) MERVIN WEBSTER prevent loss upon a debt previously contracted in good faith, owing him by his debtor, we are asked to say that the
Cashier and stock so purchased or acquired shall, within six months mortgage is effectual as to the one and inoperative as to
(Sgd.) DEE C. CHUAN from the time of its purchase, be sold or disposed of at public the other.
President or private sale, or, in default thereof, a receiver may be But a determination of this question is not essential in the
appointed to close up the business of the bank in accordance
On May 18, 1921, Chua Soco executed a promissory note in with law." present case. There can be no doubt that an equity in shares
favor of the plaintiff Fua Cun for the sum of P25,000 payable of stock may be assigned and that the assignment is valid as
in ninety days and drawing interest at the rate of 1 per cent Section 35 of the United States National Banking Act of 1864 between the parties and as to persons to whom notice is
per month, securing the note with a chattel mortgage on the contains a similar provision and it has been held in various brought home. Such an assignment exists here, though it was
shares of stock subscribed for by Chua Soco, who also decisions of the United States Supreme Court that a bank made for the purpose of securing a debt. The endorsement to
endorsed the receipt above mentioned and delivered it to the organized under that Act can have no lien on its own stock for the plaintiff of the receipt above mentioned reads:
mortgagee. The plaintiff thereupon took the receipt to the the indebtedness of the stockholders even when the by-laws For value received, I assign all my rights in these shares in
manager of the defendant Bank and informed him of the provide that the shares shall be transferable only on the favor of Mr. Tua Cun.
transaction with Chua Soco, but was told to await action upon books of the corporation and that no such transfer shall be
the matter by the Board of Directors. made if the holder of the shares is indebted to the Manila, P. I., May 18, 1921.
corporation. (Jones on Liens, 3d ed., sec. 384; First National
In the meantime Chua Soco appears to have become Bank of South Bend vs. Lanier and Handy, 11 Wall., 369; (Sgd.) CHUA SOCO
indebted to the China Banking Corporation in the sum of Bullard vs. National Eagle Bank, 18 Wall., 589; First National This endorsement was accompanied by the delivery of the
P37,731.68 for dishonored acceptances of commercial paper Bank of Xenia vs. Stewart and McMillan, 107 U.S., 676.) The receipt to the plaintiff and further strengthened by the
and in an action brought against him to recover this amount, reasons for this doctrine are obvious; if banking corporations execution of the chattel mortgage, which mortgage, at least,
Chua Soco's interest in the five hundred shares subscribed for were given a lien on their own stock for the indebtedness of operated as a conditional equitable assignment.
was attached and the receipt seized by the sheriff. The the stockholders, the prohibition against granting loans or
attachment was levied after the defendant bank had received discounts upon the security of the stock would become As against the rights of the plaintiff the defendant bank had,
notice of the facts that the receipt had been endorsed over to largely ineffective. as we have seen, no lien unless by virtue of the attachment.
the plaintiff. But the attachment was levied after the bank had received
notice of the assignment of Chua Soco's interests to the

CORPORATION LAW: 7. captial structure Page 98 of 201

plaintiff and was therefore subject to the rights of the latter. It In discussing this problem we accept as sound law the subscriber, by which the subscription is not to be payable,
follows that as against these rights the defendant bank holds proposition propounded by the appellant's attorneys and or is to be payable in part only, whether it is for the
no lien whatever. taken from Fletcher's Cyclopedia as follows: purpose of pretending that the stock is really greater than
it is, or for the purpose of preventing the predominance of
As we have already stated, the court erred in holding the In the absence of restrictions in its character, a
certain stockholders, or for any other purpose, is illegal
plaintiff as the owner of two hundred and fifty shares of stock; corporation, under its general power to contract, has the
and void as in fraud of other stockholders or creditors, or
"the plaintiff's rights consist in an equity in five hundred power to accept subscriptions upon any special terms not
both, and cannot be either enforced by the subcriber or
shares and upon payment of the unpaid portion of the prohibited by positive law or contrary to public policy,
interposed as a defense in an action on the subcription.
subscription price he becomes entitled to the issuance of provided they are not such as to require the performance
(14 C. J., p. 570.)
certificate for said five hundred shares in his favor." of acts which are beyond the powers conferred upon the
corporation by its character, and provided they do not The rule thus stated is supported by a long line of decisions
The judgment appealed from is modified accordingly, and in
constitute a fraud upon other subscribers or stockholders, from numerous courts, with little or no diversity of opinion. As
all other respects it is affirmed, with the costs against the
or upon persons who are or may become creditors of the stated in the headnote to the opinion of the Supreme Court of
appellants Banking Corporation. So ordered.
corporation. (Fletcher, Cyc. Corp., sec. 602, p. 1314.) United States in the case of Putnan vs. New Albany, etc.
G.R. No. L-27872 February 25, 1928 Railroad Co. as reported in 21 Law. ed., 361, the rule is that
Under the American regime corporate franchises in the
"Conditions attached to subcriptions, which, if valid, lessen
THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee, vs. Philippine Islands are granted subject to the provisions of
the capital of the company, are a fraud upon the grantor of
I. B. DEXTER, defendant-appellant. section 74 of the Organic Act of July 1, 1902, which, in the
the franchise, and upon those who may become creditors of
part here material, is substantially reproduced in section 28 of
Ross, Lawrence & Selph and Antonio T. Carrascoso, Jr., for the corporation, and upon unconditional stockholders."
the Autonomy Act of August 29, 1916. In the Organic Act it is
appellant. among other things, declared: "That all franchises, privileges, In the appellant's brief attention is called to the third
Lucio Javillonar for appellee. or concessions granted under this Act shall forbid the issue of headnote to Bank vs. Cook (125 Iowa, 111), where it is stated
STREET, J.: stock or bonds except in exchange for actual cash or for that a collateral agreement with a subcriber to stock that his
property at a fair valuation equal to the par value of the stock subcription shall not be collectible except from dividends on
This action was instituted in the Court of First Instance of or bonds so issued; . . . ." (Act of Congress of July 1, 1902, the stock, is valid as between the parties and a complete
Manila by the National Exchange Co., Inc., as assignee sec. 74.) defense to a suit on notes given for the amount of the
(through the Philippine National Bank) of C. S. Salmon & Co., subscription. A careful persual of the decision will show that
for the purpose of recovering from I. B. Dexter a balance of Pursuant to this provision we find that the Philippine
the rule thus broadly stated in the headnote is not justified by
P15,000, the par value of one hundred fifty shares of the Commission inserted in the Corporation Law, enacted March
anything in the reported decision; for what the court really
capital stock of C. S. Salmon & co., with interest and costs. 1, 1906, the following provision: ". . . no corporation shall
held was that the making of such promise by the agent of the
Upon hearing the cause the trial judge gave judgment for the issue stock or bonds except in exchange for actual cash paid
corporation who sold the stock is admissible in evidence in
plaintiff to recover the amount claimed, with lawful interest to the corporation or for property actually received by it at a
support of the defense of fraud and failure of consideration.
from January 1, 1920, and with costs. From this judgment the fair valuation equal to the par value of the stock or bonds so
Moreover, even if the decision had been to the effect
defendant appealed. issued." (Act No. 1459, sec. 16 as amended by Act No. 2792,
supposed, the relu announced in the headnote could have no
sec. 2.)
It appears that on August 10, 1919, the defendant, I. B. weight in a jurisdiction like this were there is a statutory
Dexter, signed a written subscription to the corporate stock of The prohibition against the issuance of shares by corporations provision prohibiting such agreements.
C. S. Salmon & Co. in the following form: except for actual cash to the par value of the stock to its full
We may add that the law in force in this jurisdiction makes no
equivalent in property is thus enshrined in both the organic
I hereby subscribe for three hundred (300) shares of the distinction, in respect to the liability of the subcriber, between
and statutory law of the Philippine; Islands; and it would seem
capital stock of C. S. Salmon and Company, payable from shares subscribed before incorporation is effected and shares
that our lawmakers could scarely have chosen language more
the first dividends declared on any and all shares of said subscribed thereafter. All like are bound to pay full value in
directly suited to secure absolute equality stockholders with
company owned by me at the time dividends are cash or its equivalent, and any attempt to discriminate in
respect to their liability upon stock subscriptions. Now, if it is
declared, until the full amount of this subscription has favor of one subscriber by relieving him of this liability wholly
unlawful to issue stock otherwise than as stated it is self-
been paid. or in part is forbidden. In what is here said we have reference
evident that a stipulation such as that now under
of course primarily to subcriptions to shares that have not
Upon this subscription the sum of P15,000 was paid in consideration, in a stock subcription, is illegal, for this
been previously issued. It is conceivable that the power of the
January, 1920, from a dividend declared at about that time by stipulation obligates the subcriber to pay nothing for the
corporation to make terms with the purchaser would be
the company, supplemented by money supplied personally by shares except as dividends may accrue upon the stock. In the
greater where the shares which are the subject of the
the subscriber. Beyond this nothing has been paid on the contingency that dividends are not paid, there is no liability at
transaction have been acquired by the corporation in course
shares and no further dividend has been declared by the all. This is a discrimination in favor of the particular subcriber,
of commerce, after they have already been once issued. But
corporation. There is therefore a balance of P15,000 still paid and hence the stipulation is unlawful.
the shares with which are here concerned are not of this sort.
upon the subscription. The general doctrine of corporation law is in conformity with
The judgment appealed from must be affirmed, and it is so
As the case reaches this court the sole question here this conclusion, as may be seen from the following proposition
ordered, with costs against the appellant.
presented for consideration is one of law, namely, whether taken from the standard encyclopedia treatise, Corpus Juris:
the stipulation contained in the subscription to the effect that Nor has a corporation the power to receive a subscription
the subscription is payable from the first dividends declared upon such terms as will operate as a fraud upon the other
on the shares has the effect of relieving the subscriber from subscribers or stockholders by subjecting the particular
personal liability in an action to recover the value of the subcriber to lighter burdens, or by giving him greater
shares. The trial court held, in effect, that the stipulation rights and privileges, or as a fraud upon creditors of the
mentioned is invalid. corporation by withdrawing or decreasing the capital. It is
well settled therefore, as a general rule, that an
agreement between a corporation and a particular

CORPORATION LAW: 7. captial structure Page 99 of 201

G.R. No. L-21601 December 28, 1968
NIELSON & COMPANY, INC., plaintiff-appellant, vs.
LEPANTO CONSOLIDATED MINING COMPANY, defendant-
appellee.

see cases on 3. Powers of corps

CORPORATION LAW: 7. captial structure Page 100 of 201

G.R. No. L-5003 June 27, 1953 payment and will pay the balance in accordance with law and
the regulations of the College. On the other hand, in the letter
NAZARIO TRILLANA, administrator-appellee, vs. QUEZON
actually sent by Damasa Crisostomo, the latter (who
COLLEGE, INC., claimant-appellant.
requested that her subscription for 200 shares be entered)
Singson, Barnes, Yap and Blanco for appellant. not only did not enclose any initial payment but stated that
"babayaran kong lahat pagkatapos na ako ay makapagpahuli G.R. Nos. L-24177-85 June 29, 1968
Delgado, Flores & Macapagal for appellee.
ng isda." There is nothing in the record to show that the PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs.
PARAS, J.: Quezon College, Inc. accepted the term of payment BITULOK SAWMILL, INC., DINGALAN LUMBER CO., INC.,
Damasa Crisostomo sent the following letter to the Board of suggested by Damasa Crisostomo, or that if there was any SIERRA MADRE LUMBER CO., INC., NASIPIT LUMBER
Trustees of the Quezon College: acceptance the same came to her knowledge during her CO., INC., WOODWORKS, INC., GONZALO PUYAT, TOMAS
lifetime. As the application of Damasa Crisostomo is obviously B. MORATO, FINDLAY MILLAR LUMBER CO., INC., ET AL.,
June 1, 1948 at variance with the terms evidenced in the form letter issued INSULAR LUMBER CO., ANAKAN LUMBER CO., AND
by the Quezon College, Inc., there was absolute necessity on CANTILAN LUMBER CO., INC., defendants-appellees.
The BOARD OF TRUSTEES
the part of the College to express its agreement to Damasa's
Quezon College FERNANDO, J.:
offer in order to bind the latter. Conversely, said acceptance
Manila
was essential, because it would be unfair to immediately In the face of a statutory norm, which, as interpreted in a
Gentlemen: obligate the Quezon College, Inc. under Damasa's promise to uniform line of decisions by this Court, speaks unequivocally
pay the price of the subscription after she had caused fish to and is free from doubt, the lower court with full recognition
Please enter my subscription to dalawang daan (200) be caught. In other words, the relation between Damasa
shares of your capital stock with a par value of P100 each. that the case for the plaintiff creditor, Philippine National
Crisostomo and the Quezon College, Inc. had only thus Bank, "is meritorious strictly from the legal standpoint" 1 but
Enclosed you will find (Babayaran kong lahat pagkatapos reached the preliminary stage whereby the latter offered its
na ako ay makapag-pahuli ng isda) pesos as my initial apparently unable to "close its eyes to the equity of the
stock for subscription on the terms stated in the form letter, case" 2 dismissed nine (9) cases filed by it, seeking "to
payment and the balance payable in accordance with law and Damasa applied for subscription fixing her own plan of
and the rules and regulations of the Quezon College. I recover from the defendant lumber producers [Bitulok
payment, a relation, in the absence as in the present case Sawmill, Inc.; Dingalan Lumber Co., Inc., Sierra Madre Lumber
hereby agree to shoulder the expenses connected with of acceptance by the Quezon College, Inc. of the counter offer
said shares of stock. I further submit myself to all lawful Co., Inc.; Nasipit Lumber Co., Inc.; Woodworks, Inc.; Gonzalo
of Damasa Crisostomo, that had not ripened into an Puyat; Tomas B. Morato; Findlay Millar Lumber Co., Inc.;
demands, decisions or directives of the Board of Trustees enforceable contract.
of the Quezon College and all its duly constituted officers Insular Lumber Co., Inc.; Anakan Lumber Co., Inc.; and
or authorities (ang nasa itaas ay binasa at ipinaliwanag sa Indeed, the need for express acceptance on the part of the Cantilan Lumber Co., Inc.] the balance of their stock
akin sa wikang tagalog na aking nalalaman). Quezon College, Inc. becomes the more imperative, in view of subscriptions
3
to the Philippine Lumber Distributing Agency,
the proposal of Damasa Crisostomo to pay the value of the Inc." In essence then, the crucial question posed by this
Very respectfully, subscription after she has harvested fish, a condition appeal from such a decision of the lower court is adherence to
(Sgd.) DAMASA CRISOSTOMO obviously dependent upon her sole will and, therefore, the rule of law. Otherwise stated, would non-compliance with
Signature of subscriber facultative in nature, rendering the obligation void, under a plain statutory command, considering the persuasiveness of
Nilagdaan sa aming harapan: article 1115 of the old Civil Code which provides as follows: "If the plea that defendants-appellees would "not have
the fulfillment of the condition should depend upon the subscribed to [the] capital stock" of the Philippine Lumber
JOSE CRISOSTOMO
exclusive will of the debtor, the conditional obligation shall be Distributing Agency "were it not for the assurance of the
EDUARDO CRISOSTOMO
void. If it should depend upon chance, or upon the will of a [then] President of the Republic of the Philippines that the
Damasa Crisostomo died on October 26, 1948. As no third person, the obligation shall produce all its effects in Government 4
would back [it] up by investing P9.00 for every
payment appears to have been made on the subscription accordance with the provisions of this code." It cannot be peso" subscribed, a condition which was not fulfilled, such
mentioned in the foregoing letter, the Quezon College, Inc. argued that the condition solely is void, because it would commitment not having been complied with, be justified? The
presented a claim before the Court of First Instance of have served to create the obligation to pay, unlike a case, answer must be in the negative.
Bulacan in her testate proceeding, for the collection of the exemplified by Osmea vs. Rama (14 Phil., 99), wherein only It cannot be otherwise even if an element of unfairness and
sum of P20,000, representing the value of the subscription to the potestative condition was held void because it referred injustice could be predicated, as the lower court, in a rather
the capital stock of the Quezon College, Inc. This claim was merely to the fulfillment of an already existing indebtedness. sympathetic mood, did find in the plaintiff bank, as creditor,
opposed by the administrator of the estate, and the Court of compelling defendant lumber producers under the above
In the case of Taylor vs. Uy Tieng Piao, et al. (43 Phil., 873,
First Instance of Bulacan, after hearing issued an order circumstances to pay the balance of their subscriptions. For a
879), this Court already held that "a condition, facultative as
dismissing the claim of the Quezon College, Inc. on the plain and statutory command, if applicable, must be
to the debtor, is obnoxious to the first sentence contained in
ground that the subscription in question was neither respected. The rule of law cannot be satisfied with anything
article 1115 and renders the whole obligation void."
registered in nor authorized by the Securities and Exchange less. The appeal must be sustained.
Commission. From this order the Quezon College, Inc. has Wherefore, the appealed order is affirmed, and it is so ordered
appealed. with costs against appellant. In these various suits decided jointly, the Philippine National
Bank, as creditor, and therefore the real party in interest, was
It is not necessary for us to discuss at length appellant's allowed by the lower court to substitute the receiver of the
various assignments of error relating to the propriety of the Philippine Lumber Distributing Agency in these respective
ground relief upon by the trial court, since, as pointed out in actions for the recovery from defendant lumber producers the
the brief for the administrator and appellee, there are other balance of their stock subscriptions. The amount sought to be
decisive considerations which, though not touched by the collected from defendants-appellees Bitulok Sawmill, Inc.,
lower court, amply sustained the appealed order. Dingalan Lumber Co., Inc., and Sierra Madre Lumber Co., Inc.,
It appears that the application sent by Damasa Crisostomo to is P5,000.00, defendants-appellees having made a partial
the Quezon College, Inc. was written on a general form payment of P15,000.00 of their total subscription worth
indicating that an applicant will enclose an amount as initial P20,000.00; from defendant-appellee Nasipit Lumber Co., Inc.,

CORPORATION LAW: 7. captial structure Page 101 of 201

the sum of P10,000.00, defendant-appellee having made a Roxas instructed the Hon. Emilio Abello, then Executive required by law, could be condoned in the event that the
partial payment of P10,000.00 of its total subscription worth Secretary and Chairman of the Board of Directors of the counterpart fund to be invested by the Government would not
P20,000.00; from defendant-appellee Woodworks, Inc., the Philippine National Bank, for the latter to grant said agency be available. Even if such were the case, however, and such a
sum of P10,886.00, defendant-appellee having made a partial an overdraft in the original sum of P250,000.00 which was promise were in fact made, to further the laudable purpose to
payment of P9,114.00 of its total subscription worth later increased to P350,000.00, which was approved by said which the proposed corporation would be devoted and the
P20,000.00; from defendant-appellee Gonzalo Puyat the sum Board of Directors of the Philippine National Bank on July 28, possibility that the lumber producers would lose money in the
of P10,000.00, defendant-appellee having made a partial 1947, payable on or before April 30, 1958, with interest at the process, still the plain and specific wording of the applicable
payment of P10,000.00 of his total subscription worth rate of 6% per annum, and secured by the chattel mortgages legal provision as interpreted by this Court must be
P20,000.00; from defendant-appellee Tomas Morato the sum on the stock of lumber of said agency." 7 The Philippine controlling. It is a well-settled principle that with all the vast
of P10,000.00, defendant-appellee having made a partial Government did not invest the P9.00 for every peso coming powers lodged in the Executive, he is still devoid of the
payment of P10,000.00 of his total subscription worth from defendant lumber producers. The loan extended to the prerogative of suspending the operation of any statute or any
P20,000.00; from defendant-appellee Findlay Millar Lumber Philippine Lumber Distributing Agency by the Philippine of its terms.
Co., Inc., the sum of P10,000.00, defendant-appellee having National Bank was not paid. Hence, these suits.
The emphatic and categorical language of an American
made a partial payment of P10,000.00 of its total subscription
For the lower court, the above facts sufficed for their decision cited by the late Justice Laurel, in People v.
worth P20,000.00; from defendant-appellee Insular Lumber
dismissal. To its mind "it is grossly unfair and unjust for the Vera, 14 comes to mind: "By the twentieth article of the
Co., Inc., the sum of P5,000.00, defendant-appellee having
plaintiff bank now to compel the lumber producers to pay the declaration of rights in the constitution of this commonwealth,
made a partial payment of P15,000.00 of its total subscription
balance of their subscriptions .... Indeed, when the late it is declared that the power of suspending the laws, or the
worth P20,000.00; from defendant-appellee Anakan Lumber
President Roxas made representations to the plaintiff bank, execution of the laws, ought never to be exercised but by the
Co., Inc., the sum of P15,000.00, defendant-appellee having
thru the Hon. Emilio Abello, who was then the Executive legislature, or by authority derived from it, to be exercised in
made a partial payment of P5,000.00 of its total subscription
Secretary and Chairman of its Board of Directors, to grant said such particular cases only as the legislature shall expressly
worth P20,000.00; and from defendant-appellee Cantilan
overdraft to the agency, it was the only way by which provide for...." Nor could it be otherwise considering that the
Lumber Co., Inc., the sum of P7,500.00, defendant-appellee
President Roxas could make good his commitment that the Constitution specifically enjoins the President to see to it that
having made a partial payment of P2,500.00 of its total
Government would invest in said agency to the extent already all laws be faithfully executed. 15 There may be a discretion as
subscription worth P10,000.00, plus interest at the legal rate
mentioned because, according to said late President Roxas, to what a particular legal provision requires; there can be
from the filing of the suits and the costs of the suits in all the
the legislature had not appropriated any amount for such none whatsoever as to the enforcement and application
nine (9) cases.
counterpart. Consequently, viewing from all considerations of thereof once its meaning has been ascertained. What it
The Philippine Lumber Distributing Agency, Inc., according to equity in the case, the Court finds that plaintiff bank should decrees must be followed; what it commands must be
the lower court, "was organized sometime in the early part of not collect any more from the defendants the balance of their obeyed. It must be respected, the wishes of the President, to
1947 upon the initiative and insistence of the late President subscriptions to the capital stock of the Philippine Lumber the contrary notwithstanding, even if impelled by the most
Manuel Roxas of the Republic of the Philippines who for the Distributing Agency, Inc." 8 worthy of motives and the most persuasive equitable
purpose, had called several conferences between him and the considerations. To repeat, such is not the case here. For at no
Even with the case for defendant lumber producers being put
subscribers and organizers of the Philippine Lumber time did President Roxas ever give defendant lumber
forth in its strongest possible light in the appealed decision,
Distributing Agency, Inc." 5 The purpose was praiseworthy, to producers to understand that the failure of the Government
the plaintiff creditor, the Philippine National Bank, should
insure a steady supply of lumber, which could be sold at for any reason to put up the counterpart fund could terminate
have been the prevailing party. On the law as it stands, the
reasonable prices to enable the war sufferers to rehabilitate their statutory liability.
judgment reached by the lower court cannot be sustained.
their devastated homes. The decision continues: "He
The appeal, as earlier made clear, possesses merit. Such is not the law. Unfortunately, the lower court was of a
convinced the lumber producers to form a lumber cooperative
different mind. That is not to pay homage to the rule of law.
and to pool their sources together in order to wrest, 9
In Philippine Trust Co. v. Rivera, citing the leading case
Its decision then, one it is to be repeated influenced by what
particularly, the retail trade from aliens who were acting as 10
of Velasco v. Poizat, this Court held: "It is established
it considered to be the "equity of the case", is not legally
middlemen in the distribution of lumber. At the beginning, thedoctrine that subscriptions to the capital of a corporation
impeccable.
lumber producers were reluctant to organize the cooperative constitute a fund to which creditors have a right to look for
agency as they believed that it would not be easy to eliminatesatisfaction of their claims and that the assignee in insolvency WHEREFORE, the decision of the lower court is reversed and
from the retail trade the alien middlemen who had been in can maintain an action upon any unpaid stock subscription in the cases remanded to the lower court for judgment
this business from time immemorial, but because the late order to realize assets for the payment of its debt.... A according to law, with full consideration of the legal defenses
President Roxas made it clear that such a cooperative agency corporation has no power to release an original subscriber to raised by defendants-appellees, Bitulok Sawmill, Inc.;
would not be successful without a substantial working capital its capital stock from the obligation of paying for his shares, Dingalan Lumber Co., Inc.; Sierra Madre Lumber Co., Inc.;
which the lumber producers could not entirely shoulder, and without a valuable consideration for such release; and as Nasipit Lumber Co., Inc.; Woodworks, Inc.; Gonzalo Puyat;
as an inducement he promised and agreed to finance the against creditors a reduction of the capital stock can take Tomas B. Morato; Findlay Millar Lumber Co., Inc.; Anakan
agency by making the Government invest P9.00 by way of place only in the manner and under the conditions prescribed Lumber Co., Inc.; and Cantilan Lumber Co., Inc. No
counterpart for every peso that the members would invest by the statute or the charter or the articles of incorporation. pronouncement as to costs.
therein,...." 6 Moreover, strict compliance with the statutory regulations is
necessary...." The Poizat doctrine found acceptance in later
This was the assurance relied upon according to the decision,
cases. 11One of the latest cases, Lingayen Gulf Electric Power
which stated that the amount thus contributed by such
v. Baltazar, 12 Speaks to this effect: "In the case of Velasco v.
lumber producers was not enough for the operation of its
Poizat, 13 the corporation involved was insolvent, in which
business especially having in mind the primary purpose of
case all unpaid stock subscriptions become payable on
putting an end to alien domination in the retail trade of
demand and are immediately recoverable in an action
lumber products. Nor was there any appropriation by the
instituted by the assignee."
legislature of the counterpart fund to be put up by the
Government, namely, P9.00 for every peso invested by It would be unwarranted to ascribe to the late President Roxas
defendant lumber producers. Accordingly, "the late President the view that the payment of the stock subscriptions, as thus

CORPORATION LAW: 7. captial structure Page 102 of 201

G.R. No. L-45493 April 21, 1939 should be paid. Of course, the obligation to pay arises from stockholders, or was authorized by the by-laws of the
the date of the subscription, but the coming into being of an corporation, to release the appellant from his obligation.
GERARDO GARCIA, plaintiff-appellee, vs. ANGEL
obligation should not be confused with the time when it
SUAREZ, defendant-appellant. Against the contention of the appellant, this court has held
becomes demandable. In a loan for example, the obligation to
that:
Sotto and Sotto for appellant. pay arises from the time the loan is taken; but the maturity of
Ramirez and Ortigas for appellee. that obligation, the date when the debtor can be compelled to A corporation has no legal capacity to release a subscriber
pay, is not the date itself of the loan, because this would be to its capital stock from the obligation to pay for his
CONCEPCION, J.: absurd. The date when payment can be demanded is shares; and any agreement to this effect is invalid.
On October 4, 1924, the appellant subscribed to sixteen necessarily distinct from and subsequent to that the (Velasco vs. Poizat, 37 Phil., 802.)
shares of the capital stock of the Compaia Hispano-Filipina, obligation is contracted.
A corporation has no power to release an original
Inc., a corporation which is duly formed and organized. Of the By the same token, the subscription to the capital stock of the
subscriber to its capital stock from the obligation of
sixteen subscribed shares, at the par value of P100 each, the corporation, unless otherwise stipulation, is not payable at
paying for his shares, without a valuable consideration for
appellant only paid P400, the value of four shares. On June 5, the moment of the subscription but on a subsequent date
such release; . . . . (Philippine Trust Co. vs. Rivera, 44 Phil.,
1931, the plaintiff-appellee was appointed by the court which may be fixed by the corporation. Hence, section 38 of
469.)
receiver of the Compaia Hispano-Filipina, Inc., to collect all the Corporation Law, amended by Act No. 3518, provides
the credits of said corporation, pay its debts and dispose of that: A stock subscription is a contract between the corporation
the remainder of its assets and of its properties. On June 18, and the subscriber, and courts will enforce it for or against
1931, the plaintiff-appellee in vain made demand upon the The board of directors or trustees of any stock corporation either. A corporation has no legal capacity to release a
defendant-appellant to pay the balance of his subscription. formed, organized, or existing under this Act may at any subscriber to its capital stock from the obligation to pay
On July 10, 1933, the plaintiff, as receiver, brought an action time declare due and payable to the corporation unpaid for his shares, and any agreement to this effect is invalid.
in the Court of First Instance of Manila to recover from the subscriptions to the capital stock . . . . (Velasco vs. Poizat, 37 Phil., 802.) (Miranda vs. Tarlac Rice
defendant-appellant and other shareholders the balance of Mill Co., 57 Phil., 619.)
The board of directors of the Compaia Hispano-Filipino, Inc.,
their subscriptions, but the complaint was dismissed for lack
not having declared due and payable the stock subscribed by The appealed judgment is affirmed, with costs to the
of prosecution. On October 10, 1935, a similar complaint was
the appellant, the prescriptive period of the action for the appellant. So ordered.
filed against the appellant, and after trial, judgment was
collection thereof only commenced to run from June 18, 1931
rendered therein ordering the said defendant to pay to the
when the plaintiff, in his capacity as receiver and in the
plaintiff, as receiver of Compaia Hispano-Filipina, Inc., the
exercise of the power conferred upon him by the said section
sum of P1,200, with legal interest thereon from October 4,
38 of the Corporation Law, demanded of the appellant to pay
1924, and the costs. The defendant appealed and in this
the balance of his subscription. The present action having
instance contends that the trial court erred in holding that the
been filed on October 10, 1935, the defense of prescription is
action of the plaintiff-appellee has not prescribed, and that
entirely without basis.
the appellant has not been released from his obligation to pay
the balance of his subscription. The second alleged error of the court assigned by the
appellant consists in not holding that he was released from
The first alleged error is based on the ground that the
the obligation to pay the balance of his subscription. In
obligation contracted by the appellant to pay the value of his
support of his connection, the appellant adduced as evidence
subscription was demandable, according to him, from the
a letter, allegedly signed by R. Pando, acting president of the
date of subscription in the absence of any stipulation to the
corporation Compaia Hispano-Filipina, Inc., wherein the
contrary, and he says that from the date of his subscription,
appellant was released by Pando from all obligation with
October 4, 1924, until the filing of the complaint on October
respect to the payment of his subscription in consideration of
10, 1935, more than ten years have elapsed, a period which
his transfer of his shares to the corporation.
is more than sufficient for the prescription of the action
against the appellant. The very citation of authorities made by the appellant in his
brief destroys his contention. It says:
In support of his contention, the appellant cites section 37 of
the Corporation Law, amended by Act No. 3518, according to Released of subscribers by the corporation. There can
which subscribers for stock shall pay to the corporation be no doubt that a corporation may effectually release a
quarterly on all unpaid subscription interest, from the date of subscriber from liability on his subscription, in whole or in
subscription, at the rate of six per centum per annum unless part, or allow him to modify his contract, if all the
otherwise provided in the by-laws. From this legal provision stockholders expressly or impliedly consent . . . .
the appellant infers that the subscriber is bound to pay the
The agents or officers of the corporation have no such
total amount of the subscription from the perfection of the
power, however, unless it is expressly conferred upon
contract, there being, as there is none of this case, any
them by the charter or statute, or by the stockholders by
stipulation to the contrary in the by-laws of the corporation or
a by-law or otherwise. . . . (Thomas vs. Wentworth Hotel
in the contract of subscription.
Co., 117 Pac., 1041; Fletcher, Encyc. of Private
The premise of the argument is wrong because it confuses Corporations, sec. 638). (Emphasis supplied.)
two distinct obligations: the obligation to pay interest and
It has not been established that the stockholders of the
that to pay the amount of the subscription. The said section
Compaia Hispano-Filipina, Inc., have in any wise consented
37 of the Corporation Law provides when the obligation to
to release the appellant from his obligation, or that the acting
pay interest arises and when payment should be made, but it
president, R. Pando, was expressly authorized by the
is absolutely silent as to when the subscription to a stock

CORPORATION LAW: 7. captial structure Page 103 of 201

G.R. Nos. L-24177-85 June 29, 1968 payment of P9,114.00 of its total subscription worth later increased to P350,000.00, which was approved by said
P20,000.00; from defendant-appellee Gonzalo Puyat the sum Board of Directors of the Philippine National Bank on July 28,
PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs.
of P10,000.00, defendant-appellee having made a partial 1947, payable on or before April 30, 1958, with interest at the
BITULOK SAWMILL, INC., DINGALAN LUMBER CO., INC.,
payment of P10,000.00 of his total subscription worth rate of 6% per annum, and secured by the chattel mortgages
SIERRA MADRE LUMBER CO., INC., NASIPIT LUMBER
P20,000.00; from defendant-appellee Tomas Morato the sum on the stock of lumber of said agency." 7 The Philippine
CO., INC., WOODWORKS, INC., GONZALO PUYAT, TOMAS
of P10,000.00, defendant-appellee having made a partial Government did not invest the P9.00 for every peso coming
B. MORATO, FINDLAY MILLAR LUMBER CO., INC., ET AL.,
payment of P10,000.00 of his total subscription worth from defendant lumber producers. The loan extended to the
INSULAR LUMBER CO., ANAKAN LUMBER CO., AND
P20,000.00; from defendant-appellee Findlay Millar Lumber Philippine Lumber Distributing Agency by the Philippine
CANTILAN LUMBER CO., INC., defendants-appellees.
Co., Inc., the sum of P10,000.00, defendant-appellee having National Bank was not paid. Hence, these suits.
FERNANDO, J.: made a partial payment of P10,000.00 of its total subscription
For the lower court, the above facts sufficed for their
worth P20,000.00; from defendant-appellee Insular Lumber
In the face of a statutory norm, which, as interpreted in a dismissal. To its mind "it is grossly unfair and unjust for the
Co., Inc., the sum of P5,000.00, defendant-appellee having
uniform line of decisions by this Court, speaks unequivocally plaintiff bank now to compel the lumber producers to pay the
made a partial payment of P15,000.00 of its total subscription
and is free from doubt, the lower court with full recognition balance of their subscriptions .... Indeed, when the late
worth P20,000.00; from defendant-appellee Anakan Lumber
that the case for the plaintiff creditor, Philippine National President Roxas made representations to the plaintiff bank,
Co., Inc., the sum of P15,000.00, defendant-appellee having
Bank, "is meritorious strictly from the legal standpoint" 1 but thru the Hon. Emilio Abello, who was then the Executive
made a partial payment of P5,000.00 of its total subscription
apparently unable to "close its eyes to the equity of the Secretary and Chairman of its Board of Directors, to grant said
worth P20,000.00; and from defendant-appellee Cantilan
case" 2 dismissed nine (9) cases filed by it, seeking "to overdraft to the agency, it was the only way by which
Lumber Co., Inc., the sum of P7,500.00, defendant-appellee
recover from the defendant lumber producers [Bitulok President Roxas could make good his commitment that the
having made a partial payment of P2,500.00 of its total
Sawmill, Inc.; Dingalan Lumber Co., Inc., Sierra Madre Lumber Government would invest in said agency to the extent already
subscription worth P10,000.00, plus interest at the legal rate
Co., Inc.; Nasipit Lumber Co., Inc.; Woodworks, Inc.; Gonzalo mentioned because, according to said late President Roxas,
from the filing of the suits and the costs of the suits in all the
Puyat; Tomas B. Morato; Findlay Millar Lumber Co., Inc.; the legislature had not appropriated any amount for such
nine (9) cases.
Insular Lumber Co., Inc.; Anakan Lumber Co., Inc.; and counterpart. Consequently, viewing from all considerations of
Cantilan Lumber Co., Inc.] the balance of their stock The Philippine Lumber Distributing Agency, Inc., according to equity in the case, the Court finds that plaintiff bank should
subscriptions to the Philippine Lumber Distributing Agency, the lower court, "was organized sometime in the early part of not collect any more from the defendants the balance of their
Inc." 3 In essence then, the crucial question posed by this 1947 upon the initiative and insistence of the late President subscriptions to the capital stock of the Philippine Lumber
appeal from such a decision of the lower court is adherence to Manuel Roxas of the Republic of the Philippines who for the Distributing Agency, Inc." 8
the rule of law. Otherwise stated, would non-compliance with purpose, had called several conferences between him and the
Even with the case for defendant lumber producers being put
a plain statutory command, considering the persuasiveness of subscribers and organizers of the Philippine Lumber
forth in its strongest possible light in the appealed decision,
the plea that defendants-appellees would "not have Distributing Agency, Inc." 5 The purpose was praiseworthy, to
the plaintiff creditor, the Philippine National Bank, should
subscribed to [the] capital stock" of the Philippine Lumber insure a steady supply of lumber, which could be sold at
have been the prevailing party. On the law as it stands, the
Distributing Agency "were it not for the assurance of the reasonable prices to enable the war sufferers to rehabilitate
judgment reached by the lower court cannot be sustained.
[then] President of the Republic of the Philippines that the their devastated homes. The decision continues: "He
The appeal, as earlier made clear, possesses merit.
Government would back [it] up by investing P9.00 for every convinced the lumber producers to form a lumber cooperative
peso" 4 subscribed, a condition which was not fulfilled, such and to pool their sources together in order to wrest, In Philippine Trust Co. v. Rivera, 9 citing the leading case
commitment not having been complied with, be justified? The particularly, the retail trade from aliens who were acting as of Velasco v. Poizat, 10 this Court held: "It is established
answer must be in the negative. middlemen in the distribution of lumber. At the beginning, the doctrine that subscriptions to the capital of a corporation
lumber producers were reluctant to organize the cooperative constitute a fund to which creditors have a right to look for
It cannot be otherwise even if an element of unfairness and agency as they believed that it would not be easy to eliminate
satisfaction of their claims and that the assignee in insolvency
injustice could be predicated, as the lower court, in a rather from the retail trade the alien middlemen who had been in
can maintain an action upon any unpaid stock subscription in
sympathetic mood, did find in the plaintiff bank, as creditor, this business from time immemorial, but because the late
order to realize assets for the payment of its debt.... A
compelling defendant lumber producers under the above President Roxas made it clear that such a cooperative agency
corporation has no power to release an original subscriber to
circumstances to pay the balance of their subscriptions. For a would not be successful without a substantial working capital
its capital stock from the obligation of paying for his shares,
plain and statutory command, if applicable, must be which the lumber producers could not entirely shoulder, and
without a valuable consideration for such release; and as
respected. The rule of law cannot be satisfied with anything as an inducement he promised and agreed to finance the
against creditors a reduction of the capital stock can take
less. The appeal must be sustained. agency by making the Government invest P9.00 by way of place only in the manner and under the conditions prescribed
In these various suits decided jointly, the Philippine National counterpart for every peso that the members would invest by the statute or the charter or the articles of incorporation.
6
Bank, as creditor, and therefore the real party in interest, was therein,...." Moreover, strict compliance with the statutory regulations is
allowed by the lower court to substitute the receiver of the This was the assurance relied upon according to the decision, necessary...." The Poizat doctrine found acceptance in later
Philippine Lumber Distributing Agency in these respective which stated that the amount thus contributed by such cases. 11One of the latest cases, Lingayen Gulf Electric Power
actions for the recovery from defendant lumber producers the lumber producers was not enough for the operation of its v. Baltazar, 12 Speaks to this effect: "In the case of Velasco v.
balance of their stock subscriptions. The amount sought to be business especially having in mind the primary purpose of Poizat, 13 the corporation involved was insolvent, in which
collected from defendants-appellees Bitulok Sawmill, Inc., putting an end to alien domination in the retail trade of case all unpaid stock subscriptions become payable on
Dingalan Lumber Co., Inc., and Sierra Madre Lumber Co., Inc., lumber products. Nor was there any appropriation by the demand and are immediately recoverable in an action
is P5,000.00, defendants-appellees having made a partial legislature of the counterpart fund to be put up by the instituted by the assignee."
payment of P15,000.00 of their total subscription worth Government, namely, P9.00 for every peso invested by
It would be unwarranted to ascribe to the late President Roxas
P20,000.00; from defendant-appellee Nasipit Lumber Co., Inc., defendant lumber producers. Accordingly, "the late President
the view that the payment of the stock subscriptions, as thus
the sum of P10,000.00, defendant-appellee having made a Roxas instructed the Hon. Emilio Abello, then Executive
required by law, could be condoned in the event that the
partial payment of P10,000.00 of its total subscription worth Secretary and Chairman of the Board of Directors of the
counterpart fund to be invested by the Government would not
P20,000.00; from defendant-appellee Woodworks, Inc., the Philippine National Bank, for the latter to grant said agency
be available. Even if such were the case, however, and such a
sum of P10,886.00, defendant-appellee having made a partial an overdraft in the original sum of P250,000.00 which was
promise were in fact made, to further the laudable purpose to

CORPORATION LAW: 7. captial structure Page 104 of 201

which the proposed corporation would be devoted and the Instance of Manila, civil case No. 37492, for the collection of
possibility that the lumber producers would lose money in the P15,109, P13,500 of which was the amount he owed for
process, still the plain and specific wording of the applicable unpaid stock and P1,609 for loans and advances by the
legal provision as interpreted by this Court must be corporation to Lumanlan. In that case Lumanlan was
controlling. It is a well-settled principle that with all the vast sentenced to pay the corporation the above-mentioned sum
powers lodged in the Executive, he is still devoid of the of P15,109 with legal interest thereon from August 30, 1930,
prerogative of suspending the operation of any statute or any and costs. Lumanlan appealed from this decision.
of its terms.
Pending this appeal, with the permission of the court, the
The emphatic and categorical language of an American creditors, some of the directors and the majority of the
decision cited by the late Justice Laurel, in People v. stockholders held several meetings in which it was agreed in
Vera, 14 comes to mind: "By the twentieth article of the substance that subscribers for the capital stock who were in
declaration of rights in the constitution of this commonwealth, default should pay the creditors; Lumanlan was designated to
it is declared that the power of suspending the laws, or the pay the debt of the corporation to Julio Valenzuela, one of the
execution of the laws, ought never to be exercised but by the petitioners in case No. 37007; at that time the corporation
legislature, or by authority derived from it, to be exercised in owed Valenzuela the sum of P8,000 plus interest thereon at
such particular cases only as the legislature shall expressly the rate of 12 per cent per annum from March 17, 1928.
provide for...." Nor could it be otherwise considering that the Lumanlan agreed to assume this obligation and in turn the
Constitution specifically enjoins the President to see to it that corporation agreed that if Lumanlan would dismiss his appeal
all laws be faithfully executed. 15 There may be a discretion asG.R. No. L-39861 March 21, 1934 in case No. 37492 the corporation would collect only 50 per
to what a particular legal provision requires; there can be cent of the amount subscribed by him for stock, provided that
none whatsoever as to the enforcement and application BONIFACIO LUMANLAN, plaintiff-appellee, vs. JACINTO R. in case the 50 percent was insufficient to pay Valenzuela he
thereof once its meaning has been ascertained. What it CURA, ET AL., defendants. should pay an additional amount which should not exceed the
decrees must be followed; what it commands must be DIZON & CO., INC., ETC., appellant. amount of the judgment against him in that case. In view of
obeyed. It must be respected, the wishes of the President, to Leoncio M. Aranda and Gregorio M. Baaga for appellant. this agreement Lumanlan withdrew his appeal and paid
the contrary notwithstanding, even if impelled by the most Lagman and Santos for appellee. Valenzuela the sum of P11,840 including interest and thereby
worthy of motives and the most persuasive equitable was subrogated in place of Valenzuela. The petitioning
considerations. To repeat, such is not the case here. For at no GODDARD, J.:. creditors having been paid the amounts owed to them by the
time did President Roxas ever give defendant lumber This is an appeal from a decision of the Court of First Instance corporation asked that the receiver be dismissed and the
producers to understand that the failure of the Government of Tarlac, the dispositive part of which reads as follows: court granted this. Disregarding this agreement and
for any reason to put up the counterpart fund could terminate notwithstanding the payment made by Lumanlan to
their statutory liability. Por las consideraciones expuestas, el Juzgado falla este Valenzuela, the corporation on May 5, 1932, asked for the
asunto condenando a Dizon y Cia., Inc., a acreditar en sus execution of the sentence in case No. 37492 and by virtue of
Such is not the law. Unfortunately, the lower court was of a libros como pago de las obligaciones de Bonifacio an order of execution the provincial sheriff levied upon two
different mind. That is not to pay homage to the rule of law. Lumanlan la suma de P11,840, ordenando a la misma parcels of land belonging to Lumanlan described in certificate
Its decision then, one it is to be repeated influenced by what entidad que inmediatamente expida los certificados de of title No. 901 of the Province of Tarlac. Lumanlan brought
it considered to be the "equity of the case", is not legally accion equivalente a la mencionada suma; declarando this case to collect from Dizon & Co., Inc., and to prevent the
impeccable. perpetuo y absoluto el interdicto prohibitorio expedido sheriff from selling the two parcels of land. Pending the result
WHEREFORE, the decision of the lower court is reversed and contra los demandados; condenando a la Dizon y Cia,. of this case the sheriff was enjoined from proceeding with the
the cases remanded to the lower court for judgment Inc., al pago de la suma de P2,000 a favor del [Link]+
according to law, with full consideration of the legal defenses demandante, y se condena a los demandados al pago de
raised by defendants-appellees, Bitulok Sawmill, Inc.; las costas del juicio. En cuanto a los daos y perjuicios In the promissory note given by the corporation to Valenzuela
Dingalan Lumber Co., Inc.; Sierra Madre Lumber Co., Inc.; reclamados por el demandante, no habiendo este probado the former obligated itself to pay Valenzuela the sum of
los mismos, el Juzgado no puede accederlos. P8,000 with interest at 12 per cent per annum and, upon
Nasipit Lumber Co., Inc.; Woodworks, Inc.; Gonzalo Puyat;
failure to pay said sum and interest when due, 25 per cent of
Tomas B. Morato; Findlay Millar Lumber Co., Inc.; Anakan The appellant, Dizon & co., Inc., assigns twenty-three errors
the principal as expenses of collection and judicial costs in
Lumber Co., Inc.; and Cantilan Lumber Co., Inc. No as having been committed by the trial court.
case of litigation.
pronouncement as to costs.
The appellant is a corporation duly organized under the laws By virtue of these facts Lumanlan is entitled to a credit
of the Philippine Islands with its central office in the City of against the judgment in case No. 37492 for P11,840 and an
Manila. The plaintiff-appellee Bonifacio Lumanlan, on July 31, additional sum of P2,000, which is 25 per cent on the
1922, subscribed for 300 shares of stock of said corporation principal debt, as he had to file this suit to collect, or receive
at a par value of P50 or a total of P15,000. Julio Valenzuela, credit for the sum which he had paid Valenzuela for and in
Pedro Santos and Francisco Escoto, creditors of this place of the corporation, or a total of P13,840. This leaves a
corporation, filed suit against it in the Court of First Instance balance due Dizon & co., Inc., of P1,269 on that judgment
of Manila, case No. 37007, praying that a receiver be with interest thereon at 6 per cent per annum from August
appointed, as it appeared that the corporation at that time 30, 1930.
had no assets except credits against those who had
subscribed for shares of stock. The court named Tayag as It appears from the record that during the trial of the case
receiver for the purpose of collecting, said subscriptions. As now under consideration, the Bank of the Philippine Islands
Bonifacio Lumanlan had only paid P1,500 of the P15,000, par appeared in this case as assignee in the "Involuntary
value of the stock for which he subscribed, the receiver on Insolvency of Dizon & Co., Inc. That bank was appointed
August 30, 1930, filed a suit against him in the Court of First assignee in case No. 43065 of the Court of First Instance of

CORPORATION LAW: 7. captial structure Page 105 of 201

the City of Manila on November 28, 1932. It is therefore Edward A. Keller & Co., Ltd. appointed COB Group Marketing,
evident that there are still other creditors of Dizon & Co., Inc. Inc. as exclusive distributor of its household products, Brite
This being the case that corporation has a right to collect all and Nuvan in Panay and Negros, as shown in the sales
unpaid stock subscriptions and any other amounts which may agreement dated March 14, 1970 (32-33 RA). Under that
be due it. agreement Keller sold on credit its products to COB Group
Marketing.
It is established doctrine that subscriptions to the capital
of a corporation constitute a fund to which the creditors As security for COB Group Marketing's credit purchases up to
have a right to look for satisfaction of their claims and that the amount of P35,000, one Asuncion Manahan mortgaged
the assignee in insolvency can maintain an action upon her land to Keller. Manahan assumed solidarily with COB
any unpaid stock subscription in order to realize assets for Group Marketing the faithful performance of all the terms and
the payment of its debts. (Philippine Trust Co. vs. Rivera, conditions of the sales agreement (Exh. D).
44 Phil., 469, 470.)
In July, 1970 the parties executed a second sales agreement
. . . the Corporation Law clearly recognizes that a stock whereby COB Group Marketing's territory was extended to
subscription is a subsisting liability from the time the Northern and Southern Luzon. As security for the credit
subscription is made, since it requires the subscriber to purchases up to P25,000 of COB Group Marketing for that
pay interest quarterly from that date unless he is relieved area, Tomas C. Lorenzo, Jr. and his father Tomas, Sr. (now
from such liability by the by-laws of the corporation. The deceased) executed a mortgage on their land in Nueva Ecija.
subscriber is as much bound to pay the amount of the Like Manahan, the Lorenzos were solidarily liable with COB
share subscribed by him as he would be to pay any other Group Marketing for its obligations under the sales agreement
debt, and the right of the company to demand payment is (Exh. E).
no less incontestable. (Velasco vs. Poizat, 37 Phil., 802,
The credit purchases of COB Group Marketing, which started
805.)
on October 15, 1969, limited up to January 22, 1971. On May
In view of the above conclusions it is not necessary to discuss 8, the board of directors of COB Group Marketing were
the other questions raised by the parties in this case. apprised by Jose E. Bax the firm's president and general
manager, that the firm owed Keller about P179,000. Bax was
The judgment of the trial court is modified in accordance with
authorized to negotiate with Keller for the settlement of his
the above and Dizon & Co., Inc., is ordered to credit Bonifacio
firm's liability (Exh. 1, minutes of the meeting).
Lumanlan with the sum of P13,840 against the judgment for
P15,109, in case No. 37492 of the Court of First Instance of G.R. No. L-68097 January 16, 1986 On the same day, May 8, Bax and R. Oefeli of Keller signed
Manila; to issue to Bonifacio Lumanlan 300 shares of its the conditions for the settlement of COB Group Marketing's
capital stock upon payment by him of the sum of P1,269 with EDWARD A. KELLER & CO., LTD., petitioner-appellant, vs. liability, Exhibit J, reproduced as follows:
interest thereon at 6 per cent per annum from August 30, COB GROUP MARKETING, INC., JOSE E. BAX,
FRANCISCO C. DE CASTRO, JOHNNY DE LA FUENTE, This formalizes our conditions for the settlement of
1930. The preliminary injunction issued in this case is hereby
SERGIO C. ORDOEZ, TRINIDAD C. ORDOEZ, MAGNO C.O.B.'s account with Edward Keller Ltd.
dissolved for the purpose of enabling Dizon & Co., Inc., to ask
for a new order of execution in case No. 37492, Court of First C. ORDOEZ, ADORACION C. ORDOEZ, TOMAS C. 1. Increase of mortgaged collaterals to the full market
Instance of Manila, for the sum of P1,269 with interest LORENZO, JR., LUIZ M. AGUILA-ADAO, MOISES P. ADAO, value (estimated by Edak at P90,000.00).
thereon as stated above. Without pronouncement as to costs. ASUNCION MANAHAN and INTERMEDIATE APPELLATE
COURT, respondents-appellees. 2. Turn-over of receivables (estimated outstandings
P70,000.00 to P80,000.00).
Sycip, Salazar, Feliciano & Hernandez Law Office for
petitioner. 3. Turn-over of 4 (four) trucks for outright sale to Edak, to
be credited against C.0.B.'s account.
Vicente G. Gregorio for private respondents.
4. Remaining 8 (eight) trucks to be assigned to Edak,
Roberto P. Vega for respondent Asuncion Manahan. C.O.B will continue operation with these 8 trucks. They win
be returned to COB after settlement of full account.

AQUINO, C.J.: 5. C.O.B has to put up securities totalling P200,000.00.

P100,000.00 has to be liquidated within one year. The
This case is about the liability of a marketing distributor under remaining P100,000.00 has to be settled within the
its sales agreements with the owner of the products. The second year.
petitioner presented its evidence before Judges Castro
Bartolome and Benipayo. Respondents presented their 6. Edak wig agree to allow C.O.B. to buy goods to the
evidence before Judge Tamayo who decided the case. value of the difference between P200,000.00 and their
outstandings, provided C.O.B. is in a position to put up
A review of the record shows that Judge Tamayo acted under securities amounting to P200,000.00.
a misapprehension of facts and his findings are contradicted
by the evidence. The Appellate Court adopted the findings of Discussion held on May 8, 1971.
Judge Tamayo. This is a case where this Court is not bound by Twelve days later, or on May 20, COB Group Marketing,
the factual findings of the Appellate Court. (See Director of through Bax executed two second chattel mortgages over its
Lands vs. Zartiga, L-46068-69, September 30, 1982, 117 12 trucks (already mortgaged to Northern Motors, Inc.) as
SCRA 346, 355). security for its obligation to Keller amounting to P179,185.16

CORPORATION LAW: 7. captial structure Page 106 of 201

as of April 30, 1971 (Exh. PP and QQ). However, the second unpaid capital subscriptions; (4) ordered the petitioner to pay against a party in default cannot exceed the amount prayed
mortgages did not become effective because the first Manahan P20,000 as moral damages; (5) ordered the for (Sec. 5, Rule 18, Rules of Court).
mortgagee, Northern Motors, did not give its consent. But the petitioner to pay P20,000 as attomey's fees to be divided
WHEREFORE, the decisions of the trial court and the Appellate
second mortgages served the purpose of being admissions of among the lawyers of all the answering defendants and to
Court are reversed and set aside.
the liability COB Group Marketing to Keller. pay the costs of the suit; (6) declared void the mortgages
executed by Manahan and Lorenzo and the cancellation of the COB Group marketing, Inc. is ordered to pay Edward A. Keller
The stockholders of COB Group Marketing, Moises P. Adao and
annotation of said mortgages on the Torrens titles thereof, & Co., Ltd. the sum of P182,994.60 with 12% interest per
Tomas C. Lorenzo, Jr., in a letter dated July 24, 1971 to Keller's
and (7) dismissed Manahan's cross-claim for lack of merit. annum from August 1, 1971 up to the date of payment plus
counsel, proposed to pay Keller P5,000 on November 30,
P20,000 as attorney's fees.
1971 and thereafter every thirtieth day of the month for three The petitioner appealed. The Appellate Court affirmed said
years until COB Group Marketing's mortgage obligation had judgment except the award of P20,000 as moral damages Asuncion Manahan and Tomas C. Lorenzo, Jr. are ordered to
been fully satisfied. They also proposed to substitute the which it eliminated. The petitioner appealed to this Court. pay solidarity with COB Group Marketing the sums of P35,000
Manahan mortgage with a mortgage on Adao's lot at 72 7th and P25,000, respectively.
Bax and the other respondents quoted the six assignments of
Avenue, Cubao, Quezon City (Exh. L).
error made by the petitioner in the Appellate Court, not the The following respondents are solidarity liable with COB Group
These pieces of documentary evidence are sufficient to prove four assignments of error in its brief herein. Manahan did not Marketing up to the amounts of their unpaid subscription to
the liability of COB Group Marketing and to justify the file any appellee's brief. be applied to the company's liability herein: Jose E. Bax
foreclosure of the two mortgages executed by Manahan and P36,000; Francisco C. de Castro, P36,000; Johnny de la
We find that the lower courts erred in nullifying the
Lorenzo (Exh. D and E). Fuente, P12,000; Sergio C. Ordonez, P12,000; Trinidad C.
admissions of liability made in 1971 by Bax as president and
Ordonez, P3,000; Magno C. Ordonez, P3,000; Adoracion C.
Section 22, Rule 130 of the Rules of Court provides that the general manager of COB Group Marketing and in giving
Ordonez P3,000; Tomas C. Lorenzo, Jr., P3,000 and Luz M.
act, declaration or omission of a party as to a relevant fact credence to the alleged overpayment computed by Bax .
Aguilar-Adao, P6,000.
may be given in evidence against him "as admissions of a
The lower courts not only allowed Bax to nullify his
party". If after ninety (90) days from notice of the finality of the
admissions as to the liability of COB Group Marketing but they
judgment in this case the judgment against COB Group
The admissions of Bax are supported by the documentary also erroneously rendered judgment in its favor in the amount
Marketing has not been satisfied fully, then the mortgages
evidence. It is noteworthy that all the invoices, with delivery of its supposed overpayment in the sum of P100,596.72 (Exh.
executed by Manahan and Lorenzo should be foreclosed and
receipts, were presented in evidence by Keller, Exhibits KK-1 8-A), in spite of the fact that COB Group Marketing was
the proceeds of the sales applied to the obligation of COB
to KK-277-a and N to N-149-a, together with a tabulation declared in default and did not file any counterclaim for the
Group Marketing. Said mortgage obligations should bear six
thereof, Exhibit KK, covering the period from October 15, supposed overpayment.
percent legal interest per annum after the expiration of the
1969 to January 22, 1971. Victor A. Mayo, Keller's finance
The lower courts harped on Keller's alleged failure to thresh said 90-day period. Costs against the private respondents.
manager, submitted a statement of account showing that
out with representatives of COB Group Marketing their
COB Group Marketing owed Keller P184,509.60 as of July 31, SO ORDERED.
"diverse statements of credits and payments". This
1971 (Exh. JJ). That amount is reflected in the customer's
contention has no factual basis. In Exhibit J, quoted above, it
ledger, Exhibit M.
is stated by Bax and Keller's Oefeli that "discussion (was) held
On the other hand, Bax although not an accountant, on May 8, 1971."
presented his own reconciliation statements wherein he
That means that there was a conference on the COB Group
showed that COB Group Marketing overpaid Keller
Marketing's liability. Bax in that discussion did not present his
P100,596.72 (Exh. 7 and 8). He claimed overpayment
reconciliation statements to show overpayment. His Exhibits 7
although in his answer he did not allege at all that there was
and 8 were an afterthought. He presented them long after the
an overpayment to Keller.
case was filed. The petitioner regards them as "fabricated" (p.
The statement of the Appellate Court that COB Group 28, Appellant's Brief).
Marketing alleged in its answer that it overpaid Keller
Bax admitted that Keller sent his company monthly
P100,596.72 is manifestly erroneous first, because COB Group
statements of accounts (20-21 tsn, September 2, 1976) but
Marketing did not file any answer, having been declared in
he could not produce any formal protest against the supposed
default, and second, because Bax and the other stockholders,
inaccuracy of the said statements (22). He lamely explained
who filed an answer, did not allege any overpayment. As
that he would have to dig up his company's records for the
already stated, even before they filed their answer, Bax
formal protest (23-24). He did not make any written demand
admitted that COB Group Marketing owed Keller around
for reconciliation of accounts (27-28).
P179,000 (Exh. 1).
As to the liability of the stockholders, it is settled that a
Keller sued on September 16, 1971 COB Group Marketing, its
stockholder is personally liable for the financial obligations of
stockholders and the mortgagors, Manahan and Lorenzo.
a corporation to the extent of his unpaid subscription (Vda. de
COB Group Marketing, Trinidad C. Ordonez and Johnny de la Salvatierra vs. Garlitos 103 Phil. 757, 763; 18 CJs 1311-2).
Fuente were declared in default (290 Record on Appeal).
While the evidence shows that the amount due from COB
After trial, the lower court (1) dismissed the complaint; (2) Group Marketing is P184,509.60 as of July 31, 1971 or
ordered Keller to pay COB Group Marketing the sum of P186,354.70 as of August 31, 1971 (Exh. JJ), the amount
P100,596.72 with 6% interest a year from August 1, 1971 prayed for in Keller's complaint is P182,994.60 as of July 31,
until the amount is fully paid: (3) ordered Keller to pay 1971 (18-19 Record on Appeal). This latter amount should be G.R. No. 158805 April 16, 2009
P100,000 as moral damages to be allocated among the the one awarded to Keller because a judgment entered
stockholders of COB Group Marketing in proportion to their

CORPORATION LAW: 7. captial structure Page 107 of 201

VALLEY GOLF & COUNTRY CLUB, INC., Petitioner, vs. thereof Valley Golf would exercise its right to sell the Golf the foregoing premises, the SEC hearing officer concluded
ROSA O. VDA. DE CARAM, Respondent. Share to satisfy the outstanding amount, again pursuant to that the auction sale had no basis in law and was thus a
the provisions of the by-laws. 8The final letter, dated 3 May nullity.
1987, issued a final deadline until 31 May 1987 for Caram to
DECISION
settle his account, or otherwise face the sale of the Golf Share
The SEC hearing officer did entertain Valley Golfs argument
to satisfy the claims of Valley Golf.9
that the sale of the Golf Share was authorized under the by-
TINGA, J.:
laws. However, it was ruled that pursuant to Section 6 of the
The Golf Share was sold at public auction on 11 June 1987 Corporation Code, "a provision creating a lien upon shares of
May a non-stock corporation seize and dispose of the for P25,000.00 after the Board of Directors had authorized the stock for unpaid debts, liabilities, or assessments of
membership share of a fully-paid member on account of its sale in a meeting on 11 April 1987, and the Notice of Auction stockholders to the corporation, should be embodied in the
unpaid debts to the corporation when it is authorized to do so Sale was published in the 6 June 1987 edition of the Philippine Articles of Incorporation, and not merely in the by-laws,
under the corporate by-laws but not by the Articles of Daily Inquirer.10 because Section 6 (par.1) prescribes that the shares of stock
Incorporation? Such is the central issue raised in this petition, of a corporation may have such rights, privileges and
which arose after petitioner Valley Golf & Country Club (Valley restrictions as may be stated in the articles of
As it turned out, Caram had died on 6 October 1986.
Golf) sold the membership share of a member who had been incorporation."15 It was observed that the Articles of
Respondent initiated intestate proceedings before the
delinquent in the payment of his monthly dues. Incorporation of Valley Golf did not impose any lien, liability or
Regional Trial Court (RTC) of Iloilo City, Branch 35, to settle
restriction on the Golf Share or, for that matter, even any
her husbands estate.11 Unaware of the pending controversy
I. The facts that preceded this petition are simple. over the Golf Share, the Caram family and the RTC included conditionality that the Golf Share would be subject to
Valley Golf & Country Club (Valley Golf) is a duly constituted the same as part of Carams estate. The RTC approved a assessment of monthly dues or a lien on the share for non-
non-stock, non-profit corporation which operates a golf project of partition of Carams estate on 29 August 1989. The payment of such dues.16 In the same vein, it was opined that
course. The members and their guests are entitled to play Golf Share was adjudicated to respondent, who paid the since Section 98 of the Corporation Code provides that
golf on the said course and otherwise avail of the facilities corresponding estate tax due, including that on the Golf restrictions on transfer of shares should appear in the articles
and privileges provided by Valley Golf. 1 The shareholders are Share. of incorporation, by-laws and the certificate of stock to be
likewise assessed monthly membership dues. valid and binding on any purchaser in good faith, there was
more reason to apply the said rule to club delinquencies to
It was only through a letter dated 15 May 1990 that the heirs constitute a lien on golf shares.17
In 1961, the late Congressman Fermin Z. Caram, Jr. of Caram learned of the sale of the Golf Share following their
(Caram),2 the husband of the present respondent, subscribed inquiry with Valley Golf about the share. After a series of
to purchased and paid for in full one share (Golf Share) in the The SEC hearing officer further held that the delinquency in
correspondence, the Caram heirs were subsequently
capital stock of Valley Golf. He was issued Stock Certificate monthly club dues was merely an ordinary debt enforceable
informed, in a letter dated 15 October 1990, that they were
No. 389 dated 26 January 1961 for the Golf Share. 3 The Stock by judicial action in a civil case. The decision generally
entitled to the refund of P11,066.52 out of the proceeds of the
Certificate likewise indicates a par value of P9,000.00. affirmed respondents assertion that Caram was not properly
sale of the Golf Share, which amount had been in the custody
notified of the delinquencies, citing Carams letter dated 7
of Valley Golf since 11 June 1987.12
July 1978 to Valley Golf about the change in his mailing
Valley Golf would subsequently allege that beginning 25
address. He also noted that Valley Golf had sent most of the
January 1980, Caram stopped paying his monthly dues, which Respondent filed an action for reconveyance of the share with letters after Carams death. In all, the decision concluded that
were continually assessed until 31 June 1987. Valley Golf damages before the Securities and Exchange Commission the sale of the Golf Share was effectively a deprivation of
claims to have sent five (5) letters to Caram concerning his (SEC) against Valley Golf. 13 On 15 November 1996, SEC property without due process of law.
delinquent account within the period from 27 January 1986 Hearing Officer Elpidio S. Salgado rendered a decision in favor
until 3 May 1987, all forwarded to P.O. Box No. 1566, Makati of respondent, ordering Valley Golf to convey ownership of
Commercial Center Post Office, the mailing address which On appeal to the SEC en banc, 18 said body promulgated a
the Golf Share or in the alternative to issue one fully paid
Caram allegedly furnished Valley Golf. 4 The first letter decision19 on 9 May 2000, affirming the hearing officers
share of stock of Valley Golf the same class as the Golf Share
informed Caram that his account as of 31 December 1985 decision in toto. Again, the SEC found that Section 67 of the
to respondent. Damages totaling P90,000.00 were also
was delinquent and that his club privileges were suspended Corporation Code could not justify the sale of the Golf Share
awarded to respondent.14
pursuant to Section 3, Article VII of the by-laws of Valley since it applies only to unpaid subscriptions and not to
Golf.5 Despite such notice of delinquency, the second letter, delinquent membership dues. The SEC also cited a general
The SEC hearing officer noted that under Section 67, rule, formulated in American jurisprudence, that a corporation
dated 26 August 1986, stated that should Carams account
paragraph 2 of the Corporation Code, a share stock could only has no right to dispose of shares of stock for delinquent
remain unpaid for 45 days, his name would be "included in
be deemed delinquent and sold in an extrajudicial sale at assessments, dues, service fees and other unliquidated
the delinquent list to be posted on the clubs bulletin
public auction only upon the failure of the stockholder to pay charges unless there is an express grant to do so, either by
board."6The third letter, dated 25 January 1987, again
the unpaid subscription or balance for the share. The section the statute itself or by the charter of a corporation. 20 Said
informed Caram of his delinquent account and the suspension
could not have applied in Carams case since he had fully rule, taken in conjunction with Section 6 of the Corporation
of his club privileges.7 The fourth letter, dated 7 March 1987,
paid for the Golf Share and he had been assessed not for the Code, militated against the validity of the sale of the Golf
informed Caram that should he fail to settle his delinquencies,
share itself but for his delinquent club dues. Proceeding from Share, the SEC stressed. In view of these premises, which
then totaling P7,525.45, within ten (10) days from receipt

CORPORATION LAW: 7. captial structure Page 108 of 201

according to the SEC entailed the nullity of the sale, the body agreement between the corporation and its stockholders or xxx
found it unnecessary to rule on whether there was valid their respective successors. Caram, by becoming a member
notice of the sale at public auction. of Valley Golf, bound himself to observe its by-laws which
Section 3. The account of any member shall be presented to
constitutes "the rules and regulations or private laws enacted
such member every month. If any statement of accounts
by the corporation to regulate, govern and control its own
Valley Golf elevated the SECs decision to the Court of remains unpaid for a period forty-five (45) days after cut-off
21 actions, affairs and concerns and its stockholders or members
Appeals by way of a petition for review. On 4 April 2003, the date, said member maybe (sic) posted as deliqnuent (sic). No
and directors and officers with relation thereto and among
appellate court rendered a decision22 affirming the decisions delinquent member shall be entitled to enjoy the privileges of
themselves in their relation to it." 27 It also points out that the
of the SEC and the hearing officer, with modification such membership for the duration of the deliquency (sic).
by-laws itself had duly passed the SECs scrutiny and
consisting of the deletion of the award of attorneys fees. This After the member shall have been posted as delinquent, the
approval.
time, Valley Golfs central argument was that its by-laws, Board may order his/her/its share sold to satisfy the claims of
rather than Section 67 of the Corporation Code, authorized the club; after which the member loses his/her/its rights and
the auction sale of the Golf Share. Nonetheless, the Court of Valley Golf further argues that it was error on the part of the privileges permanently. No member can be indebted to the
Appeals found that the by-law provisions cited by Valley Golf Court of Appeals to rely, as it did, upon Section 6 of the Club at any time any amount in excess of the credit limit set
are "of doubtful validity," as they purportedly conflict with Corporation Code "to nullify the subject provisions of the By- by the Board of Directors from time to time. The unpaid
Section 6 of the Code, which mandates that "rights privileges Laws."28 Section 6 referrs to "restrictions" on the shares of account referred to here includes non-payment of dues,
or restrictions attached to a share of stock should be stated in stock which should be stated in the articles of incorporation, charges and other assessments and non-payment for
the articles of incorporation.23 It noted that what or who had as differentiated from "liens" which under the by-laws would subscriptions.32
become delinquent was "was Mr. Caram himself and not his serve as basis for the auction sale of the share. Since Section
golf share," and such being the case, the unpaid account 6 refers to restrictions and not to liens, Valley Golf submits
To bolster its cause, Valley Golf proffers the proposition that
"should have been filed as a money claim in the proceedings that "liens" are excluded from the ambit of the provision. It
by virtue of the by-law provisions a lien is created on the
for the settlement of his estate, instead of the petitioner further proffers that assuming that liens and restrictions are
shares of its members to ensure payment of dues, charges
selling his golf share to satisfy the account." 24 synonymous, Section 6 itself utilizes the permissive word
and other assessments on the members. Both the SEC and
"may," thus evincing the non-mandatory character of the
the Court of Appeals debunked the tenability or applicability
requirement that restrictions or liens be stated in the articles
The Court of Appeals also adopted the findings of the hearing of the proposition through two common thrusts.
of incorporation.
officer that the notices had not been properly served on
Caram or his heirs, thus effectively depriving respondent of
Firstly, they correctly noted that the procedure under Section
property without due process of law. While it upheld the Valley Golf also argues that the Court of Appeals erred in
67 of the Corporation Code for the stock corporations
award of damages, the appellate court struck down the award relying on the factual findings of the hearing officer, which are
recourse on unpaid subscriptions is inapt to a non-stock
of attorneys fees since there was no discussion on the basis allegedly replete with errors and contradictions. Finally, it
corporation vis--vis a members outstanding dues. The basic
of such award in the body of the decisions of both the hearing assails the award of moral and exemplary damages.
factual backdrops in the two situations are disperate. In the
officer and the SEC.25
latter, the member has fully paid for his membership share,
III. As found by the SEC and the Court of Appeals, the while in the former, the stockholder has not yet fully paid for
There is one other fact of note, mentioned in passing by the Articles of Incorporation of Valley Golf does not contain any the share or shares of stock he subscribed to, thereby
SEC hearing officer26 but ignored by the SEC en banc and the provision authorizing the corporation to create any lien on a authorizing the stock corporation to call on the unpaid
Court of Appeals. Valley Golfs third and fourth demand letters members Golf Share as a consequence of the members subscription, declare the shares delinquent and subject the
dated 25 January 1987 and 7 March 1987, respectively, were unpaid assessments or dues to Valley Golf. Before this Court, delinquent shares to a sale at public auction. 33
both addressed to "Est. of Fermin Z. Caram, Jr." The Valley Golf asserts that such a provision is contained in its by-
abbreviation "Est." can only be taken to refer to "Estate." laws. We required the parties to submit a certified copy of the
Secondly, the two bodies below concluded that following
Unlike the first two demand letters, the third and fourth by-laws of Valley Golf in effect as of 11 June 1987. 29 In
Section 6 of the Corporation Code, which provides:
letters were sent after Caram had died on 6 October 1986. compliance, Valley Golf submitted a copy of its by-laws,
30
However, the fifth and final demand letter, dated 3 May 1987 originally adopted on 6 June 1958 and amended on 26
or twenty-eight (28) days before the sale, was again November 1986.31 The amendments bear no relevance to the The shares of stock of stock corporation may be divided into
addressed to Fermin Caram himself and not to his estate, as if issue of delinquent membership dues. The relevant classes or series of shares, or both, any of which classes or
he were still alive. The foregoing particular facts are provisions, found in Article VIII entitled "Club Accounts," are series of shares may have such rights, privileges or
especially significant to our disposition of this case. reproduced below: restrictions as may be stated in the articles of incorporation x
x x 34

II. In its petition before this Court, Valley Golf concedes Section 1. [Link] Club has the first lien on the share of
that Section 67 of the Corporation Code, which authorizes the the stockholder who has, in his/her/its name, or in the name the lien on the Golf Share in favor of Valley Golf is not valid,
auction sale of shares with delinquent subscriptions, is not of an assignee, outstanding accounts and liabilities in favor of as the power to constitute such a lien should be provided in
applicable in this case. Nonetheless, it argues that the by- the Club to secure the payment thereof. the articles of incorporation, and not merely in the by-laws.
laws of Valley Golf authorizes the sale of delinquent shares
and that the by-laws constitute a valid law or contractual

CORPORATION LAW: 7. captial structure Page 109 of 201

However, there is a specific provision under the Title XI, on of the delinquent member be sold to satisfy the claims of and it would be difficult to foresee what right under law Valley
Non-Stock Corporations of the Corporation Code dealing with Valley Golf. These conditions found in by-laws duly approved Golf would have to the remainder of the sales proceeds.
termination of membership. Section 91 of the Corporation by the SEC warrant due respect and we are disinclined to rule
Code provides: against the validity of the by-law provisions.
A refund mechanism may disquiet concerns of undue loss of
property rights corresponding to termination of membership.
SEC. 91. Termination of [Link] shall be At the same time, two points warrant special attention. Yet noticeably, the by-laws of Valley Golf does not require the
terminated in the manner and for the causes provided in the Club to refund to the discharged member the remainder of
articles of incorporation or the by-laws. Termination of the proceeds of the sale after the outstanding obligation is
A. Valley Golf has sought to accomplish the termination
membership shall have the effect of extinguishing all rights of extinguished. After petitioner had filed her complaint though,
of Carams membership through the sale of the Golf Share,
a member in the corporation or in its property, unless Valley Golf did inform her that the heirs of Caram are entitled
justifying the sale through the constitution of a lien on the
otherwise provided in the articles of incorporation or the by- to such refund.
Golf Share under Section 1, Article VIII of its by-laws.
laws. (Emphasis supplied)
Generally in theory, a non-stock corporation has the power to
effect the termination of a member without having to B. Let us now turn to the other significant concern.
Clearly, the right of a non-stock corporation such as Valley constitute a lien on the membership share or to undertake the
Golf to expel a member through the forfeiture of the Golf elaborate process of selling the same at public auction. The
The by-laws does not provide for a mode of notice to the
Share may be established in the by-laws alone, as is the articles of incorporation or the by-laws can very well simply
member before the board of directors puts up the Golf Share
situation in this case. Thus, both the SEC and the appellate provide that the failure of a member to pay the dues on time
for sale, yet the sale marks the termination of membership.
court are wrong in holding that the establishment of a lien is cause for the board of directors to terminate membership.
Whatever semblance of a notice that is afforded is bare at
and the loss of the Golf Share consequent to the enforcement Yet Valley Golf was organized in such a way that membership
best, ambiguous at most. The member is entitled to receive a
of the lien should have been provided for in the articles of is adjunct to ownership of a share in the club; hence the
statement of account every month; however, the mode by
incorporation. necessity to dispose of the share to terminate membership.
which the member is to receive such notice is not elaborated
upon. If the member fails to pay within 45 days from the due
IV. Given that the cause for termination of membership Share ownership introduces another dimension to the case date, Valley Golf is immediately entitled to have the member
in a non-stock corporation may be established through the by- the reality that termination of membership may also lead to "posted as delinquent." While the assignation of "delinquent
laws alone and need not be set forth in the articles of the infringement of property rights. Even though Valley Golf is status" is evident enough, it is not as clear what the word
incorporation, is there any cause to invalidate the lien and the a non-stock corporation, as evinced by the fact that it is not "posted" entails. Connotatively, the word could imply the
subsequent sale of the Golf Share by Valley Golf? authorized to distribute to the holder of its shares dividends physical posting of the notice of delinquency within the club
or allotments of the surplus profits on the basis of shares premises, such as a bulletin board, which we recognize is
held,37 the Golf Share has an assigned value reflected on the often the case. Still, the actual posting modality is uncertain
Former SEC Chairperson, Rosario Lopez, in her commentaries
certificate of membership itself. 38 Termination of membership from the language of the by-laws.
on the Corporation Code, explains the import of Section 91 in
in Valley Golf does not merely lead to the withdrawal of the
a manner relevant to this case:
rights and privileges of the member to club properties and
The moment the member is "posted as delinquent," Valley
facilities but also to the loss of the Golf Share itself for which
Golf is immediately enabled to seize the share and sell the
The prevailing rule is that the provisions of the articles of the member had fully paid.
same, thereby terminating membership in the club. The by-
incorporation or by-laws of termination of membership must
laws does not require any notice to the member from the time
be strictly complied with and applied to the letter. Thus, an
The claim of Valley Golf is limited to the amount of unpaid delinquency is posted to the day the sale of the share is
association whose member fails to pay his membership due
dues plus incremental costs. On the other hand, Carams loss actually held. The setup is to the extreme detriment to the
and annual due as required in the by-laws, and which
may encompass not only the amount he had paid for the member, who upon being notified that the lien on his share is
provides for the termination or suspension of erring members
share but also the price it would have fetched in the market due for execution would be duly motivated to settle his
as well as prohibits the latter from intervening in any manner
at the time his membership was terminated. accounts to foreclose such possibility.
in the operational activities of the association, must be
observed because by-laws are self-imposed private laws
binding on all members, directors and officers of the There is an easy way to remedy what is obviously an unfair Does the Corporation Code permit the termination of
corporation.35 situation. Taking the same example, Valley Golf seizes the membership without due notice to the member? The Code
share, sells it to itself or a third person for P100.000.00, then itself is silent on that matter, and the argument can be made
refunds P99,000.00 back to the delinquent member. On its that if no notice is provided for in the articles of incorporation
Examining closely the relevant by-law provisions of Valley
face, such a mechanism obviates the inequity of the first or in the by-laws, then termination may be effected without
Golf,36 it appears that termination of membership may occur
example, and assures that the loss sustained by the any notice at all. Support for such an argument can be drawn
when the following successive conditions are met: (1)
delinquent member is commensurate to the actual debt owed from our ruling in Long v. Basa, 39 which pertains to a religious
presentation of the account of the member; (2) failure of the
to Valley Golf. After all, applying civil law concepts, the corporation that is also a non-stock corporation. 40 Therein, the
member to settle the account within forty-five days after the
pecuniary injury sustained by Valley Golf attributable to the Court upheld the expulsion of church members despite the
cut-off date; (3) posting of the member as delinquent; and (4)
delinquent member is only to the extent of the unpaid debt, absence of any provision on prior notice in the by-laws,
issuance of an order by the board of directors that the share

CORPORATION LAW: 7. captial structure Page 110 of 201

stating that the members had "waived such notice by opportunity to be heard in his defense. (Fletcher Cyc. Corp., notices. That it did not do so signifies that Valley Golf was
adhering to those by-laws[,] became members of the church supra) If the method of trial is not regulated by the by-laws of bent on selling the Golf Share, impervious to potential
voluntarily[,] entered into its covenant and subscribed to its the association, it should at least permit substantial justice. complications that would impede its intentions, such as the
rules [and by] doing so, they are bound by their consent." 41 The hearing must be conducted fairly and openly and the need to pursue the claim before the estate proceedings of
body of persons before whom it is heard or who are to decide Caram. By pretending to assume that Caram was then still
the case must be unprejudiced. (SEC opinion dated alive, Valley Golf would have been able to capitalize on his
However, a distinction should be made between membership
September 29, 1987, Bacalaran-Sucat Drivers Association) previous unresponsiveness to their notices and proceed in
in a religious corporation, which ordinarily does not involve
feigned good faith with the [Link] Whatever the
the purchase of ownership shares, and membership in a non-
reason Caram was unable to respond to the earlier notices,
stock corporation such as Valley Golf, where the purchase of It is unmistakably wise public policy to require that the
the fact remains that at the time of the final notice, Valley
an ownership share is a condition sine qua non. Membership termination of membership in a non-stock corporation be
Golf knew that Caram, having died and gone, would not be
in Valley Golf entails the acquisition of a property right. In done in accordance with substantial justice. No matter how
able to settle the obligation himself, yet they persisted in
turn, the loss of such property right could also involve the one may precisely define such term, it is evident in this case
sending him notice to provide a color of regularity to the
application of aspects of civil law, in addition to the provisions that the termination of Carams membership betrayed the
resulting sale.
of the Corporation Code. To put it simply, when the loss of dictates of substantial justice.
membership in a non-stock corporation also entails the loss of
property rights, the manner of deprivation of such property That reason alone, evocative as it is of the absence of
Valley Golf alleges in its present petition that it was notified of
right should also be in accordance with the provisions of the substantial justice in the sale of the Golf Share, is sufficient to
the death of Caram only in March of 1990, 43 a claim which is
Civil Code. 44 nullify the sale and sustain the rulings of the SEC and the
reiterated in its Reply to respondents Comment. Yet this
Court of Appeals.
claim is belied by the very demand letters sent by Valley Golf
It has been held that a by-law providing that if a member fails to Carams mailing address. The letters dated 25 January
to pay dues for a year, he shall be deemed to have 1987 and 7 March 1987, both of which were sent within a few Moreover, the utter and appalling bad faith exhibited by
relinquished his membership and may be excluded from the months after Carams death are both addressed to "Est. of Valley Golf in sending out the final notice to Caram on the
rooms of the association and his certificate of membership Fermin Z. Caram, Jr.;" and the abbreviation "[e]st." can only deliberate pretense that he was still alive could bring into
shall be sold at auction, and any surplus of the proceeds be be taken to refer to "estate." This is to be distinguished from operation Articles Articles 19, 20 and 21 under the Chapter on
paid over him, does not ipso facto terminate the membership the two earlier letters, both sent prior to Carams death on 6 Human Relations of the Civil Code.46 These provisions
of one whose dues are a year in arrears; the remedy given for October 1986, which were addressed to Caram himself. enunciate a general obligation under law for every person to
non-payment of dues is not exclusive because the Inexplicably, the final letter dated 3 May 1987 was again act fairly and in good faith towards one another. Non-stock
corporation, so long as he remains a member, may sue on his addressed to Caram himself, although the fact that the two corporations and its officers are not exempt from that
agreement and collect them.42 previous letters were directed at the estate of Caram stands obligation.
as incontrovertible proof that Valley Golf had known of
Carams death even prior to the auction sale.
V. With these foregoing concerns in mind, were the VI. Another point. The by-laws of Valley Golf is
actions of Valley Golf concerning the Golf Share and discomfiting enough in that it fails to provide any formal
membership of Caram warranted? We believe not. Interestingly, Valley Golf did not claim before the Court of notice and hearing procedure before a members share may
Appeals that they had learned of Carams death only after the be seized and sold. The Court would have been satisfied had
auction sale. It also appears that Valley Golf had conceded the by-laws or the articles of incorporation established a
It may be conceded that the actions of Valley Golf were,
before the SEC that some of the notices it had sent were procedure which assures that the member would in reality be
technically speaking, in accord with the provisions of its by-
addressed to the estate of Caram, and not the decedent actually notified of the pending accounts and provide the
laws on termination of membership, vaguely defined as these
himself.45 opportunity for such member to settle such accounts before
are. Yet especially since the termination of membership in
the membership share could be seized then sold to answer for
Valley Golf is inextricably linked to the deprivation of property
the debt. As we have emphasized, membership in Valley Golf
rights over the Golf Share, the emergence of such adverse What do these facts reveal? Valley Golf acted in clear bad
and many other like-situated non-stock corporations actually
consequences make legal and equitable standards come to faith when it sent the final notice to Caram under the
involves the purchase of a membership share, which is a
fore. pretense they believed him to be still alive, when in fact they
substantially expensive property. As a result, termination of
had very well known that he had already died. That it was in
membership does not only lead to loss of bragging rights, but
the final notice that Valley Golf had perpetrated the duplicity
The commentaries of Lopez advert to an SEC Opinion dated the actual deprivation of property.
is especially blameworthy, since it was that notice that
29 September 1987 which we can cite with approval. Lopez
carried the final threat that his Golf Share would be sold at
cites:
public auction should he fail to settle his account on or before The Court has no intention to interfere with how non-stock
31 May 1987. corporations should run their daily affairs. The Court also
[I]n order that the action of a corporation in expelling a respects the fact that membership is non-stock corporations
member for cause may be valid, it is essential, in the absence is a voluntary arrangement, and that the member who signs
Valley Golf could have very well addressed that notice to the
of a waiver, that there shall be a hearing or trial of the charge up is bound to adhere to what the articles of incorporation or
estate of Caram, as it had done with the third and fourth
against him, with reasonable notice to him and a fair the by-laws provide, even if provisions are detrimental to the

CORPORATION LAW: 7. captial structure Page 111 of 201

interest of the member. At the same time, in the absence of a The award of moral damages was based on a finding by the
satisfactory procedure under the articles of incorporation or hearing officer that Valley Golf had "considerably besmirched
the by-laws that affords a member the opportunity to defend the reputation and good credit standing of the plaintiff and
against the deprivation of significant property rights in her family," such justification having foundation under Article
accordance with substantial justice, the terms of the by-laws 2217 of the Civil Code. No cause has been submitted to
or articles of incorporation will not suffice. There will be need detract from such award. In addition, exemplary damages
in such case to refer to substantive law. Such a flaw attends were awarded "to [Valley Golf] defendant from repeating
the articles of incorporation and by-laws of Valley Golf. The similar acts in the future and to protect the interest of its
Court deems it judicious to refer to the protections afforded stockholders and by way of example or correction for the
by the Civil Code, with respect to the preservation, public good." Such conclusion is in accordance with Article
maintenance, and defense from loss of property rights. 2229 of the Civil Code, which establishes liability for
exemplary damages.
The arrangement provided for in the afore-quoted by-laws of
Valley Golf whereby a lien is constituted on the membership WHEREFORE, the petition is DENIED. Costs against
share to answer for subsequent obligations to the corporation petitioners.
finds applicable parallels under the Civil Code. Membership
shares are considered as movable or personal property, 47 and
SO ORDERED.
they can be constituted as security to secure a principal
obligation, such as the dues and fees. There are at least two
contractual modes under the Civil Code by which personal
property can be used to secure a principal obligation. The first
is through a contract of pledge, 48 while the second is through
a chattel mortgage.49 A pledge would require the pledgor to
surrender possession of the thing pledged, i.e., the
membership share, to the pledge in order that the contract of
pledge may be constituted.50

Is delivery of the share cannot be effected, the suitable

security transaction is the chattel mortgage. Under Article
2124 of the Civil Code, movables may be the object of a
chattel mortgage. The Chattel mortgage is governed by Act
No. 1508, otherwise known The Chattel Mortgage Law, 51 and
the Civil Code.

In this case, Caram had not signed any document that

manifests his agreement to constitute his Golf Share as
security in favor of Valley Golf to answer for his obligations to
the club. There is no document we can assess that it is
substantially compliant with the form of chattel mortgages
under Section 5 of Act No. 1508. The by-laws could not suffice
for that purpose since it is not designed as a bilateral contract
between Caram and Valley Golf, or a vehicle by which Caram
expressed his consent to constitute his Golf Share as security
for his account with Valley Golf.

VII. We finally turn to the matter of damages. The award

of damages sustained by the Court of Appeals was for moral
damages in the sum of P50,000.00 and exemplary damages
in the sum of P10,000.00. Both awards should be sustained.
In pretending to give actual notice to Caram despite full
knowledge that he was in fact dead, Valley Golf exhibited
utter bad faith.

CORPORATION LAW: 7. captial structure Page 112 of 201

G.R. No. 165443 April 16, 2009 Then he ceased paying the dues. At that point, his balance with all the requirements for a valid sale of the subject share,
amounted to P400.00.4 Clemente having failed to inform Calatagan that the address
he had earlier supplied was no longer his address. Clemente,
CALATAGAN GOLF CLUB, INC. Petitioner, vs. SIXTO
the SEC ruled, had acted in bad faith in assuming as he
CLEMENTE, JR., Respondent. Ten (10) months later, Calatagan made the initial step to
claimed that his non-payment of monthly dues would merely
collect Clementes back accounts by sending a demand letter
render his share "inactive."
dated 21 September 1992. It was followed by a second letter
DECISION
dated 22 October 1992. Both letters were sent to Clementes
mailing address as indicated in his membership application Clemente filed a petition for review with the Court of Appeals.
TINGA, J.: but were sent back to sender with the postal note that the On 1 June 2004, the Court of Appeals promulgated a decision
address had been closed.5 reversing the SEC. The appellate court restored Clementes
Seeking the reversal of the Decision 1 dated 1 June 2004 of the one share with a directive to Calatagan to issue in his a new
Court of Appeals in CA-G.R. SP No. 62331 and the share, and awarded to Clemente a total of P400,000.00 in
Calatagan declared Clemente delinquent for having failed to
reinstatement of the Decision dated 15 November 2000 of the damages, less the unpaid monthly dues of P5,200.00.
pay his monthly dues for more than sixty (60) days,
Securities and Exchange Commission (SEC) in SEC Case No. specifically P5,600.00 as of 31 October 1992. Calatagan also
04-98-5954, petitioner Calatagan Golf Club, Inc. (Calatagan) included Clementes name in the list of delinquent members In rejecting the SECs finding that the action had prescribed,
filed this Rule 45 petition against respondent Sixto Clemente, posted on the clubs bulletin board. On 1 December 1992, the Court of Appeals cited the SECs own ruling in SEC Case
Jr. (Clemente). Calatagans board of directors adopted a resolution No. 4160, Caram v. Valley Golf Country Club, Inc., that Section
authorizing the foreclosure of shares of delinquent members, 69 of the Corporation Code specifically refers to unpaid
The key facts are undisputed. including Clementes; and the public auction of these shares. subscriptions to capital stock, and not to any other debt of
stockholders. With the insinuation that Section 69 does not
apply to unpaid membership dues in non-stock corporations,
Clemente applied to purchase one share of stock of On 7 December 1992, Calatagan sent a third and final letter
the appellate court employed Article 1140 of the Civil Code as
Calatagan, indicating in his application for membership his to Clemente, this time signed by its Corporate Secretary, Atty.
the proper rule of prescription. The provision sets the
mailing address at "Phimco Industries, Inc. P.O. Box 240, Benjamin Tanedo, Jr. The letter contains a warning that unless
prescription period of actions to recover movables at eight (8)
MCC," complete residential address, office and residence Clemente settles his outstanding dues, his share would be
years.
telephone numbers, as well as the company (Phimco) with included among the delinquent shares to be sold at public
which he was connected, Calatagan issued to him Certificate auction on 15 January 1993. Again, this letter was sent to
of Stock No. A-01295 on 2 May 1990 after Clementes mailing address that had already been closed. 6 The Court of Appeals also pointed out that since that
paying P120,000.00 for the share.2 Calatagans first two demand letters had been returned to it
as sender with the notation about the closure of the mailing
On 5 January 1993, a notice of auction sale was posted on the
address, it very well knew that its third and final demand
Calatagan charges monthly dues on its members to meet Clubs bulletin board, as well as on the clubs premises. The
letter also sent to the same mailing address would not be
expenses for general operations, as well as costs for upkeep auction sale took place as scheduled on 15 January 1993, and
7 received by Clemente. It noted the by-law requirement that
and improvement of the grounds and facilities. The provision Clementes share sold for P64,000. According to the
within ten (10) days after the Board has ordered the sale at
on monthly dues is incorporated in Calatagans Articles of Certificate of Sale issued by Calatagan after the sale,
8 auction of a members share of stock for indebtedness, the
Incorporation and By-Laws. It is also reproduced at the back Clementes share was purchased by a Nestor A. Virata. At the
Corporate Secretary shall notify the owner thereof and advise
of each certificate of stock. 3As reproduced in the dorsal side time of the sale, Clementes accrued monthly dues amounted
9 the Membership Committee of such fact. Finally, the Court of
of Certificate of Stock No. A-01295, the provision reads: to P5,200.00. A notice of foreclosure of Clementes share was
Appeals ratiocinated that "a person who is in danger of the
published in the 26 May 1993 issue of the Business World. 10
imminent loss of his property has the right to be notified and
5. The owners of shares of stock shall be subject to the be given the chance to prevent the loss."12
payment of monthly dues in an amount as may be prescribed Clemente learned of the sale of his share only in November of
in the by-laws or by the Board of Directors which shall in no 1997.11 He filed a claim with the Securities and Exchange
Hence, the present appeal.
case be less that [sic] P50.00 to meet the expenses for the Commission (SEC) seeking the restoration of his shareholding
general operations of the club, and the maintenance and in Calatagan with damages.
improvement of its premises and facilities, in addition to such Calatagan maintains that the action of Clemente had
fees as may be charged for the actual use of the facilities x x prescribed pursuant to Section 69 of the Corporation Code,
On 15 November 2000, the SEC rendered a decision
x and that the requisite notices under both the law and the by-
dismissing Clementes complaint. Citing Section 69 of the
laws had been rendered to Clemente.
Corporation Code which provides that the sale of shares at an
When Clemente became a member the monthly charge stood auction sale can only be questioned within six (6) months
at P400.00. He paid P3,000.00 for his monthly dues on 21 from the date of sale, the SEC concluded that Clementes Section 69 of the Code provides that an action to recover
March 1991 and another P5,400.00 on 9 December 1991. claim, filed four (4) years after the sale, had already delinquent stock sold must be commenced by the filing of a
prescribed. The SEC further held that Calatagan had complied complaint within six (6) months from the date of sale. As

CORPORATION LAW: 7. captial structure Page 113 of 201

correctly pointed out by the Court of Appeals, Section 69 is suit is purely for damages. As a second alternative still, of the members to the Club. This lien shall be annotated on
part of Title VIII of the Code entitled "Stocks and Calatagan posits that Clementes action is governed by Article the certificates of stock and may be enforced by the Club in
Stockholders" and refers specifically to unpaid subscriptions 1149 of the Civil Code which sets five (5) years as the period the following manner:
to capital stock, the sale of which is governed by the of prescription for all other actions whose prescriptive periods
immediately preceding Section 68. are not fixed in the Civil Code or in any other law. Neither
(a) Within ten (10) days after the Board has ordered the
article is applicable but Article 1140 of the Civil Code which
sale at auction of a members share of stock for
provides that an action to recover movables shall prescribe in
The Court of Appeals debunked both Calatagans and the indebtedness under Section 31(b) hereof, the Secretary
eight (8) years. Calatagans action is for the recovery of a
SECs reliance on Section 69 by citing another SEC ruling in shall notify the owner thereof, and shall advise the
share of stock, plus damages.
the case of Caram v. Valley Golf. In connection with Section Membership Committee of such fact.
69, Calatagan raises a peripheral point made in the SECs
Caram ruling. In Caram, the SEC, using as take-off Section 6 Calatagans advertence to the fact that the constitution of a
(b) The Membership Committee shall then notify all
of the Corporation Code which refers to "such rights, lien on the members share by virtue of the explicit provisions
applicants on the Waiting List and all registered
privileges or restrictions as may be stated in the articles of in its Articles of Incorporation and By-Laws is relevant but
stockholders of the availability of a share of stock for sale
incorporation," pointed out that the Articles of Incorporation ultimately of no help to its cause. Calatagans Articles of
at auction at a specified date, time and place, and shall
of Valley Golf does not "impose any lien, liability or restriction Incorporation states that the "dues, together with all other
post a notice to that effect in the Club bulletin board for at
on the Golf Share [of Caram]," but only its (Valley Golfs) By- obligations of members to the club, shall constitute a first lien
least ten (10) days prior to the auction sale.
Laws does. Here, Calatagan stresses that its own Articles of on the shares, second only to any lien in favor of the national
Incorporation does provide that the monthly dues assessed or local government, and in the event of delinquency such
on owners of shares of the corporation, along with all other shares may be ordered sold by the Board of Directors in the (c) On the date and hour fixed, the Membership
obligations of the shareholders to the club, "shall constitute a manner provided in the By-Laws to satisfy said dues or other Committee shall proceed with the auction by viva voce
first lien on the shares and in the event of delinquency such obligations of the stockholders." 14 In turn, there are several bidding and award the sale of the share of stock to the
shares may be ordered sold by the Board of Directors in the provisions in the By-laws that govern the payment of dues, highest bidder.
manner provided in the By-Laws to satisfy said dues or other the lapse into delinquency of the member, and the
obligations of the shareholders."13 With its illative but constitution and execution on the lien. We quote these (d) The purchase price shall be paid by the winning bidder
incomprehensible logic, Calatagan concludes that the provisions: to the Club within twenty-four (24) hours after the bidding.
prescriptive period under Section 69 should also apply to the The winning bidder or the representative in the case of a
sale of Clementes share as the lien that Calatagan perceives juridical entity shall become a Regular Member upon
ARTICLE XII MEMBERS ACCOUNT
to be a restriction is stated in the articles of incorporation and payment of the purchase price and issuance of a new
not only in the by-laws. stock certificate in his name or in the name of the juridical
SEC. 31. (a) Billing Members, Posting of Delinquent Members
entity he represents. The proceeds of the sale shall be
The Treasurer shall bill al members monthly. As soon as
We remain unconvinced. paid by the Club to the selling stockholder after deducting
possible after the end of every month, a statement showing
his obligations to the Club.
the account of bill of a member for said month will be
There are fundamental differences that defy equivalence or prepared and sent to him. If the bill of any member remains
even analogy between the sale of delinquent stock under unpaid by the 20th of the month following that in which the (e) If no bids be received or if the winning bidder fails to
Section 68 and the sale that occurred in this case. At the root bill was incurred, the Treasurer shall notify him that if his bill pay the amount of this bid within twenty-four (24) hours
of the sale of delinquent stock is the non-payment of the is not paid in full by the end of the succeeding month his after the bidding, the auction procedures may be repeated
subscription price for the share of stock itself. The stockholder name will be posted as delinquent the following day at the from time to time at the discretion of the Membership
or subscriber has yet to fully pay for the value of the share or Clubhouse bulletin board. While posted, a member, the Committee until the share of stock be sold.
shares subscribed. In this case, Clemente had already fully immediate members of his family, and his guests, may not
paid for the share in Calatagan and no longer had any avail of the facilities of the Club. (f) If the proceeds from the sale of the share of stock are
outstanding obligation to deprive him of full title to his share. not sufficient to pay in full the indebtedness of the
Perhaps the analogy could have been made if Clemente had member, the member shall continue to be obligated to the
(b) Members on the delinquent list for more than 60 days
not yet fully paid for his share and the non-stock corporation, Club for the unpaid balance. If the member whose share
shall be reported to the Board and their shares or the
pursuant to an article or by-law provision designed to address of stock is sold fails or refuse to surrender the stock
shares of the juridical entities they represent shall
that situation, decided to sell such share as a consequence. certificate for cancellation, cancellation shall be effected
thereafter be ordered sold by the Board at auction to
But that is not the case here, and there is no purpose for us to in the books of the Club based on a record of the
satisfy the claims of the Club as provided for in Section 32
apply Section 69 to the case at bar. proceedings. Such cancellation shall render the
hereon. A member may pay his overdue account at any
time before the auction sale. unsurrendered stock certificate null and void and notice to
Calatagan argues in the alternative that Clementes suit is this effect shall be duly published.
barred by Article 1146 of the Civil Code which establishes four
Sec. 32. Lien on Shares; Sale of Share at Auction- The club
(4) years as the prescriptive period for actions based upon
shall have a first lien on every share of stock to secure debts It is plain that Calatagan had endeavored to install a clear and
injury to the rights of the plaintiff on the hypothesis that the comprehensive procedure to govern the payment of monthly

CORPORATION LAW: 7. captial structure Page 114 of 201

dues, the declaration of a member as delinquent, and the records, he should also have known that the first two letters Calatagans bad faith and failure to observe its own By-Laws
constitution of a lien on the shares and its eventual public sent to Clemente were returned because the P.O. Box had had resulted not merely in the loss of Clementes privilege to
sale to answer for the members debts. Under Section 91 of been closed. Thus, we are surprised given his knowledge of play golf at its golf course and avail of its amenities, but also
the Corporation Code, membership in a non-stock corporation the law and of corporate records that he would send the in significant pecuniary damage to him. For that loss, the only
"shall be terminated in the manner and for the causes third and final letter Clementes last chance before his share blame that could be thrown Clementes way was his failure to
provided in the articles of incorporation or the by-laws." The is sold and his membership lost to the same P.O. Box that notify Calatagan of the closure of the P.O. Box. That lapse, if
By-law provisions are elaborate in explaining the manner and had been closed. we uphold Calatagan would cost Clemente a lot. But, in the
the causes for the termination of membership in Calatagan, first place, does he deserve answerability for failing to notify
through the execution on the lien of the share. The Court is the club of the closure of the postal box? Indeed, knowing as
Calatagan argues that it "exercised due diligence before the
satisfied that the By-Laws, as written, affords due protection he did that Calatagan was in possession of his home address
foreclosure sale" and "sent several notices to Clementes
to the member by assuring that the member should be as well as residence and office telephone numbers, he had
specified mailing address." We do not agree; we cannot label
notified by the Secretary of the looming execution sale that every reason to assume that the club would not be at a loss
as due diligence Calatagans act of sending the December 7,
would terminate membership in the club. In addition, the By- should it need to contact him. In addition, according to
1992 letter to Clementes mailing address knowing fully well
Laws guarantees that after the execution sale, the proceeds Clemente, he was not even aware of the closure of the postal
that the P.O. Box had been closed. Due diligence or good faith
of the sale would be returned to the former member after box, the maintenance of which was not his responsibility but
imposes upon the Corporate Secretary the chief repository
deducting the outstanding obligations. If followed to the his employer Phimcos.
of all corporate records the obligation to check Clementes
letter, the termination of membership under this procedure
other address which, under the By-Laws, have to be kept on
outlined in the By-Laws would accord with substantial justice.
file and are in fact on file. One obvious purpose of giving the The utter bad faith exhibited by Calatagan brings into
Corporate Secretary the duty to keep the addresses of operation Articles 19, 20 and 21 of the Civil Code, 16 under the
Yet, did Calatagan actually comply with the by-law provisions members on file is specifically for matters of this kind, when Chapter on Human Relations. These provisions, which the
when it sold Clementes share? The appellate courts finding the member cannot be reached through his or her mailing Court of Appeals did apply, enunciate a general obligation
on this point warrants our approving citation, thus: address. Significantly, the Corporate Secretary does not have under law for every person to act fairly and in good faith
to do the actual verification of other addressees on record; a towards one another. A non-stock corporation like Calatagan
mere clerk can do the very simple task of checking the files is not exempt from that obligation in its treatment of its
In accordance with this provision, Calatagan sent the third
as in fact clerks actually undertake these tasks. In fact, one members. The obligation of a corporation to treat every
and final demand letter to Clemente on December 7, 1992.
telephone call to Clementes phone numbers on file would person honestly and in good faith extends even to its
The letter states that if the amount of delinquency is not paid,
have alerted him of his impending loss. shareholders or members, even if the latter find themselves
the share will be included among the delinquent shares to be
contractually bound to perform certain obligations to the
sold at public auction. This letter was signed by Atty.
corporation. A certificate of stock cannot be a charter of
Benjamin Tanedo, Jr., Calatagan Golfs Corporate Secretary. It Ultimately, the petition must fail because Calatagan had
dehumanization.
was again sent to Clementes mailing address Phimco failed to duly observe both the spirit and letter of its own by-
Industries Inc., P.O. Box 240, MCC Makati. As expected, laws. The by-law provisions was clearly conceived to afford
it was returned because the post office box had been closed. due notice to the delinquent member of the impending sale, We turn to the matter of damages. The award of actual
and not just to provide an intricate faade that would damages is of course warranted since Clemente has
facilitate Calatagans sale of the share. But then, the bad faith sustained pecuniary injury by reason of Calatagans wrongful
Under the By-Laws, the Corporate Secretary is tasked to "give
on Calatagans part is palpable. As found by the Court of violation of its own By-Laws. It would not be feasible to deliver
or cause to be given, all notices required by law or by these
Appeals, Calatagan very well knew that Clementes postal box Clementes original Certificate of Stock because it had already
By-Laws. .. and keep a record of the addresses of all
to which it sent its previous letters had already been closed, been cancelled and a new one issued in its place in the name
stockholders. As quoted above, Sec. 32 (a) of the By-Laws
yet it persisted in sending that final letter to the same postal of the purchases at the auction who was not impleaded in this
further provides that "within ten (10) days after the Board has
box. What for? Just for the exercise, it appears, as it had case. However, the Court of Appeals instead directed that
ordered the sale at auction of a members share of stock for
known very well that the letter would never actually reach Calatagan to issue to Clemente a new certificate of stock.
indebtedness under Section 31 (b) hereof, the Secretary shall
Clemente. That sufficiently redresses the actual damages sustained by
notify the owner thereof and shall advise the Membership
Clemente. After all, the certificate of stock is simply the
Committee of such fact.," The records do not disclose what
evidence of the share.
report the Corporate Secretary transmitted to the It is noteworthy that Clemente in his membership application
Membership Committee to comply with Section 32(a). had provided his residential address along with his residence
Obviously, the reason for this mandatory requirement is to and office telephone numbers. Nothing in Section 32 of The Court of Appeals also awarded Clemente P200,000.00 as
give the Membership Committee the opportunity to find out, Calatagans By-Laws requires that the final notice prior to the moral damages, P100,000.00 as exemplary damages,
before the share is sold, if proper notice has been made to sale be made solely through the members mailing address. and P100,000.00 as attorneys fees. We agree that the award
the shareholder member. Clemente cites our aphorism-like pronouncement in Rizal of such damages is warranted.
Commercial Banking Corporation v. Court of Appeals 15 that
"[a] simple telephone call and an ounce of good faith x x x
We presume that the Corporate Secretary, as a lawyer is The Court of Appeals cited Calatagan for violation of Article
could have prevented this present controversy." That
knowledgeable on the law and on the standards of good faith 32 of the Civil Code, which allows recovery of damages from
memorable observation is quite apt in this case.
and fairness that the law requires. As custodian of corporate any private individual "who directly or indirectly obstructs,

CORPORATION LAW: 7. captial structure Page 115 of 201

defeats, violates or in any manner impedes or impairs" the transfers to third persons and acquired new ones, Baltazar value and cancelled from its books, and if the payments
right "against deprivation of property without due process of had to his credit, on the filing of the complaint 341 shares already made exceeded the interest accrued and collectible
laws." The plain letter of the provision squarely entitles fully paid and non-assessable. He had also 65 shares with par by virtue of the provision of law and the previous resolution
value of P6,500.00, for which no certificate was issued to him. of its board of directors, the excess should be applied to the
Clemente to damages from Calatagan. Even without Article
Of the 400 shares of stock subscribed by Rose, he had 375 payment of the unpaid subscription. For this purpose, the
32 itself, Calatagan will still be bound to pay moral and shares of fully paid stock, duly covered by certificates of stock accountant of the corporation is directed to make and
exemplary damages to Clemente. The latter was able to duly issued to him. report the proper computation of the interest.
prove that he had sustained mental anguish, serious anxiety
The respondents Ungson, Estrada, Fernandez and Yuson were Resolution No. 4 (Exh. C) resolved that "any and all shares
and wounded feelings by reason of Calatagans acts, thereby
small stockholders of the Corporation, all holding a total of stock of the Lingayen Gulf Electric Power Co., Inc., issued
entitling him to moral damages under Article 2217 of the Civil number of fully paid-up shares of stock, of not more than 100 as fully paid-up to stockholders whose subscription to a
Code. Moreover, it is evident that Calatagans bad faith as shares, with a par value of P10,000.00 and the defendant number of shares have been declared delinquent with the
exhibited in the Acena, was likewise an incorporator and stockholder, holding accrued interest on the unpaid thereof per Resolution No.
600 shares of stock, for which certificate of stock were issued 42, S. 1954, of the Board of Directors which has been duly
to him and as such, was the largest individual stockholder published in the "Manila Chronicle," are hereby
course of its corporate actions warrants correction for the thereof. Defendants Ungson, Estrada, Fernandez and Yuzon, incapacitated to utilize or avail of the voting power until
public good, thereby justifying exemplary damages under constituted the majority of the holdover seven-member Board such delinquency with the accrued interest is fully paid up
Article 2229 of the Civil Code. of Directors of the Corporation, in 1955, two (2) of said as indicated in Resolution No. 3, S. 1955.
defendants having been elected as members of the Board in
On the authority of these resolutions, the Ungson group was
the annual stockholders' meeting held in May 1954, largely on
WHEREFORE, the petition is DENIED. The Decision of the threatening and procuring to expel and oust the plaintiffs and
the vote of their co-defendant Acena, while the other two (2)
Court of Appeals is AFFIRMED. Costs against petitioner. their companion stockholders, for the ultimate purpose of
were elected mainly on the vote of the plaintiffs and their
depriving them of their right to vote in the said annual
group of stockholders. Let the first group be called
stockholders' meeting scheduled for May 1, 1955.
the Ungson group and the second, the Baltazar group.
SO ORDERED.
In their complaint, Baltazar and Rose prayed that a writ of
The date of the annual stockholders' meeting of the
preliminary injunction be issued against the defendants,
Corporation had been fixed, under its by-laws, on the first
G.R. No. L-16236 June 30, 1965 enjoining them to desist and refrain from carrying out the
Tuesday of February of every year, but for one reason or
objects and purposes of the three resolutions aforestated,
IRINEO S. BALTAZAR, plaintiff-appellee, vs. LINGAYEN another, the meeting was to be held on May 1, 1955, and commanding them to allow plaintiffs and companions to
GULF ELECTRIC POWER, CO., INC., DOMINADOR C. principally for the purpose of electing new officers and Board vote in the stockholders' meeting, on May 1, 1955, their fully
UNGSON, BRIGIDO G. ESTRADA, MANUEL L. of Directors for the calendar year 1955. In connection with paid up shares of stocks, as evidenced by stock certificates
FERNANDEZ, BENEDICTO C. YUSON and BERNARDO said meeting since January 1, 1955, there was a realignment issued to them and outstanding on the stock book of the
ACENA, defendants-appellants. effected, and the fight for control of the management and
defendant Corporation, on or before January 30, 1955, to
property of the corporation was close and keen. The total
----------------------------- declare said three resolutions illegal and invalid, and to pay
number of fully paid-up shares held by stockholders of one
plaintiffs the sum of P10,000.00 each, as damages. On April
group, was almost equal the number of fully paid-up shares
PAREDES, J.: 29, 1955, the trial court, after due hearing, issued Preliminary
held by the other group.
Injunction, as prayed for.
In Civil Case G.R. No. L-16236 (CFI No. 13211), Irineo S.
The Ungson group (specially defendant Acena), which had
Baltazar, filed the complaint against Lingayen Gulf Electric The defendants, in their answers, allege that during the years
been in complete control of the management and property of
Power Co., Inc., Dominador C. Ungson, Brigido G. Estrada, that plaintiffs and their allies were in control of the
the Corporation since January 1, 1955, in order to continue
Manuel L. Fernandez, Benedicto C. Yuson and Bernardo Acena. Corporation, no serious effort was attempted to retrieve it
retaining such control, over the objection oil three majority
from its financial collapse, caused by accumulated
In Civil Case G.R. No. L-16237 (CFI No. 13212), Marvin O. Rose members of the Board, in the regular meeting of the Board of
indebtedness and by poor and inefficient management,
filed the complaint against the same defendants. Directors, held on January 30, 1955, passed three (3)
resulting in losses of big sums of money from vicious
resolutions (Exhs. A, B, C).
In Civil Case G.R. No. L-16238 (CFI No. 13340), Baltazar and manipulation of funds, nepotism, unconscionable grant of big
Rose filed their complaint against Bernardo Acena alone. Resolution No. 2 (Exh. A), declared all watered stocks salaries and allowances, illegal payments, unaccounted funds
issued to Acena, Baltazar, Rose and Jubenville, "of no value of Caltex business and sales department store, etc.; that
The Lingayen Gulf Electric Power Co., Inc., hereinafter referred
and consequently cancelled from the books of the during the time the management was in the hands of
to as Corporation, was doing business in the Philippines, with Corporation. plaintiffs (Rose, as manager); attempts were made to release
principal offices at Lingayen, Pangasinan, and with an
themselves from liability of their unpaid subscriptions; that
authorized capital stock of P300.000.00 divided into 3,000 Resolution No. 3 (Exh. B) resolved that "... all unpaid
the three resolutions were merely functional instruments to
shares of voting stock at P100.00 par value, per share. subscriptions should bear interest annually from the year of
bolster the faith in the assets of the defendant Corporation
Plaintiffs Baltazar and Rose were among the incorporators, subscription on the basis of quarterly payment, and any or
and did not deprive the plaintiffs of their property without due
having subscribed to 600 and 400 shares of the capital stock, all payments already made on said unpaid subscriptions
process of law; that the issuance of a writ of injunction for the
or a total par value of P60,000.00 and P40.000.00, should be credited to pay interest first, then the capital
purpose of arresting the holding of the election of the Board,
respectively. It is alleged that it has always been the practice debt after all interest is fully paid.
was beyond the jurisdiction of the court. They set up
and procedure of the Corporation to issue certificates of stock counterclaims. They prayed that the resolutions be declared
All shares of stock issued to and in favor of any stockholder
to its individual subscribers for unpaid shares of stock. Of the
or stockholders of the Lingayen Gulf Electric Power Co., legal and valid, thus invalidating the "watered stocks" of
600 shares of capital stock subscribed by Baltazar, he had plaintiffs, if not paid, and disqualifying the delinquent
Inc., on account of payments on unpaid subscriptions
fully paid 535 shares of stock, and the Corporation issued to
without the interest thereon accrued and collectible subscribers, among whom were the plaintiffs, from voting
him several fully paid up and non-assessable certificates of totally or partially, their subscriptions; to order plaintiffs to
having been fully paid from the date of subscription as
stock, corresponding to the 535 shares. After having made
required by the Corporation Law, shall be declared of no pay the defendant Corporation first, the interest due and

CORPORATION LAW: 7. captial structure Page 116 of 201

payable quarterly at 6% per annum from January 11, 1946 to In view of the agreement of the parties transcribed above, injunction and/or mandamus, praying that a writ be issued,
December 31, 1954, on their liability under their delinquent this Court is called upon to decide whether or not any of ordering the defendants, as controlling majority of hold-over
subscriptions, out of the installment made therein; to pay the agreements of the parties as above transcribed is board of directors, to hold immediately the long delayed
defendant entity damages under the counterclaims and contrary to law or public policy. First, as regards pars. 1 and stockholders' meeting, and to allow the plaintiffs and all the
expenses for the enforcement of the collection; and that after 2, of said agreement, the legal capacity of the parties to stockholders, with still unpaid subscriptions, to vote all their
complete payment of the interests and the balance of their sue and be sued carries with it the power to enter into an stocks and subscriptions at said stockholders' meeting, as
unpaid subscriptions, the defendant Corporation should issue amicable settlement of pending litigations and to expressly directed in the decision.
the shares of stock to plaintiffs for their full subscription. or impliedly make admissions of facts; and they could,
On March 25, 1959, the Court issued an amending decision,
Plaintiffs filed their answer to defendants' counterclaims, with therefore, agree and recognize as fully paid for and valid
pertinent portions of which are hereunder reproduced
counterclaims against defendants. On August 8, 1955, the the shares of stocks mentioned in said paragraphs of their
lower court issued an order dismissing plaintiffs' agreement, which agreement must be held valid and ... . After hearing the parties in extensive oral argument,
counterclaims against Acena, Ungson and Fernandez "without binding among the parties, and even as against their this Court agrees with the defendants that par. 5 of the
prejudice to filing the proper separate actions therefor by the persons who have no proof that said agreement was compromise agreement of the parties, dated September
parties." Consequently, and as heretofore mentioned, entered into in fraud of creditors. 13, 1958, contemplates a modification and not a repeal of
Baltazar and Rose filed Case No. 13340 (supra). the resolutions of the Board of Directors and of the
The next question for decision is whether or not a
Stockholders referred to in said agreement. The question is,
The following tentative amicable settlement, dated corporation may validly condone interest on unpaid
therefore, to what extent has said resolutions been
September 13, 1958, formulated and entered into by some of subscriptions to its capital stock. The fact that our
modified? Considering that the primary intention of each of
the parties and their respective attorneys, before presiding Corporation Law authorizes provisions in the by-laws of a
said resolutions was to effect an early collection of unpaid
Judge Jesus P. Morfe, in the three cases, was submitted: corporation different from that set out in Sec. 37 of said
balance of stock subscriptions and interest thereon, and
law, shows that the provision of said law is to interest of
1. As to the so-called water stocks P30,000.00 each of the the moving consideration for a compromise settlement of
unpaid stock subscriptions is merely directory, so that a
holders of said stock, namely, Irineo Baltazar, Marvin Rose, the instant cases is likewise the early collection of the
corporation may fix a different interest rate, or condone the
and Bernardo Acena, will return to the corporation P3,500 obligations of stockholders of the defendant corporation,
payment of interest altogether if such condonation would,
each of said stocks, thereby retaining P6,500 worth of the extension of time to pay, as granted in par. 3 of said
as in the instant cases, serve as inducement for early
stocks to be considered as valid for each under this agreement, was clearly intended to cover not only the
payment of stock subscriptions. The condonation and
compromise; accrued interest but also the unpaid stock subscription of
reduction of interest agreed upon in par. 3 of the
the stockholders, for to hold otherwise would be to defeat
2. With respect to Dr. Bernardo Acena, of the certificates of aforequoted agreement is, therefore, valid in the absence
the primary purpose of early collection of said obligations.
stock allegedly representing, his profit, he will return to the of proof that said agreement was entered into in fraud of
Considering the same paramount intention of said
corporation P3,500 of said share of stock and retain P7,500 creditors.
resolution, and of the aforesaid compromise agreement, it
worth thereof ;
In connection with par. 5 of the aforequoted agreement, in likewise follows that the extension of time to pay and the
3. With respect to the interest on unpaid balance of relation to par. 3 thereof, this, Court is of the opinion, and reduction of interest embodied in the said agreement must
subscription it is agreed that the subscribers with unpaid so holds, that the periods of time allowed for making apply to all stockholders similarly situated.
subscription be given the opportunity to pay in two payments under par. 3 of said agreement, must be counted
Regarding the right to vote, this Court likewise agrees with
installments, the first installment to cover one-half of the from date of receipt of a copy of this decision by counsel of
the defends its that the facts considered during the
unpaid balance to be paid in three months, and the second the parties, this decision constituting the final approval of
negotiations for settlement effected by the parties in the
installment will be for the remaining unpaid half payable in said agreement, and as to stockholders who are not parties
Chambers of the presiding judge do not warrant repeal of
another three months, from the time of the approval of this to these cases, from date of notice of the said time
the declaration of delinquency and complete restoration of
agreements, with the understanding that those who comply extension. The extension of time to pay, as granted in par.
voting rights until full payment of the unpaid stock
with this arrangement will not pay interest on the balance 3 of the repealing previous declaration of delinquency of
subscriptions and interest within the time and to the extent
of their subscription, for the date of incorporation up to the the corresponding shares of stock, and all subscribed
mentioned in par. 3 of the aforesaid compromise
grant of franchise on February 24, 1948, which shall be shares of stock, except those ordered to be returned as
agreement. To rule otherwise would be to encourage non-
deemed as condoned, and from 1948 they will pay only as provided in pars. 1 and 2 of said agreement, will therefore
payment of the balance of stock subscriptions and thus
interest 3% compounded annually, it being understood that be entitled to vote until once again declared delinquent
defeat the paramount intention of the compromise
failure of any subscriber to pay any of the installment here after the expiration of the periods of time set out in par. 3
agreement. Stated differently, this Court now holds that the
provided will subject the stockholders concerned to the of said agreement.
extension of time to pay, as granted in par. 3 of the
provision of the corporation law of the payment of 6%
Defendants on March 14, 1959 filed a motion for aforesaid compromise agreement, has the effect of lifting
interest compounded quarterly.
reconsideration, alleging that the decision was partly against the previous declaration of delinquency effective as of full
4. All claims and counterclaims other than those covered by the spirit and intention of the parties to the agreement and payment of the balance of said stock subscriptions and
the preceding paragraph of stipulation will be deemed portions of the decision, carried "prejudicial eventualities," interest within the periods of time mentioned in par. 3 of
dismissed without prejudice, in all these three cases; and asking that the same be amended in the sense that "the said compromise agreement.
payment of obligations of delinquent incorporators has been
5. All the resolutions of the Board and the stockholders reduced by the agreement as stated in paragraphs 3 and 5" In view of the uncertainty brought about by the motion for
involved in these instant cases will be deemed modified in of said agreement; that delinquent stocks cannot be voted reconsideration and the motion for execution
accordance with this agreement. aforementioned, it would be unjust to count the periods of
until fully paid in accordance with the agreement and that if
time mentioned in the aforesaid compromise agreement
On February 20, 1959, the lower court rendered a decision, the plaintiffs in the above entitled cases could not pay in full from the date of receipt of the original decision of this Court
approving the agreement and requiring the parties to comply their obligations within the periods stated in the agreement, in these cases. The extension of time to pay should,
with the same, and dissolved the writ of preliminary the resolutions of delinquency would automatically stand. therefore, be counted from receipt by counsel for the
injunction, with costs. The pertinent portions of the decision On March 18, 1959, plaintiffs, in cases Nos. 13211 and 13212, parties of a copy of this amending decision, and from
are: filed a petition for immediate execution and for preliminary receipt by the other stockholders of notice of said extension

CORPORATION LAW: 7. captial structure Page 117 of 201

 of time; and the injunction in the instant case should be 2. If a stockholder subscribes to a certain number of shares practice, there is the law, which renders the said case of Fua
deemed in force for the duration of said extension of time of stock and makes partial payment only and declared Cun-Summers, obsolescent.
to pay. delinquent as to the rest, with interest, should previous
Section 37 of the Corporation Law, as amended by Act No.
payments on account of the capital, be first applied to
WHEREFORE, the decision of this Court rendered in these 3518, approved on March 1, 1929, six (6) years after the
interest, thus diminishing the voting power of the shares of
cases on February 20, 1959 is hereby modified in the promulgation of the Fua-Summers case (decided in 1923),
stock already paid? In other words, if the entire subscribed
manner set out above, maintaining said decision in all provides:
shares of stock are not paid, will the paid shares of stock be
other respects.
deprived of the right to vote, until the entire subscribed SEC. 37. ... . No certificate of stock shall be issued to a
On April 4, 1959 , plaintiffs filed a motion for reconsideration shares of stock are fully paid, including interest? subscriber as fully paid up until the full par value thereof,
and/or new trial, praying that the amending decision dated or the full subscription in the case of no par stock, has
3. Has estoppel or waiver, by virtue of the settlement
March 25, 1959, be reconsidered and/or further clarified. On been paid by him to the corporation. Subscribed shares not
agreement, set in?
July 16, 1959, the trial court reversed its amending decision in fully paid up may be voted provided no subscription is
an order, the relevant parts thereof follow: Defendants-appellants claim that resolution No. 4 (Exh. C- unpaid and delinquent.
2), withdrawing or nullifying the voting power of all the
WHEREFORE, by way of amendment to both the original The law just quoted was originally section 36 of the
aforesaid shares of stock is valid, notwithstanding the
and amending decisions of this Court in the instant Corporation Law of 1906, which reads as follows:
existence of partial payments, evidenced by certificates duly
case, this Court hereby expressly rules that all shares of
issued therefor. They invoke the ruling laid down by the Court SEC. 36. ... . No certificate of stock shall be issued to a
the capital stock of the defendant corporation covered by
in the Fua Cun v. Summers case (44 Phil, 705, March 27, subscriber as fully paid up until the full par value thereof
fully paid capital stock shares certificates are entitled to
1923) pertinent portion of which states: has been paid by him to the corporation. Subscribed shares
vote in all meetings of the stockholders of this corporation,
not fully paid up may be voted provided no subscription is
and Resolutions Nos. 2, 3 and 4 (Exhs. C, C-1 and C-2) of In the absence of special agreement to the contrary, a
unpaid and delinquent.
defendant's corporation's Board of Directors are hereby subscriber for a certain number of shares of stock does not,
nullified insofar as they are inconsistent the this ruling. upon payment of one-half of the subscription price, becomeAs may readily be seen, said Section 37 makes payment of
entitled to the issuance of certificates for one-half of the
the "par value" as prerequisite for the issuance of certificates
The extensions of time to pay, referred to in par. 3 of the
number of shares subscribed for; the subscriber's right of par value stocks, and makes payment of the "full
settlement agreement of the parties, will start to run from
consists only in equity entitling him to a certificate for the
subscription" as prerequisite for the issuance of certificates
the date of receipt by counsel for the parties of a copy of
total number of shares subscribed for by him upon of no par value stocks. No such distinction was contained in
this Order, and from receipt by the other stockholders of
payment of the remaining portion of the subscription price.
section 36 of our Corporation Law of 1906, corresponding to
notice of said extension of time.
section 37 now. The present law could have simply provided
The cited case connotes the principle that a partial payment
The injunction granted in the instant case is hereby that no certificate of par value and no par value stock shall be
of a subscription does not entitle the stockholder to a
dissolved, and the injunction bond filed by the plaintiffs is issued to a subscriber, as fully paid up, until the full
certificate for the total number of shares subscribed by him;
hereby cancelled and released. subscription has been paid by him to the corporation, if full
his right consists only in equity to a certificate of the total
payment of subscription were intended is the criterion in the
Defendants on August 14, 1959 perfected their appeal number of shares subscribed for, upon payment of the
issuance of certificates, for both the par value and no par
against the above ruling, on purely questions of law. Plaintiffs- remaining portion of the subscription price. In other words, it
value stocks. Stated in another way, the present law requires
appellees did not file any brief, manifesting that they were is contended, as in the present case, that if Baltazar
as a condition before a share holder can vote his shares, that
relying on their arguments contained in their motion for subscribed to 600 shares of stock in a single subscription, and
his full subscription be paid in the case of no par value
reconsideration, dated April 4, 1959 filed with the trial court. he merely paid for 300 shares, for which he was given fully
stock; and in case of stock corporation with par value, the
(pp. 213 to 218, rec. on appeal) and on the reasons set forth paid certificates for 300 shares, he cannot vote said 300
stockholder can vote the shares fully paid by him only,
in the trial court's order, dated July 16, 1959, third decision shares, in any meeting of the Corporation, until he shall have
irrespective of the unpaid delinquent shares. As well-observed
(pp. 219 to 230 R.A.). paid the remaining 300 shares of stock. The saving clause in
by the trial court, a corporation may now, in the absence of
the quoted pronouncement, "in the absence of special
Pending decision, the parties were required to show cause agreement to the contrary," reveals that the doctrine is not provisions in their by-laws to the contrary, apply payment
why the cases should not be dismissed for having become mandatory, but merely directory, which is not violative of law, made by , subscribers-stockholders, either as: "(a) full
moot or academic, in view of the fact that the appellees, the rigor of the pronouncement may be relaxed. The payment for the corresponding number of shares of stock, the
taking advantage of the decision of the trial court, "had paid plaintiffs-appellees seem to sustain an adverse concept, par value of each of which is covered by such payment; or (b)
all other delinquencies and interest thereon," but the postulating that once a stockholder has subscribed to a as payment pro-rata to each and all the entire number of
appellants manifested that these cases should be decided on certain number of shares, although he has made partial shares subscribed for" (amended decision). In the cases at
the issues raised, to determine, once and for all, the voting payments only, but is issued a certificate for the paid-up bar, the defendant-corporation had chosen to apply payments
rights of the other delinquent subscribers, in the election of shares of stock, he is entitled to vote the whole number of by its stockholders to definite shares of the capital stock of
the company's Board of Directors which had been suspended shares subscribed by him, paid or not, until the said unpaid the corporation and had fully paid capital stock shares
since May 1, 1955, because of the litigation. certificates for said payments; its call for payment of unpaid
shares shall have been called for payment or declared
subscription and its declaration of delinquency for non-
The questions posted in the appeal, in view of the above facts delinquent. payment of said call affecting only the remaining number of
would, therefore, be: The cases at bar do not come under the aegis of the principleshares of its capital stock for which no fully paid capital stock
1. If a stockholder, in a stock corporation, subscribes to a enunciated in the Fua Cun v. Summers case, because it was shares certificates have been issued, "and only these have
certain number of shares of stock, and he pays only the practice and procedure, since the inception of the been legally shorn of their voting rights by said declaration of
partially, for which he is issued certificates of stock, is he corporation, to issue certificates of stock to its individual delinquency" (amended decision).
entitled to vote the latter, notwithstanding the fact that he subscribers for unpaid shares of stock and gave voting power The third paragraph of the settlement agreement relates to
has not paid the balance of his subscription, which has to shares of stock fully paid. And even though no agreement interest on the unpaid balance of subscription to the capital
been called for payment or declared delinquent? existed, the ruling in said case, does not now reflect the
stock. The second paragraph of resolution No. 3 (Exh. C-1),
correct view on the matter, for better than an agreement or
unilaterally declared as of no value and cancelled all capital

CORPORATION LAW: 7. captial structure Page 118 of 201

stock shares certificates issued as fully paid up, upon with this ruling"; and (2) Dissolving the injunction granted in petitioners,8 disposing thusly:
payments made by stockholders, when interests on unpaid the cases and releasing the injunction bond filed by the
subscription from date of subscription were not previously plaintiffs-appellees, is correct and the same should be, as it is
and/or then and there paid. Defendants-appellants, invoking hereby affirmed. Costs taxed against the defendants- WHEREFORE, PREMISES CONSIDERED, judgment is hereby
Art. 1253 NCC (Art. 1173 of the Old Civil Code) which provides appellants. rendered:
that "if the debt produces interest, payment of the principal
shall not be deemed to have been made until the interests (1). Ordering respondent Abra Valley College to allow
have been covered," and relying on an opinion of the petitioners to inspect its corporate books and records and
Securities and Exchange Commission, claim that said minutes of meetings at reasonable hours on business days,
unilateral nullification and/or cancellation of previously issued G.R. No. 204089, July 29, 2015 copies of excerpts from said books, records and minutes shall
capital stock shares certificates was valid. This provision of be allowed reproduction by petitioners at their expense and
law only applies in the absence of verbal or written GRACE BORGOA INSIGNE, DIOSDADO BORGOA, after written demand pursuant to Section 74 of the
agreement, to the contrary (8 Manresa, p. 317); it is likewise OSBOURNE BORGOA, IMELDA BORGOA RIVERA, AND Corporation Code;
merely directory, and not mandatory. (Art. 1252 NCC). In the ARISTOTLE BORGOA, Petitioners, v. ABRA VALLEY
present case, the defendant-corporation had applied the COLLEGES, INC. AND FRANCIS BORGOA, Respondents. (2). Ordering respondent Abra Valley College to furnish
payments made by the stockholders to the full par value of petitioners its financial statement at their expense within ten
DECISION
the shares of stock subscribed by them, instead of the (10) days from receipt of a written request pursuant to
accepted interest, as shown by the capital stock shares BERSAMIN, J.: Section 75 of the Corporation Code;
certificate issued for the payments made, and the
Is the presentation of a stock certificate a condition sine qua
stockholders had accepted such certificates issued for such (3). Ordering respondent Abra Valley College to pay
non for proving ones shareholding in a corporation? This is
payments. This being the case, the said application of petitioners the amount of P2,000.00 as attorneys fees.
the decisive question to be resolved in this appeal.
payments must be deemed to have been agreed upon by the
Corporation and the stockholders, and the same cannot now The Case SO ORDERED.9
be changed without the consent of the stockholders
concerned. The Corporation Law and the by-laws of the
In this appeal, the petitioners challenge the decision The RTC denied Abra Valleys motion for reconsideration on
defendant Corporation do not contain any provision,
promulgated on June 6, 2012 in C.A.-G.R. SP No. August 7, 2002;10 hence, Abra Valley appealed to the CA,
prohibiting the application of stockholders' payments to the
115203,1 whereby the Court of Appeals (CA) affirmed the which promulgated its decision on December 20,
full par value of a corporation's capital stock, ahead of the
dismissal of their complaint by the Regional Trial Court (RTC), 2006,11 ordering the RTC to admit Abra Valleys answer
payment of accrued interest for unpaid subscriptions. It
Branch 1, in Bangued, Abra under the order dated June 28, despite its belated filing on May 10, 2002; and remanding the
would, therefore, result that a corporation may, upon request
2010 for their failure to comply with the order to present their case for further proceedings.
of an interested stockholder, as his option, apply payment by
them to the full par value of shares of capital leaving its stock certificates.2
Thereafter, the petitioners amended their complaint 12 to
collection later of the accrued interest on unpaid Antecedents substitute Evelyn Borgoa, the wife of Romulo Borgoa, as
subscriptions, and that once such option has been exercised
one of the plaintiffs due to Romulos intervening death; 13 to
and the corresponding stock certificates have been issued,
Petitioners Grace Borgoa Insigne, Diosdado Borgoa, implead Francis as an additional defendant, both in his
the corporation cannot, by a unilateral act, legally nullify and
Osbourne Borgoa, Imelda Borgoa Rivera, Aristotle Borgoa personal capacity and as the president of Abra Valley; and to
cancel the capital stock certificates so issued.
are siblings of the full blood. Respondent Francis Borgoa include the immediate holding of the annual stockholders
It is finally argued by defendants-appellants that the (Francis) is their older half-blood brother. The petitioners are meeting as the second cause of action. The amended
plaintiffs-appellees waived, under the agreement heretofore the children of the late Pedro Borgoa (Pedro) by his second complaint also alleged that they were bona fide stockholders
quoted, the right to enforce the voting power they were wife, Teresita Valeros, while Francis was Pedros son by his of Abra Valley, attaching copies of stock certificates indorsed
claiming to exercise, and upon the principle of estoppel, they first wife, Humvelina Avila.3 In his lifetime, Pedro was the in their favor on the dorsal portion by the original holders. 14
are now prohibited from insisting on the existence of such founder, president and majority stockholder of respondent
power, ending with the exhortation, that "they should lie upon Abra Valley Colleges, Inc. (Abra Valley), a stock corporation. On November 10, 2009, Abra Valley and Francis filed their
the bed they helped built, for a lasting peace in the interest of After Pedros death, Francis succeeded him as the president of respective answers.15
the corporation." It should, however, be stated as heretofore Abra Valley.4
exposed, that certain clauses of the agreement are contrary In its answer, Abra Valley raised the following special and
to law and public policy and would cause injury to plaintiffs- On March 26, 2002, the petitioners, along with their brother affirmative defenses, to wit:
appellees and other stockholders similarly situated. Estoppel Romulo Borgoa and Elmer Reyes, filed a complaint (with
cannot be predicated on acts which are prohibited by law or application for preliminary injunction) and damages in the RTC
are against public policy (Benguet Cons. Mining Co. v. Pineda, against Abra Valley (docketed as Special Civil Action Case No. 18. Inasmuch as the originals of the above enumerated
52 Off. Gaz. 1961, L-7231, March 28, 1956; Eugenio v. Perdido 2070),5 praying, among others, that the RTC direct Abra certificates of stock are still in names of the original owners, it
L-7083, May 19, 1955; III Rep. of the Philippines Digest, p. Valley to allow them to inspect its corporate books and is the conclusion that the transfers or transactions, if any,
269-270). records, and the minutes of meetings, and to provide them that may have transpired between said owners and plaintiffs
6 are not yet recorded and registered with the corporation
WHEREFORE, the order of the trial court of July 16, 1959, (1) with its financial statements
issuing the same;
Expressly ruling "that all shares of the capital stocks of the
defendant corporation covered by fully paid capital stock Due to Abra Valleys failure to file its responsive pleading
within the reglementary period provided in the Interim Rules 19. If said transaction or transfer was already registered, the
shares of certificates are entitled to vote in all meetings of the
of Procedure Governing Intra-Corporate Controversies,7 the stock certificates in the name of the assignor, transferor or
stockholders of this corporation and resolutions Nos. 2, 3 and
RTC rendered judgment on May 7, 2002 in favor of the indorses should have been cancelled and replaced with stock
4 (Exhs. C, C-1 and C-2) of defendant corporation's Board of
certificates in the name of the assignee, transferee or
Directors are hereby nullified insofar as they are inconsistent
indorsee;

CORPORATION LAW: 7. captial structure Page 119 of 201

 certain persons, which included the following Transfer Book (STB); and that petitioners be allowed to
20. The stocks certificate submitted by the plaintiffs are still plaintiffs: Grace B. Insigne, Osbourne v. Borgoa, inspect the same.
not in their respective names, but still in the name of the Diosdado V. Borgoa, Imelda B. Rivera and Aristotle V.
supposed assignors, transferors or indorsers. Borgoa, was duly adopted. (Annex B); On June 28, 2010, the RTC issued the assailed order
dismissing Special Civil Action Case No. 2070 pursuant to
xxxx (3) Official Receipts (O.R.) of defendant Section 3, Rule 17 of the Rules of Court, pertinently holding:
corporation showing that on August 8, 1986, each of the
23. To avail of the rights of stockholders, the plaintiffs must following plaintiffs paid for 36 shares of stock of defendant
present stock certificates already in their names, and not in corporation, to wit: As can be gleaned, the documents presented are not Stock
the names of other persons;16 Certificates as boldly announced by the plaintiffs counsel,
1. Grace Insigne [O.R. # 62092], hence, plaintiffs failed to comply with the order of the Court
On his part, Francis averred similar special and affirmative
2. Osbourne Borgoa [O.R. # 62094], dated March 8, 2010. Hence, this case is dismissible under
defenses, to wit:
3. Diosdado Borgoa [O.R. # 62095], Rule 17, Sec. 3 of the Rules of Court which provides:
4. Imelda B. Rivera [O.R. # 62096], and
5. Aristotle Borgoa [O.R. # 62097],
10. From the Annexes of the amended complaint filed by
(Annexes C to C-4); Sec. 3. Dismissal due to fault of plaintiff. If, for no
plaintiffs, it appears that not one of them is a stockholder of
justifiable cause, the plaintiff fails to appear on the date of
record of the Abra Valley Colleges, Inc.;
(4) SEC certified copy of Letter of defendant the presentation of his evidence in chief on the complaint, or
corporations President Pedro V. Borgoa, dated June to prosecute his action for an unreasonable length of time, or
11. Be that as it is, plaintiffs are not vested with the rights to
17, 1987, addressed to the Securities and Exchange to comply with these rules or any order of the court, the
vote, to notice, to inspect, to call for an annual meeting or
Commission (SEC), informing the SEC that defendant complaint may be dismissed upon motion of the defendant or
demand the conduct of one, and such other rights and
corporation issued 324 shares of its authorized and unissued upon the Court's own motion without prejudice to the right of
privileges inherent and available only to stockholders of
capital stocks to certain offerees, which included the following the defendant to prosecute his counter-claim in the same or
record;
plaintiffs: Grace B. Insigne, Osbourne v. Borgoa, in a separate action. The dismissal shall have the effect of an
Diosdado V. Borgoa, Imelda B. Rivera and Aristotle V. adjudication upon the merits, unless otherwise declared by
12. From the copies of Stock Certificate attached to the
Borgoa. (Annex D); the Court.
AMENDED COMPLAINT, some of the plaintiffs are mere
assignees or indorsees, and that the other plaintiffs are not Going into the merits, the Court is of the considered opinion
(5) SEC certified copy of Secretarys Certificate of
even assignees or indorsee; that the documents presented in the compliance failed to
defendant corporation, dated June 17, 1987, issued by
the Corporate Secretary and attested by its President, stating defeat the challenge of the defendant. A mere typewritten
13. And the right of an assignee or indorsee of a stock statement advising a stockholder of the extent of his
that at a Special Meeting of the Board of Trustees held on
certificate is limited only to the issuance of stock certificate in ownership in a corporation xxx cannot be considered a formal
February 1, 1982, a Resolution was passed formally
his or her name, after the requirements and conditions are Certificate of Stock. (SEC opinion. 20 October 1970, cited in
confirming and ratifying the issuance of 324 shares from
complied with;17 Bitong vs. CA)
the authorized and unissued capital stock of the corporation
The respondents then filed on March 2, 2010 a Motion for
to certain persons, which included the following
Preliminary Hearing of Special and Affirmative Defenses. 18 At Further, in a derivative suit, it is required that stockholder is
plaintiffs: Grace B. Insigne, Osbourne V. Borgoa,
the hearing set on March 8, 2010, the RTC ordered the an owner of a stock certificate at the time of the suit. The
Diosdado V. Borgoa, Imelda B. Rivera and Aristotle V.
petitioners to present the stock certificates issued by Abra documents presented are not updated.
Borgoa, and who subscribed and fully paid their respective
Valley under their names.
number of shares. (Annex E);
WHEREFORE, premises considered this case is ordered
On April 7, 2010, the petitioners submitted their Compliance DISMISSED.
(6) SEC certified copy of the General Information
and Manifestation,19 attaching the following documents:
Sheet (GIS) of defendant corporation showing that in
SO ORDERED.22
1989, the following plaintiffs, namely: Grace B. Insigne,
Diosdado V. Borgoa, Imelda B. Rivera and Aristotle V.
(1) Certification of defendant corporation dated April 3,
Borgoa, together with then President, Pedro V. The petitioners appealed the dismissal.
2001, issued by its Corporate Secretary, Jocelyn Bernal, Borgoa, were members of the Board of defendant
officially stating that as per Records of the Stock and
corporation. (Annex F); and On June 6, 2012, the CA promulgated its assailed
Transfer Book of the Abra Valley Colleges the following
decision,23 the dispositive portion of which states:
persons has [sic] a share in defendant corporation, namely:
(7) SEC certified copy of the MINUTES OF THE ANNUAL
plaintiffs MEETING OF DIRECTORS AND STOCKHOLDERS OF THE WHEREFORE, premises considered, the Petition is DENIED.
ABRA VALLEY COLLEGE ON JANUARY 29, 1989 showing The Order dated 28 June 2010 of the Regional Trial Court of
(a) Grace V. Borgoa [110 shares], that the following plaintiffs, namely: Grace B. Insigne, Bangued, Abra, Branch 1, in Civil Case No. 2070 is
(b) Aristotle and Imelda V. Borgoa [30 shares],
Osbourne V. Borgoa, Diosdado V. Borgoa, Imelda B. hereby AFFIRMED.
(c) Diosdado V. Borgoa [15 shares], and Rivera and Aristotle V. Borgoa, attended said Annual
(d) Osbourne V. Borgoa [10 shares].
Meeting as stockholders, and the same minutes shows that SO ORDERED.cralawlawlibrary24
(Annex A); some of the plaintiffs were elected members of the 1989
Board of defendant corporation. (Annex G)20
(2) SEC certified true copy of ISSUANCE OF PART OF After the CA denied the petitioners motion for
AUTHORIZED AND UNISSUED CAPITAL STOCK of reconsideration on October 15, 2012,25 the petitioners have
defendant corporation, declaring that in a Special Meeting The petitioners likewise filed a Motion for come to the Court for review.
of Trustees held on February 1, 1982, a Resolution to make a Production/Inspection of Documents,21 asking that the RTC
private offering of its authorized and unissued capital stock to direct the respondents to produce Abra Valleys Stock and Issue

CORPORATION LAW: 7. captial structure Page 120 of 201

 minutes, at his expense. Commission (SEC) stating that Abra Valley had issued shares
To be resolved is whether the RTC properly dismissed Special xxxx in favor of the petitioners, such as the issuance of part of
Civil Action Case No. 2070 on the ground of the petitioners authorized and unissued capital stock; the letter dated June
failure to comply with the order issued by the RTC on March 8, Section 75. Right to financial statements. Within ten (10) 17, 1987; the secretarys certificate dated June 17, 1987; and
2010 to produce stock certificates. In other words, the Court days from receipt of a written request of any stockholder or the general information sheet.
should determine whether or not the petitioners were bona member, the corporation shall furnish to him its most recent
fide stockholders of Abra Valley. financial statement, which shall include a balance sheet as of And, thirdly, the petitioners adduced competent proof
the end of the last taxable year and a profit or loss statement showing that the respondents had allowed the petitioners to
Ruling of the Court
for said taxable year, showing in reasonable detail its assets become members of the Board of Directors. According to
and liabilities and the result of its operations. (Emphasis ours) the Minutes of the Annual Meeting of Directors and
The appeal is meritorious. xxxx Stockholders of the Abra Valley College of January 29,
Conformably with these provisions, the petitioners had to 1989, which was among the documents submitted to the trial
At the outset, we stress that the Courts determination is establish that they were stockholders of Abra Valley. Indeed, court on April 7, 2010 through the Compliance and
limited to resolving the issue concerning the status or relation the CA concluded that it was the petitioners who had failed to Manifestation, the petitioners attended the annual meeting of
of the petitioners with Abra Valley. Whether or not the discharge the burden of proving their stock ownership January 29, 1989 as stockholders of Abra Valley, and
petitioners could exercise their right to inspect Abra Valleys because they did not produce their stock certificates. participated in the election of the Board of Directors at which
corporate books, records and minutes of meetings, and be some of them were chosen as members. Considering that
furnished with financial statements, and whether or not they We reverse the CA. Section 23 of the Corporation Code requires every director to
could demand the immediate holding of the annual be the holder of at least one share of capital stock of the
stockholders meeting are matters to be tried and resolved by First of all, the present issue was the offshoot of the RTCs corporation of which he is a director, the respondents would
the RTC. resolution of the Motion for Preliminary Hearing of Special not have then allowed any of the petitioners to be elected to
and Affirmative Defenses, wherein the respondents alleged sit in the Board of Directors as members unless they believed
1. Petitioners were stockholders of Abra Valley that the petitioners were not stockholders of Abra Valley; and that the petitioners so elected were not disqualified for lack of
In their amended complaint, the petitioners alleged that they that they had no cause of action against the respondents. stock ownership. Neither did the respondents thereafter assail
were bona fide stockholders of Abra Valley. On the other Being the parties who filed the Motion for Preliminary Hearing their acts as Board Directors. Conformably with the doctrine
hand, the respondents claimed as an affirmative defense that of Special and Affirmative Defenses, the respondents bore the of estoppel, the respondents could no longer deny the
the petitioners were not Abra Valleys stockholders. burden of proof to establish that the petitioners were not petitioners status as stockholders of Abra Valley. The
stockholders of Abra Valley. The respondents assertion application of the doctrine of estoppel, which is based on
In civil cases, the party having the burden of proof must therein, albeit negative, partook of a good defense that, if public policy, fair dealing, good faith and justice, is only
establish his case by a preponderance of evidence, or established, would result to their avoidance of the claim. On appropriate because the purpose of the doctrine is to forbid
evidence that is more convincing to the court as worthy of that basis, the CA erroneously laid the burden of proof on the one from speaking against his own act, representations, or
belief than that which is offered in opposition thereto. Thus, petitioners. commitments to the injury of another to whom he directed
the party, whether the plaintiff or the defendant, who asserts such act, representations, or commitments, and who
the affirmative of an issue bears the onus to prove his Secondly, the petitioners, assuming that they bore the burden reasonably relied thereon. The doctrine springs from
assertion in order to obtain a favorable judgment. From the of proving their status as stockholders of Abra Valley, equitable principles and the equities in the case, and is
plaintiff the burden to prove his positive assertions never nonetheless discharged their burden despite their non- designed to aid the law in the administration of justice where
parts. Yet, for the defendant, an affirmative defense is one production of the stock certificates. without its aid injustice might result. The Court has applied
that is not a denial of an essential ingredient in the plaintiffs the doctrine wherever and whenever special circumstances of
cause of action, but rather one that, if established, will be a A stock certificate is prima facie evidence that the holder is a the case so demanded.31
good defense i.e., an avoidance of the claim. 26 shareholder of the corporation,28 but the possession of the
certificate is not the sole determining factor of ones stock Under the circumstances, the dismissal of Special Civil Action
The petitioners causes of action against the respondents ownership. A certificate of stock is merely: Case No. 2070 on June 28, 2010 on the basis that the
were premised on Sections 50, 74 and 75 of the Corporation documents presented are not Stock Certificates as boldly
x x x the paper representative or tangible evidence of the
Code,27 to wit: announced by the plaintiffs counsel, hence, plaintiffs failed to
stock itself and of the various interests therein. The
comply with the order of the Court dated March 8, 2010 was
Section 50. Regular and special meetings of stockholders or certificate is not stock in the corporation but is merely
unwarranted and unreasonable. Although Section 3, Rule 17
members. Regular meetings of stockholders or members evidence of the holder's interest and status in the
of the Rules of Court32 expressly empowers the trial court to
shall be held annually on a date fixed in the by-laws, or if not corporation, his ownership of the share represented
dismiss the complaint motu proprio or upon motion of the
so fixed, on any date in April of every year as determined by thereby, but is not in law the equivalent of such
defendant if, for no justifiable cause, the plaintiff fails to
the board of directors or trustees: Provided, That written ownership. It expresses the contract between the
comply with any order of the court, the power to dismiss is
notice of regular meetings shall be sent to all stockholders or corporation and the stockholder, but it is not essential to the
not to wielded indiscriminately, but only when the non-
members of record at least two (2) weeks prior to the existence of a share in stock or the creation of the relation of
compliance constitutes a willful violation of an order of
meeting, unless a different period is required by the by-laws. shareholder to the corporation.29 (Emphasis supplied.)
consequence to the action. Dismissal of the action can be
grossly oppressive if it is based on non-compliance with the
Section 74. Books to be kept; stock transfer agent. x x x To establish their stock ownership, the petitioners actually most trivial order of the court considering that the dismissal
turned over to the trial court through their Compliance and equates to an adjudication upon the merits, unless otherwise
The records of all business transactions of the corporation and Manifestation submitted on April 7, 2010 the various declared by the court.33 A line of demarcation must be drawn
the minutes of any meetings shall be open to inspection by documents showing their ownership of Abra Valleys between an order whose non-compliance impacts on the
any director, trustee, stockholder or member of the shares,30 specifically: the official receipts of their payments for case, and an order whose non-compliance causes little effect
corporation at reasonable hours on business days and he may their subscriptions of the shares of Abra Valley; and the on the case. For example, the non-compliance of an order to
demand, in writing, for a copy of excerpts from said records or copies duly certified by the Securities and Exchange the plaintiff to amend his complaint to implead an

CORPORATION LAW: 7. captial structure Page 121 of 201

indispensable party as defendant should be sanctioned with the part of the corporation to recognize such rights as it is tenor:
dismissal with prejudice unless the non-compliance was upon mandated by law to recognize arises.
justifiable cause, like such party not within the jurisdiction of
the court. What is chiefly contemplated is the discovery of every bit of
Nonetheless, in Lanuza v. Court of Appeals,38 the Court has
information which may be useful in the preparation for trial,
underscored that the STB is not the exclusive evidence of the
As we have seen, however, the dismissal of Special Civil such as the identity and location of persons having knowledge
matters and things that ordinarily are or should be written
Action Case No. 2070 by virtue of Section 3, Rule 17 of of relevant facts; those relevant facts themselves; and the
therein, for parol evidence may be admitted to supply
the Rules of Court should be undone because the petitioners existence, description, nature, custody, condition, and
omissions from the records, or to explain ambiguities, or to
production of the stock certificates was rendered superfluous location of any books, documents, or other tangible things.
contradict such records, to wit:
by their submission of other competent means of establishing Hence, the deposition-discovery rules are to be accorded a
their shareholdings in Abra Valley. broad and liberal treatment. No longer can the time-honored
cry of fishing expedition serve to preclude a party from
2. Petitioners were entitled to demand
inquiring into the facts underlying his opponents case. Mutual
the production of the STB of Abra Valley x x x [A] stock and transfer book is the book which records
knowledge of all the relevant facts gathered by both parties is
the names and addresses of all stockholders arranged
essential to proper litigation. To that end, either party may
alphabetically, the installments paid and unpaid on all stock
The respondents insist that the petitioners should establish compel the other to disgorge whatever facts he has in his
for which subscription has been made, and the date of
that the indorsement of the stock certificates by the original possession. The deposition-discovery procedure simply
payment thereof; a statement of every alienation, sale or
holders was registered in their favor in the STB of Abra advances the stage at which the disclosure can be compelled
transfer of stock made, the date thereof and by and to whom
Valley.34 from the time of trial to the period preceding it, thus reducing
made; and such other entries as may be prescribed by law. A
the possibility, of surprise,...
stock and transfer book is necessary as a measure of
We do not agree with this insistence.
precaution, expediency and convenience since it provides the
only certain and accurate method of establishing the various In light of the foregoing, the RTC should have favorably acted
A person becomes a stockholder of a corporation by acquiring
corporate acts and transactions and of showing the ownership on the petitioners Motion for Production/Inspection of
a share through either purchase or subscription. Here, the
of stock and like matters. However, a stock and transfer Documents in order to enable the petitioners, consistent with
petitioners acquired their shares in Abra Valley: (1) by
book, like other corporate books and records, is not in the recognized privileges and disabilities, to enable them to
subscribing to 36 shares each from Abra Valleys authorized
any sense a public record, and thus is not exclusive obtain the fullest possible knowledge of the issues and facts
and unissued capital stock;35 and (2) by purchasing the
evidence of the matters and things which ordinarily to be determined in Special Civil Action Case No. 2070, and
shareholdings of existing stockholders, as borne out by the
are or should be written therein. In fact, it is generally thereby prevent the trial from being carried on in the dark, at
latters indorsement on the stock certificates.36
held that the records and minutes of a corporation are least from their side.44 Doing so would not have caused any
not conclusive even against the corporation but prejudice to the respondents, for, after all, even had the
In determining the validity of the transfer of shares through
are prima facie evidence only, and may be impeached petitioners not filed the Motion for Production/Inspection of
purchase, we resort to Section 63 of the Corporation Code,
or even contradicted by other competent evidence. Documents, the respondents would themselves also be
which pertinently provides:
Thus, parol evidence may be admitted to supply expected to produce the STB in court in order to substantiate
omissions in the records or explain ambiguities, or to their affirmative defense that the petitioners were not
contradict such records. (Emphasis supplied.) stockholders-of-record of Abra Valley. Verily, that there was no
Section 63. Certificate of stock and transfer of shares. x x x
entry or record in the STB showing the petitioners to be
Shares of stock so issued are personal property and may be
stockholders of Abra Valley was no valid justification for the
transferred by delivery of the certificate or certificates Considering that Abra Valleys STB was not in the possession
respondents not to produce the same. Otherwise, the
indorsed by the owner or his attorney-in-fact or other person of the petitioners, or at their disposal, they could not be
disputable presumption under Section 3 (e) of Rule 131 of
legally authorized to make the transfer. No transfer, however, reasonably expected or justly compelled to prove that their
the Rules of Court that evidence willfully suppressed would
shall be valid, except as between the parties, until the stock subscriptions and purchases were recorded therein.
be adverse if produced could arise against them.
transfer is recorded in the books of the corporation showing This, more than any other, was precisely why they filed
the names of the parties to the transaction, the date of the their Motion for Production/Inspection of Documents 39 to
For sure, the transfer of shares in favor of the petitioners was
transfer, the number of the certificate or certificates and the compel the respondents to produce the STB, but the RTC did
made through the indorsement by the original holders who
number of shares transferred. not act on the motion.
were presumably the registered owners of the shares,
coupled with the delivery of the stock certificates. Such
No shares of stock against which the corporation holds any Unfortunately, the CA concurred with the RTCs inaction on
procedure conformed to Section 63 of the Corporation
unpaid claim shall be transferable in the books of the the ground that the Stock and Transfer Book is one of the
Code. Although Abra Valley did not yet recognize such stock
corporation. corporate books which may be examined only by a
purchases until the surrender of the stock certificates to the
stockholder-of-record.40
In this regard, the Court has instructed in Ponce v. Alsons corporate secretary to enable the latter to exercise the
Cement Corporation37 that: ministerial duty of recording the transfers,45 there was no way
In our view, the CA thereby grossly erred. The rules of
of avoiding or evading the production of the STB in court on
x x x [A] transfer of shares of stock not recorded in the stock discovery, including Section 1, Rule 27 of the Rules of
the part of the respondents. The STB would definitely be
and transfer book of the corporation is non-existent as far as Court41 governing the production or inspection of any
relevant and necessary for the purpose of ascertaining
the corporation is concerned. As between the corporation on designated documents, papers, books, accounts, letters,
whether or not the petitioners subscriptions to the authorized
the one hand, and its shareholders and third persons on the photographs, objects or tangible things not privileged, which
and unissued capital stock of Abra Valley had been duly
other, the corporation looks only to its books for the purpose contain or constitute evidence material to any matter
registered.
of determining who its shareholders are. It is only when the involved in the action and which are in the other partys
transfer has been recorded in the stock and transfer book that possession, custody or control, are to be accorded broad and
Lastly, we take notice of the petitioners submission of the
a corporation may rightfully regard the transferee as one of liberal interpretation.42 In Republic v. Sandiganbayan, 43 the
certification issued on April 3, 2001 by Abra Valleys corporate
its stockholders. From this time, the consequent obligation on Court has dwelt on the breadth of discovery in the following
secretary stating that the petitioners were shareholders as

CORPORATION LAW: 7. captial structure Page 122 of 201

per Records of the Stock and Transfer Book of the Abra Valley
Colleges belied the respondents claim that no entry or
record had been made in the STB.

WHEREFORE, the Court REVERSES and SETS ASIDE the

decision promulgated on June 6, 2012 in C.A.-G.R. SP No.
115203; NULLIFIES and SETS ASIDE the order issued in
Special Civil Action Case No. 2070 on June 28, 2010 by the
Regional Trial Court, Branch 1, in Bangued,
Abra; DECLARES the petitioners as stockholders of
respondent Abra Valley Colleges, Inc.; ORDERS the Regional
Trial Court, Branch 1, in Bangued, Abra TO
REINSTATE Special Civil Action Case No. 2070, and TO
RESUME its proceedings therein; and DIRECTS the
respondents to pay the costs of suit.

SO ORDERED.

CORPORATION LAW: 7. captial structure Page 123 of 201

G.R. No. 95696 March 3, 1992 Due to the withdrawal of the aforesaid incorporators and in Five (5) years and nine (9) months after the transfer of 50
order to complete the membership of the five (5) directors of shares to Angel S. Tan, brother of petitioner Alfonso S. Tan,
ALFONSO S. TAN, Petitioner, vs. SECURITIES AND
the board, petitioner sold fifty (50) shares out of his 400 and three (3) years and seven (7) months after effecting the
EXCHANGE COMMISSION, VISAYAN EDUCATIONAL
shares of capital stock to his brother Angel S. Tan. Another transfer of Stock Certificate Nos. 2 and 8 from the original
SUPPLY CORP., TAN SU CHING, ALFREDO B. UY, ANGEL
incorporator, Alfredo B. Uy, also sold fifty (50) of his 400 owner (Alfonso S. Tan) in the stock and transfer book of the
S. TAN and PATRICIA AGUILAR, Respondents.
shares of capital stock to Teodora S. Tan and both new corporation, the latter filed the case before the Cebu SEC
PARAS, J.: stockholders attended the special meeting, Angel Tan was Extension Office under SEC Case No. C-0096, more
elected director and on March 27, 1981, the minutes of said specifically on December 3, 1983, questioning for the first
Petitioner filed a petition for certiorari against the public meeting was filed with the SEC. These facts stand time, the cancellation of his aforesaid Stock Certificates Nos.
respondent Securities and Exchange Commission and its co- unchallenged. (Rollo, p. 43) 2 and 8. (Rollo, p. 44)
respondents, after the former in an en banc Order, overturned
with modification, the decision of its Cebu SEC Extension Accordingly, as a result of the sale by petitioner of his fifty The bone of centention raised by the petitioner is that the
hearing officer, Felix Chan, in SEC Case No. C-0096, dated (50) shares of stock to Angel S. Tan on April 16, 1981, deprivation of his shares despite the non-endorsement or
May 23, 1989, on October 10, 1990, under SEC-AC No. 263. Certificate of Stock No. 2 was cancelled and the surrender of his Stock Certificate Nos. 2 and 8, was without
(Rollo, pp. 3 and 4) corresponding Certificates Nos. 6 and 8 were issued, signed the process contrary to the provision of Section 63 of the
by the newly elected fifth member of the Board, Angel S. Tan Corporation Code (Batas Pambansa Blg. 68), which requires
Sought to be reversed by petitioner, is the ruling of the as Vice-president, upon instruction of Alfonso S. Tan who was that:
Commission, specifically declaring that: then the president of the Corporation.(Memorandum of the
. . . No transfer, however, shall be valid, except as
1. Confirming the validity of the resolution of the board of Private Respondent, p. 15) between the parties, until the transfer is recorded to the
directors of the Visayan Educational Supply Corporation With the cancellation of Certificate of stock No. 2 and the books of the corporation so as to show the names of the
so far as it cancelled Stock Certificate No. 2 and split the subsequent issuance of Stock Certificate No. 6 in the name of parties to the transaction, the date of the transfer, the
same into Stock Certificates No. 6 (for Angel S. Tan) and Angel S. Tan and for the remaining 350 shares, Stock number of the certificate or certificates and the number
No. 8 (for Alfonso S. Tan); Certificate No. 8 was issued in the name of petitioner Alfonso of shares transferred.
2. Invalidating the sale of shares represented under S. Tan, Mr. Buzon, submitted an Affidavit (Exh. 29), alleging After hearing, the Cebu SEC Extension Office Hearing Officer,
Stock Certificate No. 8 between Alfonso S. Tan and the that: Felix Chan ruled, that:
respondent corporation which converted the said stocks 9. That in view of his having taken 33 1/3 interest, I was
into treasury shares, as well as those transactions a) The cancellation of the complainant's shares of stock
personally requested by Mr. Tan Su Ching to request Mr.
involved in the withdrawal of the stockholders from the with the Visayan Educational Supply Corporation is null
Alfonso Tan to make proper endorsement in the cancelled
respondent corporation for being contrary to law, but and void;
Certificate of Stock No. 2 and Certificate No. 8, but he did
ordering the neither party may recover pursuant to not endorse, instead he kept the cancelled (1981) b) The earlier cancellation of stock certificate No. 2 and
Article 1412 (1) Civil Code of the Philippines; and Certificate of Stock No. 2 and returned only to me the subsequent issuance of stock certificate No. 8 is also
3. Revoking the Order of Hearing Officer Felix Chan to Certificate of Stock No. 8, which I delivered to Tan Su hereby declared null and void;
reinstate complainant's original 400 shares of stock in Ching.
c) The Secretary of the Corporation is hereby ordered to
the books of the corporation in view of the validity of the 10. That the cancellation of his stock (Stock No. 2) was make the necessary corrections in the books of the
sale of 50 shares represented under stock certificate No. known by him in 1981; that it was Stock No. 8, that was corporation reinstating thereto complainant's original
6; and the nullity of the sale 350 shares represented delivered in March 1983 for his endorsement and 400 shares of stock. (Rollo, pp. 39-40)
under stock certificate No. 8, pursuant to the "in pari cancellation. (Ibid, p. 18)
delicto" doctrine aforecited. (Rollo, p. 4) Private respondent in the original complaint went to the
From the same Affidavit, it was alleged that Atty. Ramirez Securities and Exchange and Commission on appeal, and on
The antecedent facts of the case are as follows: prepared a Memorandum of Agreement with respect to the October 10, 1990, the commission en banc unanimously
Respondent corporation was registered on October 1, 1979. transaction of the fifty (50) shares of stock part of the Stock overturned the Decision of the Hearing Officer under SEC-AC
As incorporator, petitioner had four hundred (400) shares of Certificate No. 2 of petitioner, which was submitted to its No. 263. (Order, Rollo, pp. 42-49)
the capital stock standing in his name at the par value of former owner, Alfonso Tan, but which the purposely did not
The petition for certiorari centered on three major issues, with
P100.00 per share, evidenced by Certificate of Stock No. 2. He return. (Ibid., p. 18)
other issues considered as subordinate to them, to wit:
was elected as President and subsequently reelected, holding On January 29, 1983, during the annual meeting of the
the position as such until 1982 but remained in the Board of corporation, respondent Tan Su Ching was elected as 1. The meaning of shares of stock are personal property and
Directors until April 19, 1983 as director. (Rollo, p. 5) President while petitioner was elected as Vice-president. He, may be transferred by delivery of the certificate or certificates
indorsed by the owner or his attorney-in-fact or other person
On January 31, 1981, while petitioner was still the president of however, did not sign the minutes of said meeting which was
submitted to the SEC on March 30, 1983. (Rollo, p. 43) legally authorized to make the transfer. (Rollo, p. 10)
the respondent corporation, two other incorporators, namely,
Antonia Y. Young and Teresita Y. Ong, assigned to the When petitioner was dislodged from his position as president, The case of Nava vs. peers Marketing corporation (74 SCRA
corporation their shares, represented by certificate of stock he withdrew from the corporation on February 27, 1983, on 65) was cited by petitioner making the reference to
No. 4 and 5 after which, they were paid the corresponding condition that he be paid with stocks-in-trade equivalent to commentaries taken from 18 C.J.S. 928-930, that the transfer
40% corporate stock-in-trade. (Rollo, p. 43) 33.3% in lieu of the stock value of his shares in the amount of by delivery to the transferee of the certificate should be
properly indorsed, and that "There should be compliance with
Petitioner's certificate of stock No. 2 was cancelled by the P35,000.00. After the withdrawal of the stocks, the board of
the respondent corporation held a meeting on April 19, 1983, the mode of transfer prescribed by law." Using Section 35,
corporate secretary and respondent Patricia Aguilar by virtue
now Section 63 of the Corporation Code, the provision of the
of Resolution No. 1981 (b), which was passed and approved effecting the cancellation of Stock Certificate Nos. 2 and 8
law, reads:
while petitioner was still a member of the Board of Directors (Exh. 278-C) in the corporate stock and transfer book 1 (Exh.
of the respondent corporation. (Rollo, p. 6) 1-1-A) and submitted the minutes thereof to the SEC on May SEC. 63. Certificate of stock and transfer of shares.
18, 1983. (Rollo, p. 44) The capital stock and stock and corporations shall be

CORPORATION LAW: 7. captial structure Page 124 of 201

 divided into shares for which certificates signed by the At the time the warehouse was padlocked by the petitioner, existence of something. In this case, the "something" is a
president and vice president, countersigned by the the remaining stock inventory was valued at P7,454,189.05 of law governing sectoral representation. The phrase in
secretary or assistant secretary, and sealed with the seal which 66 2/3 percent thereof belonged to the private question should, therefore, be understood to mean as
of the corporation shall be issued in accordance with the respondents. (Ibid., p. 28) prescribed by such law that governs the matter at the
by-laws. Shares of stocks so issued are personal property time . . . The phrase does not and cannot, by its very
It was very obvious that petitioner devised the scheme of not
and may be transferred by delivery of the certificate or wording, restrict itself to the uncertainly of future
returning the cancelled Stock Certificate No. 2 which was
certificates indorsed by the owner or his attorney-in-fact legislation. (Legaspi v. Estrella, 189 SCRA 58, 24 Aug.
returned to him for his endorsement, to skim off the largesse
or other person legally authorized to make the transfer. 1990, En Banc)
of the corporation as shown by the trading of his Stock
No transfer, however, shall be valid, except as between
Certificate No. 8 for goods of the corporation valued at P2 Years before the above rulings concerning the interpretation
the parties, until the transfer is recorded in the books of
million when the par value of the same was only worth of the word "may", this Court held in Chua v. Samahang
the corporation so as to show the names of the parties to
P35,000.00. (Ibid., p. 470) He also used this scheme to renege Magsasaka, that "the word "may" indicates that the transfer
the transaction, the date of the transfer, the number of
on his indebtedness to respondent Tan Su Ching in the may be effected in a manner different from that provided for
the certificate or certificates and the number of shares
amount of P1 million. (Decision, p. 6) in the law." (62 Phil. 472)
transferred.
It is not remote that if petitioner could have cashed in on Moreover, it is safe to infer from the facts deduced in the
No shares of stocks against which the corporation holds
Stock Certificate No. 2 with the remainder of the goods that instant case that, there was already delivery of the
any unpaid claim shall be transferable in the books of the
he padlocked, he would have done so, until the respondent unendorsed Stock Certificate No. 2, which is essential to the
corporations.
corporation was bled entirely. issuance of Stock Certificate Nos. 6 and 8 to angel S. Tan and
There is no doubt that there was delivery of Stock Certificate petitioner Alfonso S. Tan, respectively. What led to the
Along this line, petitioner put up the argument that he was
No. 2 made by the petitioner to the Corporation before its problem was the return of the cancelled certificate (No. 2) to
responsible for the growth of the corporation by the alleging
replacement with the Stock Certificate No. 6 for fifty (50) Alfonso S. Tan for his endorsement and his deliberate non-
that during his incumbency, the corporation grew, prospered
shares to Angel S. Tan and Stock Certificate No. 8 for 350 endorsement.
and flourished in the court of business as evidenced by its
shares to the petitioner, on March 16, 1981. The problem
audited financial statements, and grossed the following For all intents and purposes, however, since this was already
arose when petitioner was given back Stock Certificate No. 2
incomes from: 1980 P8,658,414.10, 1981 cancelled which cancellation was also reported to the
for him to endorse and he deliberately witheld it for reasons
P8,039,816.67, 1982 P7,306,168.67, 1983 respondent Commission, there was no necessity for the same
of his own. That the Stock Certificate in question was returned
P5,874,453.55, 1984 P3,911,667.76. (Ibid., Rollo, p. 24) certificate to be endorsed by the petitioner. All the acts
to him for his purpose was attested to by Mr. Buzon in his
required for the transferee to exercise its rights over the
Affidavit, the pertinent portion of which has been earlier Moreover, petitioner asserted that he was ousted from the
acquired stocks were attendant and even the corporation was
quoted. corporation by reason of his efforts to establish fiscal controls
protected from other parties, considering that said transfer
and to demand an accounting of corporate funds which were
The proof that Stock Certificate No. 2 was split into two (2) was earlier recorded or registered in the corporate stock and
accordingly being transferred and diverted to certain of
consisting of Stock Certificate No. 6 for fifty (50) shares and transfer book.
private respondents' personal accounts which were allegedly
Stock Certificate No. 8 for 350 shares, is the fact that
misapplied, misappropriated and converted to their own Following the doctrine enunciated in the case of Tuazon v. La
petitioner surrendered the latter stock (No. 8) in lieu of P2
personal use and benefit. (Ibid., p. 125) Provisora Filipina, where this Court held, that:
million pesos 1 worth of stocks, which the board passed in a
resolution in its meeting on April 19, 1983. Thus, on February 2. Petitioner further claims that "(T)he cancellation and But delivery is not essential where it appears that the
27, 1983, petitioner indicated he was withdrawing from the transfer of petitioner's shares and Certificate of Stock No. 2 persons sought to be held as stockholders are officers of
corporation on condition that he be paid with stock-in-trade (Exh. A) as well as the issuance and cancellation of Certificate the corporation, and have the custody of the stock book .
corresponding to 33.3% (Exh. 294), which had only a par of Stock No. 8 (Exh. M) was patently and palpably unlawful, . . (67 Phi. 36).
value of P35,000.00. In this same meeting, the transfer of null and void, invalid and fraudulent." (Rollo, p. 9) And, that
Stock Certificate Nos. 2 and 8 from the original owner, Alfonso Section 63 of the Corporation Code of the Philippines is Furthermore, there is a necessity to delineate the function of
S. Tan was ordered to be recorded in the corporate stock and "mandatory in nature", meaning that without the actual the stock itself from the actual delivery or endorsement of the
transfer book (Exh. "I-1-A") thereafter submitting the minutes delivery and endorsement of the certificate in question, there certificate of stock itself as is the question in the instant case.
of said meeting to the SEC on May 18, 1983 (Exhs. 12 and I). can be no transfer, or that such transfer is null and void. A certificate of stock is not necessary to render one a
(Order, Rollo, p. 44) stockholder in corporation.
(Rollo, p. 10)
It is also doubtless that Stock Certificate No. 8 was exchanged These arguments are all motivated by self-interest, using Nevertheless, a certificate of stock is the paper representative
by petitioner for stocks-in-trade since he was operating his foreign authorities that are slanted in his favor and even or tangible evidence of the stock itself and of the various
own enterprise engaged in the same business, otherwise, why misquoting local authorities to prop up his erroneous posture interests therein. The certificate is not stock in the
would a businessman be interested in acquiring and all these attempts are intended to stifle justice, truth and corporation but is merely evidence of the holder's interest
P2,000,000.00 worth of goods which could possibly at that equity. and status in the corporation, his ownership of the share
time, fill up warehouse? In fact, he even padlocked the represented thereby, but is not in law the equivalent of such
warehouse of the respondent corporation, after withdrawing Contrary to the understanding of the petitioner with respect ownership. It expresses the contract between the corporation
the thirty-three and one-third (33 1/3%) percent stocks. to the use of the word "may", in the case of Shauf v. Court of and the stockholder, but is not essential to the existence of a
Accordingly, the Memorandum of Agreement prepared by the Appeals, (191 SCRA 713, 27 November 1990), this Court held, share in stock or the nation of the relation of shareholder to
respondents' counsel, Atty. Ramirez evidencing the that "Remedial law statues are to be construed liberally." The the corporation. (13 Am. Jur. 2d, 769)
transaction, was also presented to petitioner for his signature, term 'may' as used in adjective rules, is only permissive and Under the instant case, the fact of the matter is, the new
however, this document was never returned by him to the not mandatory. In several earlier cases, the usage of the word holder, Angel S. Tan has already exercised his rights and
corporate officer for the signature of the other officers "may" was described as follows: prerogatives as stockholder and was even elected as member
concerned. (Rollo, p. 28) The word "may"is an auxilliary verb showing among of the board of directors in the respondent corporation with
others, opportunity or possibility. Under ordinary the full knowledge and acquiescence of petitioner. Due to the
circumstances, the phrase "may be" implies the possible transfer of fifty (50) shares, Angel S. Tan was clothed with

CORPORATION LAW: 7. captial structure Page 125 of 201

rights and responsibilities in the board of the respondent (P)etitioner Hodges did not cause to be entered in the reason for declaring the unedorsed, unsurrendered and
corporation when he was elected as officer thereof. books of the corporation as he had his stock certificate uncancelled stock certificate, null and void:
No. 17 which, therefore had not been endorsed by him to
Besides, in Philippine jurisprudence, a certificate of stock is . . . It is, moreover, obvious that Hodges retained it
anybody or cancelled and which he considered still
not a negotiable instrument. "Although it is sometime (stock certificate no. 17) with Borja's consent. It was
subsisting. On September 18, 1958, petitioner Hodges
regarded as quasi-negotiable, in the sense that it may be evidently part of their agreement, or implied therein, that
again sold his aforesaid 2,230 shares of stock covered by
transferred by endorsement, coupled with delivery, it is well- Hodges would keep the stock certificate and thus remain
his stock certificate No. 17 on installment basis to his co-
settled that it is non-negotiable, because the holder thereof in the records of the Corporation as owner of the shares,
petitioner Ricardo Gurrea, but continued keeping the
takes it without prejudice to such rights or defenses as the despite the aforementioned sale thereof and the chattel
stock certificate in his possession without endorsing it to
registered owner/s or transferror's creditor may have under mortgage thereon. In other words, the parties thereto
Gurrea or causing the sale to be entered in the books of
the law, except insofar as such rights or defenses are subject intended Hodges to continue, for all intents and
the corporation, believing that said shares of stock were
to the limitations imposed by the principles governing purposes, as owner of said share, until Borja shall have
his until fully paid for. Up to the present, petitioner
estoppel." (De los Santos vs. McGrath, 96 Phil. 577) fully paid its stipulated price. (Ibid, pp. 1033-1034)
Hodges has in his possession and under his control his
To follow the argument put up by petitioner which was upheld aforesaid stock certificate No. 17, unendorsed and Other issues raised by the petitioner, subordinate to the
by the Cebu SEC Extension Office Hearing Officer, Felix Chan, uncancelled (Exhs. A & A-1), a fact known to the principal issues above, (except the ruling by the respondent
that the cancellation of Stock Certificate Nos. 2 and 8 was null respondents. (14 SCRA p. 1032) Commission with respect to the "pari delicto" doctrine which
and void for lack of delivery of the cancelled "mother" is not acceptable to this Court) are of no moment.
The pertinent misquoted portion follows:
Certificate No. 2 whose endorsement was deliberately
Considering the circumstances of the case, it appearing that
withheld by petitioner, is to prescribe certain restrictions on Before the stockholders' meeting of the La Paz ice Plant
petitioner is guilty of manipulation, and high-handedness,
the transfer of stock in violation of the corporation law itself & Cold Storage Co., Inc., hereinafter referred to as the
circumventing the clear provisions of law in shielding himself
as the only law governing transfer of stocks. While Section Corporation - which was scheduled to be held on August
from his wrongdoing contrary to the protective mantle that
47(s) grants a stock corporations the authority to determine 6, 1959, petitioners C.N. Hodges and Ricardo Gurrea filed
the law intended for innocent parties, the Court finds the
in the by-laws "the manner of issuing certificates" of shares of with the CFI of Iloilo, a petition docketed as Civil Case
excuses of the petitioner as unworthy of belief.
stock, however, the power to regulate is not the power to No. 5261 of said court for a writ of prohibition with
prohibit, or to impose unreasonable restrictions of the right of preliminary injunction, to restrain respondents Jose WHEREFORE, in view of the foregoing, the Order of the
stockholders to transfer their shares. (Emphasis supplied) Manuel Lezama, as president and secretary, respectively, Commission under SEC-AC No. 263 dated October 10, 1990 is
of said Corporation from allowing their brother-in-law and hereby AFFIRMED but modified with respect to the "nullity of
In Fleisher v. Botica Nolasco Co., Inc., it was held that a by-law
brother, respectively, respondent Benjamin L. Borja, to the sale of 350 shares represented under stock certification
which prohibits a transfer of stock without the consent or
vote in said meeting on the aforementioned 2,230 shares No. 8, pursuant to the "in pari delicto" doctrine. The court
approval of all the stockholders or of the president or board of
of stock. Upon the filing of said petition and of a bond in holds that the conversion of the 350 shares with a par value
directors is illegal as constituting undue limitation on the right
the sum of P1,000, the writ of preliminary injunction of only P35,000.00 at P100.00 per share into treasury stocks
of ownership and in restraint of trade. (47 Phil. 583)
prayed for was issued. After due trial, or on March 28, after petitioner exchanged them with P2,000,000.00 worth of
3. Attempt to mislead Petitioner should be held guilty of 1960, (start of petitioner's quotation) "The court of origin stocks-in-trade of the corporation, is valid and lawful. With
manipulating the provision of Section 63 of the Corporation rendered a decision holding that, in view of the provision regard to the damages being claimed by the petitioner, the
Law for contumaciously withholding the endorsement of Stock in stock certificate no. 17, in the name of Hodges, to the respondent Commission is not empowered to award such,
Certificate No. 2 which was returned to him for the purpose, effect that he other than the imposition of fine and imprisonment under
wasting time and resources of the Court, even after he had Section 56 of the Corporation Code of the Philippines, as
. . . is the owner of Two Thousand Two Hundred
received the stocks-in-trade equivalent to P2,000,000.00 in amended.
Thirty shares of the capital stock of La Paz Ice Plant
lieu of his 350 shares of stock with a par value of P35,000.00
& Cold Storage Co., Inc., transferrable only on the SO ORDERED.
only, and thereafter withdrawing from the respondent
books of the corporation by the holder hereof in
corporation.
person or by attorney upon surrender of this
Not content with the fantastic return of his investment in the certificate properly endorsed.
corporation and bent on sucking out the corporate resources
stock certificate no. 18, issued in favor of Borja and the
by filing the instant case for damages and seeking the nullity
entry thereof at his instance in the books of the
of the cancellation of his Certificate of Stock Nos. 2 and 8,
corporation without stock certificate no. 17 being first
petitioner even attempted to mislead the Court by
properly endorsed, surrendered and cancelled, is null and
erroneously quoting the ruling of the Court in C. N. Hodges v.
void. . . . " (end of quotation by petitioner, but the ruling,
Lezama, which has some parallelism with the instant case
continues without the period after the word void.) "and
was the parties involved therein were also close relatives as
that it would be unconscionable and for Borja to vote on
in this case.
said shares of stock, knowing that he had ceased to have
The quoted portion appearing on p. 11 of the petition, was cut actual interest therein since September 17, 1958, when
short in such a way that relevant portions thereof were Hodges bought such interest at the public auction held in
purposely left out in order to impress upon the Court that the the proceedings for the foreclosure of his chattel was
unendorsed and uncancelled stock certificate No. 17, was rendered making said preliminary injunction permanent
unconditionally declared null and void, flagrantly omitting the and declaring Hodges as the one entitled to vote on the
justifying circumstances regarding its acquisition and the shares of stock in question.
reason given by the Court why it was declared so. The history
Petitioner ought to have even included the following which
of certificate No. 17 is quoted below, showing the reason why
was the reason for declaring the following which was the
the certificate in question was considered null and void, as
follows:

CORPORATION LAW: 7. captial structure Page 126 of 201

G.R. No. 80682 August 13, 1990 correspond to the paid subscription because as reflected in Division of the Court of Appeals enjoined the enforcement of
the Articles of Incorporation (Annexes "B") EBE subscribed the Pasig Court's order dated July 30, 1987.
EMBASSY FARMS, INC., petitioner, vs. HON. COURT OF
10,900 shares, Epifania Evangelista 1,000 shares, while Angel
APPEALS (INTERMEDIATE APPELLATE COURT), HON. Meanwhile, on July 30, 1987, Embassy Farms Incorporated
Santos, Armando Martin and Teofilo Mesina had 200 shares
ZENAIDA S. BALTAZAR, Judge of the Regional Trial instituted an action for Injunction with damages against EBE.
each subscription in the capital stocks of the corporation.
Court, Branch CLVIII, (158), Pasig, Metro Manila, In its complaint it alleged that sometime on July 11, 1987,
However, despite the indorsement, EBE retained possession
VOLTAIRE B. CRUZ, Deputy Sheriff, Branch CLVIII, EBE forced his way inside the Embassy Farms and while inside
of said shares and opted to deliver to AGA only upon full
Regional Trial Court, Pasig, Metro Manila and took some cash and cheek amounting to P423,275.45. The
compliance of the latter of his obligations under the
EDUARDO B. EVANGELISTA, respondents. case was docketed as Civil Case No. 348-11-89 and raffled to
Memorandum of Agreement.
Branch 19, Regional Trial Court's 3rd Judicial Region, Malolos,
Romeo Z. Comia for petitioner.
Notwithstanding the non-delivery of the shares of stocks, in a Bulacan.
Manuel Y Macias for private respondents. Deed of Transfer of Shares of Stock dated August 1984, but
On August 10, 1987, upon a motion to dismiss filed by EBE,
notarized on June 20, 1985, AGA transferred a total of 8,602
PARAS, J.: the Malolos Court issued an order, the dispositive portion
shares to several persons.
provides, viz:
This is a petition for certiorari and prohibition with preliminary For failure to comply with his obligations, EBE intimated the
injunction seeking to set aside the resolution * dated October WHEREFORE, the motion to dismiss is hereby denied for
institution of appropriate legal action.
13, 1987 in CA-G.R. SP No. 12817 entitled "Eduardo B. lack of merit, and a writ of preliminary injunction is hereby
Evangelists v. Honorable Camilo O. Montesa, et al." and CA On April 10, 1986, AGA preempted EBE by filing an action for issued enjoining defendant, his agent and/or any person
G.R. SP No. 12834 entitled "Embassy Farms, Inc. v. Hon. rescission of the Memorandum of Agreement with damages. claiming right under him to refrain or desist from
Zenaida S. Baltazar, et al." lifting the restraining order dated The case was docketed as Civil Case No. 53335 and assigned interfering in the management and operation of Embassy
September 22, 1987, and the resolution dated November 3, to Branch CLVIII, Regional Trial Court, National Capital Judicial Farms, Inc. at Barangay Loma de Gato Marilao, Bulacan,
1987 denying petitioner's motion for reconsideration. Region, Pasig, Metro Manila alleging among others, EBE's until further orders from this Court, subject to plaintiffs
misrepresentation on the piggery business since said filing of a bond in the amount of P150,000.00 executed in
It appears on record that sometime on August 2, 1984, business is actually losing and EBE's failure to execute the favor of defendant conditioned for the payment of all
Alexander G. Asuncion (AGA for short) and Eduardo B. deeds of conveyance of the 19 parcels of land. damages which the latter may sustain by reason of this
Evangelists (EBE for short) entered into a Memorandum of injunction and in case said defendant is adjudged entitled
Agreement (Annex "A" of the petition). Under said agreement The Pasig Court in its order dated July 30, 1987, granted a thereto.
EBE obligated himself to transfer to AGA 19 parcels of writ of preliminary injunction the dispositive portion of which
agricultural land registered in his name with an aggregate reads, viz: SO ORDERED. (p. 296, Rollo)
area of 104,447 square meters located in Loma de Gato,
WHEREFORE, this Court hereby orders the issuance of a On August 27, 1987, EBE filed a motion for the
Marilao, Bulacan, together with the stocks, equipment and
writ of preliminary injunction whereby restraining the reconsideration of the order dated August 10, 1987 of the
facilities of a piggery farm owned by Embassy Farms, Inc., a
plaintiff, his nominees, agents, security guards, Malolos Court.
registered corporation wherein ninety (90) per cent of its
employees and all persons claiming under him from
shares of stock is owned by EBE. EBE also obligated himself to On September 15, 1987, without awaiting the resolution of his
disposing of in any manner removing and carrying away
cede, transfer and convey "in a manner absolute and motion for reconsideration, EBE filed a Petition
the stocks including rights sucklings, equipment and other
irrevocable any and all of his shares of stocks" in Embassy for certiorari and Prohibition with preliminary injunction with
facilities in Embassy Farms, Inc. in Bo. Loma de Gato,
Farins Inc. to AGA or his nominees "until the total of said the Court of Appeals, docketed as CA-G.R. No. 12817.
Marilao, Bulacan; from harrassing defendant and his
shares of stock so transferred shall constitute 90% of the
employees and associates; and preventing defendant, On October 13, 1987, the Fifth Division of the Court of
paid-in-equity of said corporation" within a reasonable time
assisted by his said employees and associates from Appeals issued a consolidated resolution in CA-G.R. Nos.
from signing of the document. Likewise, EBE obligated to
discharging, performing and exercising his duties, 12817 and 12834 sustaining the order dated July 30, 1987 of
turnover to AGA the effective control and management of the
prerogatives as director, president and chief executive of the Pasig Court. Accordingly, it set aside and lifted the
piggery upon the signing of the agreement.
Embassy Farms, Inc. until further orders from this Court restraining order dated September 22, 1987 it issued in CA-
On the other hand, AGA obligated himself, upon signing of the subject to defendant's filing a bond with this Court in the G.R. SP No. 12834. The appellate court based its resolution on
agreement to pay to EBE the total sum of close to amount of P1,750,000.00 executed in favor of herein its findings in the hearing that the Board of Directors of
P8,630,000.00. Within reasonable time from signing of the plaintiff, Alexander G. Asuncion, conditioned upon Embassy Farms are nominees of AGA so that it considered
agreement AGA obligated himself to organize and register a defendant's payment to such plaintiff Asuncion of all AGA and Embassy Farms as one and the same person. It
new corporation with an authorized capital stock of damages which the latter may sustain by reason of this noted that EBE has not delivered the certificate of stock
P10,000,000.00 which upon registration will take over all the injunction in the event the Court shall finally decide outstanding in his name in the books of the corporation to
rights and liabilities of AGA. otherwise and in case said plaintiff, Alexander G. Asuncion AGA because the latter allegedly has not complied with the
is adjudged entitled to such damages. terms and conditions of the memorandum of agreement. Also
Pursuant to clause 8 of the Memorandum of Agreement, on
the appellate court opined that "(I)n the instant case, it will
August 2, 1984, EBE turned over to AGA the effective control SO ORDERED.(p. 258, Rollo)
appear that no transfer of shares of stock has been made by
and management of the piggery at Embassy Farms. Likewise,
On September 14, 1987, the Pasig Court on EBE's motion Evangelista to Asuncion as there had been no delivery of the
in accordance with clause 15 of the Memorandum of
issued an order to break open the premises of Embassy Farms certificate in order to produce or effect the transfer of such
Agreement EBE served as President and Chief Executive of
to enforce the writ of preliminary injunction dated July 30, shares of stock." (Rollo, pp. 231-232)
the Embassy Farms with a monthly salary of P15,000. EBE
1987.
also endorsed in blank all his shares of stock including that of Embassy Farms filed a motion for reconsideration thereto but
his wife and three nominees with minor holdings in Embassy On September 18, 1987, Embassy Farms, Inc. filed a petition it was denied in the resolution dated November 5, 1987 of the
Farms Inc. Out of the total 3,125 shares of stocks EBE has with the Court of Appeals for prohibition with preliminary appellate court. Hence, this petition.
2,725 shares, his wife Epifania has 250 shares, while Angel injunction. The case was docketed as CA-G.R. 12834 and
The primary issue for resolution is whether or not the
Santos, Armando Martin and Teofilo Mesina had 50 shares, entitled "Embassy Farms, Inc. v. the Hon. Zenaida S. Baltazar,
appellate court committed a reversible error when it
each registered in their names. Said shares of 3,125 et al." In its resolution dated September 22, 1987, the Fifth

CORPORATION LAW: 7. captial structure Page 127 of 201

sustained the order dated July 13, 1987 of the Pasig Court and management of the Embassy Farms to AGA on August 2, injunction to enjoin acts being performed or about to be
lifted the restraining order it had issued in CA-G.R. SP No. 1984. performed outside its territorial boundaries. (C.F. Tan vs.
12834. Sarmiento, L,24971, June 20, 1975). However, to avoid an
When AGA filed on April 10, 1986 an action for the rescission
irreparable prejudice We allowed in Dagupan Electric
It is the contention of Petitioner that the appellate court acted of contracts with damages the Pasig Court merely restored
Corporation et al. v. Pano (95 SCRA 693) the enforcement of
without jurisdiction or in excess of jurisdiction and/or gravely and established the status quo prior to the execution of the
an injunction to restrain acts committed outside the territorial
abused its discretion when it sustained the order dated July memorandum of agreement by the issuance of a restraining
jurisdiction of the issuing court. In Dagupan case We ruled
30, 1987 of the Pasig Court and lifted the restraining order it order on July 10, 1987 and the writ of preliminary injunction
that a Court of First Instance has jurisdiction to try a case
had issued on September 22, 1987 in CA-G.R. SP No. 12834. on July 30, 1987. It would be unjust and unfair to allow AGA
although the acts sought be restrained are committed outside
Petititioner argued that the Pasig Court has no jurisdiction to and his nominees to control and manage the Embassy Farms
its territorial jurisdiction where the principal business
hear and decide EBE's application for the issuance of a writ of despite the fact that AGA who is the source of their supposed
addresses of the parties and the decisions on the acts to be
preliminary injunction in Civil Case No. 53335 because the shares of stock in the corporation is not asking for the
restrained are located and originated within the Court's
ouster of EBE and his reinstatement as President and Chief delivery of the indorsed certificate of stock but for the
jurisdiction.
Executive Officer of Embassy Farms is an intra-corporate rescission of the memorandum of agreement. Rescission
matter within the exclusive and original jurisdiction of the would result in mutual restitution (Magdalena Estate v. Here to avoid an injustice and irreparable injury We apply the
Securities and Exchange Commission. Petitioner also claimed Myrick, 71 Phil. 344) so it is but proper to allow EBE to exception rather than the general rule. Both parties are
that the Pasig Court did not acquire jurisdiction over Embassy manage the farm. Compared to AGA or his nominees EBE residents of the National Capital Region. AGA is a resident of
Farms because it was not made a party in Civil Case No. would be more interested in the preservation of the assets, 7-A Lake Street, San Juan, Metro Manila while EBE is residing
53335. Neither could the orders of the Pasig Court be equipment and facilities of Embassy Farms during the at 113 R. Tirona Street, BF Homes, Paraaque, Metro Manila.
enforced at Loma de Gato, Marilao Bulacan, the principal pendency of the main case. AGA filed the case with the Pasig Court and the injunction as
office of the corporatin, because it is located outside of the an equitable remedy intended to preserve the status quo is
Contrary to petitioner's contention the dispute at bar is not an
National Capital Judicial Region. Petitioner likewise claimed directed against AGA, his nominees and agents. Besides, as
intracorporate controversy within the exclusive and original
that the writ of preliminary injunction issued in Civil Case No. noted by the Pasig Court all orders to be enforced and
jurisdiction of the Securities and Exchange Commission under
53335 was irregularly issued because it was issued one day executed at Embassy Farms in Loma de Gato, Marilao,
Presidential Decree No. 902-A as amended by Presidential
ahead of the injunction bond. Bulacan emanated from its main office which is located at the
Decree No. 1758. To be an intracorporate controversy it must
2nd Floor, Agora Complex, Domingo Street, San Juan, Metro
We do not agree with the petitioner. pertain to any of the following relationships: (1) between the
Manila.
corporation, partnership or association and the public; (2)
It must be stressed at the outset that the case at bar is
between the corporation, partnership or association and the Finally, on the issue whether or not the writ of injunction was
merely an offshoot of a controversy yet to be decided on the
state in so far as its franchise, permit or license to operate is irregularly issued as it was issued on July 30, 1987 one day
merits by the Pasig Court. The action for rescission filed by
concerned; (3) between the corporation, partnership or ahead of the injunction bond, suffice it to say that aside from
AGA in Civil Case No. 53335 now pending before the Pasig
association and its stockholders, partners, members or the factual findings of the Court of Appeals that the date July
Court will ultimately settle the controversy as to whether it is
officers; and (4) among the stockholders, partners or 31, 1987, appearing on the bond is a typographical error it
AGA or EBE or both parties who have reneged on their
associates themselves (Union Glass and Container Corp. v. must be pointed out that with the injunction bond the party
obligations under the memorandum of agreement. We do not
SEC, 126 SCRA 31; DMRC Enterprises v. Este Del Sol Mountain enjoined is amply protected against loss or damage in case it
want to pre-empt the Pasig Court on the main case.
Reserve Inc., 132 SCRA 293; Rivera v. Florendo, 144 SCRA is finally decided that the injunction ought not to have been
From the pleadings submitted by the parties it is clear that 643; Abeijo v. De la Cruz, 149 SCRA 654). granted.
although EBE has indorsed in blank the shares outstanding in
Basically the conflict here is between AGA and EBE arising WHEREFORE, the instant petition is hereby DENIED for lack of
his name he has not delivered the certificate of stocks to AGA
from a contract denominated as a memorandum of merit.
because the latter has not fully complied with his obligations
agreement. Here the controversy in reality involves the
under the memorandum of agreement. There being no SO ORDERED.
contractual rights and obligations of AGA and EBE under the
delivery of the indorsed shares of stock AGA cannot therefore
memorandum of agreement and not to the enforcement of
effectively transfer to other person or his nominees the
rights and obligations under the corporation code or the
undelivered shares of stock. For an effective transfer of
internal or intracorporate affairs of the corporation. AGA or his
shares of stock the mode and manner of transfer as
nominees are not even the lawful stockholders of Embassy
prescribed by law must be followed (Navea v. Peers Marketing
Farms because EBE for a justifiable reason has withheld the
Corp., 74 SCRA 65). As provided under Section 3 of Batas
delivery of the indorsed certificate of stocks so that the
Pambansa Bilang 68, otherwise known as the Corporation
supposed transfer by virtue of the memorandum of
Code of the Philippines, shares of stock may be transferred by
agreement could not be properly recorded in the book of the
delivery to the transferree of the certificate properly indorsed.
corporation. The dispute therefore does not fall within the
Title may be vested in the transferree by the delivery of the
special jurisdiction of the Securities and Exchange
duly indorsed certificate of stock (18 C.J.S. 928, cited in
Commission but with regular Courts. AGA or his nominees
Rivera v. Florendo, 144 SCRA 643). However, no transfer shall
unduly dragged the petitioner Embassy Farms in order to
be valid, except as between the parties until the transfer is
resist the order of the Pasig Court and to confuse the real and
properly recorded in the books of the corporation (Sec. 63,
legitimate issue in the case at bar.
Corporation Code of the Philippines).
On the enforceability of the order of the Pasig Court, We see
In the case at bar the indorsed certificate of stock was not
no cogent reason to depart from the ruling of the trial court
actually delivered to AGA so that EBE is still the controlling
which was sustained by the Court of Appeals. Generally, an
stockholder of Embassy Farms despite the execution of the
injunction under Section 21 of Batas Pambansa Bilang 129 is
memorandum of agreement and the turn over of control and
enforceable within the region. The reason is that the trial
court has no jurisdiction to issue a writ of preliminary

CORPORATION LAW: 7. captial structure Page 128 of 201

G.R. No. 202205 March 6, 2013 payment of actual damages for the defendants unjustified Without the issuance of the stock certificate and despite
refusal to issue the stock certificate. Vertexs full payment of the purchase price, the share cannot
be considered as having been validly transferred. Hence, the
FOREST HILLS GOLF & COUNTRY CLUB, Petitioner, vs.
CA rescinded the sale of the share and ordered the
VERTEX SALES AND TRADING, INC., Respondent. Forest Hills denied transacting business with Vertex and
defendants to return the amount paid by Vertex by reason of
claimed that it was not a party to the sale of the share; FELI
the sale. The dispositive portion reads:
claimed the same defense. While admitting that no stock
DECISION
certificate was issued, FEGDI alleged that Vertex nonetheless
was recognized as a stockholder of Forest Hills and, as such, it WHEREFORE, in view of the foregoing premises, the appeal is
BRION, J.: exercised rights and privileges of one. FEGDI added that hereby GRANTED and the March 1, 2007 Decision of the
during the pendency of Vertex's action for rescission, a stock Regional Trial Court, Branch 161, Pasig City in Civil Case No.
Before the Court is a petition for review on certiorari, 1 filed certificate was issued in Vertex's name,7 but Vertex refused to 68791 is hereby REVERSED AND SET ASIDE. Accordingly, the
under Rule 45 of the Rules of Court, assailing the accept it. sale of x x x one (1) Class "C" Common Share of Forest Hills
decision2 dated February 22, 2012 and the resolution 3dated Golf and Country Club is hereby rescinded and defendants-
May 31, 2012 of the Court of Appeals (CA) in CA-G.R. CV No. appellees are hereby ordered to return to Vertex Sales and
The RTC Ruling
89296. Trading, Inc. the amount it paid by reason of the said
sale.13 (emphasis ours)
In its March 1, 2007 decision, 8 the Regional Trial Court (RTC)
The Facts dismissed Vertex's complaint after finding that the failure to
The CA denied Forest Hills' motion for reconsideration in its
issue a stock certificate did not constitute a violation of the
resolution of May 31, 2012.14
Petitioner Forest Hills Golf & Country Club (Forest Hills) is a essential terms of the contract of sale that would warrant its
domestic non-profit stock corporation that operates and rescission. The RTC noted that the sale was already
maintains a golf and country club facility in Antipolo City. consummated notwithstanding the non-issuance of the stock The Parties Arguments
Forest Hills was created as a result of a joint venture certificate. The issuance of a stock certificate is a collateral
agreement between Kings Properties Corporation (Kings) and matter in the consummated sale of the share; the stock
Forest Hills filed the present petition for review on certiorari to
Fil-Estate Golf and Development, Inc. (FEGDI). Accordingly, certificate is not essential to the creation of the relation of a
assail the CA rulings. It argues that rescission should be
Kings and FEGDI owned the shares of stock of Forest Hills, shareholder. Hence, the RTC ruled that the non-issuance of
allowed only for substantial breaches that would defeat the
holding 40% and 60% of the shares, respectively. the stock certificate is a mere casual breach that would not
9
very object of the parties making the agreement.
entitle Vertex to rescind the sale.

In August 1997, FEGDI sold to RS Asuncion Construction The delay in the issuance of the stock certificate could not be
Corporation (RSACC) one (1) Class "C" common share of The CA Ruling
considered as a substantial breach, considering that Vertex
Forest Hills for P1.1 million. Prior to the full payment of the was recognized as, and enjoyed the privileges of, a
purchase price, RSACC transferred its interests over FEGDI's Vertex appealed the RTC's dismissal of its complaint. In its stockholder.
Class "C" common share to respondent Vertex Sales and February 22, 2012 decision, 10 the CA reversed the RTC. It
Trading, Inc. (Vertex).4 RSACC advised FEGDI of the transfer declared that "in the sale of shares of stock, physical delivery
Forest Hills also objects to the CA ruling that required it to
and FEGDI, in turn, requested Forest Hills to recognize Vertex of a stock certificate is one of the essential requisites for the
return the amount paid by Vertex for the share of stock. It
as a shareholder. Forest Hills acceded to the request, and 11
transfer of ownership of the stocks purchased." It based its
claims that it was not a party to the contract of sale; hence, it
Vertex was able to enjoy membership privileges in the golf 12
ruling on Section 63 of the Corporation Code, which requires
did not receive any amount from Vertex which it would be
and country club. for a valid transfer of stock
obliged to return on account of the rescission of the contract.

Despite the sale of FEGDI's Class "C" common share to (1) the delivery of the stock certificate;
In its comment to the petition,15 Vertex disagrees and claims
Vertex, the share remained in the name of FEGDI, prompting
that its compliance with its obligation to pay the price and the
Vertex to demand for the issuance of a stock certificate in its
(2) the endorsement of the stock certificate by the owner other fees called into action the defendants compliance with
name.5 As its demand went unheeded, Vertex filed a
or his attorney-in-fact or other persons legally authorized their reciprocal obligation to deliver the stock certificate, but
complaint6 for rescission with damages against defendants
to make the transfer; and the defendants failed to discharge this obligation. The
Forest Hills, FEGDI, and Fil-Estate Land, Inc. (FELI) the
defendants three (3)-year delay in issuing the stock
developer of the Forest Hills golf course. Vertex averred that
certificate justified the rescission of the sale of the share of
the defendants defaulted in their obligation as sellers when (3) to be valid against third parties, the transfer must be
stock. On account of the rescission, Vertex claims that mutual
they failed and refused to issue the stock certificate covering recorded in the books of the corporation.
restitution should take place. It argues that Forest Hills should
the Class "C" common share. It prayed for the rescission of
be held solidarily liable with FEGDI and FELI, since the delay
the sale and the return of the sums it paid; it also claimed

CORPORATION LAW: 7. captial structure Page 129 of 201

was caused by Forest Hills refusal to issue the share of Ruling on return of amounts paid by reason of the sale WHEREFORE, in view of the foregoing, the Court PARTIALLY
FEGDI, from whom Vertex acquired its share. modified GRANTS the petition for review on certiorari. The decision
dated February 22, 2012 and the resolution dated May 31,
2012 of the Court of Appeals in CA-G.R. CV No. 89296 are
The Courts Ruling The CAs ruling ordering the "return to [Vertex] the amount it
hereby MODIFIED. Petitioner Forest Hills Golf & Country Club
paid by reason of the sale" 18 did not specify in detail what the
is ABSOLVED from liability for any amount paid by Vertex
amount to be returned consists of and it did not also state the
The assailed CA rulings (a) declared the rescission of the sale Sales and Trading, Inc. by reason of the rescinded sale of one
extent of Forest Hills, FEGDI, and FELIs liability with regard to
of one (1) Class "C" common share of Forest Hills to Vertex (1) Class "C" common share of Forest Hills Golf & Country
the amount to be returned. The records, however, show that
and (b) ordered the return by Forest Hills, FEGDI, and FELI to Club.
the following amounts were paid by Vertex to Forest Hills,
Vertex of the amount the latter paid by reason of the sale.
FEGDI, and FELI by reason of the sale:
While Forest Hills argues that the ruling rescinding the sale of
SO ORDERED.
the share is erroneous, its ultimate prayer was for the
reversal and setting aside of the ruling holding it liable to Payee Date of Purpose Amount
return the amount paid by Vertex for the sale.16 Payment Paid
FEGDI February 9, Purchase P780,000.001
1999 price for one 9
The Court finds Forest Hills prayer justified.
(1) Class "C"
common
Ruling on rescission of sale is asettled matter share
FEGDI February 9, Transfer fee P 60,000.0020
At the outset, we declare that the question of rescission of the 1999
sale of the share is a settled matter that the Court can no Forest February Membershi P
longer review in this petition. While Forest Hills questioned Hills 23, 1999 p fee 150,000.002
1
and presented its arguments against the CA ruling rescinding
FELI September Documentar P 6,300.0022
the sale of the share in its petition, it is not the proper party
25, 2000 y
to appeal this ruling.
Stamps
FEGDI September Notarial fees P 200.0023
As correctly pointed out by Forest Hills, it was not a party to 25, 2000
the sale even though the subject of the sale was its share of
stock. The corporation whose shares of stock are the subject
A necessary consequence of rescission is restitution: the
of a transfer transaction (through sale, assignment, donation,
parties to a rescinded contract must be brought back to their
or any other mode of conveyance) need not be a party to the
original situation prior to the inception of the contract; hence,
transaction, as may be inferred from the terms of Section 63
they must return what they received pursuant to the
of the Corporation Code. However, to bind the corporation as
contract.24 Not being a party to the rescinded contract,
well as third parties, it is necessary that the transfer is
however, Forest Hills is under no obligation to return the
recorded in the books of the corporation. In the present case,
amount paid by Vertex by reason of the sale. Indeed, Vertex
the parties to the sale of the share were FEGDI as the seller
failed to present sufficient evidence showing that Forest Hills
and Vertex as the buyer (after it succeeded RSACC). As party
received the purchase price for the share or any other fee
to the sale, FEGDI is the one who may appeal the ruling
paid on account of the sale (other than the membership fee G.R. No. 178523 June 16, 2010
rescinding the sale. The remedy of appeal is available to a
which we will deal with after) to make Forest Hills jointly or
party who has "a present interest in the subject matter of the
solidarily liable with FEGDI for restitution.
litigation and is aggrieved or prejudiced by the MAKATI SPORTS CLUB, INC., Petitioner, vs. CECILE H.
judgment. A party, in turn, is deemed aggrieved or CHENG, MC FOODS, INC., and RAMON
prejudiced when his interest, recognized by law in the Although Forest Hills received P150,000.00 from Vertex as SABARRE, Respondents.
subject matter of the lawsuit, is injuriously affected by membership fee, it should be allowed to retain this amount.
the judgment, order or decree." 17 The rescission of the For three years prior to the rescission of the sale, the
sale does not in any way prejudice Forest Hills in such a nominees of Vertex enjoyed membership privileges and used D E C I S I O N
manner that its interest in the subject matter the share of the golf course and the amenities of Forest Hills. 25 We
stock is injuriously affected. Thus, Forest Hills is in no consider the amount paid as sufficient consideration for the NACHURA, J.:
position to appeal the ruling rescinding the sale of the share. privileges enjoyed by Vertex's nominees as members of
Since FEGDI, as party to the sale, filed no appeal against its Forest Hills.
This is a petition for review on certiorari 1 under Rule 45 of the
rescission, we consider as final the CAs ruling on this matter. Rules of Court, assailing the Decision 2 dated June 25, 2007 of
the Court of Appeals (CA) in CA-G.R. CV No. 80631, affirming

CORPORATION LAW: 7. captial structure Page 130 of 201

the decision3 dated August 20, 2003 of the Regional Trial assured her that there was one (1) available share at the (B) RESPONDENT CHENGS ADMISSIONS AND OTHER
Court (RTC), Branch 138, Makati City in Civil Case No. 01-837. price of P2,800,000. The purchase to be validated by paying PERTINENT DOCUMENTARY EVIDENCE RELATED TO THE
50% immediately and the balance after thirty (30) days; [c] SALE OF MSCIS UNISSUED CLASS "A" SHARE TO
Marian Punzalan, Head, Membership Section of the plaintiff RESPONDENT MC FOODS, INC. AND THE RESALE OF THE
The facts of the case, as narrated by the RTC and adopted by
declared that she informed Cheng of the intention of Hodreal SAME TO SPOUSES HODREAL PROVE THAT THE SALE OF
the CA, are as follows:
to purchase one (1) share and she gave to Cheng the contact THE SAID UNISSUED SHARE TO MC FOODS, INC. AT ONE
telephone number of Hodreal; and [d] the authorization from MILLION EIGHT HUNDRED THOUSAND PESOS
On October 20, 1994, plaintiffs Board of Directors adopted a Sabarre to claim the stock certificate.4 (PHP1,800,000.00) WAS MADE WITH A VIEW TO RESELL
resolution (Exhibit 7) authorizing the sale of 19 unissued THE SAME AT A PROFIT TO THE HODREAL SPOUSES AT
shares at a floor price of P400,000 and P450,000 per share for THE AMOUNT OF TWO MILLION EIGHT HUNDRED PESOS
Thus, petitioner sought judgment that would order
Class A and B, respectively. (PHP2,800,000.00); THE "RESALE" OF THE SAID SHARE TO
respondents to pay the sum of P1,000,000.00, representing
THE SPOUSES HODREAL OCCURRING EVEN BEFORE MC
the amount allegedly defrauded, together with interest and
Defendant Cheng was a Treasurer and Director of plaintiff in damages. FOODS, INC. GAINED OWNERSHIP OVER THE SAID
1985. On July 7, 1995, Hodreal expressed his interest to buy a UNISSUED SHARE.
share, for this purpose he sent the letter, Exhibit 13. In said
After trial on the merits, the RTC rendered its August 20, 2003
letter, he requested that his name be included in the waiting (C) THE UTTER LACK OF DOCUMENTARY EVIDENCE
decision, dismissing the complaint, including all
list. SHOWING THAT MC FOODS, INC. EVINCED A DESIRE TO
counterclaims.
PURCHASE PETITIONERS UNISSUED SHARES
It appears that sometime in November 1995, McFoods CONCLUSIVELY PROVES THAT MC FOODS, INC. NEVER
Aggrieved, Makati Sports Club, Inc. (MSCI) appealed to the MADE ANY FORMAL OFFER TO BUY AN UNISSUED M[SC]I
expressed interest in acquiring a share of the plaintiff, and
CA, arguing that the RTC erred in finding neither direct nor SHARE FROM PETITIONERS BOARD OF DIRECTORS
one was acquired with the payment to the plaintiff by
circumstantial evidence that Cecile H. Cheng (Cheng) had any AND/OR MEMBERSHIP COMMITTEE, COURSING THE SAID
McFoods of P1,800,000 through Urban Bank (Exhibit 3). On
fraudulent participation in the transaction between MSCI and TRANSACTION CLANDESTINELY THROUGH RESPONDENT
December 15, 1995, the Deed of Absolute Sale, Exhibit 1, was
Mc Foods, Inc. (Mc Foods), while it allegedly ignored MSCIs CHENG.
executed by the plaintiff and McFoods Stock Certificate No. A
overwhelming evidence that Cheng and Mc Foods
2243 was issued to McFoods on January 5, 1996. On
confabulated with one another at the expense of MSCI.
December 27, 1995, McFoods sent a letter to the plaintiff (D) RESPONDENT CHENGS OWN ADMISSIONS
giving advise (sic) of its offer to resell the share. INDUBITABLY PROVE THAT SHE DELIBERATELY CONCEALED
After the submission of the parties respective briefs, the CA THE FACT THAT THERE WERE OTHER UNISSUED M[SC]I
promulgated its assailed Decision, affirming the August 20, SHARES AVAILABLE FOR PURCHASE BY THE SPOUSES
It appears that while the sale between the plaintiff and
2003 decision of the RTC. Hence, this petition anchored on the HODREAL, CHOOSING INSTEAD TO BROKER THE "RESALE"
McFoods was still under negotiations, there were negotiations
grounds that OF THE SHARE PURCHASED BY MC FOODS, INC. FROM
between McFoods and Hodreal for the purchase by the latter
of a share of the plaintiff. On November 24, 1995, Hodreal MSCI TO THE SPOUSES HODREAL AT THE PRICE OF TWO
paid McFoods P1,400,000. Another payment of P1,400,000 THE APPELLATE COURT ERRED IN UPHOLDING THE MILLION EIGHT HUNDRED THOUSAND PESOS
was made by Hodreal to McFoods on December 27, 1995, to CONCLUSION OF THE TRIAL COURT THAT PETITIONER DID NOT (PHP2,800,000.00) TO THE DETRIMENT OF THE
complete the purchase price of P2,800,000. PROFFER CLEAR AND CONVINCING EVIDENCE SHOWING THAT PETITIONER.
THE RESPONDENTS DEFRAUDED THE PETITIONER DESPITE
OVERWHELMING EVIDENCE TO THE CONTRARY AS SHOWN BY (E) RESPONDENTS CHENG AND SABARRES ADMISSIONS,
On February 7, 1996, plaintiff was advised of the sale by
THE FOLLOWING: MSCIS BY-LAWS AND DOCUMENTARY EVIDENCE RELATING
McFoods to Hodreal of the share evidenced by Certificate No.
2243 for P2.8 Million. Upon request, a new certificate was TO THE TWO IRREGULAR SALES TRANSACTIONS ALL
issued. In 1997, an investigation was conducted and the (A) RESPONDENTS CHENG AND SABARRES OWN POINT TO THE CONCLUSION THAT MC FOODS, INC. IN
committee held that there is prima facie evidence to show ADMISSIONS, MARIAN PUNZALANS AFFIDAVIT, AND RESELLING ITS MSCI SHARE TO SPOUSES HODREAL FAILED
that defendant Cheng profited from the transaction because OTHER PERTINENT DOCUMENTARY EVIDENCE ALL TO GIVE MSCI A CREDIBLE OPPORTUNITY TO REPURCHASE
of her knowledge. UNEQUIVOCALLY PROVE THAT RESPONDENT CHENG HAD THE SAME IN ACCORDANCE WITH SECTION 30 (E) OF
INTIMATE MSCIS BY-LAWS.

xxxx
PARTICIPATION IN THE SALE OF MSCIS UNISSUED CLASS (F) RESPONDENT CHENGS OWN DOCUMENTARY
"A" SHARE TO MC FOODS, INC. FOR THE CONSIDERATION EVIDENCE PROVES THAT RESPONDENTS FALSIFIED AN
Plaintiffs evidence of fraud are [a] letter of Hodreal dated
OF ONE MILLION EIGHT HUNDRED THOUSAND PESOS ENTRY IN MC FOODS, INC.S "OFFER" TO SELL ITS SHARE
July 7, 1995 where he expressed interest in buying one (1)
(PHP1,800,000.00). TO MSCI IN AN EFFORT TO COAT THE RESELLING OF THE
share from the plaintiff with the request that he be included in
SAID SHARE TO SPOUSES HODREAL WITH A SEMBLANCE
the waiting list of buyers; [b] declaration of Lolita Hodreal in
OF REGULARITY[.]
her Affidavit that in October 1995, she talked to Cheng who

CORPORATION LAW: 7. captial structure Page 131 of 201

 (G) FINALLY, PERHAPS THE MOST OVERLOOKED MATTER MSCI insists that Cheng, in collaboration with Mc Foods, purchase one Class "A" share and even requested if he could
BY THE TRIAL COURT AND THE APPELLATE COURT IS THE committed fraud in transacting the transfers involving Stock be included in the waiting list of buyers. However, there is no
SINGULAR UNDENIABLE FACT THAT RESPONDENT CHENG Certificate No. A 2243 (Certificate A 2243) on account of the evidence on record that the Membership Committee acted on
DURING THE PERIOD IN WHICH THE ABOVE-MENTIONED following circumstances(1) on November 24, 1995, Joseph this letter by replying to Hodreal if there still were original,
TRANSACTIONS CAME INTO FRUITION WAS A MEMBER OF L. Hodreal (Hodreal) paid the first installment unissued shares then or if he would indeed be included in the
THE BOARD OF DIRECTORS AND THE TREASURER OF of P1,400,000.00 for the purchase of a Class "A" share in waiting list21 of buyers. All that Punzalan did was to inform
MSCI, THIS FACT ALONE TAINTS THE PARTICIPATION OF favor of Mc Foods;8 (2) on November 28, 1995, Mc Foods Cheng of Hodreals intent and nothing more, even as Cheng
RESPONDENT CHENG IN THE SAID IRREGULAR deposited to MSCIs account an Allied Banking Corporation asked for Hodreals contact number. It may also be observed
TRANSACTIONS WITH BAD FAITH.5 managers check for the purchase of the same share in the that, although established by Punzalans affidavit that she
amount of P1,800,000.00,9 sans an official receipt from informed Cheng about Hodreals desire to purchase a Class
MSCI;10 (3) on December 15, 1995, MSCI and Mc Foods "A" share and that Cheng asked for Hodreals contact
The petition should be denied.
executed a Deed of Sale for the purchase of a Class "A" number, it is not clear when Punzalan relayed the information
share;11 (4) on December 27, 1995, Hodreal paid the last to Cheng or if Cheng indeed initiated contact with Hodreal to
At the outset, we note that this recourse is a petition for installment of P1,400,000.00 to Mc Foods;12 (5) on December peddle Mc Foods purchased share.
review on certiorari under Rule 45 of the Rules of Court. Under 27, 1995, Mc Foods sent a letter to MSCI, offering to sell its
Section 1 of the Rule, such a petition shall raise only purchased share of stock in the amount
While Punzalan declared that, in December 1995, she
questions of law which must be distinctly alleged in the of P2,800,000.00;13 (6) on January 5, 1996, Certificate A 2243
received a Deed of Absolute Sale between MSCI and Mc Foods
appropriate pleading. In a case involving a question of law, was issued to Mc Foods by MSCI; 14 and (7) on January 29,
of a Class "A" share for P1,800,000.00 signed by Atty. Rico
the resolution of the issue must rest solely on what the law 1996, Mc Foods and Hodreal executed a Deed of Sale for the
Domingo and Cheng, in their respective capacities as then
provides for a given set of facts drawn from the evidence same share of stock.15
President and Treasurer of MSCI, and by Ramon Sabarre, as
presented. Stated differently, there should be nothing in
President of Mc Foods, what she merely did was to inquire
dispute as to the state of facts; the issue to be resolved is
Based on the above incidents, MSCI asserts that Mc Foods from her immediate superior Becky Pearanda what share to
merely the correctness of the conclusion drawn from the said
never intended to become a legitimate holder of its issue; and the latter, in turn, replied that it should be an
facts. Once it is clear that the issue invites a review of the
purchased Class "A" share but did so only for the purpose of original share. Thereafter, Punzalan prepared a letter, signed
probative value of the evidence presented, the question
realizing a profit in the amount of P1,000,000.00 at the by then corporate secretary, Atty. Rafael Abiera, to be sent to
posed is one of fact. If the query requires a reevaluation of
expense of the former. MSCI further claims that Cheng MSCIs stock transfer agent for the issuance of the
the credibility of witnesses, or the existence or relevance of
confabulated with Mc Foods by providing it with an insiders corresponding certificate of stock. Then, Certificate A 2243
surrounding circumstances and their relation to each other,
information as to the status of the shares of stock of MSCI and was issued in favor of Mc Foods on January 5, 1996.
then the issue is necessarily factual.6
even, allegedly with unusual interest, facilitated the transfer
of ownership of the subject share of stock from Mc Foods to
Also in point are the powers and duties of the MSCIs
A perusal of the assignment of errors and the discussion set Hodreal, instead of an original, unissued share of stock.
Membership Committee, viz.:
forth by MSCI would readily show that the petition seeks a According to MSCI, Chengs fraudulent participation was
review of all the evidence presented before the RTC and clearly and overwhelmingly proven by the following
reviewed by the CA; therefore, the issue is factual. circumstances: (1) sometime in October 1995, Lolita Hodreal, SEC. 29. (a) The Membership Committee shall process
Accordingly, the petition should be dismissed outright, wife of Hodreal, talked to Cheng about the purchase of one applications for membership; ascertain that the requirements
especially considering that the very same factual Class "A" share of stock and the latter assured her that there for stock ownership, including citizenship, are complied with;
circumstances in this petition have already been ruled upon was already an available share for P2,800,000.00;16 (2) the submit to the Board its recommended on applicants for
by the CA. second installment payment of P1,400,000.00 of spouses inclusion in the Waiting List; take charge of auction sales of
Hodreal to Mc Foods was received by Cheng on the latters shares of stock; and exercise such other powers and perform
17 such other functions as may be authorized by the Board. 22
However, MSCI seeks to evade this rule that the findings of behalf; (3) Marian N. Punzalan (Punzalan), head of MSCIs
fact made by the trial court, particularly when affirmed by the membership section, informed Cheng about Hodreals
appellate court, are entitled to great weight and even finality, intention to purchase a share of stock and Cheng asked her if Charged with ascertaining the compliance of all the
claiming that its case falls under two of the well-recognized there was a quoted price for it, and for Hodreals contact requirements for the purchase of MSCIs shares of stock, the
18
exceptions, to wit: (1) that the judgment of the appellate number; and (4) on January 29, 1996, Cheng claimed Membership Committee failed to question the alleged
19
court is premised on a misapprehension of facts or that it has Certificate A 2243 on behalf of Mc Foods, per letter of irregularities attending Mc Foods purchase of one Class "A"
failed to consider certain relevant facts which, if properly authority dated January 26, 1996, executed by Mc Foods in share at P1,800,000.00. If there was really any irregularity in
20
considered, will justify a different conclusion; and (2) that the favor of Cheng. the transaction, this inaction of the Management Committee
findings of fact of the appellate court are ostensibly premised belies MSCIs cry of foul play on Mc Foods purchase of the
on the absence of evidence, but are contradicted by the The Court is not convinced. subject share of stock. In fact, the purchase price
evidence on record.7 of P1,800,000.00 cannot be said to be detrimental to MSCI,
considering that it is the same price paid for a Class "A" share
It is noteworthy that, as early as July 7, 1995, Hodreal already
in the last sale of an original share to Land Bank of the
expressed to the MSCI Membership Committee his intent to
Philippines on September 25, 1995, and in the sale by Marina

CORPORATION LAW: 7. captial structure Page 132 of 201

Properties Corporation to Xanland Properties, Inc. on October names appear in such list, or in the absence of a Waiting List, behalf of Mc Foods, do not by themselves, individually or
23, 1995.23 These circumstances have not been denied by to any applicant.27 taken together, show badges of fraud, since Mc Foods did acts
MSCI. What is more, the purchase price of P1,800,000.00 well within its rights and there is no proof that Cheng
is P1,400,000.00 more than the floor price set by the MSCI personally profited from the assailed transaction. Even the
We disagree.
Board of Directors for a Class "A" share in its resolution dated statement of MSCI that Cheng doctored the books to give a
24
October 20, 1994. semblance of regularity to the transfers involving the share of
Undeniably, on December 27, 1995, when Mc Foods offered stock covered by Certificate A 2243 remains merely a plain
for sale one Class "A" share of stock to MSCI for the price statement not buttressed by convincing proof.
Further, considering that Mc Foods tendered its payment
of P2,800,000.00 for the latter to exercise its pre-emptive
of P1,800,000.00 to MSCI on November 28, 1995, even
right as required by Section 30(e) of MSCIs Amended By-
assuming arguendo that it was driven solely by the intent to Fraud is deemed to comprise anything calculated to deceive,
Laws, it legally had the right to do so since it was already an
speculate on the price of the share of stock, it had all the including all acts, omissions, and concealment involving a
owner of a Class "A" share by virtue of its payment on
right to negotiate and transact, at least on the anticipated breach of legal or equitable duty, trust or confidence justly
November 28, 1995, and the Deed of Absolute Share dated
and expected ownership of the share, with Hodreal. 25 In other reposed, resulting in the damage to another or by which an
December 15, 1995, notwithstanding the fact that the stock
words, there is nothing wrong with the fact that the first undue and unconscionable advantage is taken of another. 30 It
certificate was issued only on January 5, 1996. A certificate of
installment paid by Hodreal preceded the payment of Mc is a question of fact that must be alleged and proved. It
stock is the paper representative or tangible evidence of the
Foods for the same share of stock to MSCI because eventually cannot be presumed and must be established by clear and
stock itself and of the various interests therein. The certificate
Mc Foods became the owner of a Class "A" share covered by convincing evidence, not by mere preponderance of
is not a stock in the corporation but is merely evidence of the
Certificate A 2243. Upon payment by Mc Foods evidence.31 The party alleging the existence of fraud has the
holders interest and status in the corporation, his ownership
of P1,800,000.00 to MSCI and the execution of the Deed of burden of proof.32 On the basis of the above disquisitions, this
of the share represented thereby. It is not in law the
Absolute Sale on December 15, 1995, it then had the right to Court finds that petitioner has failed to discharge this burden.
equivalent of such ownership. It expresses the contract
demand the delivery of the stock certificate in its name. The No matter how strong the suspicion is on the part of
between the corporation and the stockholder, but is not
right of a transferee to have stocks transferred to its name is petitioner, such suspicion does not translate into tangible
essential to the existence of a share of stock or the nature of
an inherent right flowing from its ownership of the stocks. 26 evidence sufficient to nullify the assailed transactions
the relation of shareholder to the corporation. 28
involving the subject MSCI Class "A" share of stock.
It is MSCIs stance that Mc Foods violated Section 30(e) of
Therefore, Mc Foods properly complied with the requirement
MSCIs Amended By-Laws on its pre-emptive rights, which WHEREFORE, the petition is DENIED for lack of merit. The
of Section 30(e) of the Amended By-Laws on MSCIs pre-
provides Decision dated June 25, 2007 of the Court of Appeals in CA-
emptive rights. Without doubt, MSCI failed to repurchase Mc
G.R. CV No. 80631, affirming the decision dated August 20,
Foods Class "A" share within the thirty (30) day pre-emptive
2003 of the Regional Trial Court, Branch 138, Makati City in
SEC. 30. x x x . period as provided by the Amended By-Laws. It was only on
Civil Case No. 01-837, is AFFIRMED. Costs against petitioner.
January 29, 1996, or 32 days after December 28, 1995, when
MSCI received Mc Foods letter of offer to sell the share, that
(e) Sale of Shares of Stockholder. Where the registered owner
Mc Foods and Hodreal executed the Deed of Absolute Sale SO ORDERED.
of share of stock desires to sell his share of stock, he shall
over the said share of stock. While Hodreal had the right to
first offer the same in writing to the Club at fair market value
demand the immediate execution of the Deed of Absolute
and the club shall have thirty (30) days from receipt of written
Sale after his full payment of Mc Foods Class "A" share, he
offer within which to purchase such share, and only if the club
did not do so. Perhaps, he wanted to wait for Mc Foods to first
has excess revenues over expenses (unrestricted retained
comply with the pre-emptive requirement as set forth in the
earning) and with the approval of two-thirds (2/3) vote of the
Amended By-Laws. Neither can MSCI argue that Mc Foods was
Board of Directors. If the Club fails to purchase the share, the
not yet a registered owner of the share of stock when the G.R. No. L-23241 March 14, 1925
stockholder may dispose of the same to other persons who
latter offered it for resale, in order to void the transfer from
are qualified to own and hold shares in the club. If the share is HENRY FLEISCHER, plaintiff-appellee, vs. BOTICA
Mc Foods to Hodreal. The corporations obligation to register
not purchased at the price quoted by the stockholder and he NOLASCO CO., INC., defendant-appellant.
is ministerial upon the buyers acquisition of ownership of the
reduces said price, then the Club shall have the same pre-
share of stock. The corporation, either by its board, its by-
emptive right subject to the same conditions for the same see cases on 4. BY-LAWS
laws, or the act of its officers, cannot create restrictions in
period of thirty (30) days. Any transfer of share, except by
stock transfers.29
hereditary succession, made in violation of these conditions
shall be null and void and shall not be recorded in the books
of the Club. Moreover, MSCIs ardent position that Cheng was in cahoots
with Mc Foods in depriving it of selling an original, unissued
Class "A" share of stock for P2,800,000.00 is not supported by
The share of stock so acquired shall be offered and sold by
the evidence on record. The mere fact that she performed
the Club to those in the Waiting List in the order that their
acts upon authority of Mc Foods, i.e., receiving the payments
of Hodreal in her office and claiming the stock certificate on

CORPORATION LAW: 7. captial structure Page 133 of 201

 void on the ground that it constitutes and unreasonable that the judgment originally rendered to that effect is
limitation of the right of ownership and is in restraint of trade. untenable and should be set aside.
Shares of corporate stock being regarded as property, the Wherefore, the judgment appealed from is hereby reversed,
owner of such shares may, as a general rule, dispose of and the restriction consisting in the word "nontransferable"
them as he sees fit, unless the corporation has been appearing on the 12 certificates of shares of stock, is declared
dissolved, or unless the right to do so is properly null and void. The defendants herein are hereby ordered to
G.R. No. L-38684 December 21, 1933 restricted, or the owner's privilege of disposing of his cancel the certificates in question and to issue in lieu thereof
CYRUS PADGETT, plaintiff-appellee, vs. BABCOCK & shares has been hampered by his own action. (14 C. J., new ones without any restriction whatsoever, with the costs
TEMPLETON, INC., and W. R. BABCOCK, defendants- sec. 1033, pp. 663, 664.) of both instances against the said defendant-appellants. So
appellants. ordered.
Any restriction on a stockholder's right to dispose of his
IMPERIAL, J.: shares must be construed strictly; and any attempt to
restrain a transfer of shares is regarded as being in
By resolution approved on November 25, 1933, this court set restraint of trade, in the absence of a valid lien upon its
aside its decision in this case, which was promulgated on shares, and except to the extent that valid restrictive G.R. No. 96674 June 26, 1992
October 13th of the same year, and thereby granted a regulations and agreements exist and are applicable.
rehearing before the second division. The defendant W. R. Subject only to such restrictions, a stockholder cannot be RURAL BANK OF SALINAS, INC., MANUEL SALUD,
Babcock and his counsel J. F. Boomer, both of whom were controlled in or restrained from exercising his right to LUZVIMINDA TRIAS and FRANCISCO TRIAS, petitioners,
present during the said rehearing again argued the merits of transfer by the corporation or its officers or by other vs. COURT OF APPEALS*, SECURITIES AND EXCHANGE
the case. Nobody appeared for the plaintiff. stockholders, even though the sale is to a competitor of COMMISSION, MELANIA A. GUERRERO, LUZ ANDICO,
the company, or to an insolvent person, or even though a WILHEMINA G. ROSALES, FRANCISCO M. GUERRERO,
The facts of the case have not suffered any change. They JR., and FRANCISCO GUERRERO , SR., respondents.
remain the same as those which we stated in the original controlling interest is sold to one purchaser. (Ibid., sec.
decision as follows: "The appellee was an employee of the 1035, pp. 665, 666.) PARAS, J.:
appellant corporation and rendered services as such from In the case of Fleischer vs. Botica Nolasco Co. (47 Phil., 583), The basic controversy in this case is whether or not the
January 1, 1923, to April 15, 1929. During that period he we have discussed the validity of a clause in the by-laws of respondent court erred in sustaining the Securities and
bought 35 shares thereof at P100 a share at the suggestion of the defendant corporation, which provided that, under the Exchange Commission when it compelled by Mandamus the
the president of said corporation. He was also the recipient of same conditions, the owner of a share of stock could not sell Rural Bank of Salinas to register in its stock and transfer book
9 shares by way of bonus during Christmas seasons. In this it to another person except to the defendant corporation. In the transfer of 473 shares of stock to private respondents.
way the said appellee became the owner of 44 shares for deciding the legality and validity of said restriction, we held: Petitioners maintain that the Petition for Mandamus should
which the 12 certificates, Exhibits F to F-11, were issued in his
The only restraint imposed by the Corporation Law upon have been denied upon the following grounds.
favor. The word "nontransferable" appears on each and every
one of these certificates. Before severing his connections with transfer of shares is found in section 35 of Act No. 1459, (1) Mandamus cannot be a remedy cognizable by the
the said corporation, the appellee proposed to the president quoted above, as follows: "No transfer, however, shall be Securities and Exchange Commission when the purpose is to
that the said corporation buy his 44 shares at par value plus valid, except as between the parties, until the transfer is register certificates of stock in the names of claimants who
the interest thereon, or that he be authorized to sell them to entered and noted upon the books of the corporation so are not yet stockholders of a corporation:
other persons. The corporation bought similar shares as to show the names of the parties to the transaction, the
date of the transfer, the number of the certificate, and the (2) There exist valid reasons for refusing to register the
belonging to other employees, at par value. Sometime later,
number of shares transferred." This restriction is transfer of the subject of stock, namely:
the said president offered to buy the appellee's shares first at
P85 each and then at P80. The appellee did not agree necessary in order that the officers of the corporation may (a) a pending controversy over the ownership of the
thereto." know who are the stockholders, which is essential in certificates of stock with the Regional Trial Court;
conducting elections of officers, in calling meetings of
The defendants admit that the 44 shares in question have stockholders, and for other purposes. But any restriction (b) claims that the Deeds of Assignment covering the
become the property of the plaintiff. They likewise grant that of the nature of that imposed in the by-law now in subject certificates of stock were fictitious and antedated;
under the law the said appellee has the right to have the question, is ultra vires, violative of the property rights of and
restriction "nontransferable" appearing on the 12 certificates shareholders, and in restraint of trade. (Id., p. 592.)
eliminated therefrom. However, they vigorously contend that (c) claims on a resultant possible deprivation of
there is no existing law nor authority in support of the It is obvious, therefore, that the restriction consisting in the inheritance share in relation with a conflicting claim over
proposition that they are bound to redeem or buy said shares word "nontransferable", appearing on the 12 certificates, the subject certificates of stock.
at par value. Their admission is only limited to the proposition Exhibits F to F-11, is illegal and should be eliminated. The facts are not disputed.
that after the restriction appearing thereon is eliminated, the
As we have hereinbefore stated, there is no existing law nor
plaintiff may sell the said shares to anybody, at their market On June 10, 1979, Clemente G. Guerrero, President of the
authority in support of the plaintiff's claim to the effect that Rural Bank of Salinas, Inc., executed a Special Power of
value or at any price he sees fit. the defendants are obliged to buy his shares of stock value at Attorney in favor of his wife, private respondent Melania
We have not had the opportunity of hearing the opinion of the par value, plus the interest demanded thereon. In this Guerrero, giving and granting the latter full power and
counsel for the plaintiff. We have again studied the laws respect, we hold that there has been no such contract, either authority to sell or otherwise dispose of and/or mortgage 473
applicable thereto and have searched for more authorities on express or implied, between the plaintiff and the defendants. shares of stock of the Bank registered in his name
the subject under discussion, but we have not found anything In the absence of a similar contractual obligation and of a (represented by the Bank's stock certificates nos. 26, 49 and
that bears directly on the question whether or not the legal provision applicable thereto, it is logical to conclude that 65), to execute the proper documents therefor, and to receive
defendants may be compelled, in this case, to buy the shares it would be unjust and unreasonable to compel the said and sign receipts for the dispositions.
in question at par value. However, the opinion seems to be defendants to comply with a non-existent or imaginary
unanimous that a restriction imposed upon a certificate of obligation. Whereupon, we are likewise compelled to conclude On February 27, 1980, and pursuant to said Special Power of
shares, similar to the ones under consideration, is null and Attorney, private respondent Melania Guerrero, as Attorney-

CORPORATION LAW: 7. captial structure Page 134 of 201

in-Fact, executed a Deed of Assignment for 472 shares out of SEC Case No. 1979 until after the question of whether the In the case of Fleisher vs. Botica Nolasco, 47 Phil.
the 473 shares, in favor of private respondents Luz Andico subject Deeds of Assignment are fictitious, void or simulated 583, the Court interpreted Sec. 63 in his wise:
(457 shares), Wilhelmina Rosales (10 shares) and Francisco is resolved in Civil Case No. Q-32050. The SEC Hearing Officer
Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the
Guerrero, Jr. (5 shares). denied said motion.
Corporation Code]) contemplates no restriction as to
Almost four months later, or two (2) days before the death of On December 10, 1984, the SEC Hearing Officer rendered a whom the stocks may be transferred. It does not suggest
Clemente Guerrero on June 24, 1980, private respondent Decision granting the writ of Mandamus prayed for by the that any discrimination may be created by the corporation
Melania Guerrero, pursuant to the same Special Power of private respondents and directing petitioners to cancel stock in favor of, or against a certain purchaser. The owner of
Attorney, executed a Deed of Assignment for the remaining certificates nos. 26, 49 and 65 of the Bank, all in the name of shares, as owner of personal property, is at liberty, under
one (1) share of stock in favor of private respondent Francisco Clemente G. Guerrero, and to issue new certificates in the said section to dispose them in favor of whomever he
Guerrero, Sr. names of private respondents, except Melania Guerrero. The pleases, without limitation in this respect, than the
dispositive, portion of the decision reads: general provisions of law. . . .
Subsequently, private respondent Melania Guerrero presented
to petitioner Rural Bank of Salinas the two (2) Deeds of WHEREFORE, judgment is hereby rendered in favor of the The only limitation imposed by Section 63 of the
Assignment for registration with a request for the transfer in petitioners and against the respondents, directing the Corporation Code is when the corporation holds any
the Bank's stock and transfer book of the 473 shares of stock latter, particularly the corporate secretary of respondent unpaid claim against the shares intended to be
so assigned, the cancellation of stock certificates in the name Rural Bank of Salinas, Inc., to register in the latter's Stock transferred, which is absent here.
of Clemente G. Guerrero, and the issuance of new stock and Transfer Book the transfer of 473 shares of stock of
A corporation, either by its board, its by-laws, or the act of its
certificates covering the transferred shares of stocks in the respondent Bank and to cancel Stock Certificates Nos. 26,
officers, cannot create restrictions in stock transfers, because:
name of the new owners thereof. However, petitioner Bank 45 and 65 and issue new Stock Certificates covering the
denied the request of respondent Melania Guerrero. transferred shares in favor of petitioners, as follows: . . . Restrictions in the traffic of stock must have their
source in legislative enactment, as the corporation itself
On December 5, 1980, private respondent Melania Guerrero 1. Luz Andico 457 shares
cannot create such impediment. By-laws are intended
filed with the Securities and Exchange Commission" (SEC) an
2. Wilhelmina Rosales 10 shares merely for the protection of the corporation, and prescribe
action for mandamus against petitioners Rural Bank of
regulation, not restriction; they are always subject to the
Salinas, its President and Corporate Secretary. The case was 3. Francisco Guerrero, Jr. 5 shares
charter of the corporation. The corporation, in the absence
docketed as SEC Case No. 1979.
4. Francisco Guerrero, Sr. 1 share of such power, cannot ordinarily inquire into or pass upon
Petitioners filed their Answer with counterclaim on December the legality of the transactions by which its stock passes
19, 1980 alleging the upon the death of Clemente G. and to pay to the above-named petitioners, the dividends from one person to another, nor can it question the
Guerrero, his 473 shares of stock became the property of his for said shares corresponding to the years 1981, 1982, consideration upon which a sale is based. . . . (Tomson on
estate, and his property and that of his widow should first be 1983 and 1984 without interest. Corporation Sec. 4137, cited in Fleisher vs.
settled and liquidated in accordance with law before any No pronouncement as to costs. Nolasco, Supra).
distribution can be effected so that petitioners may not be a
SO ORDERED. (p. 88, Rollo) The right of a transferee/assignee to have stocks transferred
party to any scheme to evade payment of estate or
to his name is an inherent right flowing from his ownership of
inheritance tax and in order to avoid liability to any third On appeal, the SEC En Banc affirmed the decision of the
the stocks. Thus:
persons or creditors of the late Clemente G. Guerrero. Hearing Officer. Petitioner filed a petition for review with the
Whenever a corporation refuses to transfer and register
On January 29, 1981, a motion for intervention was filed by Court of Appeals but said Court likewise affirmed the decision
stock in cases like the present, mandamus will lie to
Maripol Guerrero, a legally adopted daughter of the late of the SEC.
compel the officers of the corporation to transfer said
Clemente G. Guerrero and private respondent Melania We rule in favor of the respondents.
stock in the books of the corporation" (26, Cyc. 347, Hyer
Guerrero, who stated therein that on November 26, 1980
vs. Bryan, 19 Phil. 138; Fleisher vs. Botica Nolasco, 47
(almost two weeks before the filing of the petition Section 5 (b) of P.D. No. 902-A grants to the SEC the original
Phil. 583, 594).
for Mandamus) a Petition for the administration of the estate and exclusive jurisdiction to hear and decide cases involving
of the late Clemente G. Guerrero had been filed with the intracorporate controversies. An intracorporate controversy The corporation's obligation to register is ministerial.
Regional Trial Court, Pasig, Branch XI, docketed as Special has been defined as one which arises between a stockholder
Proceedings No. 9400. Maripol Guerrero further claimed that and the corporation. There is no distinction, qualification, nor In transferring stock, the secretary of a corporation acts in
the Deeds of Assignment for the subject shares of stock are any exception whatsoever (Rivera vs. Florendo, 144 SCRA 643 purely ministerial capacity, and does not try to decide the
fictitious and antedated; that said conveyances are donations [1986]). The case at bar involves shares of stock, their question of ownership. (Fletcher, Sec. 5528, page 434).
since the considerations therefor are below the book value of registration, cancellation and issuances thereof by petitioner The duty of the corporation to transfer is a ministerial one
the shares, the assignees/private respondents being close Rural Bank of Salinas. It is therefore within the power of and if it refuses to make such transaction without good
relatives of private respondent Melania Guerrero; and that the respondent SEC to adjudicate. cause, it may be compelled to do so by mandamus. (See.
transfer of the shares in question to assignees/private Respondent SEC correctly ruled in favor of the registering of 5518, 12 Fletcher 394)
respondents, other than private respondent Melania Guerrero, the shares of stock in question in private respondent's names.
would deprive her (Maripol Guerrero) of her rightful share in Such ruling finds support under Section 63 of the Corporation For the petitioner Rural Bank of Salinas to refuse registration
the inheritance. The SEC hearing officer denied the Motion for Code, to wit: of the transferred shares in its stock and transfer book, which
Intervention for lack of merit. On appeal, the SEC En duty is ministerial on its part, is to render nugatory and
Banc affirmed the decision of the hearing officer. Sec. 63. . . . Shares of stock so issued are personal ineffectual the spirit and intent of Section 63 of the
property and may be transferred by delivery of the Corporation Code. Thus, respondent Court of Appeals did not
Intervenor Guerrero filed a complaint before the then Court of certificate or certificates indorsed by the owner or his err in upholding the Decision of respondent SEC affirming the
First Instance of Rizal, Quezon City Branch, against private attorney-in-fact or other person legally authorized to make Decision of its Hearing Officer directing the registration of the
respondents for the annulment of the Deeds of Assignment, the transfer. No transfer, however, shall be valid, except 473 shares in the stock and transfer book in the names of
docketed as Civil Case No. Q-32050. Petitioners, on the other as between the parties, until the transfer is recorded in private respondents. At all events, the registration is without
hand, filed a Motion to Dismiss and/or to Suspend Hearing of the books of the corporation . . .

CORPORATION LAW: 7. captial structure Page 135 of 201

prejudice to the proceedings in court to determine the validity acquired in your name, you would execute such its directors, officers and assigns, employees and/or
of the Deeds of Assignment of the shares of stock in question. documents as necessary to acknowledge beneficial representatives may have against J. MARSH THOMSON." 10The
ownership thereof by the Chamber. 2 quitclaim, expressed in general terms, did not mention
WHEREFORE, the petition is DISMISSED for lack of merit.
specifically the MPC share.
xxx xxx xxx
SO ORDERED.
On April 5, 1990, private respondent, through counsel sent a
On April 25, 1986, Burridge transferred said proprietary share
3 letter to the petitioner demanding the return and delivery of
to petitioner, as confirmed in a letter of notification to the
the MPC share which "it (AmCham) owns and placed in your
Manila Polo Club.
(Thomson's) name." 11
Upon his admission as a new member of the MPC, petitioner
Failing to get a favorable response, private respondent filed
paid the transfer fee of P40,000.00 from his own funds; but
on May 15, 1990, a complaint against petitioner praying, inter
private respondent subsequently reimbursed this amount. On
alia, that the Makati Regional Trial Court render judgment
November 19, 1986, MPC issued Proprietary Membership
ordering Thomson "to return the Manila Polo Club share to the
Certificate Number 3398 in favor of petitioner. But petitioner,
plaintiff and transfer said share to the nominee of plaintiff." 12
however, failed to execute a document recognizing private
respondent's beneficial ownership over said share. On February 28, 1992, the trial court promulgated its
decision, 13 thus:
Following AmCham's policy and practice, there was a yearly
renewal of employment contract between the petitioner and The foregoing considered judgment is rendered as follows:
private respondent. Separate letters of employment advice
1) The ownership of the contested Manila Polo Club
dated October 1, 1986 4, as well March 4, 1988 5 and January
share is adjudicated in favor of defendant Marsh
7, 1989 6, mentioned the MPC share. But petitioner never
Thomson; and;
acknowledged that private respondent is the beneficial owner
of the share as requested in follow-up requests, particularly 2) Defendant shall pay plaintiff the sum of
G.R. No. 116631 October 28, 1998
one dated March 4, 1988 as follows: P300,000.00
MARSH THOMSON, petitioner, vs. COURT OF APPEALS
Dear Marsh: Because both parties thru their respective faults have
and THE AMERICAN CHAMPER OF COMMERCE OF THE
PHILIPPINES, INC, respondents. somehow contributed to the birth of this case, each shall
xxx xxx xxx
bear the incidental expenses incurred. 14
QUISUMBING, J.: All other provisions of your compensation/benefit package
In said decision, the trial court awarded the MPC share to
will remain the same and are summarized as follows:
This is a petition for review on certiorari seeking the reversal defendant (petitioner now) on the ground that the Articles of
of the Decision 1 of the Court of Appeals on May 19, 1994, xxx xxx xxx Incorporation and By-laws of Manila Polo Club prohibit
disposing as follows: artificial persons, such as corporations, to be club members,
9) The Manila Polo Club membership provided by the
ratiocinating in this manner:
WHEREFORE, THE DECISION APPEALED FROM IS HEREBY Chamber for you and your family will continue on the
SET ASIDE. ANOTHER JUDGMENT IS ENTERED ORDERING same basis, to wit: all dues and other charges relating An assessment of the evidence adduced by both parties at
DEFENDANT-APPELLEE MARSH THOMSON TO TRANSFER to such membership shall be for your personal account the trial will show clearly that it was the intention of the
THE SAID MPC [Manila Polo Club] SHARE TO THE NOMINEE and, if you have not already done so, you will execute parties that a membership to Manila Polo Club was to be
OF THE APPELLANT. such documents as are necessary to acknowledge that secured by plaintiff [herein private respondent] for
the Chamber is the beneficial owner of your defendant's [herein petitioner] use. The latter was to
The facts of the case are:
membership in the execute the necessary documents to acknowledge
Petitioner Marsh Thomson (Thomson) was the Executive Vice- Club. 7 ownership of the Polo membership in favor of plaintiff.
President and, later on, the Management Consultant of (Exh. C par 9) However, when the parties parted ways in
When petitioner's contract of employment was up for renewal
private respondent, the American Chamber of Commerce of disagreement and with some degree of bitterness, the
in 1989, he notified private respondent that he would no
the Philippines, Inc. (AmCham) for over ten years, 1979-1989. defendant had second thoughts and decided to keep the
longer be available as Executive Vice President after
membership for himself. This is evident from the exhibits
While petitioner was still working with private respondent, his September 30, 1989. Still, the private respondent asked the
(E & G) where defendant asked that he retained the Polo
superior, A. Lewis Burridge, retired as AmCham's President. petitioner to stay on for another six (6) months. Petitioner
Club membership upon reimbursement of its purchase
Before Burridge decided to return to his home country, he indicated his acceptance of the consultancy arrangement with
price; and where he showed his "profound
wanted to transfer his proprietary share in the Manila Polo a counter-proposal in his letter dated October 8, 1989, among
disappointment, both at the previous Board's unfair
Club (MPC) to petitioner. However, through the intercession of others as follows:
action, and at what I consider to be harsh terms, after my
Burridge, private respondent paid for the share but had it long years of dedication to the Chamber's interest."
11.) Retention of the Polo Club share, subject to my
listed in petitioner's name. This was made clear in an
reimbursing the purchase price to the Chamber, or one
employment advice dated January 13, 1986, wherein xxx xxx xxx
hundred ten thousand pesos (P110,000.00). 8
petitioner was informed by private respondent as follows:
Notwithstanding all these evidence in favor of plaintiff,
Private respondent rejected petitioner's counter-proposal.
xxx xxx xxx however, defendant may not be declared the owner of the
Pending the negotiation for the consultancy arrangement, contested membership be compelled to execute
11. If you so desire, the Chamber is willing to acquire for documents transferring the Polo Membership to plaintiff or
private respondent executed on September 29, 1989 a
your use a membership in the Manila Polo Club. The the latter's nominee for the reason that this is prohibited
Release and Quitclaim, 9 stating that "AMCHAM, its directors,
timing of such acquisition shall be subject to the discretion by Polo Club's Articles & By-Laws. . . .
officers and assigns, employees and/or representatives do
of the Board based on the Chamber's financial position. All
hereby release, waive, abandon and discharge J. MARSH
dues and other charges relating to such membership shall
THOMSON from any and all existing claims that the AMCHAM,
be for your personal account. If the membership is

CORPORATION LAW: 7. captial structure Page 136 of 201

 It is for the foregoing reasons that the Court rules that the Manila Polo Club (MPG), and being an artificial person, it is Although petitioner initiated the acquisition of the share,
ownership of the questioned Polo Club membership be precluded under MPC's Articles of Incorporation and evidence on record shows that private respondent acquired
retained by defendant. 15 . . . . governing rules and regulations from owning a proprietary said share with its funds. Petitioner did not pay for said share,
share or from becoming a member thereof: and (b) even although he later wanted to, but according to his own terms,
Not satisfied with the trial court's decision, private respondent
under AmCham's Articles of Incorporation, the purposes particularly the price thereof.
appealed to the Court of Appeals.
for which it is dedicated, becoming a stockholder or
Private respondent's evident purpose in acquiring the share
On May 19, 1994, the Court of Appeals (Former Special Sixth shareholder in other corporation is not one of the express
was to provide additional incentive and perks to its chosen
Division) promulgated its decision 16 in said CA-G.R. CV No. implied powers fixed in AmCham's said corporate
executive, the petitioner himself. Such intention was repeated
38417, reversing the, trial court's judgment and ordered franchise. 20
in the yearly employment advice prepared by AmCham for
herein petitioner to transfer the MPC share to the nominee of
As posited above, these assigned errors show the disputed petitioner's concurrence. In the cited employment advice,
private respondent, reasoning thus:
matters herein are mainly factual. As such they are best left dated March 4, 1988, private respondent once again, asked
xxx xxx xxx to the trial and appellate courts' disposition. And this Court the petitioner to execute proof to recognize the trust
could have dismissed the petition outright, were it not for the agreement in writing:
The significant fact in the instant case is that the opposite results reached by the courts below. Moreover, for
appellant [herein private respondent] purchased the MPC the enhanced appreciation of the jural relationship between The Manila Polo membership provided by the Chamber for
share for the use of the appellee [herein petitioner] and the parties involving trust, this Court has given due course to you and your family will continue on the same basis, to
the latter expressly conformed thereto as shown in the petition, which we now decide. wit: all dues and other charges relating to such
Exhibits A-1, B, B-1, C, C-1, D, D-1. By such express membership shall be for your personal account and, if you
conformity of the appellee, the former was bound to After carefully considering the pleadings on record, we find have not already done so, you will execute such
recognize the appellant as the owner of the said share for there are two main issues to be resolved: (1) Did respondent documents as are necessary to acknowledge that the
a contract has the force of law between the parties. (Alim court err in holding that private respondent is the beneficial Chamber is the beneficial owner of your membership in
vs. CA, 200 SCRA 450; Sasuhura Company, Inc., Ltd. vs. owner of the disputed share? (2) Did the respondent court err the Club. 24
IAC, 205 SCRA 632) Aside from the foregoing, the appellee in ordering petitioner to transfer said share to private
Petitioner voluntarily affixed his signature to conform with the
conceded the true ownership of the said share to the respondent's nominees?
employment advice, including his obligation stated therein
appellant when (1) he offered to buy the MPC share from
Petitioner claims ownership of the MPC share, asserting that for him to execute the necessary document to recognize his
the appellant (Exhs. E and E-1) upon the termination of his
he merely incurred a debt to respondent when the latter employer as the beneficial owner of the MPC share. Now, we
employment; (2) he obliged himself to return the MPC
advanced the funds for the purchase of the share. On the cannot hear him claiming otherwise, in derogation of said
share after his six month consultancy contract had
other hand, private respondent asserts beneficial ownership undertaking, without legal and equitable justification.
elapsed, unless its return was earlier requested in writting
whereby petitioner only holds the share in his name, but the
(Exh. I); and (3) on cross-examination, he admitted that For private respondent's intention to hold on to its beneficial
beneficial title belongs to private respondent. To resolve the
the proprietary share listed as one of the assets of the ownership is not only presumed; it was expressed in writing at
first issue, we must clearly distinguish a debt from a trust.
appellant corporation in its 1988 Corporate Income Tax the very outset. Although the share was placed in the name
Return, which he signed as the latter's Executive Vice The beneficiary of a trust has beneficial interest in the trust of petitioner, his title is limited to the usufruct, that is, to
President (prior to its filing), refers to the Manila Polo Club property, while a creditor has merely a personal claim against enjoy the facilities and privileges of such membership in the
Share (tsn., pp. 19-20, August 30, 1991). . . . 17 the debtor. In trust, there is a fiduciary relation between a club appertaining to the share. Such arrangement reflects a
trustee and a beneficiary, but there is no such relation trust relationship governed by law and equity.
On 16 June 1994, petitioner filed a motion for
18 between a debtor and creditor. While a debt implies merely
reconsideration of said decision. By While private respondent paid the purchase price for the
19 an obligation to pay a certain sum of money, a trust refers to
resolution promulgated on August 4, 1994, the Court of share, petitioner was given legal title thereto. Thus, a
a duty to deal with a specific property for the benefit of
Appeals denied the motion for reconsideration. resulting trust is presumed as a matter of law. The burden
another. If a creditor-debtor relationship exists, but not a
then shifted to the transferee to show otherwise, that it was
In this petition for review, petitioner alleges the following fiduciary relationship between the parties, there is no express
just a loan. Such resulting trust could have been rebutted by
errors of public respondent as grounds for our review: trust. However, it is understood that when the purported
proof of a contrary intention by a showing that, in fact, no
trustee of funds is entitled to use them as his or her own (and
I. The respondent Court of Appeals erred in setting aside commingle them with his or her own money), a debtor- trust was intended. Petitioner could have negated the trust
the Decision dated 28 February 1992 of the Regional Trial creditor relationship exists, not a trust. 21 agreement by contrary, consistent and convincing evidence
Court, NCJR, Branch 65, Makati, Metro Manila, in its Civil on rebuttal. However, on the witness stand, petitioner failed
Case No. 90-1286, and in not confirming petitioner's In the present case, as the Executive Vice-President of to do so persuasively.
ownership over the MPC membership share. AmCham, petitioner occupied a fiduciary position in the
On cross-examination, the petitioner testified as follows:
business of AmCham. AmCham released the funds to acquire
II. The respondent Court of Appeals erred in ruling that a share in the Club for the use of petitioner but obliged him to
ATTY. AQUINO (continuing)
"the Quitclaim executed by AmCham in favor of petitioner "execute such document as necessary to acknowledge
of September 29, 1989 was superseded by the contractual beneficial ownership thereof by the Chamber". 22 A trust Q. Okay, let me go to the cash advance that you
agreement entered into by the parties on October 13, relationship is, therefore, manifestly indicated. mentioned Mr. Witness, is there any document proving
1989 wherein again the appellee acknowledged that the that you claimed cash advance signed by an officer of the
appellant owned the MPC share, there being absolutely no Moreover, petitioner failed to present evidence to support his Chamber?
evidence to support such a conclusion and/or such allegation of being merely a debtor when the private
respondent paid the purchase price of the MPC share. A. I believe the best evidence is the check.
inference is manifestly mistaken.
Applicable here is the rule that a trust arises in favor of one Q. Is there any document?
III. The respondent Court of Appeals erred in rendering who pays the purchase money of property in the name of
judgment ordering petitioner to transfer the contested another, because of the presumption that he who pays for a COURT
MPC share to a nominee of respondent AmCham thing intends a beneficial interest therein for himself. 23
notwithstanding that: (a) AmCham has no standing in the Other than the Check?

CORPORATION LAW: 7. captial structure Page 137 of 201

 MR. THOMSON other reasonable explanation of his conduct is limitations does not begin to run until the trustee clearly
possible. 31 Considering the terms of the quitclaim executed repudiates or disavows the trust and such disavowal is
Nothing more.
by the President of private respondent, the tenor of the brought home to the other party, "cestui que trust". 36 The
ATTY. AQUINO document does not lead to the purported conclusion that be statute of limitations runs generally from the time when the
intended to renounce private respondent's beneficial title act was done by which the party became chargeable as a
Is there any application filed in the Chamber to avail of over its share in the Manila Polo Club. We, therefore, find no trustee by operation of law or when the beneficiary knew that
this cash advance? reversible error in the respondent Court's holding that private he had a cause of action, 37in the absence of fraud or
A. Verbal only. respondent, AmCham, is the beneficial owner of the share in concealment.
dispute.
Q. Nothing written, and can you tell to this Honorable Noteworthy in the instant case, there was no declared or
Court what are the stipulations or conditions, or terms of Turning now to the second issue, the petitioner contends that explicit repudiation of the trust existing between the parties.
this transaction of securing this cash advance or loan? the Articles of Incorporation and By-laws of Manila Polo Club Such repudiation could only be inferred as evident when the
prohibit corporate membership. However, private respondent petitioner showed his intent to appropriate the MPC share for
xxx xxx xxx does not insist nor intend to transfer the club membership in himself. Specifically, this happened when he requested to
COURT its name but rather to its designated nominee. For as properly retain the MPC share upon his reimbursing the purchase price
ruled by the Court of Appeals: of P110,000, a request denied promptly by private
How are you going to repay the cash advance? respondent. Eventually, petitioner refused to surrender the
The matter prayed for does not involve the transfer of said
MR. THOMSON share despite the written demand of private respondent. This
share to the appellant, an artificial person. The transfer
act could then be construed as repudiation of the trust. The
The cash advance, we never stipulate when I have to sought is to the appellant's nominee. Even if the MPC By-
statute of limitation could start to set in at this point in time.
repay it, but I presume that I would, when able to repay Laws and Articles prohibit corporate membership, there
But private respondent took immediate positive action. Thus,
the money. 25 would be no violation of said prohibition for the appellant's
on May 15, 1990, private respondent filed an action to
nominee to whom the said share is sought to be
recover the MPC share. Between the time of implicit
In deciding whether the property was wrongfully appropriated transferred would certainly be a natural person. . . .
repudiation of the trust on October 9, 1989, as evidenced by
or retained and what the intent of the parties was at the time
As to whether or not the transfer of said share the petitioner's letter of said date, and private respondent's
of the conveyance, the court must rely upon its impression of
appellant's nominee would be disapproved by the MPC, is institution of the action to recover the MPC share on May 15,
the credibility of the witnesses. 26 Intent is a question of fact,
a matter that should be raised at the proper time, which is 1990, only about seven months bad lapsed. Our laws on the
the determination of which is not reviewable unless the
only if such transfer is disapproved by the MPC. 32 matter provide that actions to recover movables shall
conclusion drawn by the trier is one which could not
prescribe eight years from the time the possession thereof is
reasonably be drawn. 27 Petitioner's denial is not adequate to The Manila Polo Club does not necessarily prohibit the lot, 38 unless the possessor has acquired the ownership by
rebut the trust. Time and again, we have ruled that denials, if transfer of proprietary shares by its members. The Club only prescription for a less period of four years if in good
unsubstantiated by clear and convincing evidence, are restricts membership to deserving applicants in accordance faith. 39Since the private respondent filed the necessary
deemed negative and self-serving evidence, unworthy of with its rules, when the amended Articles of Incorporation action on time and the defense of good faith is not available
credence. 28 states that: "No transfer shall be valid except between the to the petitioner, there is no basis for any purported claim of
The trust between the parties having been established, parties, and shall be registered in the Membership Book prescription, after repudiation of the trust, which will entitle
petitioner advanced an alternative defense that the private unless made in accordance with these Articles and the By- petitioner to ownership of the disputed share. As correctly
respondent waived the beneficial ownership of MPC share by Laws". 33 Thus, as between parties herein, there is no held by the respondent court, petitioner has the obligation to
issuing the Release and Quitclaim in his favor. question that a transfer is feasible. Moreover, authority transfer now said share to the nominee of private respondent.
granted to a corporation to regulate the transfer of its stock
This argument is less than persuasive. The quitclaim executed does not empower it to restrict the right of a stockholder to WHEREFORE, the Petition for Review on Certiorari is DENIED.
by private respondent does not clearly show the intent to transfer his shares, but merely authorizes the adoption of The Decision of the Court of Appeals of May 19, 1994, is
include therein the ownership over the MPC share. Private regulations as to the formalities and procedure to be followed AFFIRMED.
respondent even asserts that at the time the Release and in effecting transfer. 34
COSTS against petitioner. SO ORDERED.
Quitclaim was executed on September 29, 1989, the
ownership of the MPC share was not controversial nor In this case, the petitioner was the nominee of the private
contested. Settled is the rule that a waiver to be valid and respondent to hold the share and enjoy the privileges of the
effective must, in the first place, be couched in clear and club. But upon the expiration of petitioner's employment as G.R. No. L-50439 July 20, 1982
unequivocal terms which leave no doubt as to the intention of officer and consultant of AmCham, the incentives that go with
ENRIQUE T. YUCHENGCO, INC., A. T. YUCHENGCO, INC.,
a party to give up a right or benefit which legally pertains to the position, including use of the MPC share, also ceased to
ANNABELLE Y. PUEY and MONA LISA Y. ABAYA, plaintiffs-
him. 29 A waiver may not be attributed to a person when the exist. It now behooves petitioner to surrender said share to
appellees, vs. CONRADO M. VELAYO, defendant-appellant.
terms thereof do not explicitly and clearly evidence an intent private respondent's next nominee, another natural person.
to abandon a right vested in such person. 30 If we apply the Obviously this arrangement of trust and confidence cannot be Flavio P. Gutierrez and Angara, Abello, Concepcion, Regala &
standard rule that waiver must be cast in clear and defeated by the petitioner's citation of the MPC rules to shield Cruz Law Offices for plaintif-appellees.
unequivocal terms, then clearly the general terms of the cited his untenable position, without doing violence to basic tenets
of justice and fair dealing. Ramon M. Velayo for defendant-appellant.
release and quitclaim indicates merely a clearance from
general accountability, not specifically a waiver of AmCham's However, we still have to ascertain whether the rights of DE CASTRO, J.:
beneficial ownership of the disputed shares. herein parties to the trust still subsist. It has been held that so This case is certified to Us by the Court of Appeals in its
Additionally, the intention to waive a right or advantage must long as there has been no denial or repudiation of the trust, Resolution dated March 6, 1976, on the ground that it
be shown clearly and convincingly, and when the only proof of the possession of the trustee of an express and continuing involves purely question of law, as raised in the appeal of the
intention rests in what a party does, his act should be so trust is presumed to be that of the beneficiary, and 35
the decision of the Court of First Instance of Rizal (Pasig Branch)
manifestly consistent with, and indicative of, an intent to statute of limitations does not run between them. With in Civil Case No. 21031, the dispositive portion of which reads
voluntarily relinquish the particular right or advantage that no regard to a constructive or a resulting trust, the statute of as follows:

CORPORATION LAW: 7. captial structure Page 138 of 201

 FROM THE FOREGOING, this Court rules that the Stock 1974, appellant filed a formal appeal to the Secretary of they would indeed suffer much loss after parting with their
Purchase Agreement, Exhibit "A", is not merely Tourism from the order dated February 5, 1975. money for which they would receive nothing. The doctrine
annulable, but null and void ab initio, and it is hereby so of res suo domino perit advanced by the defendant cannot,
On February 24, 1976, appellant filed a formal appeal to the
declared, and as a consequence, defendant is ordered therefore, be applied.
Office of the President, which, however affirmed the decisions
to return to the plaintiffs the sum of P367,500.00
and orders of the Director of Special Services and the Appellant would further contend that both parties are
together with its interests at the legal rate from July 22,
Secretary of Tourism cancelling the license of Ric Tours Phil. presumed to know the rule requiring prior approval by the
1974, which is the date of the Stock Purchase
as a tour operator. Department of Tourism of sales of shares of stock of tour
Agreement, Exhibit "A". Defendant is also ordered to
operators, and both are guilty of having violated said rule;
pay attorney's fees of P10,000.00, and the costs. 1 On April 4, 1975, appellees brought a complaint before the
that they are, therefore, in pari delicto and the law will not aid
Court of First Instance of Rizal (Pasig Branch) praying for the
The records show that sometime in June 1974, defendant- either party but leave them where they are.
annulment of contract, the return of P367,500.00 plus interest
appellant Conrado M. Velayo offered to sell to the plaintiffs-
and the payment of damages. On October 4, 1976, the We, likewise, see no merit in this contention. Appellant as the
appellees 2,265 shares of common stock of the RIC Tours
parties agreed to submit the case for decision on the basis of vendor in the sale of the shares of stock of RIC Tours Phil. is
Philippines, Inc. ("Ric Tours Phil., for short) a Philippine
their Joint Stipulation of Facts wherein they admitted the facts obligated not only to transfer the ownership of and deliver,
Corporation then duly licensed as a tourist operator,
set forth above, and the pleadings on record without the but also to warrant the thing which is the object of the sale,
constituting 70% of the subscribed and outstanding capital
necessity of oral evidence. On March 17, 1977, the trial court i.e., the 2,265 shares of stock of Ric Tours Phil., pursuant to
stock of the said corporation. Appellees paid the entire
rendered its decision favorable to appellees. Hence, this article 1495 of the New Civil Code. Delivery, alone, of said
purchase price of P367,500.00 to appellant Velayo, and the
appeal. shares of stock is not sufficient, for the appellant, as the
latter, on his part, delivered to the former all the 2,265 shares
vendor, must also warrant clear title to the same, in
of stock of Ric Tours Phil. On July 5, 1974, appellees took The only issue presented in this case is whether or not the
accordance with the aforesaid provision. Consequently, only
possession of all the assets of Ric Tours Phil. "Stock Purchase Agreement" entered into by the appellees
appellant is charged with knowledge of the rule requiring
and appellant Velayo should be annulled, or in the alternative,
On August 5, 1975, appellant received a letter from the prior approval by the Department of Tourism of an sales of
declared void ab initio.
Director of Bureau of Special Services, Department of Tourism shares of stock of tour operators, for it is he as the vendor,
(now Ministry of Tourism) directing him "to explain within Appellant contends that appellees have no right to rescind who is under obligation to give the appellees-vendees clear
seventy-two (72) hours from receipt of said letter why the the contract since the ownership of Ric Tours Phil. and its title to the property he is conveying. As aptly stated by the
Department of tourism should not cancel the Local Tour license to operate as tour operator were transferred to trial court: "The obligation to secure prior Department of
Operator's License of Ric Tours Phil. for having sold to another appellees upon delivery to them of all the shares of stock Tourism approval devolved upon the defendant (herein
group the shares of stock of Ric Tours Phil. without prior notice together with all the other assets of the corporation: appellant) for it was he as the owner vendor who had the duty
and approval from the Department of Tourism which is a consequently under the doctrine of res suo domino perit, to give clear title to the properties he was conveying. It was
violation of Part II, Sec. 10, Part IV, Sec. 4 of the Rules and appellees as buyers in a consummated sale should suffer the he alone who was charged with knowing about the rules
Regulations Governing the business of Tour Operators and loss when the license was cancelled. attendant to a sale of the assets or shares of his tourist-
Tour Guides." oriented organization. He should- have known that under said
Appellant's contention is devoid of merit. The provision rules and regulations, on pain of nullity, shares of stock in his
In his answer, appellant claims that the shares of stock of Ric governing the Agreement sought to be annuled is Sec 4, Part company could not be transferred without prior approval from
Tours Phil. were sold to another group without previous IV of the Rules and Regulations Governing the Business of the Department of Tourism. The failure to secure this approval
clearance from the Department of Tourism because he really Tour Operators and Tour Guides, which recites as follows: is attributable to him alone." The pari delicto doctrine,
was not aware of the rule requiring prior approval by the
Department of Tourism for the validity of transfers of shares Sec. 4. No transfer of rights to a license of a tour therefore, can neither be applied.
of local tour operators. On August 12, 1974, appellant operator or ownership of shares or interests in the Even assuming that both parties were guilty of the violation, it
received a letter from Director Jose Clemente of the Bureau of agency shall be valid unless made with the prior does not always follow, as is appellant's contention , that both
Special Services, informing him that "the license to operate approval of the Department. (Emphasis supplied). parties being in pari delicto, should be left where they are. It
the business as Tour Operator of the Ric Tours Phil. is The above-quoted rule is clear and mandatory. It requires the has been held that "although the parties are in pari delicto,
cancelled effective upon receipt of this letter." On August 18,
prior approval of the Department of Tourism for the validity of yet the court may interfere and grant relief at the suit of one
1974, appellant wrote a letter addressed to Hon. Jose Aspiras,
any transfer of rights to a license of a tour operator or of them, where public policy requires its intervention, even
Secretary of Tourism, requesting for a reconsideration of theownership of shares or interests in any tour agency. In the though the result may be that a benefit will be derived by a
order of August 12, 1974 of Director Jose Clemente. On case at bar, it was admitted by both parties, that the Stock plaintiff who is in equal guilt with defendant." 4 In the case at
August 20, 1974, Director Jose Clemente issued Circular No. Purchase Agreement was made without the prior approval of bar, there is no question that contracts and agreements
11 informing all concerned "that the provisional license of Ric
the Department of Tourism. Pursuant to paragraph 7, article concerning the transfer of rights or ownership of shares of
Tours Phil. has been cancelled as of August 12, 1974 for 1409 of the New Civil Code, such agreement would be stock in a tour operator or agency should be as would assure
violation of the Rules and Regulations Governing the Businessinexistent and null and void from the beginning. For it is well- the best protection of the public, for as admitted by the
of Tour Operators and that by virtue of said cancellation, Ric
settled that any contract entered into must be in accordance appellant himself, the "Department of Tourism would like to
Tours Phil. has been ordered to close shop and to cease from with, and not repugnant to, an applicable statute whose terms assure itself that the shares of stock would not be sold to
further engaging in any business transaction immediately." are deemed embodied therein 2 and without the need for the persons unfit to engage in the business of tour operation," in
3 line with the policy of the Government to make the tourist
On September 3, 1974, appellees wrote a letter to appellant parties of expressly making reference to it. Inasmuch as the
agreement between the parties is null and void from the industry a positive instrument towards accelerated national
demanding rescission of the contract, the restitution of the
development. Pursuant thereto, Presidential Decree No. 189,
sum of P367,500.00 representing the purchase price of 2,265 beginning, it produces no legal effect. No valid transfer of
creating the Department of Tourism, expressly confers upon it
shares of Ric Tours Phil. and offering delivery of the ownership of Ric Tours Phil., to the appellees, therefore, took
the function of licensing, regulating and supervising travel
certificates of stock representing the 2,265 shares upon place upon delivery to them by the appellant of the shares of
agents, tour operators and tour guides, 5 to see to it that only
receipt of the P367,500.00. On September 13, 1974, stock of said corporation as to make them suffer the
those persons and entities who are fit and responsible should
appellant received a letter from the Department of Tourism consequence of the subsequent revocation by the
engage in tour operation business. Accordingly, the
denying his request for reconsideration. On September 18, Department of Tourism of the license of Ric Tours Phil., as
Department of Tourism promulgated its "Rules and

CORPORATION LAW: 7. captial structure Page 139 of 201

Regulations Governing the Business of Tour Operators and LIM TAY, petitioner, vs. COURT OF APPEALS, GO FAY AND executed a "Contract of Pledge" covering his three
Tour Guides," 6 providing, among others, that prior approval of CO. INC., SY GUIOK, and THE ESTATE OF ALFONSO hundred (300) shares of stock in Respondent Corporation.
the Department of Tourism is a requisite for the validity of LIM, respondents. Under said contract, Sy Lim obliged himself to pay interest
transfers of rights, of ownership of shares of stock in a tour on his loan at the rate of 10% per annum from the date of
PANGANIBAN, J.:
operator or agency, and that a violation of this rule and the execution of said contract.
regulation is a ground for suspension/cancellation of license The duty of a corporate secretary to record transfers of stocks
Under said "Contracts of Pledge," Respondent[s] Guiok
and/or forfeiture of bond. is ministerial. However, he cannot be compelled to do so
and Sy Lim covenanted, inter alia, that:
when the transferee's title to said shares has no prima
It is a familiar doctrine in administrative law, that the "Rules
facie validity or is uncertain. More specifically, a pledgor, prior 3. In the event of the failure of the PLEDGOR to pay
and Regulations Governing the Business of Tour Operators
to foreclosure and sale, does not acquire ownership rights the amount within a period of six (6) months from
and Tour Guides" issued by the Ministry of Tourism,
over the pledged shares and thus cannot compel the the date hereof, the PLEDGEE is hereby authorized
promulgated pursuant to the authority vested upon it by P.D.
corporate secretary to record his alleged ownership of such to foreclose the pledge upon the said shares of
Nos. 189 and 259, to accomplish the objectives of the statute
shares on the basis merely of the contract of pledge. stock hereby created by selling the same at public
of making the tourist industry a positive instrument towards
Similarly, the SEC does not acquire jurisdiction over a dispute or private sale with or without notice to the
accelerated national development, have the force and effect
when a party's claim to being a shareholder is, on the face of PLEDGOR, at which sale the PLEDGEE may be the
of law, are binding on all persons subject to them and
the complaint, invalid or inadequate or is otherwise negated purchaser at his option; and the PLEDGEE is hereby
compliance therewith may be enforced by a penal sanction
by the very allegations of such complaint. Mandamus will not authorized and empowered at his option to transfer
provided in the law. 7 Thus, Section 4-B of P.D. No. 189, as
issue to establish a right, but only to enforce one that is the said shares of stock on the books of the
amended by P.D. No. 259, commands that:
already established. corporation to his own name and to hold the
Sec. 4-B. Any person violating or causing to violate any certificate issued in lieu thereof under the terms of
Statement of the Case
provision of this Decree or of the rules and regulations this pledge, and to sell the said shares to issue to
or circulars promulgated by the Department of Tourism There are the principles, used by this Court in resolving this him and to apply the proceeds of the sale to the
pursuant to its power to license, classify, regulate Petition for Review on Certiorari before us, assailing the payment of the said sum and interest, in the
and/or supervise the operation of all persons, October 24, 1996 Decision 1 of the Court of Appeals 2 in CA- manner hereinabove provided;
businesses, establishments, facilities and services that GR SP No. 40832, the dispositive portion of which reads:
4. In the event of the foreclosure of this pledge and
cater to, or have any thing to do with travelers and
IN THE LIGHT OF ALL THE FOREGOING, the Petition at the sale of the pledged certificate, any surplus
tourists, both international and domestic, shall upon,
bench is DENIED DUE COURSE and is hereby DISMISSED. remaining in the hands of the PLEDGEE after the
conviction by a court of competent jurisdiction, suffer
With costs against the [p]etitioner. 3 payment of the said sum and interest, and the
the penalty of imprisonment of not less than two (2)
expenses, if any, connected with the foreclosure
years nor more than five (5) years or a fine of not less By the foregoing disposition, the Court of Appeals effectively
sale, shall be paid by the PLEDGEE to the PLEDGOR;
than two thousand pesos nor more than five thousand affirmed the March 7, 1996 Decision 4 of the Securities and
pesos or both, at the discretion of the Court. In addition Exchange Commission (SEC) en banc: 5. Upon payment of the said amount and interest in
thereto such violation shall ipso facto constitute a valid full, the PLEDGEE will, on demand of the PLEDGOR,
ground for the revocation of all privileges, permits and WHEREFORE, in view of all the foregoing, judgment is redeliver to him the said shares of stock by
authorization granted to such persons or entity under hereby rendered dismissing the appeal on the ground that surrendering the certificate delivered to him by the
this Decree by the Department of Tourism. ... mandamus will only issue upon a clear showing of PLEDGOR or by retransferring each share to the
(Emaphasis supplied). ownership over the assailed shares of stock, [t]he PLEDGOR, in the event that the PLEDGEE, under the
determination of which, on the basis of the foregoing option hereby granted, shall have caused such
From the foregoing, We hold that the transfer to plantiffs- facts, is within the jurisdiction of the regular courts and shares to be transferred to him upon the books of
appellees of rights of ownership of shares of stck of Ric Tours not with the SEC. 5 the issuing company."(idem, supra)
Phil. is void, and since the agreement concerning the sale or 6
transfer legally did not exist, appellant has no title The SEC en banc upheld the August 16, 1993 Decision of Respondent Guiok and Sy Lim endorsed their respective
whatsoever to the money received by him by virtue thereof, SEC Hearing Officer Rolando C. Malabonga, which dismissed shares of stock in blank and delivered the same to the
which he and should accordingly refund to appellees, with the action for mandamus filed by petitioner. [p]etitioner. 7
interest thereon at the legal rate until filly paid. 8 The Facts However, Respondent Guiok and Sy Lim failed to pay their
WHEREFORE, the decision appealed from being in accordance As found by the Court of Appeals, the facts of the case are as respective loans and the accrued interests thereon to the
with law, is hereby AFFIRMED, without special pronouncement follows: [p]etitioner. In October, 1990, the [p]etitioner filed a
as to costs. "Petition for Mandamus" against Respondent Corporation,
. . . On January 8, 1980, Respondent-Appellee Sy Guiok with the SEC entitled "Lim Tay versus Go Fay & Company.
SO ORDERED. secured a loan from the [p]etitioner in the amount of Inc., SEC Case No. 03894", praying that:
P40,000 payable within six (6) months. To secure the
payment of the aforesaid loan and interest thereon, PRAYER
Respondent Guiok executed a Contract of Pledge in favor WHEREFORE, premises considered, it is respectfully
of the [p]etitioner whereby he pledged his three hundred prayed that an order be issued directing the
(300) shares of stock in the Go Fay & Company Inc., corporate secretary of [R]espondent Go Fay & Co.,
Respondent Corporation, for brevity's sake. Respondent Inc. to register the stock transfers and issue new
Guiok obliged himself to pay interest on said loan at the certificates in favor of Lim Tay. It is likewise prayed
rate of 10% per annum from the date of said contract of that [R]espondent Go Fay & Co., Inc[.] be ordered to
pledge. On the same date, Alfonso Sy Lim secured a loan pay all dividends due and unclaimed on the said
from the [p]etitioner in the amount of P40,000 payable in certificates to [P]laintiff Lim Tay.
G.R. No. 126891 August 5, 1998
six (6) months. To secure the payment of his loan, Sy Lim

CORPORATION LAW: 7. captial structure Page 140 of 201

 Plaintiff further prays for such other relief just and plaintiff in the absence of clear and legal basis for The [r]espondents-[i]ntervenors prayed the SEC that
equitable in the premises. ( page 34, Rollo) such; judgment be rendered in their favor, as follows:
The [p]etitioner alleged, inter alia, in his Petition that the 4. DENY specifically the allegations under IV. PRAYER
controversy between him as stockholder and the paragraphs 6, 7 and 8 of the complaint as to the
It is respectfully prayed to this Honorable
Respondent Corporation was intra-corporate in view of the existence of the alleged intracorporate dispute
Commission after due hearing, to dismiss the case
obstinate refusal of the corporate secretary of Respondent between plaintiff and company for being without
for lack of merit, ordering plaintiff to accept
Corporation to record the transfer of the shares of stock of proper and legal basis. In the first place, plaintiff is
payment for the loans secured by the subject shares
Respondent Guiok and Sy Lim in favor of and under the not a stockholder of the respondent corporation;
of stocks and to pay plaintiff:
name of the [p]etitioner and to issue new certificates of there was no foreclosure of shares executed in
stock to the [p]etitioner. accordance with the Chattel Mortgage Law 1. The sum of P50,000.00, as moral damages;
whatsoever; there were no sales consummated that
The Respondent Corporation filed its Answer to the 2. the sum of P50,000.00, as attorneys fees; and,
would transfer to the plaintiff the subject shares of
Complaint and alleged, as Affirmative Defense, that:
stocks and therefore, any demand to transfer the 3. costs of suit.
AFFIRMATIVE DEFENSE shares of stocks to the name of the plaintiff has no
legal basis. In the second place, [i]ntervenors had Other reliefs just and equitable [are] likewise prayed for.
7. Respondent repleads and incorporates herein by been in the past negotiating possible compromise ( pages 42-43, Rollo)
reference the foregoing allegations. and at the same time, had tendered payment of the After due proceedings, the [h]earing [o]fficer promulgated a
8. The Complaint states no cause of action against loan secured by the subject pledges but plaintiff Decision dismissing [p]etitioner's Complaint on the ground
[r]espondent. refused unjustifiably to oblige and accept payment that although the SEC had jurisdiction over the action,
o[r] even agree on the computation of the principal pursuant to the Decision of the Supreme Court in the case of
9. Complainant is not a stockholder of [r]espondent. amount of the loan and interest on top of a "Rural Bank of Salinas, et al. vs. Court of Appeals, et al., 210
Hence, the Honorable Commission has no substantial amount ofered just to settle and SCRA 510", he failed to prove the legal basis for the secretary
jurisdiction to enter the present controversy since compromise the indebtedness of [i]ntervenors; of the Respondent Corporation to be compelled to register
their [sic] is no intracorporate relationship between
II. SPECIAL AFFIRMATIVE DEFENSES stock transfers in favor of the [p]etitioner and to issue new
complainant and respondent.
certificates of stock under his name ( pages 67-77, Rollo). The
10. Granting arguendo that a pledge was Intervenors replead by way of reference all the [p]etitioner appealed the Decision of the [h]earing [o]fficer to
constituted over the shareholdings of Sy Guiok in foregoing allegations to form part of the special the SEC, but, on March 7, 1996, the SEC promulgated a
favor of the complainant and that the former affirmative defenses; Decision, dismissing [p]etitioner's appeal on the grounds that:
defaulted in the payment of his obligations to the 5. This Honorable Commission has no jurisdiction (a) the issue between the [p]etitioner and the [r]espondents
latter, the same did not automatically vest [i]n over the person of the respondent and nature of the being one involving the ownership of the shares of stock
complainant ownership of the pledged shares. action, plaintiff having no personality at all to pledged by Respondent Guiok and Sy Lim, the SEC had no
( pace 37, Rollo) compel respondent by way of mandamus to perform jurisdiction over the action filed by the [p]etitioner; (b) the
certain corporate function[s]; latter had no cause of action for mandamus against the
In the interim, Sy Lim died. Respondents Guiok and the
Respondent Corporation, the right of ownership of the
Intestate Estate of Alfonso Sy Lim, represented by 6. The complaint states no cause of action; [p]etitioner over the 300 shares of stock pledged by
Conchita Lim, filed their Answer-In-Intervention with the
Respondent Guiok and Sy Lim not having been as yet,
SEC alleging, inter alia, that: 7. That respondent is not [a] real party in interest;
established, preparatory to the institution of said Petition for
xxx xxx xxx 8. The appropriation of the subject shares of stocks Mandamus with the SEC.
by plaintiff, without compliance with the formality of
3. Deny specifically the allegation under paragraph Ruling of the Court of Appeals
law, amounted to "[p]actum commis[s]orium"
5 of the Complaint that, failure to pay the loan therefore, null and void; On the issue of jurisdiction, the Court of Appeals ruled:
within the contract period automatically foreclosed
the pledged shares of stocks and that the share of 9. Granting for the sake of argument only that there In ascertaining whether or not the SEC had exclusive
stocks are automatically purchased by the plaintiff, was a valid foreclosure and sale of the subject jurisdiction over [p]etitioner's action, the [a]ppellate
for being false and distorted, the truth being that st[o]cks in favor of the plaintiff which [c]ourt must delve into and ascertain: (a) whether or not
pursuant to the [sic] paragraph 3 of the contract of [i]ntervenors deny still paragraph 5 of the there is a need to enlist the expertise and technical know-
pledges, Annexes "A" and "B", it is clear that upon contract allows redemption, for which intervenors how of the SEC in resolving the issue of the ownership of
failure to pay the amount within the stipulated are willing to redeem the share of stocks pledged; the shares of stock; (b) the status of the relationships of
period, the pledgee is authorized to foreclose the the parties; [and] (c) the nature of the question that is the
10. Even the Chattel Mortgage law allowed
pledge and thereafter, to sell the same to satisfy the subject of the controversy. Where the controversy is
redemption of the [c]hattel foreclosed;
loan. [H]owever, to this point in time, plaintiff has purely a civil matter resoluble by civil law principles and
not performed any operative act of foreclosing the 11. As a matter of fact, on several occasions, there is no need for the application of the expertise and
shares of stocks of [i]ntervenors in accordance with [i]ntervenors had made representations with the technical know-how of the SEC, then the regular courts
the Chattel Mortgage law, [n]either was there any plaintiff for the compromise and settlement of all have jurisdiction over the action. 8 [citations omitted]
sale of stocks by way of public or private auction the obligations secured by the subject pledges
On the issue of whether mandamus can be availed of by the
made after foreclosure in favor of the plaintiff to even offering to pay compensation over and above
petitioner, the Court of Appeals agreed with the SEC, viz.:
speak about, and therefore, the respondent the value of the obligations, interest[s] and
company could not be force[d] to [sic] by way of dividends accruing to the share of stocks but, . . . [T]he [p]etitioner failed to establish a clear and legal
mandamus, to transfer the subject shares of stocks plaintiff unjustly refused to accept the offer of right to the writ of mandamus prayed for by him. . . .
from the name of your [i]ntervenors to that of the payment; ( pages 39-42, Rollo) Mandamus will not issue to enforce a right which is in
substantial dispute or to which a substantial doubt exists .

CORPORATION LAW: 7. captial structure Page 141 of 201

 . . . The principal function of the writ of mandamus is to flow from ownership. The determination of whether or not a Fay & Co., Inc., from Sy Guiok as security for the payment
command and expedite, and not to inquire and adjudicate shareholder is entitled to exercise the above-mentioned rights of a loan of [f]orty [t]housand [p]esos (P40,000.00)
and, therefore it is not the purpose of the writ to establish falls within the jurisdiction of the SEC. However, if ownership Philippine currency, the sum of which was payable within
a legal right, but to enforce one which has already been of the shares is not clearly established and is still unresolved six (6) months [with interest] at ten percentum (10%) per
established. 9 [citations omitted] at the time the action for mandamus is filed, then jurisdiction annum from the date of the execution of the contract; a
lies with the regular courts. copy of this Contract of Pledge is attached as
The Court of Appeals debunked petitioner's claim that he had
Annex "A" and made part hereof;
acquired ownership over the shares by virtue of novation, Sec. 5 of Presidential Decree No. 902-A sets forth the
holding that respondents' indorsement and delivery of the jurisdiction of the SEC as follows: 4. On the same date January 8, 1980, under a similar
shares were pursuant to Articles 2093 and 2095 of the Civil Contract of Pledge, Lim Tay received three hundred (300)
Sec. 5. In addition to the regulatory and adjudicative
Code and that petitioner's receipt of dividends was in shares of stock of Go Pay & Co., Inc. from Alfonso Sy Lim
functions of the Securities and Exchange Commission over
compliance with Article 2102 of the same Code. Petitioner's as security for the payment of a loan of [f]orty [t]housand
corporations, partnerships and other forms of associations
claim that he had acquired ownership of the shares by virtue [p]esos (P40,000.00) Philippine currency, the sum of
registered with it as expressly granted under existing laws
of prescription was likewise dismissed by Respondent Court in which was payable within six (6) months [with interest] at
and decrees, it shall have original and exclusive
this wise: ten percentum (10%) per annum from the date of the
jurisdiction to hear and decide cases involving:
execution of the contract; a copy of this Contract of
The prescriptive period for the action of Respondent[s]
(a) Devices or schemes employed by or any acts of the Pledge is attached as Annex "B" and made part hereof;
Guiok and Sy Lim to recover the shares of stock from the
board of directors, business associates, its officers or
[p]etitioner accrued only from the time they paid their 5. By the express terms of the agreements, upon failure of
partners, amounting to fraud and misrepresentation which
loans and the interests thereon and [made] a demand for the borrowers to pay the stated amounts within the
10 may be detrimental to the interest of the public and/or of
their return. contract period, the pledge is foreclosed and the shares of
stockholders, partners, members of associations or
stock are purchased by [p]laintiff, who is expressly
Hence, the petitioner brought before us this Petition for organizations registered with the Commission;
authorized and empowered to transfer the duly endorsed
Review on Certiorari in accordance with Rule 45 of the Rules
11 (b) Controversies arising out of intra-corporate or shares of stock on the books of the corporation to his own
of Court.
partnership relations, between and among stockholders, name; . . . 18 (emphasis supplied)
Assignment of Errors members, or associates; between any or all of them and
However, the contracts of pledge, which were made integral
the corporation, partnership or association of which they
Petitioner submits, for the consideration of this Court, these parts of the Complaint, contain this common proviso:
are stockholders, members or associates, respectively;
issues: 12
and between such corporation, partnership or association 3. In the event of the failure of the PLEDGOR to pay the
(a) Whether the Securities and Exchange Commission had and the State insofar as it concerns their individual amount within a period of six (6) months from the date
jurisdiction over the complaint filed by the petitioner; and franchise or right to exist as such entity; hereof, the PLEDGEE is hereby authorized to foreclose the
pledge upon the said shares of stock hereby created by
(b) Whether the petitioner is entitled to the relief of (c) Controversies in the election or appointment of
selling the same at public or private sale with or without
mandamus as against the respondent Go Fay & Co., Inc. directors, trustees, officers or managers of such
notice to the PLEDGOR, at which sale the PLEDGEE may
corporations, partnerships or associations.
In addition, petitioner contends that it has acquired ownership be the purchaser at his option; and the PLEDGEE is hereby
of the shares "through extraordinary prescription," pursuant (d) Petitions of corporations, partnerships or associations authorized and empowered at his option, to transfer the
to Article 1132 of the Civil Code, and through respondents' to be declared in the state of suspension of payments in said shares of stock on the books of the corporation to his
subsequent acts, which amounted to a novation of the cases where the corporation, partnership or association own name and to hold the certificate issued in lieu thereof
contracts of pledge. Petitioner also claims that there possesses property to cover all its debts but foresees the under the terms of this pledge, and to sell the said shares
was dacion en pago, in which the shares of stock were impossibility of meeting them when they respectively fall to issue to him and to apply the proceeds of the sale to
deemed sold to petitioner, the consideration for which was due or in cases where the corporation, partnership or the payment of the said sum and interest, in the manner
the extinguishment of the loans and the interests thereon. association has no sufficient assets to cover its liabilities, hereinabove provided;
Petitioner likewise claims that laches bars respondents from but is under the Management Committee created
This contractual stipulation, which was part of the Complaint,
recovering the subject shares. pursuant to this decree. 15
shows that plaintiff was merely authorized to foreclose the
The Court's Ruling Thus, a controversy "among stockholders, partners or pledge upon maturity of the loans, not to own them. Such
associates themselves" 16 is intra-corporate in nature and falls foreclosure is not automatic, for it must be done in a public or
The petition has no merit. within the jurisdiction of the SEC. private sale. Nowhere did the Complaint mention that
First Issue: Jurisdiction of the SEC petitioner had in fact foreclosed the pledge and purchased
As a general rule, the jurisdiction of a court or tribunal over the shares after such foreclosure. His status as a mere
Claiming that the present controversy is intra-corporate and the subject matter is determined by the allegations in the pledgee does not, under civil law, entitle him to ownership of
17
falls within the exclusive jurisdiction of the SEC, petitioner complaint. In the present case, however, petitioner's claim the subject shares. It is also noteworthy that petitioner's
13
relies heavily on Abejo v. De la Cruz, which upheld the that he was the owner of the shares of stock in question has Complaint did not aver that said shares were acquired
jurisdiction of the SEC over a suit filed by an unregistered no prima facie basis. through extraordinary prescription, novation or laches.
stockholder seeking to enforce his rights. He also seeks In his Complaint, petitioner alleged that, pursuant to the Moreover, petitioner's claim, subsequent to the filing of the
support from Rural Bank of Salinas, Inc. v. Court of contracts of pledge, he became the owner of the shares when Complaint, that he acquired ownership of the said shares
Appeals, 14 which ruled that the right of a transferee or an the term for the loans expired. The Complaint contained the through these three modes is not indubitable and still has to
assignee to have stocks transferred to his name was an following pertinent averments: be resolved. In fact, as will be shown, such allegation-has no
inherent right flowing from his ownership of the said stocks. merit. Manifestly, the Complaint by itself did not contain
xxx xxx xxx any prima facie showing that petitioner was the owner of the
The registration of shares in a stockholder's name, the
issuance of stock certificates, and the right to receive 3. On [J]anuary 8, 1990, under a Contract of Pledge, Lim shares of stocks. Quite the contrary, it demonstrated that he
dividends which pertain to the said shares are all rights that Tay received three hundred (300) shares of stock of Go was merely a pledgee, not an owner. Accordingly, it failed to

CORPORATION LAW: 7. captial structure Page 142 of 201

lay down a sufficient basis for the SEC to exercise jurisdiction Second Issue: Mandamus Will Not Issue to Establish hereby authorized and empowered at his option to
over the controversy. In fact, the very allegations of the a Right transfer the said shares of stock on the books of the
Complaint and its annexes negated the jurisdiction of the corporation to his own name, and to hold the certificate
Petitioner prays for the issuance of a writ of mandamus,
SEC. issued in lieu thereof under the terms of this pledge, and
directing the corporate secretary of respondent corporation to
to sell the said shares to issue to him and to apply the
Petitioner's reliance on the doctrines set forth in Abejo v. De have the shares transferred to his name in the corporate
proceeds of the sale to the payment of the said sum and
la Cruz and Rural Bank of Salinas, Inc. v. Court of Appeals is books, to issue new certificates of stock and to deliver the
interest, in the manner hereinabove provided; 22
misplaced. In Abejo, he Abejo spouses sold to Telectronic corresponding dividends to him. 20
Systems, Inc. shares of stock in Pocket Bell Philippines, Inc. There is no showing that petitioner made any attempt to
In order that a writ of mandamus may issue, it is essential
Subsequent to such contract of sale, the corporate secretary, foreclose or sell the shares through public or private auction,
that the person petitioning for the same has a clear legal right
Norberto Braga, refused to record the transfer of the shares in as stipulated in the contracts of pledge and as required by
to the thing demanded and that it is the imperative duty of
the corporate books and instead asked for the annulment of Article 2112 of the Civil Code. Therefore, ownership of the
the respondent to perform the act required. It neither confers
the sale, claiming that he and his wife had a preemptive right shares could not have passed to him. The pledgor remains
powers nor imposes duties and is never issued in doubtful
over some of the shares, and that his wife's shares were sold the owner during the pendency of the pledge and prior to
cases. It is simply a command to exercise a power already
without consideration or consent. foreclosure and sale, as explicitly provided by Article 2103 of
possessed and to perform a duty already imposed. 21
the same Code:
At the time the Bragas questioned the validity of the sale, the
In the present case, petitioner has failed to establish a clear
contract had already been perfected, thereby demonstrating Unless the thing pledged is expropriated, the debtor
legal right. Petitioner's contention that he is the owner of the
that Telectronic Systems, Inc. was already the prima continues to be the owner thereof.
said shares is completely without merit. Quite the contrary
facie owner of the shares and, consequently, a stockholder of
and as already shown, he does not have any ownership rights Nevertheless, the creditor may bring the actions which
Pocket Bell Philippines, Inc. Even if the sale were to be
at all. At the time petitioner instituted his suit at the SEC, his pertain to the owner of the thing pledged in order to
annulled later on, Telectronic Systems, Inc. had, in the
ownership claim had no prima facie leg to stand on. At best, recover it from, or defend it against a third person.
meantime, title over the shares from the time the sale was
his contention was disputable and uncertain Mandamus will
perfected until the time such sale was annulled. The effects of No Ownership by Prescription
not issue to establish a legal right, but only to enforce one
an annulment operate prospectively and do not, as a rule,
that is already clearly established. Petitioner did not acquire the shares by prescription either.
retroact to the time the sale was made. Therefore, at the time
the Bragas questioned the validity of the tranfers made by The period of prescription of any cause of action is reckoned
Without Foreclosure and Purchase at Auction,
the Abejos, Telectronic Systems, Inc. was already a prima only from the date the cause of action accrued.
Pledgor Is Not the Owner of Pledged Shares
facie shareholder of the corporation, thus making the dispute Since a cause of action requires as an essential element not
between the Bragas and the Abejos "intra-corporate" in Petitioner initially argued that ownership of the shares
only a legal right of the plaintiff and a correlative obligation of
nature. Hence, the Court held that "the issue is not on pledged had passed to him, upon Respondents Sy Guiok and the defendant, but also an act or omission of the defendant in
ownership of shares but rather the non-performance by the Sy Lim's failure to pay their respective loans. But on appeal, violation of said legal right, the cause of action does not
corporate secretary of the ministerial duty of recording petitioner claimed that ownership over the shares had passed accrue until the party obligated refuses, expressly or
transfers of shares of stock of the corporation of which he is to him, not via the contracts of pledge, but by virtue of impliedly, to comply with its duty." 23Accordingly, a cause of
secretary." 19 prescription and by respondents' subsequent acts which
action on a written contract accrues when a breach or
amounted to a novation of the contracts of pledge. We do not
Unlike Abejo, however, petitioner's ownership over the shares agree. violation thereof occurs.
in this case was not yet perfected when the Complaint was Under the contracts of pledge, private respondents would
filed. The contract of pledge certainly does not make him the At the outset, it must be underscored that petitioner did not have a right to ask for the redelivery of their certificates of
owner of the shares pledged. Further, whether prescription acquire ownership of the shares by virtue of the contracts of stock upon payment of their debts to petitioner, consonant
effectively transferred ownership of the shares, whether there pledge. Article 2112 of the Civil Code states: with Article 2105 of the Civil Code, which reads:
was a novation of the contracts of pledge, and whether laches The creditor to whom the credit has not been satisfied in
had set in were difficult legal issues, which were unpleaded The debtor cannot ask for the return of the thing pledged
due time, may proceed before a Notary Public to the sale
and unresolved when herein petitioner asked the corporate against the will of the creditor, unless and until he has
of the thing pledged. This sale shall be made at a public
secretary of Go Fay to effect the transfer, in his favor, of the paid the debt and its interest, with expenses in a proper
auction, and with notification to the debtor and the owner
shares pledged to him. case. 24
of the thing pledged in a proper case, stating the amount
In Rural Bank of Salinas, Melenia Guerrero executed deeds of for which the public sale is to be held. If at the first Thus, the right to recover the shares based on the written
assignment for the shares in favor of the respondents in that auction the thing is not sold, a second one with the same contract of pledge between petitioner and respondents would
case. When the corporate secretary refused to register the formalities shall be held; and if at the second auction arise only upon payment of their respective loans. Therefore,
transfer, an action for mandamus was instituted. there is no sale either, the creditor may appropriate the the prescriptive period within which to demand the return of
Subsequently, a motion for intervention was filed, seeking the thing pledged. In this case he shall be obliged to give an the thing pledged should begin to run only after the payment
annulment of the deeds of assignment on the grounds that acquittance for his entire claim. of the loan and a demand for the thing has been made,
the same were fictitious and antedated, and that they were in Furthermore, the contracts of pledge contained a common because it is only then that respondents acquire a cause of
fact donations because the considerations therefor were proviso, which we quote again for the sake of clarity: action for the return of the thing pledged.
below the book value of the shares. Prescription should not begin to run on the action to demand
3. In the event of the failure of the PLEDGOR to pay the
Like the Abejo spouses, the respondents in Rural Bank of the return of the thing pledged while the loan still exists. This
amount within a period of six (6) months from the date
Salinas were already prima facie shareholders when the is because the right to ask for the return of the thing pledged
hereof, the PLEDGEE is hereby authorized to foreclose the
deeds of assignment were questioned. If the said deeds were will not arise so long as the loan subsists. In the present case,
pledge upon the said shares of stock hereby created by
to be annulled later on, respondents would still be considered the prescriptive period did not begin to run when the loan
selling the same at public or private sale with or without
shareholders of the corporation from the time of the became due. On the other hand, it is petitioner's right to
notice to the PLEDGOR, at which sale the PLEDGEE may
assignment until the annulment of such contracts. demand payment that may be in danger of prescription.
be the purchaser at his option; and "the PLEDGEE is

CORPORATION LAW: 7. captial structure Page 143 of 201

Petitioner contends that he can be deemed to have acquired This stipulation did not effect the transfer of ownership to
ownership over the certificates of stock through extraordinary petitioner. It was merely in compliance with Article 2093 of
prescription, as provided for in Article 1132 of the Civil Code the Civil Code, 29 which requires that the thing pledged be
which states: placed in the possession of the creditor or a third person of
common agreement; and Article 2095, 30 which states that if
Art. 1132. The ownership of movables prescribes through
the thing pledged are shares of stock, then the "instrument
uninterrupted possession for four years in good faith.
proving the right pledged" must be delivered to the creditor.
The ownership of personal property also prescribes
Moreover, the fact that respondents allowed the petitioner to
through uninterrupted possession for eight years, without
receive dividends pertaining to the shares was not meant to
need of any other condition. . . . .
relinquish ownership thereof. As stated by respondent
Petitioner's argument is untenable. What is required by Article corporation, the same was done pursuant to an agreement
1132 is possession in the concept of an owner. In the present between the petitioner and Respondents Sy Guiok and Sy
case, petitioner's possession of the stock certificates came Lim, following Article 2102 of the civil Code which provides:
about because they were delivered to him pursuant to the
It the pledge earns or produces fruits, income, dividends,
contracts of pledge. His possession as a pledgee cannot ripen
or interests, the creditor shall compensate what he
into ownership by prescription. As aptly pointed out by Justice
receives with those which are owing him; but if none are
Jose C. Vitug:
owing him, or insofar as the amount may exceed that
Acquisitive prescription is a mode of acquiring ownership which is due, he shall apply it to the principal. Unless
by a possessor through the requisite lapse of time. In there is a stipulation to the contrary, the pledge shall
order to ripen into ownership, possession must be in the extend to the interest and the earnings of the right
concept of an owner, public, peaceful and uninterrupted. pledged.
Thus, possession with a juridical title, such as by a
Novation cannot be inferred from the mere fact that petitioner
usufructory, a trustee, a lessee, agent or a pledgee, not
has not, since 1980, instituted any action to recover the
being in the concept of an owner, cannot ripen into
shares. Such action is in fact premature, as the loan is still
ownership by acquisitive prescription unless the juridical
outstanding. Besides, as already pointed out, novation is
relation is first expressly repudiated and such repudiation
25 never presumed or inferred.
has been communicated to the other party.
No Dacion en Pago in Favor of Petitioner
Petitioner expressly repudiated the pledge, only when he filed
his Complaint and claimed that he was not a mere pledgee, Neither can there be dacion en pago, in which the certificates
but that he was already the owner of the shares. Based on the of stock are deemed sold to petitioner, the consideration for
foregoing, petitioner has not acquired the certificates of stock which is the extinguishment of the loans and the accrued
through extraordinary prescription. interests thereon. Dacion en pago is a form of novation in
which a change takes place in the object involved in the
No Novation in Favor of Petitioner
original contract. Absent an explicit agreement, petitioner
Neither did petitioner acquire the shares by virtue of a cannot simply presume dacion en pago.
novation of the contract of pledge. Novation is defined as "the
Laches Not a Bar to Petitioner
extinguishment of an obligation by a subsequent one which
terminates it, either by changing its object or principal Petitioner submits that "the inaction of the individual
conditions, by substituting a new debtor in place of the old respondents with respect to the recovery of the shares of
one, or by subrogating a third person to the rights of the stock serves to bar them from asserting rights over said
creditor." 26 Novation of a contract must not be presumed. "In shares on the basis of laches." 31
the absence of an express agreement, novation takes place
Laches has been defined as "the failure or neglect, for an
only when the old and the new obligations are incompatible
unreasonable length of time, to do that which by exercising
on every point." 27
due diligence could or should have been done earlier; it is
In the present case, novation cannot be presumed by (a) negligence or omission to assert a right within a reasonable
respondents' indorsement and delivery of the certificates of time, warranting a presumption that the party entitled to
stock covering the 600 shares, (b) petitioner's receipt of assert it either has abandoned it or declined to assert it." 32
dividends from 1980 to 1983, and (c) the fact that
In this case, it is in fact petitioner who may be guilty of
respondents have not instituted any action to recover the
laches. Petitioner had all the time to demand payment of the
shares since 1980.
debt. More important, under the contracts of pledge,
Respondents' indorsement and delivery of the certificates of petitioner could have foreclosed the pledges as soon as the
stock were pursuant to paragraph 2 of the contract of pledge loans became due. But for still unknown or unexplained
which reads: reasons, he failed to do so, preferring instead to pursue his
baseless claim to ownership.
2. The said certificates had been delivered by the
PLEDGOR endorsed in blank to be held by the PLEDGEE WHEREFORE, the petition is hereby DENIED and the assailed
under the pledge as security for the payment of the Decision is AFFIRMED. Costs against petitioner.
aforementioned sum and interest thereon accruing. 28
SO ORDERED.

CORPORATION LAW: 7. captial structure Page 144 of 201

 G.R. No. 208844, November 10, 2015 B. Ricafort and to respondents Peter Paul L. Danao (Danao), determines the rightful owner of Angela's properties, Madrid
Maureen R. Labalan (Labalan), and Manuel L. Arimado only has an equitable right over Angela's 70.82% ownership
(Arimado; collectively, Madrid Group).6 of FSVCI's shares of stock. As such, Madrid cannot exercise
F & S VELASCO COMPANY, INC., IRWIN J. SEVA, ROSINA the rights accorded to such ownership, hence, making his call
B. VELASCO-SCRIBNER, MERCEDEZ SUNICO, AND JOSE Meanwhile, as Madrid was performing the aforesaid acts, for a meeting, as well as the actual conduct of the November
Seva, in his then-capacity as FSVCI corporate secretary, sent
SATURNINO O. VELASCO*, Petitioners, v. DR. ROMMEL L. 18, 2009 Meeting, invalid.17
MADRID, PETER PAUL L. DANAO, MANUEL L. ARIMADO, a Notice of an Emergency Meeting to FSVCI's remaining
AND MAUREEN R. LABALAN, Respondents. stockholders for the purpose of electing a new president and Aggrieved, the Madrid Group appealed18 before the CA
vice-president, as well as the opening of a bank account. Such contesting the RTC's declaration of invalidity of the November
meeting was held on November 6, 2009 which was attended 18, 2009 Meeting, as well as the denial of the appointment of
DECISION by Saturnino, Seva, and Sunico (November 6, 2009 Meeting), a Management Committee for FSVCI.19 Meanwhile, records do
during which, Saturnino was recognized as a member of the not show that the Saturnino Group appealed the declaration
FSVCI Board of Directors and thereafter, as FSVCI President, of invalidity of the November 6, 2009 Meeting to the CA.
PERLAS-BERNABE, J.: while Scribner was elected FSVCI Vice-President (Saturnino The CA Ruling
Group).7
Assailed in this petition for review on certiorari1 are the In a Decision20 dated March 1, 2013, the CA modified the RTC
Despite the election conducted by the Saturnino Group, the
Decision2 dated March 1, 2013 and the Resolution3 dated ruling: (a) declaring the November 18, 2009 Meeting
Madrid Group proceeded with the Special Stockholders' and
conducted by the Madrid Group valid; and (b) remanding the
August 7, 2013 of the Court of Appeals (CA) in CA-G.R. SP No. Re-Organizational Meeting on November 18, 2009, wherein:
case to the court a quo and directing it to appoint or
113279, which modified the Decision4 dated March 3, 2010 of (a) the current members of FSVCI Board of Directors (save for
constitute a Management Committee to take over the
the Regional Trial Court of Legazpi City, Branch 5 (RTC) in SR- Madrid) were ousted and replaced by the members of the
corporate and business affairs of FSVCI.21
09-007: (a) declaring the Special Stockholders' and Re- Madrid Group; and (b) Madrid, Danao, Arimado, and Labalan
were elected President, Vice-President, Corporate Secretary,
Organizational Meeting of petitioner F & S Velasco Company, Contrary to the RTC findings, the CA held that Madrid's
and Treaurer, respectively, of FSVCI (November 18, 2009
Inc. (FSVCI) held on November 18, 2009 legal and valid; and execution of the Affidavit of Self-Adjudication already
Meeting).8
(b) remanding the case to the court a quo and directing it to conferred upon him the ownership of Angela's 70.82%
ownership of FSVCI's shares of stock, resulting in total
appoint or constitute a. Management Committee to take over In view of the November 18, 2009 Meeting, the Saturnino
ownership of 74.98% shares of stock inclusive of his original
the corporate and business affairs of FSVCI. Group filed a petition for Declaration of Nullity of Corporate
4.16% ownership.22 In this relation, the CA found that Madrid
Election with Preliminary Injunction and Temporary
had already complied with the registration requirement of
Restraining Order9 (TRO) against the Madrid Group before the
The Facts such transfer in the books of the corporation through the
RTC, which was acting as a Special Commercial Court. 10
November 18, 2009 General Information Sheet (GIS) of the
corporation duly filed with the Securities and Exchange
On June 8, 1987, FSVCI was duly organized and registered as After the RTC denied the Saturnino Groups' prayer for TRO,
Commission (SEC). As such, he validly made the call for the
a corporation with Francisco O. Velasco (Francisco), Simona J. the Madrid Group filed its Answer (with Compulsory
November 18, 2009 Meeting, and accordingly, the matters
Velasco (Simona), Angela V. Madrid (Angela), herein Counterclaims)11 which prayed for, among others, the
resolved therein - such as the reorganization of the FSVCI
respondent Dr. Rommel L. Madrid (Madrid), and petitioner declaration of nullity of the November 6, 2009 Meeting
Board of Directors and the election of corporate officers
Saturnino O. Velasco (Saturnino) as its incorporators. When conducted by the Saturnino Group. The Madrid Group likewise
should bind the corporation.23
Simona and Francisco died on June 12, 1998 and June 22, applied for the Appointment of a Management Committee for
1999, respectively, their daughter, Angela, inherited their FSVCI, which was denied by the RTC in an Order12dated
Further, the CA ruled that the creation of a Management
shares, thereby giving her control of 70.82% of FSVCI's total January 12, 2010.13
Committee is appropriate in view of the persisting conflict
shares of stock. As of May 11, 2009, the distribution of The RTC Ruling between the Saturnino and Madrid Groups, the allegations of
FSVCI's 24,000 total shares of stock is as follows: (a) Angela embezzlement of corporate funds among the parties, and the
with 16,998 shares; (b) Madrid with 1,000 shares; (c) In a Decision14 dated March 3, 2010, the RTC declared both uncertainty in the leadership and direction of the corporation
petitioner Rosina B. Velasco-Scribner (Scribner) with 6,000 the November 6, 2009 and November 18, 2009 Meetings null which had created an imminent danger of dissipation, loss,
shares; and (d) petitioners Irwin J. Seva (Seva) and Mercedez and void.15 It found the November 6, 2009 Meeting invalid and wastage of FSVCI's assets and the paralyzation of its
Sunico (Sunico) with one (1) share each.5 because: (a) it was conducted without a quorum as only two business operations which may be prejudicial to the minority
(2) FSVCI Board Members (i.e., Seva and Sunico) attended the stockholders, parties-litigants, or the general public. 24
On September 20, 2009 and during her tenure as Chairman of same, and that Scribner cannot attend by proxy as the
the Board of Directors of FSVCI (the other members of the Corporation Code expressly prohibits proxy attendance in Dissatisfied, the Saturnino Group moved for
Board of Directors being Madrid, Scribner, Seva, and Sunico), Board meetings; and (b) merely recognizing Saturnino as an reconsideration25 which was, however, denied in a
Angela died intestate and without issue. On October 8, 2009, additional member of the FSVCI Board of Directors - and not Resolution26 dated August 7, 2013; hence, the instant
Madrid, as Angela's spouse, executed an Affidavit of Self- electing him to take the position vacated by Angela upon her petition.
Adjudication covering the latter's estate which includes her death - had the effect of increasing FSVCI's number of
70.82% ownership of FSVCI's shares of stock. Believing that The Issues Before the Court
Directors to six (6), thus, exceeding the number of Directors
he is already the controlling stockholder of FSVCI by virtue of explicitly stated in the FSVCI Articles of Incorporation. 16
such self-adjudication, Madrid called for a Special The core issues for the Court's resolution are whether or not
Stockholders' and Re-Organizational Meeting to be held on the CA correctly ruled that: (a) the November 18, 2009
On the other hand, in ruling on the invalidity of the November
November 18, 2009. On November 10, 2009 and in Meeting organized by Madrid is legal and valid; and (b) a
18, 2009 Meeting, the RTC held that until a probate court
preparation for said meeting, Madrid executed separate Management Committee should be appointed or constituted
conducting the settlement proceedings of Angela's estate
deeds of assignment transferring one share each to Vitaliano to take over the corporate and business affairs of FSVCI.

CORPORATION LAW: 7. captial structure Page 145 of 201

 The Court's Ruling SEC. 74. Books to be kept; stock transfer agent. - x x x. pursuant to the objective sought by Section 2640 of the
Corporation Code which is to give the public information,
The petition is partly meritorious. xxxx under sanction of oath of responsible officers, of the nature of
business, financial condition, and operational status of the
At the outset, the Court notes that after Madrid executed his Stock corporations must also keep a book to be known as the company, as well as its key officers or managers, so that
Affidavit of Self-Adjudication, he then filed a petition for "stock and transfer book", in which must be kept a record of those dealing and who intend to do business with it may know
letters of administration regarding Angela's estate, docketed all stocks in the names of the stockholders alphabetically or have the means of knowing facts concerning the
as S.P. No. M-7025, before the Regional Trial Court of Makati arranged; the installments paid and unpaid on all stock for corporation's financial resources and business
City, Branch 5927 (RTC-Makati Br. 59). Through Orders dated which subscription has been made, and the date of payment responsibility.41 The contents of the GIS, however, should not
December 29, 201028 and March 29, 2011,29 the RTC-Makati of any installment; a statement of every alienation, sale or be deemed conclusive as to the identities of the registered
Br. 59 already recognized Madrid as Angela's sole heir to the transfer of stock made, the date thereof, and by and to whom stockholders of the corporation, as well as their respective
exclusion of others - i.e., Angela's purported biological sister, made; and such other entries as the by-laws may prescribe. ownership of shares of stock, as the controlling document
Lourdita J. Estevez (Estevez) - and, thus, appointed him as The stock and transfer book shall be kept in the principal should be the corporate books, specifically the Stock and
Special Administrator of Angela's estate. 30 Estevez then office of the corporation or in the office of its stock transfer Transfer Book. Jurisprudence in Lao v. Lao42 is instructive on
belatedly challenged such Orders of the RTC-Makati Br. agent and shall be open for inspection by any director or this matter, to wit:
59 via a petition for annulment of judgment before the CA, stockholder of the corporation at reasonable hours on The mere inclusion as shareholder of petitioners in the
docketed as CA-G.R. SP No. 128979, which was dismissed business days. General Information Sheet of PFSC is insufficient proof
through Resolutions dated April 3, 201331 and November 4, that they are shareholders of the company.
2013.32 Undaunted, Estevez made a further appeal33 to the xxxx
Court, which was denied in the Minute Resolutions dated In this regard, the case of Batangas Laguna Tayabas Bus Co., Petitioners bank heavily on the General Information Sheet
February 26, 201434 and June 16, 2014.35 Such ruling of the Inc. v. Bitanga38 instructs that an owner of shares of stock submitted by PFSC to the SEC in which they were named as
Court had already attained finality as evidenced by an Entry cannot be accorded the rights pertaining to a stockholder - shareholders of PFSC. They claim that respondent is now
of Judgment36 dated June 16, 2014. In view of the foregoing, such as the right to call for a meeting and the right to vote, or estopped from contesting the General Information Sheet.
the Court is constrained to view that Madrid is indeed be voted for - if his ownership of such shares is not recorded
Angela's sole heir and her death caused the immediate in the Stock and Transfer Book, viz.: While it may be true that petitioners were named as
transfer of her properties, including her 70.82% ownership of Indeed, until registration is accomplished, the transfer, shareholders in the General Information Sheet
FSVCI's shares of stock, to Madrid.37 As such, Madrid may though valid between the parties, cannot be effective as submitted to the SEC, that document alone does not
compel the issuance of certificates of stock in his favor, as against the corporation. Thus, the unrecorded transferee, the conclusively prove that they are shareholders of PFSC.
well as the registration of Angela's stocks in his name in Bitanga group in this case, cannot vote nor be voted for. The The information in the document will still have to be
FSVCI's Stock and Transfer Book. purpose of registration, therefore, is two-fold: to correlated with the corporate books of PFSC. As
enable the transferee to exercise all the rights of a between the General Information Sheet and the
Be that as it may, it must be clarified that Madrid's stockholder, including the right to vote and to be voted corporate books, it is the latter that is controlling. As
inheritance of Angela's shares of stock does not ipso for, and to inform the corporation of any change in correctly ruled by the CA:
facto afford him the rights accorded to such majority share ownership so that it can ascertain the persons We agree with the trial court that mere inclusion in the
ownership of FSVCI's shares of stock. Section 63 of the entitled to the rights and subject to the liabilities of a General Information Sheets as stockholders and
Corporation Code governs the rule on transfers of shares of stockholder. Until challenged in a proper proceeding, a officers does not make one a stockholder of a
stock. It reads: stockholder of record has a right to participate in any corporation, for this may have come to pass by
SEC. 63. Certificate of stock and transfer of shares. - The meeting; his vote can be properly counted to determine mistake, expediency or negligence. As professed by
capital stock of stock corporations shall be divided into shares whether a stockholders' resolution was approved, despite the respondent-appellee, this was done merely to comply
for which certificates signed by the president or vice claim of the alleged transferee. On the other hand, a person with the reportorial requirements with the SEC. This
president, countersigned by the secretary or assistant who has purchased stock, and who desires to be maybe against the law but "practice, no matter how long
secretary, and sealed with the seal of the corporation shall be recognized as a stockholder for the purpose of voting, continued, cannot give rise to any vested right."
issued in accordance with the by-laws. Shares of stock so must secure such a standing by having the transfer
issued are personal property and may be transferred by recorded on the corporate books. Until the transfer is If a transferee of shares of stock who failed to register such
delivery of the certificate or certificates indorsed by the registered, the transferee is not a stockholder but an transfer in the Stock and Transfer Book of the Corporation
owner or his attorney-in-fact or other person legally outsider.39(Emphases and underscoring supplied) could not exercise the rights granted unto him by law as
authorized to make the transfer. No transfer, however, In the case at bar, records reveal that at the time Madrid stockholder, with more reason that such rights be denied to a
shall be valid, except as between the parties, until the called for the November 18, 2009 Meeting, as well as the person who is not a stockholder of a corporation. Petitioners-
transfer is recorded in the books of the corporation actual conduct thereof, he was already the owner of 74.98% appellants never secured such a standing as stockholders of
showing the names of the parties to the transaction, shares of stock of FSVCI as a result of his inheritance of PFSC and consequently, their petition should be
the date of the transfer, the number of the certificate Angela's 70.82% ownership thereof. However, records are denied.43(Emphases and underscoring supplied)
or certificates and the number of shares transferred. bereft of any showing that the transfer of Angela's shares of In light of the foregoing, Madrid could not have made a valid
stock to Madrid had been registered in FSVCFs Stock and call of the November 18, 2009 Meeting as his stock ownership
No shares of stock against which the corporation holds any Transfer Book when he made such call and when the of FSVCI as registered in the Stock and Transfer Book is only
unpaid claim shall be transferable in the books of the November 18, 2009 Meeting was held. Thus, the CA erred in 4.16% in view of the nonregistration of Angela's shares of
corporation. (Emphasis and underscoring supplied) holding that Madrid complied with the required registration of stock in the FSVCI Stock and Transfer Book in his favor. As
Verily, all transfers of shares of stock must be registered in transfers of shares of stock through mere reliance on FSVCI's there was no showing that he was able to remedy the
the corporate books in order to be binding on the corporation. GIS dated November 18, 2009. situation by the time the meeting was held, the conduct of
Specifically, this refers to the Stock and Transfer Book, which such meeting, as well as the matters resolved therein,
is described in Section 74 of the same Code as follows: In this relation, it is noteworthy to point out that the including the reorganization of the FSVCI Board of Directors
submission of a GIS of a corporation before the SEC is and the election of new corporate officers, should all be

CORPORATION LAW: 7. captial structure Page 146 of 201

declared null and void. necessarily dislodged from their positions in favor of
appointees who are strangers to the corporation's operations
Thus, in view of the nullity of the November 6, 2009 Meeting and affairs.49
conducted by the Saturnino Group which ruling of the RTC had
already attained finality, as well as the November 18, 2009 In the case at bar, the CA merely based its directive of
Meeting conducted by the Madrid Group - both of which creating a Management Committee for FSVCI on its finding of
attempted to wrest control of FSVCI by reorganizing the Board "the persisting conflict between [the Saturn ino and Madrid
of Directors and electing a new set of corporate officers - the Groups], the allegations of embezzlement of corporate funds
FSVCI Board of Directors at the time of Angela's death among the parties, and the uncertainty in the leadership and
(i.e. Madrid, Seva, Scribner, and Sunico) should be direction of the corporation had created an imminent danger
reconstituted, and thereafter, fill the vacant seat left by of dissipation, loss[,] and wastage of FSVCI's assets and the
Angela in accordance with Section 2944 of the Corporation paralyzation of its business operations which may be
Code. Such Board of Directors shall only act in a hold-over prejudicial to the minority stockholders, parties-litigants or
capacity until their successors are elected and qualified, the general public."50 However, absent any actual evidence
pursuant to Section 2345 of the Corporation Code. from the records showing such imminent danger, the CA's
findings have no legal or factual basis to support the
Finally, on the issue of the propriety of appointing/constituting appointment/constitution of a Management Committee for
a Management Committee to manage FSVCI's affairs, the FSVCI. Accordingly, the CA erred in ordering the creation of a
Court recognizes that a corporation may be placed under the Management Committee in this case. Hence, in the event a
care of a Management Committee specifically created by a Management Committee had already been constituted
court and, thus, under the latter's control and supervision, for pursuant to the CA ruling, as what herein respondents point
the purpose of preserving properties involved in a suit and out,51 then it should be immediately dissolved for the reasons
protecting the rights of the parties. 46 However, case law is aforestated.
quick to point out that "the creation and appointment of a
management committee x x x is an extraordinary and drastic WHEREFORE, the petition is PARTLY GRANTED. The
remedy to be exercised with care and caution; and only when Decision dated March 1, 2013 and the Resolution dated
the requirements under the Interim Rules [of Procedure August 7, 2013 of the Court of Appeals (CA) in CA-G.R. SP No.
Governing Intra-Corporate Controversies] are shown. It is a 113279 are hereby REVERSED and SET ASIDE. The Special
drastic course for the benefit of the minority stockholders, the Stockholders' and Re-Organizational Meeting of petitioner F &
parties-litigants or the general public [and is] allowed only S Velasco Company, Inc. called by respondent Rommel L.
under pressing circumstances and when there is inadequacy, Madrid and held on November 18, 2009 is
ineffectual or exhaustion of legal or other remedies. x x x The declared NULL and VOID and the Management Committee
power of the court to continue a business of a corporation x x constituted pursuant to the aforementioned CA Decision and
x must be exercised with the greatest care and caution. There Resolution is hereby DISSOLVED.
should be a full consideration of all the attendant facts,
including the interest of all the parties concerned. 47 In view of Accordingly, the Board of Directors of petitioner F & S Velasco
the extraordinary nature of such a remedy, Section 1, Rule 9 Company, Inc. prior to the death of Angela V. Madrid -
of the Interim Rules of Procedure Governing Intra-Corporate consisting of the remaining members petitioners Rosina B. G.R. No. 177066 September 11, 2009
Controversies48 provides the elements needed for the creation Velasco-Scribner, Irwin J. Seva, and Mercedez Sunico and
of a Management Committee: respondent Dr. Rommel L. Madrid - is
JOSELITO MUSNI PUNO (as heir of the late Carlos
SEC. 1. Creation of a management committee. - As an hereby ORDERED reconstituted. The Board of Directors
is ORDERED to fill the vacant seat left by Angela V. Madrid Puno), Petitioner, vs. PUNO ENTERPRISES, INC.,
incident to any of the cases filed under these Rules or the
and, thereafter, act in a hold-over capacity until their represented by JESUSA PUNO, Respondent.
Interim Rules on Corporate Rehabilitation, a party may apply
for the appointment of a management committee for the successors are elected and qualified, in accordance with
corporation, partnership or association, when there is prevailing laws, rules, and jurisprudence.
DECISION
imminent danger of:
SO ORDERED.
(1) Dissipation, loss, wastage or destruction of assets or other NACHURA, J.:
properties; and

(2) Paralyzation of its business operations which may be Upon the death of a stockholder, the heirs do not
prejudicial to the interest of the minority stockholders, automatically become stockholders of the corporation;
parties-litigants or the general public. neither are they mandatorily entitled to the rights and
Thus, applicants for the appointment of a management privileges of a stockholder. This, we declare in this petition for
committee need to establish the confluence of these two (2) review on certiorari of the Court of Appeals (CA)
requisites. This is because appointed management Decision1 dated October 11, 2006 and Resolution dated March
committees will immediately take over the management of
6, 2007 in CA-G.R. CV No. 86137.
the corporation and exercise the management powers
specified in the law. This may have a negative effect on the
operations and affairs of the corporation with third parties, as The facts of the case follow:
persons who are more familiar with its operations are

CORPORATION LAW: 7. captial structure Page 147 of 201

Carlos L. Puno, who died on June 25, 1963, was an petitioner was not able to establish the paternity of and his Petitioner anchors his claim on his being an heir of the
incorporator of respondent Puno Enterprises, Inc. On March filiation to Carlos L. Puno since his birth certificate was deceased stockholder. However, we agree with the appellate
14, 2003, petitioner Joselito Musni Puno, claiming to be an prepared without the intervention of and the participatory court that petitioner was not able to prove satisfactorily his
heir of Carlos L. Puno, initiated a complaint for specific acknowledgment of paternity by Carlos L. Puno. Accordingly, filiation to the deceased stockholder; thus, the former cannot
performance against respondent. Petitioner averred that he is the CA said that petitioner had no right to demand that he be claim to be an heir of the latter.
the son of the deceased with the latters common-law wife, allowed to examine respondents books. Moreover, petitioner
Amelia Puno. As surviving heir, he claimed entitlement to the was not a stockholder of the corporation but was merely
Incessantly, we have declared that factual findings of the CA
rights and privileges of his late father as stockholder of claiming rights as an heir of Carlos L. Puno, an incorporator of
supported by substantial evidence, are conclusive and
respondent. The complaint thus prayed that respondent allow the corporation. His action for specific performance therefore
binding.8 In an appeal via certiorari, the Court may not review
petitioner to inspect its corporate book, render an accounting appeared to be premature; the proper action to be taken was
the factual findings of the CA. It is not the Courts function
of all the transactions it entered into from 1962, and give to prove the paternity of and his filiation to Carlos L. Puno in a
under Rule 45 of the Rules of Court to review, examine, and
petitioner all the profits, earnings, dividends, or income petition for the settlement of the estate of the latter. 5
evaluate or weigh the probative value of the evidence
pertaining to the shares of Carlos L. Puno.2
presented.9
Petitioners motion for reconsideration was denied by the CA
Respondent filed a motion to dismiss on the ground that in its Resolution6 dated March 6, 2007.
A certificate of live birth purportedly identifying the putative
petitioner did not have the legal personality to sue because
father is not competent evidence of paternity when there is
his birth certificate names him as "Joselito Musni Muno."
In this petition, petitioner raises the following issues: no showing that the putative father had a hand in the
Apropos, there was yet a need for a judicial declaration that
preparation of the certificate. The local civil registrar has no
"Joselito Musni Puno" and "Joselito Musni Muno" were one and
authority to record the paternity of an illegitimate child on the
the same. I. THE HONORABLE COURT OF APPEALS ERRED IN NOT
information of a third person. 10 As correctly observed by the
RULING THAT THE JOSELITO PUNO IS ENTITLED TO THE
CA, only petitioners mother supplied the data in the birth
RELIEFS DEMANDED HE BEING THE HEIR OF THE LATE
The court ordered that the proceedings be held in abeyance, certificate and signed the same. There was no evidence that
CARLOS PUNO, ONE OF THE INCORPORATORS [OF]
ratiocinating that petitioners certificate of live birth was no Carlos L. Puno acknowledged petitioner as his son.
RESPONDENT CORPORATION.
proof of his paternity and relation to Carlos L. Puno.
As for the baptismal certificate, we have already decreed that
II. HONORABLE COURT OF APPEALS ERRED IN RULING THAT
Petitioner submitted the corrected birth certificate with the it can only serve as evidence of the administration of the
FILIATION OF JOSELITO PUNO, THE PETITIONER[,] IS NOT DULY
name "Joselito M. Puno," certified by the Civil Registrar of the sacrament on the date specified but not of the veracity of the
PROVEN OR ESTABLISHED.
City of Manila, and the Certificate of Finality thereof. To hasten entries with respect to the childs paternity.11
the disposition of the case, the court conditionally admitted
the corrected birth certificate as genuine and authentic and III. THE HONORABLE COURT ERRED IN NOT RULING THAT
In any case, Sections 74 and 75 of the Corporation Code
ordered respondent to file its answer within fifteen days from JOSELITO MUNO AND JOSELITO PUNO REFERS TO THE ONE
enumerate the persons who are entitled to the inspection of
the order and set the case for pretrial.3 AND THE SAME PERSON.
corporate books, thus

On October 11, 2005, the court rendered a Decision, the IV. THE HONORABLE COURT OF APPEALS ERRED IN NOT
Sec. 74. Books to be kept; stock transfer agent. x x x.
dispositive portion of which reads: RULING THAT WHAT RESPONDENT MERELY DISPUTES IS THE
SURNAME OF THE PETITIONER WHICH WAS MISSPELLED AND
THE FACTUAL ALLEGATION E.G. RIGHTS OF PETITIONER AS The records of all business transactions of the corporation and
WHEREFORE, judgment is hereby rendered ordering Jesusa
HEIR OF CARLOS PUNO ARE DEEMED ADMITTED the minutes of any meeting shall be open to the inspection of
Puno and/or Felicidad Fermin to allow the plaintiff to inspect
HYPOTHETICALLY IN THE RESPONDENT[S] MOTION TO any director, trustee, stockholder or member of the
the corporate books and records of the company from 1962
DISMISS. corporation at reasonable hours on business days and he may
up to the present including the financial statements of the
demand, in writing, for a copy of excerpts from said records or
corporation.
minutes, at his expense.
V. THE HONORABLE COURT OF APPEALS THEREFORE ERRED
I[N] DECREEING THAT PETITIONER IS NOT ENTITLED TO
The costs of copying shall be shouldered by the plaintiff. Any
INSPECT THE CORPORATE BOOKS OF DEFENDANT x x x x
expenses to be incurred by the defendant to be able to
CORPORATION.7
comply with this order shall be the subject of a bill of costs.
Sec. 75. Right to financial statements. Within ten (10) days
4
The petition is without merit. Petitioner failed to establish the from receipt of a written request of any stockholder or
SO ORDERED.
right to inspect respondent corporations books and receive member, the corporation shall furnish to him its most recent
dividends on the stocks owned by Carlos L. Puno. financial statement, which shall include a balance sheet as of
On appeal, the CA ordered the dismissal of the complaint in the end of the last taxable year and a profit or loss of
its Decision dated October 11, 2006. According to the CA,

CORPORATION LAW: 7. captial structure Page 148 of 201

statement for said taxable year, showing in reasonable detail direct respondent corporation to allow petitioner to exercise THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS
its assets and liabilities and the result of its operations. 12 rights that pertain only to the deceased and his AND DIRECTORS, BERNARDO BAUTISTA, JAIME
representatives. CUSTODIO, OCTAVIO KATIGBAK, FRANCISCO CUSTODIO,
and JUANITA BAUTISTA OF THE RURAL BANK OF LIPA
The stockholders right of inspection of the corporations CITY, INC., petitioners, vs. HONORABLE COURT OF
books and records is based upon his ownership of shares in WHEREFORE, premises considered, the petition is DENIED. APPEALS, HONORABLE COMMISSION EN BANC,
the corporation and the necessity for self-protection. After all, The Court of Appeals Decision dated October 11, 2006 and SECURITIES AND EXCHANGE COMMISSION, HONORABLE
a shareholder has the right to be intelligently informed about Resolution dated March 6, 2007 are AFFIRMED. ENRIQUE L. FLORES, JR., in his capacity as Hearing
Officer, REYNALDO VILLANUEVA, SR, AVELINA M.
corporate affairs.13 Such right rests upon the stockholders
VILLANUEVA, CATALINO VILLANUEVA, ANDRES
underlying ownership of the corporations assets and GONZALES, AURORA LACERNA, CELSO LAYGO,
14
SO ORDERED.
property. EDGARDO REYES, ALEJANDRA TONOGAN and ELENA
USI, respondents.
Similarly, only stockholders of record are entitled to receive YNARES-SANTIAGO, J.:
dividends declared by the corporation, a right inherent in the Before us is a petition for review on certiorari assailing the
ownership of the shares.15 Decision of the Court of Appeals dated February 27, 1996, as
well as the Resolution dated March 29, 1996, in CA-G.R. SP
G.R. No. 183278 April 24, 2009 No. 38861.
Upon the death of a shareholder, the heirs do not
automatically become stockholders of the corporation and The instant controversy arose from a dispute between the
acquire the rights and privileges of the deceased as IMELDA O. COJUANGCO, PRIME HOLDINGS, INC., AND Rural Bank of Lipa City, Incorporated (hereinafter referred to
shareholder of the corporation. The stocks must be as the Bank), represented by its officers and members of its
THE ESTATE OF RAMON U. COJUANGCOPetitioners, vs.
Board of Directors, and certain stockholders of the said bank.
distributed first to the heirs in estate proceedings, and the SANDIGANBAYAN, REPUBLIC OF THE PHILIPPINES, AND The records reveal the following antecedent facts:
transfer of the stocks must be recorded in the books of the THE SHERIFF OF SANDIGANBAYAN, Respondents.
corporation. Section 63 of the Corporation Code provides that Private respondent Reynaldo Villanueva, Sr., a stockholder of
no transfer shall be valid, except as between the parties, until the Rural Bank of Lipa City, executed a Deed of
see cases on 3. Powers of Corps Assignment,1 wherein he assigned his shares, as well as those
the transfer is recorded in the books of the of eight (8) other shareholders under his control with a total
corporation.16 During such interim period, the heirs stand as of 10,467 shares, in favor of the stockholders of the Bank
the equitable owners of the stocks, the executor or G.R. Nos. 107789 & 147214 April 30, 2003 represented by its directors Bernardo Bautista, Jaime Custodio
administrator duly appointed by the court being vested with and Octavio Katigbak. Sometime thereafter, Reynaldo
REPUBLIC OF THE PHILIPPINES (PRESIDENTIAL Villanueva, Sr. and his wife, Avelina, executed an
the legal title to the stock.17 Until a settlement and division of
COMMISSION ON GOOD GOVERNMENT), petitioner, vs.
the estate is effected, the stocks of the decedent are held by Agreement2 wherein they acknowledged their indebtedness to
THE HONORABLE SANDIGANBAYAN (THIRD DIVISION) the Bank in the amount of Four Million Pesos (P4,000,000.00),
the administrator or executor.18 Consequently, during such and VICTOR AFRICA, respondents. and stipulated that said debt will be paid out of the proceeds
time, it is the administrator or executor who is entitled to AEROCOM INVESTORS AND MANAGERS, INC., BENITO of the sale of their real property described in the Agreement.
exercise the rights of the deceased as stockholder. NIETO, CARLOS NIETO, MANUEL NIETO III, RAMON
NIETO, ROSARIO ARELLANO, VICTORIA LEGARDA, At a meeting of the Board of Directors of the Bank on
ANGELA LOBREGAT, MA. RITA DE LOS REYES, CARMEN November 15, 1993, the Villanueva spouses assured the
Thus, even if petitioner presents sufficient evidence in this TUAZON and RAFAEL VALDEZ, intervenors. Board that their debt would be paid on or before December
case to establish that he is the son of Carlos L. Puno, he 31 of that same year; otherwise, the Bank would be entitled
x-----------------------------x to liquidate their shareholdings, including those under their
would still not be allowed to inspect respondents books and
be entitled to receive dividends from respondent, absent any see cases on 6. Voting control. In such an event, should the proceeds of the sale of
said shares fail to satisfy in full the obligation, the unpaid
showing in its transfer book that some of the shares owned by
balance shall be secured by other collateral sufficient
Carlos L. Puno were transferred to him. This would only be therefor.
possible if petitioner has been recognized as an heir and has
When the Villanueva spouses failed to settle their obligation
participated in the settlement of the estate of the deceased.
to the Bank on the due date, the Board sent them a
letter3 demanding: (1) the surrender of all the stock
Corollary to this is the doctrine that a determination of certificates issued to them; and (2) the delivery of sufficient
whether a person, claiming proprietary rights over the estate collateral to secure the balance of their debt amounting to
P3,346,898.54. The Villanuevas ignored the bank's demands,
of a deceased person, is an heir of the deceased must be
whereupon their shares of stock were converted into Treasury
ventilated in a special proceeding instituted precisely for the Stocks. Later, the Villanuevas, through their counsel,
purpose of settling the estate of the latter. The status of an questioned the legality of the conversion of their shares. 4
illegitimate child who claims to be an heir to a decedents
On January 15, 1994, the stockholders of the Bank met to
estate cannot be adjudicated in an ordinary civil action, as in
elect the new directors and set of officers for the year 1994.
a case for the recovery of property. 19 The doctrine applies to The Villanuevas were not notified of said meeting. In a letter
the instant case, which is one for specific performance to G.R. No. 124535 September 28, 2001 dated January 19, 1994, Atty. Amado Ignacio, counsel for the

CORPORATION LAW: 7. captial structure Page 149 of 201

Villanueva spouses, questioned the legality of the said voluntarily or involuntarily, they were still stockholders SCRA 492, citing Nava v. Peers Marketing Corp., the non-
stockholders' meeting and the validity of all the proceedings entitled to notice of the annual stockholders' meeting was delivery of the stock certificate does not make the transfer
therein. In reply, the new set of officers of the Bank informed sustained by the SEC. Accordingly, a writ of preliminary of the shares of stock effective. For an effective transfer of
Atty. Ignacio that the Villanuevas were no longer entitled to injunction was issued enjoining the petitioners from acting as stock, the mode of transfer as prescribed by law must be
notice of the said meeting since they had relinquished their directors and officers of the bank.9 followed.
rights as stockholders in favor of the Bank.
Thereafter, petitioners filed an urgent motion to quash the We likewise find that the provision of the Corporation Code
Consequently, the Villanueva spouses filed with the Securities writ of preliminary injunction,10 challenging the propriety of cited by the herein petitioner, particularly Section 83
and Exchange Commission (SEC), a petition for annulment of the said writ considering that they had not yet received a thereof, to support the claim that the private respondents
the stockholders' meeting and election of directors and copy of the order granting the application for the writ of are no longer stockholders of the Bank is misplaced. The
officers on January 15, 1994, with damages and prayer for preliminary injunction. said law applies to acquisition of shares of stock by the
preliminary injunction5 , docketed as SEC Case No. 02-94- corporation in the exercise of a stockholder's right of
With the impending 1995 annual stockholders' meeting only
4683. Joining them as co-petitioners were Catalino Villanueva, appraisal or when the said stockholder opts to dissent on
nine (9) days away, the Villanuevas filed an Omnibus
Andres Gonzales, Aurora Lacerna, Celso Laygo, Edgardo a specific corporate act in those instances provided by law
Motion11 praying that the said meeting and election of officers
Reyes, Alejandro Tonogan, and Elena Usi. Named respondents and demands the payment of the fair value of his shares.
scheduled on January 14, 1995 be suspended or held in
were the newly-elected officers and directors of the Rural It does not contemplate a "transfer" whereby the
abeyance, and that the 1993 Board of Directors be allowed, in
Bank, namely: Bernardo Bautista, Jaime Custodio, Octavio stockholder, in the exercise of his right to dispose of his
the meantime, to act as such. One (1) day before the
Katigbak, Francisco Custodio and Juanita Bautista. shares (jus disponendi) sells or assigns his stockholdings
scheduled stockholders meeting, the SEC Hearing Officer
in favor of another person where the provisions of Section
The Villanuevas' main contention was that the stockholders' granted the Omnibus Motion by issuing a temporary
63 of the same Code should be complied with.
meeting and election of officers and directors held on January restraining order preventing petitioners from holding the
15, 1994 were invalid because: (1) they were conducted in stockholders meeting and electing the board of directors and The hearing officer, therefore, had a basis in issuing the
violation of the by-laws of the Rural Bank; (2) they were not officers of the Bank.12 questioned orders since the private respondents' rights as
given due notice of said meeting and election stockholders may be prejudiced should the writ of
A petition for Certiorari and Annulment with Damages was
notwithstanding the fact that they had not waived their right injunction not be issued. The private respondents are
filed by the Rural Bank, its directors and officers before the
to notice; (3) they were deprived of their right to vote despite presumably stockholders of the Bank in view of the fact
SEC en banc,13 naming as respondents therein SEC Hearing
their being holders of common stock with corresponding that they have in their possession the stock certificates
Officer Enrique L. Flores, Jr., and the Villanuevas, erstwhile
voting rights; (4) their names were irregularly excluded from evidencing their stockholdings. Until proven otherwise,
petitioners in SEC Case No. 02-94-4683. The said petition
the list of stockholders; and (5) the candidacy of petitioner they remain to be such and the hearing officer, being the
alleged that the orders dated December 16, 1994 and January
Avelina Villanueva for directorship was arbitrarily disregarded one directly confronted with the facts and pieces of
13, 1995, which allowed the issuance of the writ of
by respondent Bernardo Bautista and company during the evidence in the case, may issue such orders and
preliminary injunction and prevented the bank from holding
said meeting resolutions which may be necessary or reasonable relative
its 1995 annual stockholders' meeting, respectively, were
thereto to protect their rights and interest in the
On February 16, 1994, the SEC issued a temporary restraining issued by the SEC Hearing Officer with grave abuse of
meantime that the said case is still pending trial on the
order enjoining the respondents, petitioners herein, from discretion amounting to lack or excess of jurisdiction.
merits.
acting as directors and officers of the Bank, and from Corollarily, the Bank, its directors and its officers questioned
performing their duties and functions as such. 6 the SEC Hearing Officer's right to restrain the stockholders' A subsequent motion for reconsideration 15 was likewise
meeting and election of officers and directors considering that denied by the SEC en banc in a Resolution16 dated September
In their joint Answer, 7 the respondents therein raised the
the Villanueva spouses and the other petitioners in SEC Case 29, 1995.
following defenses:
No. 02-94-4683 were no longer stockholders with voting
A petition for review was thus filed before the Court of
1) The petitioners have no legal capacity to sue; rights, having already assigned all their shares to the Bank.
Appeals, which was docketed as CA-G.R. SP No. 38861,
2) The petition states no cause of action; In their Comment/Opposition, the Villanuevas and other assailing the Order dated June 7, 1995 and the Resolution
private respondents argued that the filing of the petition for dated September 29, 1995 of the SEC en banc in SEC EB No.
3) The complaint is insufficient; certiorari was premature and there was no grave abuse of 440. The ultimate issue raised before the Court of Appeals
4) The petitioners' claims had already been paid, waived, discretion on the part of the SEC Hearing Officer, nor did he was whether or not the SEC en banc erred in finding:
abandoned, or otherwise extinguished; act without or in excess of his jurisdiction.
1. That the Hon. Hearing Officer in SEC Case No. 02-94-
5) The petitioners are estopped from challenging the On June 7, 1995, the SEC en banc denied the petition for 4683 did not commit any grave abuse of discretion that
conversion of their shares. certiorari in an Order,14 which stated: would warrant the filing of a petition for certiorari;

Petitioners, respondents therein, thus moved for the lifting of In the case now before us, petitioners could not show any 2. That the private respondents are still stockholders of
the temporary restraining order and the dismissal of the proof of despotic or arbitrary exercise of discretion the subject bank and further stated that "it does not
petition for lack of merit, and for the upholding of the validity committed by the hearing officer in issuing the assailed contemplate a transfer" whereby the stockholders, in the
of the stockholders' meeting and election of directors and orders save and except the allegation that the private exercise of his right to dispose of his shares (Jus
officers held on January 15, 1994. By way of counterclaim, respondents have already transferred their stockholdings Disponendi) sells or assigns his stockholdings in favor of
petitioners prayed for actual, moral and exemplary damages. in favor of the stockholders of the Bank. This, however, is another person where the provisions of Sec. 63 of the
the very issue of the controversy in the case a quo and same Code should be complied with; and
On April 6, 1994, the Villanuevas' application for the issuance which, to our mind, should rightfully be litigated and
of a writ of preliminary injunction was denied by the SEC 3. That the private respondents are presumably
proven before the hearing officer. This is so because of the
Hearing Officer on the ground of lack of sufficient basis for the stockholders of the bank in view of the fact that they have
undisputed fact the (sic) private respondents are still in
issuance thereof. However, a motion for reconsideration 8 was in their possession the stock certificates evidencing their
possession of the stock certificates evidencing their
granted on December 16, 1994, upon finding that since the stockholdings.
stockholdings and as held by the Supreme Court
Villanuevas' have not disposed of their shares, whether in Embassy Farms, Inc. v. Court of Appeals, et al., 188

CORPORATION LAW: 7. captial structure Page 150 of 201

On February 27, 1996, the Court of Appeals rendered the may be transferred by delivery of the certificate or There being no showing that any of the requisites mandated
assailed Decision17 dismissing the petition for review for lack certificates indorsed by the owner or his attorney-in-fact by law23 was complied with, the SEC Hearing Officer did not
of merit. The appellate court found that: or other person legally authorized to make the transfer. abuse his discretion in granting the issuance of the
No transfer, however, shall be valid, except as between preliminary injunction prayed for by petitioners in SEC Case
The public respondent is correct in holding that the
the parties, until the transfer is recorded in the books of No. 02-94-4683 (herein private respondents). Accordingly, the
Hearing Officer did not commit grave abuse of discretion.
the corporation so as to show the names of the parties to order of the SEC en banc affirming the ruling of the SEC
The officer, in exercising his judicial functions, did not
the transaction, the date of the transfer, the number of Hearing Officer, and the Court of Appeals decision upholding
exercise his judgment in a capricious, whimsical, arbitrary
the certificate or certificates and the number of shares the SEC en banc order, are valid and in accordance with law
or despotic manner. The questioned Orders issued by the
transferred. and jurisprudence, thus warranting the denial of the instant
Hearing Officer were based on pertinent law and the facts
petition for review.
of the case. No shares of stock against which the corporation holds
any unpaid claim shall be transferable in the books of the To enable the shareholders of the Rural Bank of Lipa City, Inc.
Section 63 of the Corporation Code states: "x x x Shares of
corporation. (Emphasis ours) to meet and elect their directors, the temporary restraining
stock so issued are personal property and may be
order issued by the SEC Hearing Officer on January 13, 1995
transferred by delivery of the certificate or certificates Petitioners argue that by virtue of the Deed of
must be lifted. However, private respondents shall be notified
indorsed by the owner x x x. No transfer, however, shall Assignment,19 private respondents had relinquished to them
of the meeting and be allowed to exercise their rights as
be valid, except as between the parties, until the transfer any and all rights they may have had as stockholders of the
stockholders thereat.
is recorded in the books of the corporation so as to show Bank. While it may be true that there was an assignment of
the names of the parties to the transaction, the date of private respondents' shares to the petitioners, said While this case was pending, Republic Act No. 8799 24 was
the transfer, the number of the certificate or certificates assignment was not sufficient to effect the transfer of shares enacted, transferring to the courts of general jurisdiction or
and the number of shares transferred." since there was no endorsement of the certificates of stock by the appropriate Regional Trial Court the SEC's jurisdiction over
the owners, their attorneys-in-fact or any other person legally all cases enumerated under Section 5 of Presidential Decree
In the case at bench, when private respondents executed
authorized to make the transfer. Moreover, petitioners admit No. 902-A.25 One of those cases enumerated is any
a deed of assignment of their shares of stocks in favor of
that the assignment of shares was not coupled with delivery, controversy "arising out of intra-corporate or partnership
the Stockholders of the Rural Bank of Lipa City,
the absence of which is a fatal defect. The rule is that the relations, between and among stockholders, members, or
represented by Bernardo Bautista, Jaime Custodio and
delivery of the stock certificate duly endorsed by the owner is associates, between any and/or all of them and the
Octavio Katigbak, title to such shares will not be effective
the operative act of transfer of shares from the lawful owner corporation, partnership or association of which they are
unless the duly indorsed certificate of stock is delivered to
to the transferee.20 Thus, title may be vested in the transferee stockholders, members or associates, respectively; and
them. For an effective transfer of shares of stock, the
only by delivery of the duly indorsed certificate of stock. 21 between such corporation, partnership or association and the
mode and manner of transfer as prescribed by law should
state insofar as it concerns their individual franchise or right
be followed. Private respondents are still presumed to be We have uniformly held that for a valid transfer of stocks,
to exist as such entity." The instant controversy clearly falls
the owners of the shares and to be stockholders of the there must be strict compliance with the mode of transfer
under this category of cases which are now cognizable by the
Rural Bank. prescribed by law.22 The requirements are: (a) There must be
Regional Trial Court.
delivery of the stock certificate: (b) The certificate must be
We find no reversible error in the questioned orders.
endorsed by the owner or his attorney-in-fact or other persons Pursuant to Section 5.2 of R.A. No. 8799, this Court
Petitioners' motion for reconsideration was likewise denied by legally authorized to make the transfer; and (c) To be valid designated specific branches of the Regional Trial Courts to
the Court of Appeals in an Order18 dated March 29, 1996. against third parties, the transfer must be recorded in the try and decide cases formerly cognizable by the SEC. For the
books of the corporation. As it is, compliance with any of Fourth Judicial Region, specifically in the Province of
Hence, the instant petition for review seeking to annul the these requisites has not been clearly and sufficiently shown. Batangas, the RTC of Batangas City, Branch 32 is the
Court of Appeals' decision dated February 27, 1996 and the designated court.26
resolution dated March 29, 1996. In particular, the decision is It may be argued that despite non-compliance with the
challenged for its ruling that notwithstanding the execution of requisite endorsement and delivery, the assignment was valid WHEREFORE, in view of all the foregoing, the instant petition
the deed of assignment in favor of the petitioners, transfer of between the parties, meaning the private respondents as for review on certiorari is DENIED. The Decision and
title to such shares is ineffective until and unless the duly assignors and the petitioners as assignees. While the Resolution of the Court of Appeals in CA-G.R. SP No. 38861
indorsed certificate of stock is delivered to them. Moreover, assignment may be valid and binding on the petitioners and are hereby AFFIRMED. The case is ordered REMANDED to the
petitioners faulted the Court of Appeals for not taking into private respondents, it does not necessarily make the transfer Regional Trial Court of Batangas City, Branch 32, for proper
consideration the acts of disloyalty committed by the effective. Consequently, the petitioners, as mere assignees, disposition. The temporary restraining order issued by the
Villanueva spouses against the Bank. cannot enjoy the status of a stockholder, cannot vote nor be SEC Hearing Officer dated January 13, 1995 is ordered LIFTED.
voted for, and will not be entitled to dividends, insofar as the
We find no merit in the instant petition. SO ORDERED.
assigned shares are concerned Parenthetically, the private
The Court of Appeals did not err or abuse its discretion in respondents cannot, as yet, be deprived of their rights as
affirming the order of the SEC en banc, which in turn upheld stockholders, until and unless the issue of ownership and
the order of the SEC Hearing Officer, for the said rulings were transfer of the shares in question is resolved with finality.
in accordance with law and jurisprudence.
The Corporation Code specifically provides:
SECTION 63. Certificate of stock and transfer of shares.
The capital stock of stock corporations shall be divided
into shares for which certificates signed by the president
or vice president, countersigned by the secretary or
assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-
laws. Shares of stocks so issued are personal property and

CORPORATION LAW: 7. captial structure Page 151 of 201

G.R. No. 137934 August 10, 2001 forms covering the sale, indicating no taxable gain on the
same.3
BATANGAS LAGUNA TAYABAS BUS COMPANY, INC.,
DOLORES A. POTENCIANO, MAX JOSEPH A. Furthermore, the buyer guaranteed that it shall take over the
POTENCIANO, MERCEDELIN A. POTENCIANO, and management and operations of BLTB but shall immediately
DELFIN C. YORRO, petitioners, vs. BENJAMIN M. BITANGA, surrender the same to the sellers in case it fails to pay the
RENATO L. LEVERIZA, LAUREANO A. SIY, JAMES A. balance of the purchase price on November 26, 1997. 4
OLAYVAR, EDUARDO A. AZUCENA, MONINA GRACE S.
LIM, and GEMMA M. SANTOS, respondents.
Barely a month after the Agreement was executed, on
November 21, 1997, at a meeting of the stockholders of BLTB,
x---------------------------------------------------------x Benjamin Bitanga and Monina Grace Lim were elected as
directors of the corporation, replacing Dolores and Max Joseph
Potenciano. Subsequently, on November 28, 1997, another
YNARES-SANTIAGO, J.:
stockholders' meeting was held, wherein Laureano A. Siy and
Renato L. Leveriza were elected as directors, replacing
These cases involve the Batangas Laguna Tayabas Bus Candido Potenciano and Delfin Yorro who had both resigned
Company, Inc., which has been owned by four generations of as such. At the same meeting, the Board of Directors of BLTB
the Potenciano family. Immediately prior to the events leading elected the following officers: Benjamin Bitanga as Chairman
to this controversy, the Potencianos owned 87.5% of the of the Board, President and Chief Executive Officer; Monina
outstanding capital stock of BLTB.1 Grace Lim as Vice President for Finance and Supply and
Treasurer; James Olayvar as Vice President for Operations and
On October 28, 1997, Dolores A. Potenciano, Max Joseph A. Maintenance: Eduardo Azucena as Vice President for
Potenciano, Mercedelin A. Potenciano, Delfin C. Yorro, and Administration; Evelio Custodia as Corporate Secretary; and
5
Maya Industries, Inc., entered into a Sale and Purchase Gemma Santos as Assistant Corporate Secretary.
2
Agreement, whereby they sold to BMB Property Holdings,
Inc., represented by its President, Benjamin Bitanga, their During a meeting of the Board of Directors on April 14, 1998,
21,071,114 shares of stock in BLTB. The said shares the newly elected directors of BLTB scheduled the annual
represented 47.98% of the total outstanding capital stock of stockholders' meeting on May 19, 1998, to be held at the
BLTB. principal office of BLTB in San Pablo, Laguna. Before the
scheduled meeting, on May 16, 1998, Michael Potenciano
The purchase price for the shares of stock was wrote Benjamin Bitanga, requesting for a postponement of
P72,076,425.00, the downpayment of which, in the sum of the stockholders' meeting due to the absence of a thirty-day
P44,354,723.00, was made payable upon signing of advance notice. However, there was no response from
Agreement, while the balance of P27,721,702.00 was payable Bitanga on whether or not the request for postponement was
on November 26, 1997. The contracting parties stipulated favorably acted upon.
that the downpayment was conditioned upon receipt by the
buyer of certain documents upon signing of the Agreement, On the scheduled date of the meeting, May 19, 1998, a notice
namely, the Secretary's Certificate stating that the Board of of postponement of the stockholders' meeting was published
Directors of Maya Industries, Inc. authorized the sale of its in the Manila Bulletin. Inasmuch as there was no notice of
shares in BLTB and the execution of the Agreement, and postponement prior to that, a total of two hundred eighty six
designating Dolores A. Potenciano as its Attorney-in-Fact; the stockholders, representing 87% of the shares of stock of BLTB,
Special Power of Attorney executed by each of the sellers in arrived and attended the meeting. The majority of the
favor of Dolores A. Potenciano for purposes of the Agreement; stockholders present rejected the postponement and voted to
the undated written resignation letters of the Directors of proceed with the meeting. The Potenciano group was re-
BLTB, except Henry John A. Potenciano, Michael A. Potericiano elected to the Board of Directors,6 and a new set of officers
and Candido A. Potenciano); a revocable proxy to vote the was thereafter elected.7
subject shares made by the sellers in favor of the buyer; a
Declaration of Trust made by the sellers in favor of the buyer
However, the Bitanga group refused to relinquish their
acknowledging that the subject shares shall be held in trust
positions and continued to act as directors and officers of
by the sellers for the buyer pending their transfer to the
BLTB. The conflict between the Potencianos and the Bitanga
latter's name; and the duly executed capital gains tax return

CORPORATION LAW: 7. captial structure Page 152 of 201

group escalated to levels of unrest and even violence among followed by a Supplemental Petition on August 10, 1998. The NATURE, IS AN ANCILLARY REMEDY. THE MAIN PETITION
laborers and employees of the bus company. petition was docketed as CA-G.R. SP No. 48374. REMAINS PENDING BEFORE THE SEC FOR THE RESOLUTION
OF ITS MERITS.17
On May 21, 1998, the Bitanga group filed with the Securities Meanwhile, on July 29, 1998, the SEC En Banc issued a writ of
and Exchange Commission a Complaint for Damages and preliminary injunction against the Bitanga group, after the Another petition for review, docketed as G.R. No. 137936, was
Injunction, docketed as SEC Case No. 05-98-5973. 8 Their Potencianos posted the required bond of P20,000,000.00. 14 filed by petitioners Danilo L. Concepcion, Fe Eloisa Gloria and
prayer for the issuance of a temporary restraining order was, Edijer A. Martinez, in their capacities as Associate
however, denied at the ex-parte summary hearing conducted Commissioners of the Securities and Exchange Commission,
On November 23, 1998, the Court of Appeals rendered the
by SEC Chairman Perfecto Yasay, Jr. Batangas Laguna Tayabas Bus Company, Inc., Dolores A.
now assailed Decision, reversing the assailed Orders of the
Potenciano, Max Joseph A. Potenciano, Michael A. Potenciano,
SEC En Banc and reinstating the Order of the Hearing Panel
Mercedelin A. Potenciano, Candido A. Potenciano, Henry John
Likewise, the Potenciano group filed on May 25, 1998, a ordered dated June 17, 1998.15 The Court of Appeals denied
A. Potenciano, Delfin C. Yorro, Reynaldo Magtibay, Lorna
Complaint for Injunction and Damages with Preliminary the Motions for Reconsideration in a Resolution dated March
Navarro and Restituto Baylon based on the following grounds:
Injunction and Temporary Restraining Order with the SEC, 25, 1999.16
9
docketed as SEC Case No. 05-98-5978. SEC Chairman
Perfecto Yasay, Jr. issued a temporary restraining order I THE COURT OF APPEALS COMMITTED GRAVE ABUSE
Petitioners Batangas Laguna Tayabas Bus Company, Inc.,
enjoining the Bitanga group from acting as officers and OF DISCRETION IN HOLDING THAT THE JULY 21, 1998 ORDER
Dolores A. Potenciano, Max Joseph A. Potenciano, Mercedelin
directors of BLTB. OF THE SEC IN SEC EN BANC CASE NO. 611 RESOLVED THE
A. Potenciano and Delfin C. Yorro filed the instant petition for
MAIN CASE.
review, docketed as G.R. No. 137934, against respondents
On June 8, 1998, the Bitanga group filed another complaint Benjamin M. Bitanga, Renato L. Leveriza, Laureano A. Siy,
with application for a writ of preliminary injunction and prayer James A. Olayvar, Eduardo A. Azucena, Monina Grace S. Lim II THE COURT OF APPEALS COMMITTED GRAVE ABUSE
for temporary restraining order, seeking to annul the May 19, and Gemma M. Santos. Petitioners contend that OF DISCRETION IN HOLDING THAT THE PRIVATE
1998 stockholders' meeting. The complaint was docketed as RESPONDENTS WERE DENIED THEIR RIGHT TO DUE PROCESS.
SEC Case No. 06-98-5994.
I WITH ALL DUE RESPECT, THE HONORABLE COURT
OF APPEALS GRAVELY ERRED WHEN IT DISREGARDED, III THE COURT OF APPEALS GRAVELY ERRED IN NOT
A Hearing Panel of the SEC conducted joint hearings of SEC CONTRARY TO WELL-ESTABLISHED JURISPRUDENCE, THE HOLDING THAT THE SEC ORDER OF JULY 21, 1998 IS VALID
Cases Nos. 05-98-5973 and 05-98-5978. On June 17, 1998, FACTUAL FINDINGS OF THE SEC WHICH IS A SPECIALIZED AND IN DISREGARDING THE FACTUAL FINDINGS OF THE SEC.18
the SEC Hearing Panel granted the Bitanga group's QUASI-JUDICIAL AGENCY, AND INVALIDATED THE PRELIMINARY
application for a writ of preliminary injunction upon the INJUNCTION ISSUED BY THE LATTER. THE COURT OF APPEALS
The two petitions for review were consolidated.
posting of a bond in the amount of P20,000,000.00. 10 It COMMITTED REVERSIBLE ERROR BECAUSE THERE IS NO
declared that the May 19, 1998 stockholders' meeting was SHOWING THAT THE SEC MADE ANY ERROR IN EITHER
void on the grounds that, first, Michael Potenciano had JURISDICTION OR JUDGMENT. We find that the petitions are impressed with merit. Contrary
himself asked for its postponement due to improper notice; to the findings of the Court of Appeals, the Bitanga group was
and, second, there was no quorum, since BMB Holdings, Inc., not deprived of due process when the SEC En Banc issued its
II WITH ALL DUE RESPECT, THE HONORABLE COURT
represented by the Bitanga group, which then owned 50.26% Order dated July 21, 1998.
OF APPEALS GRAVELY ERRED IN RULING THAT RESPONDENTS
of BLTB's shares having purchased the same from the
WERE DEPRIVED OF THEIR RIGHT TO DUE PROCESS BECAUSE:
Potenciano group, was not present at the said meeting. The
(1) A FULL-BLOWN HEARING WAS CONDUCTED ON 6 JULY Due process, in essence, is simply an opportunity to be
Hearing Panel further held that the Bitanga Board remains the 19
1998 WHERE THE PARTIES FULLY ARGUED THEIR POSITIONS heard. It cannot be denied that in the case at bar, a hearing
legitimate Board in a hold-over capacity.
AND WERE HEARD BY THE SEC EN BANC; (2) THE LAW DOES on the prayer for injunction was held on July 9, 1998. Both
NOT REQUIRE A SEPARATE HEARING FOR THE FIXING OF THE parties were represented at the said hearing, and the Bitanga
The Potenciano group filed a petition for certiorari 11 with the AMOUNT OF THE INJUNCTION BOND; AND (3) IN ANY CASE, group presented its arguments in opposition to the injunctive
SEC En Banc on June 29, 1998, seeking a writ of preliminary THE ALLEGED FAILURE OF THE SEC TO FIX THE AMOUNT OF relief. This alone negates any proposition that the Bitanga
injunction to restrain the implementation of the Hearing THE INJUNCTION BOND IN ITS 21 JULY 1998 ORDER AND group was denied due process.
Panel's assailed Order. SUBSEQUENT FIXING THEREOF IN ITS 26 JULY 1998 ORDER IS
NOT A FATAL ERROR. In applications for preliminary injunction, the requirement of
On July 21, 1998, the SEC En Banc set aside the June 17, 1998 hearing and prior notice before injunction may issue has been
Order of the Hearing Panel and issued the writ of preliminary III WITH ALL DUE RESPECT, THE HONORABLE COURT relaxed to the point that not all petitions for preliminary
injunction prayed for.12 OF APPEALS GRAVELY ERRED IN RULING THAT THE 21 JULY injunction must undergo a trial-type hearing, it being
1998 ORDER OF THE SEC RESOLVED THE MAIN CASE. THE hornbook doctrine that a formal or trial-type is not at all times
SEC, ACTING WITHIN THE BOUNDS OF ITS JURISDICTION, and in all instances essential to due process. Due process
The Bitanga group immediately filed a petition for
MERELY MADE A PRELIMINARY EVALUATION TO RESOLVE THE simply means giving every contending party the opportunity
certiorari13 with the Court of Appeals on July 22, 1998,
PRAYER FOR PRELIMINARY INJUNCTION, WHICH, BY ITS VERY to be heard and the court to consider every piece of evidence

CORPORATION LAW: 7. captial structure Page 153 of 201

presented in their favor. Accordingly, this Court has recently In the case at bar, it cannot be said that the July 21, 1998 books.29 Until the transfer is registered, the transferee is not a
rejected a claim of denial of due process where such claimant Order of the SEC En Banc terminated the Potenciano group's stockholder but an outsider.30
was given the opportunity to be heard, having submitted his petition in its entirety. As mentioned above, there remain
counter-affidavit and memorandum in support of his several issues which have yet to be resolved and adjudicated
We find no error either in jurisdiction or judgment on the part
position.20 upon by the SEC.
of the SEC En Banc, since its conclusions of law were
anchored on established principles and jurisprudence.
Much ado has been made over the fact that the injunction The next issue whether or not the SEC En Banc committed
order was issued with "deliberate speed" even before the error in jurisdiction as to entitle the Bitanga group to the
Indeed, nowhere in the Bitanga group's petition for certiorari
Bitanga group filed its Comment to the Potenciano group's extraordinary remedy of certiorari should likewise be
before the Court of Appeals was it shown that the SEC En
Petition. However, the said Comment is rather directed to the resolved in the negative.
Banc committed such patent, gross and prejudicial errors of
petition of the Potenciano group; it is not essential to the
law or fact, or a capricious disregard of settled law and
resolution of the prayer for injunction. The Rules of Court do
In the July 21, 1998 Order of the SEC En Banc, the validity of jurisprudence, as to amount to a grave abuse of discretion or
not require that issues be joined before preliminary injunction
the BLTB stockholders' meeting held on May 19, 1998 was lack of jurisdiction on its part. Absent such showing, neither
may issue. Preliminary injunction may be granted at any
sustained, in light of the time-honored doctrine in corporation the Court of Appeals nor this Court should engage in a review
stage of an action or proceeding prior to the judgment or final
law that a transfer of shares is not valid unless recorded in of the facts found nor even of the law as interpreted or
order, ordering a party or a court, agency or a person to
the books of the corporation. The SEC En Banc went on to rule applied by the SEC En Banc, for the writ of certiorari is an
refrain from a particular act or acts. For as long as the
that extraordinary remedy, and certiorari jurisdiction is not to be
requisites for its issuance are present in the case, the
equated with appellate jurisdiction. The main thrust of a
injunctive writ was properly issued.21
petition for certiorari under Rule 65 of the Rules of Court is
It is not disputed that the transfer of the shares of the
only the correction of errors of jurisdiction including the
group of Dolores Potenciano to the Bitanga group has not
Respondents argue that the SEC En Banc's July 21, 1998 commission of grave abuse of discretion amounting to lack or
yet been recorded in the books of the corporation. Hence,
Order amounted to a ruling on the main case. We disagree. excess of jurisdiction. However, for this Court or the Court of
the group of Dolores Potenciano, in whose names those
Appeals to properly exercise the power of judicial review over
shares still stand, were the ones entitled to attend and
a decision of an administrative agency, such as the SEC, it
A reading of the said Order readily reveals that it merely vote at the stockholders' meeting of the BLTB on 19 May
must first be shown that the tribunal, board or officer
delved on the propriety of granting a writ of preliminary 1998. This being the case, the Hearing Panel committed
exercising judicial or quasi judicial functions has indeed acted
injunction against the Bitanga group. The main case is far grave abuse of discretion in holding otherwise and in
25 without or in excess of its or his jurisdiction, and that there is
from being disposed of as there are several issues still concluding that there was no quorum in said meeting.
no appeal, or any plain, speedy and adequate remedy in the
awaiting resolution, including, whether or not the Bitanga
ordinary course of law. In the absence of any showing of lack
group has taken funds and assets of BLTB and if so, in what
Based on the foregoing premises, the SEC En Banc issued a of jurisdiction or grave abuse tantamount to lack or excess of
amount and consisting of what assets; and whether or not the
writ of preliminary injunction against the Bitanga group. In so jurisdiction, judicial review may not be had over an
Potenciano group is entitled to the payment of exemplary
ruling, the SEC En Banc merely exercised its wisdom and administrative agency's decision.31 We have gone over the
damages, attorney's fees and costs of suit. There is no merit,
competence as a specialized administrative agency records of the case at bar and we see no cogent reason to
therefore, in the statement that the SEC En Banc's ruling is a
specifically tasked to deal with corporate law issues. We are in hold that the SEC En Banc had abused its discretion.
prejudgment of the main case, as several matters need yet to
full accord with the SEC En Banc on this matter. Indeed, until
be addressed.
registration is accomplished, the transfer, though valid
Moreover, it is a fundamental rule that factual findings of
between the parties, cannot be effective as against the
quasi-judicial agencies like the SEC, if supported by
The fact that the aforesaid Order was merely provisional in corporation. Thus, the unrecorded transferee, the Bitanga
substantial evidence, are generally accorded not only great
character may be gleaned from the very nature of the group in this case, cannot vote nor be voted for. The purpose
respect but even finality, and are binding upon this Court,
injunctive writ granted. Generally, injunction is a preservative of registration, therefore, is two-fold: to enable the transferee
unless petitioner is able to show that it had arbitrarily
remedy for the protection of one's substantive right or to exercise all the rights of a stockholder, including the right
disregarded evidence before it or had misapprehended
interest. It is not a cause of action in itself but merely a to vote and to be voted for, and to inform the corporation of
evidence to such an extent as to compel a contrary
provisional remedy, an adjunct to a main suit. 22 Thus, it has any change in share ownership so that it can ascertain the
conclusion if such evidence had been properly appreciated.
been held that an order granting a writ of preliminary persons entitled to the rights and subject to the liabilities of a
This rule is rooted in the doctrine that this Court is not a trier
injunction is an interlocutory order.23 As distinguished from a stockholder.26 Until challenged in a proper proceeding, a
of facts, as well as in the respect to be accorded the
final order which disposes of the subject matter in its entirety stockholder of record has a right to participate in any
determinations made by administrative bodies in general on
or terminates a particular proceeding or action, leaving meeting;27 his vote can be properly counted to determine
matters falling within their respective fields of specialization
nothing else to be done but to enforce by execution what has whether a stockholders' resolution was approved, despite the
or expertise.32
been determined by the court, an interlocutory order does not claim of the alleged transferee. 28 On the other hand, a person
dispose of a case completely, but leaves something more to who has purchased stock, and who desires to be recognized
be adjudicated upon.24 as a stockholder for the purpose of voting, must secure such In light of all the foregoing, we find that the Court of Appeals
a standing by having the transfer recorded on the corporate erred in granting the extraordinary remedy of certiorari to the
Bitanga group. It is elementary that a special civil action for

CORPORATION LAW: 7. captial structure Page 154 of 201

certiorari is limited to correcting errors of jurisdiction or grave never transferred her 63,000 shares to Telectronics but had
abuse of discretion.33 None of these have been found to lost the five stock certificates representing those shares.
obtain in the petition before the Court of Appeals. What is This triggered off the series of intertwined actions between
more, it is also settled that the issuance of the writ of the protagonists, all centered on the question of jurisdiction
preliminary injunction as an ancillary or preventive remedy to over the dispute, which were to culminate in the filing of the
secure the rights of a party in a pending case is entirely two cases at bar.
within the discretion of the court taking cognizance of the The Bragas assert that the regular civil court has original and
case, the only limitation being that this discretion should be exclusive jurisdiction as against the Securities and Exchange
exercised based upon the grounds and in the manner Commission, while the Abejos claim the contrary. A summary
G.R. No. L-63558 May 19, 1987 of the actions resorted to by the parties follows:
provided by law. The exercise of sound judicial discretion by
the lower court in injunctive matters should not be interfered SPOUSES JOSE ABEJO AND AURORA ABEJO, TELEC. A. ABEJOS ACTIONS IN SEC
with except in cases of manifest abuse.34 TRONIC SYSTEMS, INC., petitioners, vs. HON. RAFAEL DE
LA CRUZ, JUDGE OF THE REGIONAL TRIAL COURT 1. The Abejos and Telectronics and the latter's nominees, as
(NATIONAL CAPITAL JUDICIAL REGION, BRANCH CLX- new majority shareholders, filed SEC Cases Nos. 02379 and
WHEREFORE, in view of all the foregoing, the instant petitions PASIG), SPOUSES AGAPITO BRAGA AND VIRGINIA 02395 against the Bragas on December 17, 1982 and
for review are GRANTED. The Decision of the Court of Appeals BRAGA, VIRGILIO BRAGA AND NORBERTO February 14, 1983, respectively.
dated November 23, 1998 in CA-G.R. SP No. 48374 and its BRAGA, respondents. 2. In SEC Case No. 02379, they prayed for mandamus from
resolution dated March 25, 1999 are SET ASIDE. The Orders of No. L-68450-51 May 19, 1987 the SEC ordering Norberto Braga, as corporate secretary of
the SEC En Banc dated July 21, 1998 and July 27, 1998 in SEC Pocket Bell to register in their names the transfer and sale of
POCKET BELL PHILIPPINES, INC., AGAPITO T. BRAGA, the aforesaid 196,000 Pocket Bell shares (of the Abejos 1 and
Case No. EB 611 are ordered REINSTATED. VIRGILIO T. BRAGA, NORBERTO BRAGA, and VIRGINIA Virginia Braga 2, cancel the surrendered certificates as duly
BRAGA, petitioners, [Link] HONORABLE SECURITIES AND endorsed and to issue new certificates in their names.
SO ORDERED. EXCHANGE COMMISSION, TELECTRONIC SYSTEMS, INC.,
JOSE ABEJO, JOSE LUIS SANTIAGO, SIMEON A. 3. In SEC Case No.02395, they prayed for injunction and a
MIRAVITE, SR., ANDRES T. VELARDE AND L. QUIDATO temporary restraining order that the SEC enjoin the Bragas
BANDOLINO, respondents. from disbursing or disposing funds and assets of Pocket Bell
and from performing such other acts pertaining to the
functions of corporate officers.
TEEHANKEE, C.J.: 4. Pocket Bell's corporate secretary, Norberto Braga, filed a
These two cases, jointly heard, are jointly herein decided. Motion to Dismiss the mandamus case (SEC Case No. 02379)
They involve the question of who, between the Regional Trial contending that the SEC has no jurisdiction over the nature of
Court and the Securities and Exchange Commission (SEC), the action since it does not involve an intracorporate
has original and exclusive jurisdiction over the dispute controversy between stockholders, the principal petitioners
between the principal stockholders of the corporation therein, Telectronics, not being a stockholder of record of
Pocket Bell Philippines, Inc. (Pocket Bell), a "tone and voice Pocket Bell.
paging corporation," namely, the spouses Jose Abejo and 5. On January 8, 1983, SEC Hearing Officer Joaquin Garaygay
Aurora Abejo (hereinafter referred to as the Abejos) and the denied the motion. On January 14, 1983, the corporate
purchaser, Telectronic Systems, Inc. (hereinafter referred to as secretary filed a Motion for Reconsideration. On March 21,
Telectronics) of their 133,000 minority shareholdings (for P5 1983, SEC Hearing Officer Joaquin Garaygay issued an order
million) and of 63,000 shares registered in the name of granting Braga's motion for reconsideration and dismissed
Virginia Braga and covered by five stock certificates endorsed SEC Case No. 02379.
in blank by her (for P1,674,450.00), and the spouses Agapito
Braga and Virginia Braga (hereinafter referred to as the 6. On February 11, 1983, the Bragas filed their Motion to
Bragas), erstwhile majority stockholders. With the said Dismiss the injunction case, SEC Case No. 02395. On April 8,
purchases, Telectronics would become the majority 1985, the SEC Director, Eugenio Reyes, acting upon the
stockholder, holding 56% of the outstanding stock and voting Abejos'ex-parte motion, created a three-man committee
power of the corporation Pocket Bell. composed of Atty. Emmanuel Sison as Chairman and Attys.
Alfredo Oca and Joaquin Garaygay as members, to hear and
With the said purchases in 1982, Telectronics requested the decide the two SEC cases (Nos. 02379 and 02395).
corporate secretary of the corporation, Norberto Braga, to
register and transfer to its name, and those of its nominees 7. On April 13, 1983, the SEC three-man committee issued an
the total 196,000 Pocket Bell shares in the corporation's order reconsidering the aforesaid order of March 21, 1983 of
transfer book, cancel the surrendered certificates of stock and the SEC Hearing Officer Garaygay (dismissing the mandamus
issue the corresponding new certificates of stock in its name petition SEC Case No. 02379) and directing corporate
and those of its nominees. secretary Norberto Braga to file his answer to the petitioner
therein.
Norberto Braga, the corporate secretary and son of the
Bragas, refused to register the aforesaid transfer of shares in B. BRAGAS' ACTION IN SEC
t e corporate oo s, asserting that the Bragas claim preemptive 8. On December 12, 1983, the Bragas filed a petition for
rights over the 133,000 Abejo shares and that Virginia Braga certiorari, prohibition and mandamus with the SEC en

CORPORATION LAW: 7. captial structure Page 155 of 201

banc, SEC Case No. EB #049, seeking the dismissal of SEC themselves as the new set of officers of Pocket Bell and from 1. The SEC ruling upholding its primary and exclusive
Cases Nos.' 02379 and 02395 for lack of jurisdiction of the assuming control of the corporation and discharging their jurisdiction over the dispute is correctly premised on, and fully
Comn-iission and the setting aside of the various orders functions. supported by, the applicable provisions of P.D. No. 902-A
issued by the SEC three-man committee in the course of the which reorganized the SEC with additional powers "in line with
15. On March 2, 1983, the Abejos filed a motion for
proceedings in the two SEC cases. the government's policy of encouraging investments, both
reconsideration, which motion was duly opposed by the
domestic and foreign, and more active publicParticipation in
9. On May 15, 1984, the SEC en banc issued an order Bragas. On March 11, 1983, respondent Judge denied the
the affairs of private corporations and enterprises through
dismissing the Bragas' petition in SEC Case No. EB#049 for motion for reconsideration.
which desirable activities may be pursued for the promotion
lack of merit and at the same time ordering the SEC Hearing
D. ABEJOS' PETITION AT BAR of economic development; and, to promote a wider and more
Committee to continue with the hearings of the Abejos and
meaningful equitable distribution of wealth," and accordingly
Telectronics SEC Cases Nos. 02379 and 02395, ruhng that the 16. On March 26, 1983, the Abejos, alleging that the acts of provided that:
"issue is not the ownership of shares but rather the respondent Judge in refusing to dismiss the complaint despite
nonperformance by the Corporate Secretary of the ministerial clear lack of jurisdiction over the action and in refusing to SEC. 3. The Commission shall have absolute jurisdiction,
duty of recording transfers of shares of stock of the reconsider his erroneous position were performed without supervision and control ouer all corporations, partnerships
corporation of which he is secretary." jurisdiction and with grave abuse of discretion, filed their or associations, who are the grantees of primary franchise
herein Petition for certiorari and Prohibition with Preliminary and/or a license or permit issued by the government to
10. On May 15, 1984 the Bragas filed a motion for
Injunction. They prayed that the challenged orders of operate in the Philippines; ...
reconsideration but the SEC en banc denied the same on
respondent Judge dated February 14, 1983 and March 11,
August 9, 1984. SEC. 5. In addition to the regulatory and adjudicative
1983 be set aside for lack of jurisdiction and that he be
functions of the Securities and Exchange Commission over
C. BRAGAS' ACTION IN CFI (NOWRTC) ordered to permanently desist from further proceedings in
corporations, partnerships and other forms of associations
Civil Case No. 48746. Respondent judge desisted from further
11. On November 25, 1982, following the corporate registered with it as expressly granted under existing laws
proceedings in the case, dispensing with the need of issuing
secretary's refusal to register the transfer of the shares in and decrees, it shall have original and exclusive jurisdiction
any restraining order.
question, the Bragas filed a complaint against the Abejos and to hear and decide cases involving:
Telectronics in the Court of First Instance of Pasig, Branch 21 E. BRAGAS' PETITION AT BAR
a) Devices or schemes employed by or any acts, of the
(now the Regional Trial Court, Branch 160) docketed as Civil
17. On August 29, 1984, the Bragas, alleging in turn that the board of directors, business associations, its officers or
Case No. 48746 for: (a) rescission and annulment of the sale
SEC has no jurisdiction over SEC Cases Nos. 02379 and 02395 partners, amounting to fruud and
of the shares of stock in Pocket Bell made by the Abejos in
and that it acted arbitrarily, whimsically and capriciously in misrepresentation which may be detrimental to the
favor of Telectronics on the ground that it violated the Bragas'
dismissing their petition (in SEC Case No. EB #049) for interest of the public andlor of the stockholder,
alleged pre-emptive right over the Abej os' shareholdings and
dismissal of the said cases, filed their herein Petition for partners, members of associations or organizations
an alleged perfected contract with the Abejos to sell the same
certiorari and Prohibition with Preliminary Injunction or TRO. registered with the Commission.
shares in their (Bragas) favor, (Ist cause of action); plus
The petitioner seeks the reversal and/or setting aside of the
damages for bad faith; and (b) declaration ofnullity of any b) Controversies arising out of intracorporate or
SEC Order dated May 15, 1984 dismissing their petition in
transfer, assignment or endorsement of Virginia Bragas' stock partnership relations, between and among
said SEC Case No. EB #049 and sustaining its jurisdiction over
certificates for 63,000 shares in Pocket Ben to Telectronics for stockholders, members, or associates; between any
SEC Cases Nos. 02379 and 02395, filed by the Abejos. On
want of consent and consideration, alleging that said stock andlor all of them and the corporation, partnership or
September 24, 1984, this Court issued a temporary
certificates, which were intended as security for a loan association of which they are stockholders, members or
restraining order to maintain the status quo and restrained
application and were thus endorsed by her in blank, had been assmiates, respectively; and between such corporation,
the SEC and/or any of its officers or hearing committees from
lost (2nd cause of action). partnership or assmiation and the state insofar as it
further proceeding with the hearings in SEC Cases Nos. 02379
concems their individual franchise or right to exist as
12. On January 4, 1983, the Abejos filed a Motion to Dismiss and 02395 and from enforcing any and all orders and/or
such entity;
the complaint on the ground that it is the SEC that is vested resolutions issued in connection with the said cases.
under PD 902-A with original and exclusive jurisdiction to hear c) Controversies in the election or appointments of
The cases, having been given due course, were jointly heard
and decide cases involving, among others, controversies directors, trustees, officers or managers of such
by the Court on March 27, 1985 and the parties thereafter
"between and among stockholders" and that the Bragas' suit corporations, partnerships or associations. 3
filed on April 16, 1985 their respective memoranda in
is such a controversy as the issues involved therein are the
amplification of oral argument on the points of law that were Section 6 further grants the SEC "in order to effectively
stockholders' alleged pre-emptive rights, the validity of the
crystalled during the hearing, exercise such jurisdiction," the power, inter alia, "to
transfer and endorsement of certificates of stock, the election
issue preliminary or permanent
of corporate officers and the management and control of the The Court rules that the SEC has original and exclusive
injunctions, whether prohibitory or mandatory, in all cases in
corporation's operations. The dismissal motion was granted jurisdiction over the dispute between the principal
which it has jurisdiction, and in which cases the pertinent
by Presiding Judge G. Pineda on January 14, 1983. stockholders of the corporation Pocket Bell, namely, the
provisions of the Rules of Court shall apply."
Abejos and
13. On January 24, 1983, the Bragas filed a motion for
2. Basically and indubitably, the dispute at bar, as held by the
reconsideration. The Abejos opposed. Meanwhile, respondent Telectronics, the purchasers of the 56% majority stock (supra,
SEC, is an intracorporate dispute that has arisen between and
Judge Rafael de la Cruz was appointed presiding judge of the at page 2) on the one hand, and the Bragas, erstwhile
among the principal stockholders of the corporation Pocket
court (renamed Regional Trial Court) in place of Judge G. majority stockholders, on the other, and that the SEC, through
Bell due to the refusal of the corporate secretary, backed up
Pineda. its en banc Resolution of May 15, 1984 co"ectly ruled in
by his parents as erstwhile majority shareholders, to perform
dismissing the Bragas' Petition questioning its jurisdiction,
14. On February 14, 1983, respondent Judge de la Cruz issued his "ministerial duty" to record the transfers of the
that "the issue is not the ownership of shares but rather the
an order rescinding the January 14, 1983 order and reviving corporation's controlling (56%) shares of stock, covered by
nonperformance by the Corporate Secretary of the ministerial
the temporary restraining order previously issued on duly endorsed certificates of stock, in favor of Telectronics as
duty of recording transfers of shares of stock of the
December 23, 1982 restraining Telectronics' agents or the purchaser thereof. mandamus in the SEC to compel the
Corporation of which he is secretary."
representatives from enforcing their resolution constituting corporate secretary to register the transfers and issue new

CORPORATION LAW: 7. captial structure Page 156 of 201

certificates in favor of Telectronics and its nominees was amounting to fraud and misrepresentation emplolyed by them while the defendants are the Abejos who are also
properly resorted to under Rule XXI, Section 1 of the SEC's to keep themselves in control of the corporation to the stockholders whose sale of the shares to Telectronics they
New Rules of Procedure, 4 which provides for the filing of such detriment of Telectronics (as buyer and substantial investor in would annul.
petitions with the SEC. Section 3 of said Rules further the corporate stock) and the Abejos (as substantial
(b) There can be no question that the dispute between the
authorizes the SEC to "issue orders expediting the stockholders-sellers), the case falls under paragraph (a). The
Abejos and the Bragas as to the sale and transfer of the
proceedings ... and also [to] grant a preliminary injunction for dispute is likewise an intra-corporate controversy between
former's shares to Telectronics for P5 million is an
the preservation of the rights of the parties pending such and among the majority and minority stockholders as to the
intracorporate one under section 5 (b), prescinding from
proceedings, " transfer and disposition of the controlling shares of the
the applicability of section 5 (a) and (c), (supra, par. 4) lt is
corporation, failing under paragraph (b). As stressed by the
The claims of the Bragas, which they assert in their complaint the SEC which must resolve the Bragas' claim in their own
Court in DMRC Enterprises v. Este del Sol Mountain
in the Regional Trial Court, praying for rescission and complaint in the court case filed by them of an alleged pre-
Reserve, Inc, 7 Considering the announced policy of PD 902-A,
annulment of the sale made by the Abejos in favor of emptive right to buy the Abejos' shares by virtue of "on-
the expanded jurisdiction of the respondent Securities and
Telectronics on the ground that they had an alleged perfected going negotiations," which they may submit as their
Exchange Commission under said decree extends exclusively
preemptive right over the Abejos' shares as well as for defense to the mandamus petition to register the sale of
to matters arising from contracts involving investments in
annulment of sale to Telectronics of Virginia Braga's shares the shares to Telectronics. But asserting such preemptive
private corporations, partnerships and associations." The
covered by street certificates duly endorsed by her in blank, rights and asking that the same be enforced is a far cry
dispute also concerns the fundamental issue ofwhether the
may in no way deprive the SEC of its primary and exclusive from the Bragas' claim that "the case relates to questions
Bragas or Telectronics have the right to elect the corporate
jurisdiction to grant or not the writ of mandamus ordering the of ownership" over the shares in question. 9 (Not to
directors and officers and manage its business and
registration of the shares so transferred. The Bragas' mention, as pointed out by the Abejos, that the corporation
operations, which falls under paragraph (c).
contention that the question of ordering the recording of the is not a close corporation, and no restriction over the free
transfers ultimately hinges on the question of ownership or 5. Most of the cases that have come to this Court involve transferability of the shares appears in the Articles of
right thereto over the shares notwithstanding, the jurisdiction those under paragraph (b), i.e. whether the controversy is an Incorporation, as well as in the by-laws 10 and the
over the dispute is clearly vested in the SEC. intra-corporate one, arising "between and among certificates of stock themselves, as required by law for the
stockholders" or "between any or allof them and the enforcement of such restriction. See Go Soc & Sons, etc. v.
3. The very complaint of the Bragas for annulment of the
corporation." The parties have focused their arguments on IAC, G.R. No. 72342, Resolution of February 19, 1987.)
sales and transfers as filed by them in the regular court
this question. The Bragas' contention in his field must likewise
questions the validity of the transfer and endorsement of the (c) The dispute between the Bragas and Telectronics as to
fail. In Philex Mining Corp. v. Reyes, 8 the Court spelled out
certificates of stock, claiming alleged pre-emptive rights in the sale and transfer for P1,674,450.00 of Virginia Braga's
that"'an intra-corporate controversy is one which arises
the case of the Abejos' shares and alleged loss of thio 63.000 shares covered by Street certificates duly endorsed
between a stockholder and the corporation. There is no
certificates and lack of consent and consideration in the case in blank by her is within the special competence and
distinction, qualification, nor any exemption whatsoever. The
of Virginia Braga's shares. Such dispute c learly involve's jurisdiction of the SEC, dealing as it does with the free
provision is broad and covers all kinds of controversies
controversies "between and among stockholders, " as to the transferability of corporate shares, particularly street
between stockholders and corporations. The issue of whether
Abej os' right to sell and dispose of their shares to certificates," as guaranteed by the Corporation Code and
or not a corporation is bound to replace a stockholder's lost
Telectronics, the validity of the latter's acquisition of Virginia its proclaimed policy of encouraging foreign and domestic
certificate of stock is a matter purely between a stockholder
Braga's shares, who between the Bragas and the Abejos' investments in Philippine private corpora. tions and more
and the corporation. It is a typical intra-corporate dispute. The
transferee should be recognized as the controlling active public participation therein for the Promotion of
quqsjion of damage's raised is merely incidental to that main
shareholders of the corporation, with the right to elect the economic development. Here again, Virginia Braga's claim
issue. The Court rejected the stockholders' theory of
corporate officers and the management and control of its of loss of her street certificates 11 or theft thereof
excluding his complaint (for replacement of a lost stock
operations. Such a dispute and case clearly fag within the (denounced by Telectronics as 11 perjurious" 12 ) must be
[dividend] certificate which he claimed to have never
original and exclusive jurisdiction of the SEC to decide, under pleaded by her as a defense against Telectronics'petition
received) from the classification of intra-corporate
Section 5 of P.D. 902-A, above-quoted. The restraining order for mandamus and recognition now as the controlling
controversies as one that "does not square with the intent of
issued by the Regional Trial Court restraining Telectronics stockholder of the corporation in the light of the joint
the law, which is to segregate from the general jurisdiction of
agents and representatives from enforcing their resolution affidavit of Geneml Cerefino S. Carreon of the National
regular Courts controversies involving corporations and their
constituting themselves as the new set of officers of Pocket Telecommunications Commission and private respondent
stockholders and to bring them to the SEC for exclusive
Bell and from assuming control of the corporation and Jose Luis Santiago of Telectronics narrating the facts and
resolution, in much the same way that labor disputes are now
discharging their functions patently encroached upon the circumstances of how the former sold and delivered to
brought to the Ministry-of Labor and Employment (MOLE) and
SEC's exclusive jurisdiction over such specialized corporate Telectronics on behalf of his compadres, the Bragas,
the National Labor Relations Commission (NLRC), and not to
controversies calling for its special competence. As stressed Virginia Braga's street certificates for 63,000 shares
the Courts."
by the Solicitor General on behalf of the SEC, the Court has equivalent to 18% of the corporation's outstanding stock
held that "Nowhere does the law [PD 902-A] empower any (a) The Bragas contend that Telectronics, as and received the cash price thereof. 13 But as to the sale
Court of First Instance [now Regional Trial Court] to interfere buyertransferee of the 56% majority shares is not a and transfer of the Abejos' shares, the Bragas cannot oust
with the orders of the Commission," 5 and consequently "any registered stockholder, because they, through their son the the SEC of its original and exclusive jurisdiction to hear and
ruling by the trial court on the issue of ownership of the corporate secretary, appear to have refused to perform decide the case, by blocking through the corporate
6
shares of stock is not binding on the Commission for want of "the ministerial duty of recording transfers of shares of secretary, their son, the due recording of the transfer and
jurisdiction. stock of the corporation of which he is the secretary," and sale of the shares in question and claiming that Telectronics
that the dispute is therefore, not an intracorporate one. is not a stockholder of the corporation which is the very
4. The dispute therefore clearly falls within the general
This contention begs the question which must properly be issue that the SEC is called upon to resolve. As the SEC
classification of cases within the SEC's original and exclusive
resolved by the SEC, but which they would prevent by their maintains, "There is no requirement that a stockholder of a
jurisdiction to hear and decide, under the aforequoted
own act, through their son, of blocking the due recording of corporation must be a registered one in order that,the
governing section 5 of the law. Insofar as the Bragas and their
the transfer and cannot be sanctioned. It can be seen from Securities and Exchange Commission may take cognizance
corporate secretary's refusal on behalf of the corporation
their very complaint in the regular courts that they with of a suit seeking to enforce his rights as such
Pocket Bell to record the transfer of the 56% majority shares
their two sons constituting the plaintiffs are all stockholders stockholder." 14 This is because the SEC by express
to Telectronics may be deemed a device or scheme

CORPORATION LAW: 7. captial structure Page 157 of 201

 mandate has "absolute jurisdiction, supervision and control the Code and particularly charges it with the duty of by the dissenting stockholder to the regular courts only if and
over all corporations" and is called upon to enforce the preventing fraud and abuses on the part of controlling when the SE C rendered final judgment annulling the dacion
provisions of the Corporation Code, among which is the stockholders, directors and officers, as follows: en pago and furthermore subject to Union Glass' defenses as
stock purchaser's right to secure the corresponding a third party buyer in good faith. Similarly, in the DMRC case,
SEC. 143. Rule-making power of the Securities and
certificate in his name under the provisions of Section 63 of therein petitioner's,tomplaint for collection of the amounts
Exchange Commission. The Securities and Exchange
the Code. Needless to say, any problem encountered in due to it as payment of rentals for the lease of its heavy
Commission shall have the power and authority to
securing the certificates of stock representing the equipment in the form mainly of cash and part in shares of
implement the provisions of this Code, and to promulgate
investment made by the buyer must be expeditiously dealt stock of the debtor-defendant corporation was held to be not
rules and regulations reasonably necessary to enable it to
with through administrative mandamus proceedings with covered by the SEC's exclusive jurisdiction over
perform its duties hereunder, particularly in the prevention
the SEC, rather than through the usual tedious regular intracorporate disputes, since "to pass upon a money claim
of fraud and abuses on the part of the controlling
court procedure. Furthermore, as stated in the SEC order of under a lease contract would be beyond the competence Of
stockholders, members, directors, trustees or
April 13, 1983, notice given to the corporation of the sale of the Securities and Exchange Commission and to separate the
officers. (Emphasis supplied)
the shares and presentation of the certificates for transfer claim for money from the claim for shares of stock would be
is ,equivalent to registration: "Whether the refusal of the The dispute between the contending parties for control of splitting a single cause of action resulting in a multiplicity of
(corporation) to effect the same is ivalid or not is still thecorporation manifestly fans within the primary and suitS." 21 Such an action for collection of a debt does not
subject to the outcome of the hearing on the merits of the exclusive jurisdiction of the SEC in whom the law has reserved involve enforcement Of rights and obligations under the
case. 15 such jurisdiction as an administrative agency of special Corporation Code nor the in. temal or intracorporate affairs of
competence to deal promptly and expeditiously therewith. the debtor corporation. But in aR disputes affecting and
6. In the fifties, the Court taking cognizance of the move to
dealing With the interests of the corporation and its
vest jurisdiction in administrative commissions and boards As the Court stressed in Union Glass & Container Corp. v. stockholders, following the trend and clear legislative intent
the power to resolve specialized disputes in the field of labor SEC, 19 "This grant of jurisdiction [in Section 51 must be of entmsting all disputes of a specialized nature to
(as in corporations, public transportation and public utilities) viewed in the light of the nature and functions of the SEC administrative agencies possessing. the requisite
ruled that Congress in requiring the Industrial Court's under the law. Section 3 of PD No. 902-A confers upon the competence, special knowledge, experience and services and
intervention in the resolution of labor-management latter 'absolute jurisdiction, supervision, and control over all facilities to expeditiously resolve them and determine the
controversies likely to cause strikes or lockouts meant such corporations, partnerships or associations, who are grantees essential facts including technical and intricate matters, as in
jurisdiction to be exclusive, although it did not so expressly of primary franchise and/or license or permit issued by the labor and public utilities rates disputes, the SEC has been
state in the law. The Court held that under the "sense-making government to operate in the Philippines ... The principal given "the original and exclusive jurisdiction to hear
and expeditious doctrine of primary jurisdiction ... the courts function of the SEC is the supervision and control over anddecide" them (under section 5 of P.D. 902-A) "in addition
cannot or will n6t determine a controversy involving a corporations, partnerships and associations with the end in to [its] regulatory and adjudicative functions" (under Section
question which is within the jurisdiction of an administrative view that investment in these entities may be encouraged 3, vesting in it "absolute jurisdiction, supervision and control
tribunal, where the question demands the exercise of sound and protected, and their activities pursued for the promotion over all corporations" and the Rule-making power granted it
administrative discretion requiring the special knowledge, of economic development. in Section 143 of the Corporation Code, supra). As stressed by
experience, and seruices of the administratiue tribunal to
determine technical and intricate matters of fact, and a "It is in aid of this office that the adjudicative power of the the Court in the Philex case, supra, "(T)here is no distinction,
uniformity of ruling is essential to comply uith the purposes of SEC must be exercised. Thus the law explicitly specified and qualification, nor any exemption whatsoever. The provision is
the regulatory statute administered " 16 delin-dted its jurisdiction to matters intrinsically connected broad and covers all kinds of controversies between
with the regulation of corporations, partnerships and stockholders and corporations."
In this era of clogged court dockets, the need for specialized associations and those dealing with the internal affairs of It only remains now to deal with the Order dated April 15,
administrative boards or commissions with the special such corporations, partnerships or associations. 1983 (Annex H, Petition) 22 of the SEC's three-member
knowledge, experience and capability to hear and determine
"Otherwise stated, in order that the SEC can take cognizance Hearing Conunittee granting Telectronics' motion for creation
promptly disputes on technical matters or essentially factual
of a case, the controversy must pertain to any of the following of a receivership or management committee with the ample
matters, subject to judicial review in case of grave abuse of
relationships: [al between the corporation, partnership or powers therein enumerated for the preservation pendente
discretion, has become well nigh indispensable. Thus, in
association and the public; [b] between the corporation, lite of the corporation's assets and in discharge of its "power
1984, the Court noted that "between the power lodged in an
partnership or association and its stockholders, partners, and duty to preserve the rights of the parties, the
administrative body and a court, the unmistakable trend has
members, or officers; [c] between the corporation, stockholders, the public availing of the corporation's services
been to refer it to the former. 'Increasingly, this Court has
partnership or association and the state in so far as its and the rights of creditors," as well as "for reasons of equity
been committed to the view that unless the law speaks
franchise, permit or license to operate is concerned; and Id] and justice ... (and) to prevent possible paralization of
clearly and unequivocably, the choice should fall on [an
among the stockholders, partners or associates corporate business." The said Order has not been
administrative agency.]' " 17 The Court in the earlier case
themselves." 20 implemented notwithstanding its having been upheld per the
of Ebon vs. De Guzman 18 noted that the lawmaking
SEC en banc's Order of May 15, 1984 (Annex "V", Petition)
authority, in restoring to the labor arbiters and the NLRC their Parenthetically, the cited case of Union Glass illustrates by dismissing for lack of merit the petition for certiorari,
jurisdiction to award all kinds of damages in labor cases, as way of contrast what disputes do not fall within the special prohibition and mandamus with prayer for restraining order or
against the previous P.D. amendment splitting their jurisdiction of the SEC. In this case, the SEC had properly injunction filed by the Bragas seeking the disbandment of the
jurisdiction with the regular courts, "evidently ... had second assumed jurisdiction over the dissenting stockholders' com. Hearing Committee and the setting aside of its Orders, and its
thoughts about depriving the Labor Arbiters and the NLRC of Plaint against the corporation Pioneer Glass questioning Resolution of August 9, 1984, denying reconsideration (Annex
the jurisdiction to award damages in labor cases because that its dacion en pago of its glass plant and all its assets in favor "X", Petition), due to the Bragas' filing of the petition at bar.
setup would mean duplicity of suits, splitting the cause of of the DBP which was clearly an intra-corporate controversy
action and possible conflicting findings and conclusions by dealing with its internal affairs. But the Court held that the Prescinding from the great concern of damage and prejudice
two tribunals on one and the same claim." SEC had no jurisdiction over petitioner Union Glass Corp., expressed by Telectronics due to the Bragas having remained
7. Thus, the Corporation Code (B.P. No. 178) enacted on May imPle,aded as third party purchaser of the plant from DBP in in control of the corporation and having allegedly committed
1, 1980 specifically vests the SEC with the Rule-making power the action to annul the dacion en pago. The Court held that acts of gross mismanagement and misapplication of funds,
in the discharge of its task of implementing the provisions of such action for recovery of the glass plant could be brought the Court finds that under the facts and circumstances of

CORPORATION LAW: 7. captial structure Page 158 of 201

record, it is but fair and just that the SEC's order creating a Quisumbing, Caparas, Ilagan Alcantara & Mosqueda Law Certificate No. 16807 duly endorsed by Francisco Aguac
receivership committee be implemented forthwith, in Office for private respondent. for registration and transfer of the said stock certificate in
accordance with its terms, as follows: the name of the plaintiff (Exhibit F). The said letter was
PARAS, J.:
addressed to defendant Del Rosario and Company which
The three-man receivership committee shall be composed
This is a petition to review the decision dated August 27, was the transfer agent of Batong Buhay at that time. In a
of a representative from the commission, in the person of
1976 of the Court of Appeals (CA) in CA-G.R. No. 51313-R letter dated February 24, 1970 also addressed to Del
the Director, Examiners and Appraisers Department or his
which modified the decision of the then Court of First Instance Rosario and Company, plaintiff's counsel requested
designated representative, and a representative from the
(CFI) of Manila, Branch 11 in Civil Case No. 79183 Also sought information as to the action taken on the transfer of Stock
petitioners and a representative of the respondent.
for review are the resolutions of the aforenamed court dated Certificate No. 16807 in favor of the plaintiff, nothing
The petitioners and respondent are therefore directed to October 21, 1976 and November 12, 1976 which denied about which having heard despite the lapse of over a
submit to the Commission the name of their designated petitioner's motion for reconsideration of the subject decision month (Exhibit H). In a reply letter dated February 28,
representative within three (3) days from receipt of this and petition and/or motion for new trial, respectively. 1970, Del Rosario and Company informed plaintiff's
order. The Conunission shall appoint the other counsel that Batong Buhay has referred the matter to
The dispositive portion of the CFI judgment reads: their attorneys, inasmuch as there was a "technical
representatives if either or both parties fafl to comply with
the requirement within the stated time. WHEREFORE, the Court renders judgment enjoining the problem that has developed in the transfer of stock," and
defendants to effect the transfer of the shares covered by further advised that the plaintiff communicate directly
ACCORDINGLY, judgment is hereby rendered: with Batong Buhay for further details (Exhibit 1).lwphl@it
Stock Certificate No. 16807 to and in the name of plaintiff
(a) Granting the petition in G.R. No. 63558, annulling the INCORPORATED Mining Corporation, and the writ of It developed that when Batong Buhay was about to effect
challenged Orders of respondent Judge clated February 14, preliminary mandatory injunction issued on March 16, the cancellation of Stock Certificate No. 16807 and
1983 and March i 1, 1983 (Annexes "L" and "P" of the 1970 is hereby declared permanent. transfer the 62,495 shares covered thereby to the plaintiff
Abejos' petition) and prohibiting respondent Judge from and had, in fact, prepared new Stock Certificate No. 27650
SO ORDERED.
further proceeding in Civil Case No. 48746 filed in his Court dated January 5, 1970, it received the letter of Paula G.
other than to dismiss the same for lack or jurisdiction over Upon the other hand, the decretal portion of the CA decision Aguac advising it to withhold the transfer of the subject
the subject-matter; states: shares of stock on the ground that the same are conjugal
(b) Dismissing the petition in G.R. Nos. 68450-51 and lifting WHEREFORE, the judgment appealed from is hereby property.
the temporary restraining order issued on September 24, modified by adding the following to the dispositive portion On March 2, 1970 Francisco Aguac was charged in a
1984, effective immediately upon promulgation hereof, thereof: criminal complaint Pasil Kalinga-Apayao, docketed as
(c) Directing the SEC through its Hearing Committee to Ordering defendant Batong Buhay Gold Mines, Inc. to pay Criminal Case No. 10, entitled "People vs. Francisco
proceed immediately with hearing and resolving the to the plaintiff the sum of P5,625.55, with interest at the Aguac, et al."
pending mandamus petition for recording in the corporate legal rate from March 5, 1970 until full payment; and The defendants justify their refusal to transfer the shares
books the transfer to Telectronics and its nominees of the dismissing the complaint with respect to defendant Del of stock of Francisco Aguac in the name of the plaintiff in
majority (56%) shares of stock of the corporation Pocket Rosario and Company. Defendant Batong Buhay shall pay view of their apprehension that they might he held liable
Bell pertaining to the Abejos and Virginia Braga and all the costs. for damages under Article 173 of the Civil Code and the
related issues, taking into consideration, without need of ruling of the Supreme Court in Bucoy vs. Paulino, 23 SCRA
resubmittal to it, the pleadings, annexes and exhibits filed IT IS SO ORDERED.
248.
by the contending parties in the cases at bar; and (pp. 67-68, Rollo)
On March 5, 1970, in view of the defendant's inaction on
(d) Likewise directing the SEC through its Hearing The antecedent facts, as found by the Court of Appeals, are the request for the transfer of the stock certificate in its
Committee to proceed immediately with the as follows: name, the plaintiff commenced this action before the
implementation of its receivership or management Court of First Instance of Manila, praying that the
committee Order of April 15, 1983 in SEC Case No. 2379 The defendant Batong Buhay Gold Mines, Inc. issued Stock
Certificate No. 16807 covering 62,495 shares with a par defendants be ordered to issue and release the transfer
and for the purpose, the contending parties are ordered to stock certificate covering 62,495 shares of defendant
submit to said Hearing Committee the name of their value of P0.01 per share to Francisco Aguac who was then
legally married to Paula G. Aguac, but the said spouses Batong Buhay, formerly registered in the name of
designated representatives in the Francisco Aguac, in favor of the plaintiff, and for the
receivership/management committee within three (3) days had lived separately for more than fourteen (14) years
prior to the said date. On December 16, 1969, Francisco recovery of compensatory, exemplary and corrective
from receipt of this decision, on pain of forfeiture of such damages and attorney's fees. A writ of preliminary
right in case of failure to comply herewith, as provided in Aguac sold his 62,495 shares covered by Stock Certificate
No. 16807 for the sum of P9,374.70 in favor of the mandatory injunction was prayed for to order the
the said Order; and ordering theBragas to perform only defendants to issue immediately the transfer certificate
caretaker acts in the corporation pending the organization plaintiff, the said transaction being evidenced by a deed
of sale (Exhibit D). The said sale was made by Francisco covering the aforesaid shares of stock of defendant
of such receivership/management committee and Batong Buhay in the name of the plaintiff.
assumption of its functions. Aguac without the knowledge or consent of his wife Paula
G. Aguac. The trial court granted the prayer for the issuance of the
This decision shall be immediately executory upon its writ of preliminary mandatory injunction in its order of
promulgation. SO ORDERED. On the same date of the sale, December 16, 1969, Paula
G. Aguac wrote a letter to the president of defendant March 16, 1970. In compliance therewith, Stock Certificate
G.R. No. L-45048 January 7, 1987 Batong Buhay Gold Mines, Inc. asking that the transfer of No. 16807 was cancelled and new Stock Certificate No.
the shares sold by her husband be withheld, inasmuch as 27650 dated January 5, 1970 was issued to and received
BATONG BUHAY GOLD MINES, INC., petitioner, vs. THE by the plaintiff on July 20, 1970."
COURT OF APPEALS and INC. MINING the same constituted conjugal property and her share of
CORPORATION, respondents. proceeds of the sale was not given to her (Exhibit 1). On October 28, 1971, the trial court handed down its
On January 5, 1970, under a covering letter dated judgment ordering the defendant (herein petitioner) to effect
Taada, Sanchez, Taada & Taada Law Office for petitioner.
December 26, 1969, plaintiff's counsel presented Stock the transfer of the shares covered by Stock Certificate No.

CORPORATION LAW: 7. captial structure Page 159 of 201

16807 in the name of herein respondent Incoporated Mining WHEREFORE, the assailed decision and resolutions of the amount of the judgment, to be determined by Regional
Corporation and declaring permanent the writ of preliminary Court of Appeals are hereby SET ASIDE, and a new one is Trial Court, taking into account the value of assets that the
mandatory injunction issued on March 16, 1970. hereby rendered REINSTATING the decision of the trial court. consortium may have already recovered and shall have
No costs. recovered in accordance with the other portions of this
Private respondent seasonably appealed the aforesaid
decision.
decision to the Court of Appeals anchored on the lower court's SO ORDERED.
alleged failure to award damages for the wrongful refusal of 2. The Orders of the Regional Trial Court dated December
petitioner to transfer the subject shares of stock and alleged 19, 1989 and March 5, 1990 are hereby REVERSED and
failure to award attorney's fees, cost of injunction bond and G.R. Nos. 112438-39 December 12, 1995 SET ASIDE and judgment is hereby rendered confirming
expenses of litigation. the ownership of the consortium over the Chemphil shares
CHEMPHIL EXPORT & IMPORT CORPORATION of stock, subject of CA-G.R. CV No. 26511, and the Order
On August 27, 1986, respondent appellate court rendered the (CEIC), petitioner, vs. THE HONORABLE COURT OF
dated September 4, 1989, is reinstated.
subject decision the dispositive portion of which has already APPEALS JAIME Y. GONZALES, as Assignee of the Bank
been quoted hereinabove. of the Philippine Islands (BPI), RIZAL COMMERCIAL No pronouncement as to costs.
BANKING CORPORATION (RCBC), LAND BANK OF THE 1
Hence, this petition. SO ORDERED.
PHILIPPINES (LBP), PHILIPPINE COMMERCIAL &
In assailing the decision of the Court of Appeals, petitioner INTERNATIONAL BANK (PCIB) and THE PHILIPPINE In G.R. No. 113394, PCIB and its assignee, Jaime Gonzales,
poses the following issues: INVESTMENT SYSTEM ORGANIZATION ask for the annulment of the Court of Appeals' decision
(PISO), respondents. (former Special Ninth Division) promulgated on 26 March
1. May the Court of Appeals award damages by way of
1993 in "PCIB v. Hon. Job B. Madayag & CEIC" (CA-G.R. SP NO.
unrealized profits despite the absence of supporting evidence, G.R. No. 113394 December 12, 1995
20474) dismissing the petition for certiorari, prohibition
or merely on the basis of pure assumption, speculation or
PHILIPPINE COMMERCIAL INDUSTRIAL BANK (AND ITS and mandamus filed by PCIB and of said court's resolution
conjecture; or can the respondent recover damages by way of
ASSIGNEE JAIME Y. GONZALES) petitioner, vs. dated 11 January 1994 denying their motion for
unrealized profits when it has not shown that it was damaged
HONORABLE COURT OR APPEALS and CHEMPHIL reconsideration of its decision. 2
in any manner by the act of petitioner?
EXPORT AND IMPORT CORPORATION
The antecedent facts leading to the aforementioned
2. May the appellate court deny the petitioner the chance to (CEIC), respondents.
controversies are as follows:
present evidence discovered after judgment which were not
only very material to its case, but would also show the On September 25, 1984, Dynetics, Inc. and Antonio M. Garcia
untenability and illegality of private respondent's position? KAPUNAN, J.: filed a complaint for declaratory relief and/or injunction
against the PISO, BPI, LBP, PCIB and RCBC or the consortium
We answer the first issue in the negative. Before us is a legal tug-of-war between the Chemphil Export with the Regional Trial Court of Makati, Branch 45 (Civil Case
and Import Corporation (hereinafter referred to as CEIC), on No. 8527), seeking judicial declaration, construction and
The petitioner alleges that the appellate court gravely and
one side, and the PISO and Jaime Gonzales as assignee of the interpretation of the validity of the surety agreement that
categorically erred in awarding damages by way of unrealized
Bank of the Philippine Islands (BPI), Rizal Commercial Banking Dynetics and Garcia had entered into with the consortium and
profit (or lucro cesante) to private respondent. Petitioner
Corporation (RCBC), Land Bank of the Philippines (LBP) and to perpetually enjoin the latter from claiming, collecting and
company also alleges that the claim for unrealized profit must
Philippine Commercial International Bank (PCIB), on the other enforcing any purported obligations which Dynetics and
be duly and sufficiently established, that is, that the claimant
(hereinafter referred to as the consortium), over 1,717,678 Garcia might have undertaken in said agreement. 3
must submit proof that it was in fact damaged because of
shares of stock (hereinafter referred to as the "disputed
petitioner's act or omission.
shares") in the Chemical Industries of the Philippines The consortium filed their respective answers with
The stipulation of facts of the parties does not at all show that (Chemphil/CIP). counterclaims alleging that the surety agreement in question
private respondent intended to sell, or would sell or would was valid and binding and that Dynetics and Garcia were
Our task is to determine who the rightful owner of the liable under the terms of the said agreement. It likewise
have sold the stocks in question on specified dates. While it is
disputed shares is. applied for the issuance of a writ of preliminary attachment
true that shares of stock may go up or down in value (as in
fact the concerned shares here really rose from fifteen (15) Pursuant to our resolution dated 30 May 1994, the instant against Dynetics and Garcia. 4
centavos to twenty three or twenty four (23/24) centavos per case is a consolidation of two petitions for review filed before
Seven months later, or on 23 April 1985, Dynetics, Antonio
share and then fell to about two (2) centavos per share, still us as follows:
Garcia and Matrix Management & Trading Corporation filed a
whatever profits could have been made are purely
In G.R. Nos. 112438-39, CEIC seeks the reversal of the complaint for declaratory relief and/or injunction against the
SPECULATIVE, for it was difficult to predict with any decree of
Security Bank & Trust Co. (SBTC case) before the Regional
certainty the rise and fall in the value of the shares. Thus this decision of the Court of Appeals (former Twelfth Division)
Trial Court of Makati, Branch 135 docketed as Civil Case No.
Court has ruled that speculative damages cannot be promulgated on 30 June 1993 and its resolution of 29 October 5
recovered. 1993, denying petitioner's motion for reconsideration in the 10398.
consolidated cases entitled "Dynetics, Inc., et al. v. PISO, et On 2 July 1985, the trial court granted SBTC's prayer for the
It is easy to say now that had private respondent gained legal al." (CA-G.R. No. 20467) and "Dynetics, Inc., et al. v. PISO, et
issuance of a writ of preliminary attachment and on 9 July
title to the shares, it could have sold the same and reaped a al.; CEIC, Intervenor-Appellee" (CA-G.R. CV No. 26511).
1985, a notice of garnishment covering Garcia's shares in
profit of P5,624.95 but it could not do so because of
CIP/Chemphil (including the disputed shares) was served on
petitioner's refusal to transfer the stocks in the former's name The dispositive portion of the assailed decision reads, thus:
Chemphil through its then President. The notice of
at the time demand was made, but then it is also true that WHEREFORE, this Court resolves in these consolidated garnishment was duly annotated in the stock and transfer
human nature, being what it is, private respondent's officials cases as follows: books of Chemphil on the same date. 6
could also have refused to sell and instead wait for expected
further increases in value. 1. The Orders of the Regional Trial Court, dated March 25, On 6 September 1985, the writ of attachment in favor of SBTC
1988, and May 20, 1988, subject of CA-G.R. CV No. 10467, was lifted. However, the same was reinstated on 30 October
In view of what has been said, We find no necessity to discuss are SET ASIDE and judgment is hereby rendered in favor 1985. 7
the second issue. of the consortium and against appellee Dynetics, Inc., the

CORPORATION LAW: 7. captial structure Page 160 of 201

In the meantime, on 12 July 1985, the Regional Trial Court in Unsatisfied with the aforementioned order, the consortium Meanwhile, Antonio Garcia, in the consortium case, failed to
Civil Case No. 8527 (the consortium case) denied the appealed to the Court of Appeals, docketed as CA-G.R. CV No. comply with the terms of the compromise agreement he
application of Dynetics and Garcia for preliminary injunction 20467. entered into with the consortium on 17 January 1989. As a
and instead granted the consortium's prayer for a result, on 18 July 1989, the consortium filed a motion for
On 17 January 1989 during the pendency of consortium's
consolidated writ of preliminary attachment. Hence, on 19 execution which was granted by the trial court on 11 August
appeal in CA-G.R. CV No. 20467, Antonio Garcia and the
July 1985, after the consortium had filed the required bond, a 1989. Among Garcia's properties that were levied upon on
consortium entered into a Compromise Agreement which the
writ of attachment was issued and various real and personal execution were his 1,717,678 shares in Chemphil (the
Court of Appeals approved on 22 May 1989 and became the
properties of Dynetics and Garcia were garnished, including disputed shares) previously garnished on 19 July 1985. 19
basis of its judgment by compromise. Antonio Garcia was
the disputed shares. 8 This garnishment, however, was not
dropped as a party to the appeal leaving the consortium to On 22 August 1989, the consortium acquired the disputed
annotated in Chemphil's stock and transfer book.
proceed solely against Dynetics, Inc. 12 On 27 June 1989, entry shares of stock at the public auction sale conducted by the
On 8 September 1987, PCIB filed a motion to dismiss the of judgment was made by the Clerk of Court. 13 sheriff for P85,000,000.00. 20 On same day, a Certificate of
complaint of Dynetics and Garcia for lack of interest to Sale covering the disputed shares was issued to it.
Hereunder quoted are the salient portions of said compromise
prosecute and to submit its counterclaims for decision,
agreement: On 30 August 1989, 21 the consortium filed a motion (dated 29
adopting the evidence it had adduced at the hearing of its
August 1989) to order the corporate secretary of Chemphil to
application for preliminary attachment. 9 xxx xxx xxx
enter in its stock and transfer books the sheriff's certificate of
On 25 March 1988, the Regional Trial Court dismissed the 3. Defendants, in consideration of avoiding an extended sale dated 22 August 1989, and to issue new certificates of
complaint of Dynetics and Garcia in Civil Case No. 8527, as litigation, having agreed to limit their claim against stock in the name of the banks concerned. The trial court
well as the counterclaims of the consortium, thus: plaintiff Antonio M. Garcia to a principal sum of P145 granted said motion in its order dated 4 September 1989,
Million immediately demandable and to waive all other thus:
Resolving defendant's, Philippine Commercial International
claims to interest, penalties, attorney's fees and other
Bank, MOTION TO DISMISS WITH MOTION TO SUBMIT For being legally proper, defendant's MOTION TO ORDER
charges. The aforesaid compromise amount of
DEFENDANT PCIBANK's COUNTERCLAIM FOR DECISION, THE CORPORATE SECRETARY OF CHEMICAL INDUSTRIES
indebtedness of P145 Million shall earn interest of
dated September 7, 1987: OF THE PHILS., INC. (CHEMPIL) TO ENTER IN THE STOCK
eighteen percent (18%) from the date of this Compromise.
AND TRANSFER BOOKS OF CHEMPHIL THE SHERIFF'S
(1) The motion to dismiss is granted; and the instant case
4. Plaintiff Antonio M. Garcia and herein defendants have CERTIFICATE OF SALE DATED AUGUST 22, 1989 AND TO
is hereby ordered dismissed pursuant to Sec. 3, Rule 17 of
no further claims against each other. ISSUE NEW CERTIFICATES OF STOCK IN THE NAME OF THE
the Revised Rules of Court, plaintiff having failed to
DEFENDANT BANKS, dated August 29, 1989, is hereby
comply with the order dated July 16, 1987, and having not 5. This Compromise shall be without prejudice to such granted.
taken further steps to prosecute the case; and claims as the parties herein may have against plaintiff
Dynetics, Inc. WHEREFORE, the corporate secretary of the aforesaid
(2) The motion to submit said defendant's counterclaim
corporation, or whoever is acting for and in his behalf, is
for decision is denied; there is no need; said counterclaim 6. Plaintiff Antonio M. Garcia shall have two (2) months hereby ordered to (1) record and/or register the Certificate
is likewise dismissed under the authority of Dalman from date of this Compromise within which to work for the of Sale dated August 22, 1989 issued by Deputy Sheriff
vs. City Court of Dipolog City, L-63194, January 21, 1985, entry and participation of his other creditor, Security Bank Cristobal S. Jabson of this Court; (2) to cancel the
wherein the Supreme Court stated that if the civil case is and Trust Co., into this Compromise. Upon the expiration certificates of stock of plaintiff Antonio M. Garcia and all
dismissed, so also is the counterclaim filed therein. "A of this period, without Security Bank and Trust Co. having those which may have subsequently been issued in
person cannot eat his cake and have it at the same time" joined, this Compromise shall be submitted to the Court replacement and/or in substitution thereof; and (3) to
(p. 645, record, Vol. I). 10 for its information and approval (pp. 27, 28-31, rollo, CA-
14
issue in lieu of the said shares new shares of stock in the
G.R. CV No. 10467). name of the defendant Banks, namely, PCIB, BPI, RCBC,
The motions for reconsideration filed by the consortium were,
likewise, denied by the trial court in its order dated 20 May It appears that on 15 July 1988, Antonio Garcia under a Deed LBP and PISO bank in such proportion as their respective
1988: of Sale transferred to Ferro Chemicals, Inc. (FCI) the disputed claims would appear in this suit (p. 82, record, Vol. II). 22
shares and other properties for P79,207,331.28. It was agreed On 26 September 1989, CEIC filed a motion to intervene
The Court could have stood pat on its order dated 25
upon that part of the purchase price shall be paid by FCI (dated 25 September 1989) in the consortium case seeking
March 1988, in regard to which the defendants-banks
directly to SBTC for whatever judgment credits that may be the recall of the abovementioned order on grounds that it is
concerned filed motions for reconsideration. However,
adjudged in the latter's favor and against Antonio Garcia in the rightful owner of the disputed shares. 23It further alleged
inasmuch as plaintiffs commented on said motions that:
the aforementioned SBTC case. 15 that the disputed shares were previously owned by Antonio M.
"3). In any event, so as not to unduly foreclose on the
rights of the respective parties to refile and prosecute On 6 March 1989, FCI, through its President Antonio M. Garcia but subsequently sold by him on 15 July 1988 to Ferro
their respective causes of action, plaintiffs manifest their Garcia, issued a Bank of America Check No. 860114 in favor Chemicals, Inc. (FCI) which in turn assigned the same to CEIC
conformity to the modification of this Honorable Court's of SBTC in the amount of P35,462,869.62. 16 SBTC refused to in an agreement dated 26 June 1989.
order to indicate that the dismissal of the complaint and accept the check claiming that the amount was not sufficient
On 27 September 1989, the trial court granted CEIC's motion
the counterclaims is without prejudice." (p. 2, plaintiffs' to discharge the debt. The check was thus consigned by
allowing it to intervene, but limited only to the incidents
COMMENT etc. dated May 20, 1988). The Court is inclined Antonio Garcia and Dynetics with the Regional Trial Court as
covered by the order dated 4 September 1989. In the same
to so modify the said order. payment of their judgment debt in the SBTC case. 17 order, the trial court directed Chemphil's corporate secretary
WHEREFORE , the order issued on March 25, 1988, is On 26 June 1989, FCI assigned its 4,119,614 shares in to temporarily refrain from implementing the 4 September
hereby modified in the sense that the dismissal of the Chemphil, which included the disputed shares, to petitioner 1989
24
complaint as well as of the counterclaims of defendants CEIC. The shares were registered and recorded in the order.
RCBC, LBP, PCIB and BPI shall be considered as without corporate books of Chemphil in CEIC's name and the
On 2 October 1989, the consortium filed their opposition to
prejudice (p. 675, record, Vol. I). 11 corresponding stock certificates were issued to it. 18 CEIC's motion for intervention alleging that their attachment
lien over the disputed shares of stocks must prevail over the

CORPORATION LAW: 7. captial structure Page 161 of 201

private sale in favor of the CEIC considering that said shares paid SBTC the amount of P35,462,869.12 pursuant to the HAD THE EFFECT OF DISCHARGING THE ATTACHMENTS
of stock were garnished in the consortium's favor as early as Deed of Sale and Purchase of Shares of Stock executed by ISSUED IN CIVIL CASE NO. 8527;
19 July 1985. 25 Antonio M. Garcia on July 15, 1988. By reason of such
IV WHETHER OR NOT THE ATTACHMENT OF SHARES OF
payment, sale with the knowledge and consent of Antonio
On 4 October 1989, the consortium filed their opposition to STOCK, IN ORDER TO BIND THIRD PERSONS, MUST BE
M. Garcia, FCI and CEIC, as party-in-interest to FCI, are
CEIC's motion to set aside the 4 September 1989 order and RECORDED IN THE STOCK AND TRANSFER BOOK OF THE
subrogated by operation of law to the rights of SBTC. The
moved to lift the 27 September 1989 order. 26 CORPORATION; AND
Court is not unaware of the citation in CEIC's reply that "as
On 12 October 1989, the consortium filed a manifestation and between two (2) attaching creditors, the one whose claims V WHETHER OR NOT FERRO CHEMICALS, INC. (FCI),
motion to lift the 27 September 1989 order, to reinstate the 4 was first registered on the books of the corporation enjoy AND ITS SUCCESSOR-IN-INTEREST, CEIC, WERE
September 1989 order and to direct CEIC to surrender the priority." (Samahang Magsasaka, Inc. vs. Chua Gan, 96 SUBROGATED TO THE RIGHTS OF SECURITY BANK & TRUST
disputed stock certificates of Chemphil in its possession Phil. 974.) COMPANY (SBTC) IN A SEPARATE CIVIL ACTION. (This issue
within twenty-four (24) hours, failing in which the President, appears to be material as SBTC is alleged to have obtained
The Court holds that a levy on the shares of corporate
Corporate Secretary and stock and transfer agent of Chemphil an earlier attachment over the same Chemphil shares that
stock to be valid and binding on third persons, the notice
be directed to register the names of the banks making up the the consortium seeks to recover in the case at bar). 33
of attachment or garnishment must be registered and
consortium as owners of said shares, sign the new certificates
annotated in the stock and transfer books of the On 6 April 1990, the PCIB separately filed with the Court of
of stocks evidencing their ownership over said shares and to
corporation, more so when the shares of the corporation Appeals a petition for certiorari, prohibition
immediately deliver the stock certificates to them. 27
are listed and traded in the stock exchange, as in this and mandamus with a prayer for the issuance of a writ of
Resolving the foregoing motions, the trial court rendered an case. As a matter of fact, in the CONSORTIUM's motion of preliminary injunction (CA-G.R. No. SP-20474), likewise,
order dated 19 December 1989, the dispositive portion of August 30, 1989, they specifically move to "order the assailing the very same orders dated 19 December 1989 and
which reads as follows: Corporate Secretary of CHEMPHIL to enter in the stock 5 March 1990, subject of CA-G.R. No. 26511. 34
and transfer books of CHEMPHIL the Sheriff's Certificate of
WHEREFORE, premises considered, the Urgent Motion Sale dated August 22, 1989." This goes to show that, On 30 June 1993, the Court of Appeals (Twelfth Division) in
dated September 25, 1989 filed by CEIC is hereby contrary to the arguments of the CONSORTIUM, in order CA-G.R. No. 26511 and CA-G.R. No. 20467 rendered a decision
GRANTED. Accordingly, the Order of September 4, 1989, is that attachment, garnishment and/or encumbrances reversing the orders of the trial court and confirming the
hereby SET ASIDE, and any and all acts of the Corporate affecting rights and ownership on shares of a corporation ownership of the consortium over the disputed shares. CEIC's
Secretary of CHEMPHIL and/or whoever is acting for and in to be valid and binding, the same has to be recorded in motion for reconsideration was denied on 29 October 1993. 35
his behalf, as may have already been done, carried out or the stock and transfer books. In ruling for the consortium, the Court of Appeals made the
implemented pursuant to the Order of September 4, 1989, 36
are hereby nullified. Since neither CEIC nor FCI had notice of the following ratiocination:
CONSORTIUM's attachment of July 19, 1985, CEIC's shares On the first issue, it ruled that the evidence offered by the
PERFORCE, the CONSORTIUM'S Motions dated October 3, of stock in CHEMPHIL, legally acquired from Antonio M. consortium in support of its counterclaims, coupled with the
1989 and October 11, 1989, are both hereby denied for Garcia, cannot be levied upon in execution to satisfy his failure of Dynetics and Garcia to prosecute their case, was
lack of merit. judgment debts. At the time of the Sheriff's levy on sufficient basis for the RTC to pass upon and determine the
The Cease and Desist Order dated September 27, 1989, is execution, Antonio M. Garcia has no more in CHEMPHIL consortium's counterclaims.
29
hereby AFFIRMED and made PERMANENT. which could be levied upon.
The Court of Appeals found no application for the ruling
SO ORDERED. 28 xxx xxx xxx in Dalman v. City Court of Dipolog, 134 SCRA 243 (1985)
On 23 January 1990, the consortium and PCIB filed separate that "a person cannot eat his cake and have it at the same
In so ruling, the trial court ratiocinated in this wise:
motions for reconsideration of the aforestated order which time. If the civil case is dismissed, so also is the
xxx xxx xxx were opposed by petitioner CEIC. 30 counterclaim filed therein" because the factual background
of the present action is different. In the instant case, both
After careful and assiduous consideration of the facts and On 5 March 1990, the trial court denied the motions for Dynetics and Garcia and the consortium presented
applicable law and jurisprudence, the Court holds that reconsideration. 31 testimonial and documentary evidence which clearly should
CEIC's Urgent Motion to Set Aside the Order of September have supported a judgment on the merits in favor of the
4, 1989 is impressed with merit. The CONSORTIUM has On 16 March 1990, the consortium appealed to the Court of
consortium. As the consortium correctly argued, the net
admitted that the writ of attachment/garnishment issued Appeals (CA-G.R. No. 26511). In its Resolution dated 9 August
atrocious effect of the Regional Trial Court's ruling is that it
on July 19, 1985 on the shares of stock belonging to 1990, the Court of Appeals consolidated CA-G.R. No. 26511
32 allows a situation where a party litigant is forced to plead
plaintiff Antonio M. Garcia was not annotated and with CA-G.R. No. 20467.
and prove compulsory counterclaims only to be denied
registered in the stock and transfer books of CHEMPHIL. The issues raised in the two cases, as formulated by the Court those counterclaims on account of the adverse party's
On the other hand, the prior attachment issued in favor of of Appeals, are as follows: failure to prosecute his case. Verily, the consortium had no
SBTC on July 2, 1985 by Branch 135 of this Court in Civil alternative but to present its counterclaims in Civil Case No.
Case No. 10398, against the same CHEMPHIL shares of I WHETHER OR NOT, UNDER THE PECULIAR
8527 since its counterclaims are compulsory in nature.
Antonio M. Garcia, was duly registered and annotated in CIRCUMSTANCES OF THE CASE, THE TRIAL COURT ERRED IN
the stock and transfer books of CHEMPHIL. The matter of DISMISSING THE COUNTERCLAIMS OF THE CONSORTIUM IN On the second issue, the Court of Appeals opined that
non-recording of the Consortium's attachment in CIVIL CASE NO. 8527; unless a writ of attachment is lifted by a special order
Chemphil's stock and transfer book on the shares of specifically providing for the discharge thereof, or unless a
II WHETHER OR NOT THE DISMISSAL OF CIVIL CASE
Antonio M. Garcia assumes significance considering CEIC's case has been finally dismissed against the party in whose
NO. 8527 RESULTED IN THE DISCHARGE OF THE WRIT OF
position that FCI and later CEIC acquired the CHEMPHIL favor the attachment has been issued, the attachment lien
ATTACHMENT ISSUED THEREIN EVEN AS THE CONSORTIUM
shares of Antonio M. Garcia without knowledge of the subsists. When the consortium, therefore, took an appeal
APPEALED THE ORDER DISMISSING CIVIL CASE NO. 8527;
attachment of the CONSORTIUM. This is also important as from the Regional Trial Court's orders of March 25, 1988
CEIC claims that it has been subrogated to the rights of III WHETHER OR NOT THE JUDGMENT BASED ON and May 20, 1988, such appeal had the effect of preserving
SBTC since CEIC's predecessor-in-interest, the FCI, had COMPROMISE RENDERED BY THIS COURT ON MAY 22, 1989 the consortium's attachment liens secured at the inception

CORPORATION LAW: 7. captial structure Page 162 of 201

of Civil Case No. 8527, invoking the rule in Olib Accordingly, the question of whether or not the attachment Consortium's purported attachment over the disputed
v. Pastoral, 188 SCRA 692 (1988) that where the main lien in favor of SBTC in the SBTC case is superior to the shares.
action is appealed, the attachment issued in the said main attachment lien in favor of the consortium in Civil Case No.
III. THE RESPONDENT COURT OF APPEALS GRAVELY
case is also considered appealed. 8527 becomes immaterial with respect to the right of
ERRED IN NOT HOLDING THAT CEIC HAD BEEN
intervenor-appellee CEIC. The said issue would have been
Anent the third issue, the compromise agreement between SUBROGATED TO THE RIGHTS OF SBTC SINCE CEIC'S
relevant had CEIC established its subrogation to the rights
the consortium and Garcia dated 17 January 1989 did not PREDECESSOR IN INTEREST HAD PAID SBTC PURSUANT TO
of SBTC.
result in the abandonment of its attachment lien over his THE DEED OF SALE AND PURCHASE OF STOCK EXECUTED
properties. Said agreement was approved by the Court of On 26 March 1993, the Court of Appeals (Special Ninth BY ANTONIO M. GARCIA ON JULY 15, 1988, AND THAT BY
Appeals in a Resolution dated 22 May 1989. The judgment Division) in CA-G.R. No. SP 20474 rendered a decision denying REASON OF SUCH PAYMENT, WITH THE CONSENT AND
based on the compromise agreement had the effect of due course to and dismissing PCIB's petition for certiorari on KNOWLEDGE OF ANTONIO M. GARCIA, FCI AND CEIC, AS
preserving the said attachment lien as security for the grounds that PCIB violated the rule against forum-shopping PARTY IN INTEREST TO FCI, WERE SUBROGATED BY
satisfaction of said judgment (citing BF Homes, Inc. v. CA, and that no grave abuse of discretion was committed by OPERATION OF LAW TO THE RIGHTS OF SBTC.
190 SCRA 262, [1990]). respondent Regional Trial Court in issuing its assailed orders
IV. THE RESPONDENT COURT OF APPEALS GRAVELY
dated 19 December 1989 and 5 March 1990. PCIB's motion
As to the fourth issue, the Court of Appeals agreed with the ERRED AND MADE UNWARRANTED INFERENCES AND
for reconsideration was denied on 11 January 1994. 37
consortium's position that the attachment of shares of CONCLUSIONS, WITHOUT ANY SUPPORTING EVIDENCE,
stock in a corporation need not be recorded in the On 7 July 1993, the consortium, with the exception of PISO, THAT THERE WAS AN ATTEMPT ON THE PART OF ANTONIO
corporation's stock and transfer book in order to bind third assigned without recourse all its rights and interests in the M. GARCIA TO USE FCI AND CEIC AS CONVENIENT VEHICLES
persons. disputed shares to Jaime Gonzales. 38 TO DENY THE CONSORTIUM ITS RIGHTS TO MAKE ITSELF
WHOLE THROUGH AN EXECUTION OF THE CHEMPHIL
Section 7(d), Rule 57 of the Rules of Court was complied On 3 January 1994, CEIC filed the instant petition for review
SHARES PURPORTEDLY ATTACHED BY THE CONSORTIUM ON
with by the consortium (through the Sheriff of the trial docketed as G.R. Nos. 112438-39 and assigned the following
19 JULY 1985. 39
court) when the notice of garnishment over the Chemphil errors:
shares of Garcia was served on the president of Chemphil On 2 March 1994, PCIB filed its own petition for review
I. THE RESPONDENT COURT OF APPEALS GRAVELY
on July 19, 1985. Indeed, to bind third persons, no law docketed as G.R. No. 113394 wherein it raised the following
ERRED IN SETTING ASIDE AND REVERSING THE ORDERS OF
requires that an attachment of shares of stock be recorded issues:
THE REGIONAL TRIAL COURT DATED DECEMBER 5, 1989
in the stock and transfer book of a corporation. The
AND MARCH 5, 1990 AND IN NOT CONFIRMING I. RESPONDENT COURT OF APPEALS COMMITTED SERIOUS
statement attributed by the Regional Trial Court to the
PETITIONER'S OWNERSHIP OVER THE DISPUTED CHEMPHIL ERROR IN RENDERING THE DECISION AND RESOLUTION IN
Supreme Court in Samahang Magsasaka, Inc. vs. Gonzalo
SHARES AGAINST THE FRIVOLOUS AND UNFOUNDED QUESTION (ANNEXES A AND B) IN DEFIANCE OF LAW AND
Chua Guan, G.R. No. L-7252, February 25, 1955
CLAIMS OF THE CONSORTIUM. JURISPRUDENCE BY FINDING RESPONDENT CEIC AS HAVING
(unreported), to the effect that "as between two attaching
BEEN SUBROGATED TO THE RIGHTS OF SBTC BY THE
creditors, the one whose claim was registered first on the II. THE RESPONDENT COURT OF APPEALS GRAVELY
PAYMENT BY FCI OF GARCIA'S DEBTS TO THE LATTER
books of the corporation enjoys priority," is an obiter ERRED:
DESPITE THE FACT THAT
dictum that does not modify the procedure laid down in
Section 7(d), Rule 57 of the Rules of Court. (1) In not holding that the Consortium's attachment over
A. FCI PAID THE SBTC DEBT BY VIRTUE OF A CONTRACT
the disputed Chemphil shares did not vest any priority
BETWEEN FCI AND GARCIA, THUS, LEGAL SUBROGATION
Therefore, ruled the Court of Appeals, the attachment right in its favor and cannot bind third parties since
DOES NOT ARISE;
made over the Chemphil shares in the name of Garcia on admittedly its attachment on 19 July 1985 was not
July 19, 1985 was made in accordance with law and the lien recorded in the stock and transfer books of Chemphil, B. THE SBTC DEBT WAS PAID BY GARCIA HIMSELF AND
created thereby remained valid and subsisting at the time and subordinate to the attachment of SBTC which SBTC NOT BY FCI, HENCE, SUBROGATION BY PAYMENT COULD
Garcia sold those shares to FCI (predecessor-in-interest of registered and annotated in the stock and transfer books NOT HAVE OCCURRED;
appellee CEIC) in 1988. of Chemphil on 2 July 1985, and that the Consortium's
C. FCI DID NOT ACQUIRE ANY RIGHT OVER THE DISPUTED
attachment failed to comply with Sec. 7(d), Rule 57 of
Anent the last issue, the Court of Appeals rejected CEIC's SHARES AS SBTC HAD NOT YET LEVIED UPON NOR
the Rules as evidenced by the notice of garnishment of
subrogation theory based on Art. 1302 (2) of the New Civil BOUGHT THOSE SHARES ON EXECUTION. ACCORDINGLY,
the deputy sheriff of the trial court dated 19 July 1985
Code stating that the obligation to SBTC was paid by Garcia WHAT FCI ACQUIRED FROM SBTC WAS SIMPLY A
(annex "D") which the sheriff served on a certain Thelly
himself and not by a third party (FCI). JUDGMENT CREDIT AND AN ATTACHMENT LIEN TO SECURE
Ruiz who was neither President nor managing agent of
ITS SATISFACTION.
The Court of Appeals further opined that while the check Chemphil;
used to pay SBTC was a FCI corporate check, it was funds II. RESPONDENT COURT OF APPEALS COMMITTED SERIOUS
(2) In not applying the case law enunciated by this
of Garcia in FCI that was used to pay off SBTC. That the ERROR IN SUSTAINING THE ORDERS OF THE TRIAL COURT
Honorable Supreme Court in Samahang Magsasaka,
funds used to pay off SBTC were funds of Garcia has not DATED DECEMBER 19, 1989 AND MARCH 5, 1990 WHICH
Inc. vs. Gonzalo Chua Guan, 96 Phil. 974 that as between
been refuted by FCI or CEIC. It is clear, therefore, that there DENIED PETITIONER'S OWNERSHIP OVER THE DISPUTED
two attaching creditors, the one whose claim was
was an attempt on the part of Garcia to use FCI and CEIC as SHARES NOTWITHSTANDING PROVISIONS OF LAW AND
registered first in the books of the corporation enjoys
convenient vehicles to deny the consortium its right to EXTANT JURISPRUDENCE ON THE MATTER THAT PETITIONER
priority, and which respondent Court erroneously
make itself whole through an execution sale of the AND THE CONSORTIUM HAVE PREFERRED SENIOR RIGHTS
characterized as mere obiter dictum;
Chemphil shares attached by the consortium at the THEREOVER.
inception of Civil Case No. 8527. The consortium, therefore, (3) In not holding that the dismissal of the appeal of the
is entitled to the issuance of the Chemphil shares of stock III. RESPONDENT COURT OF APPEAL COMMITTED SERIOUS
Consortium from the order of the trial court dismissing its
in its favor. The Regional Trial Court's order of September 4, ERROR IN CONCLUDING THAT THE DISMISSAL OF THE
counterclaim against Antonio M. Garcia and the finality of
1989, should, therefore, be reinstated in toto. COMPLAINT AND THE COUNTERCLAIM IN CIVIL CASE NO.
the compromise agreement which ended the litigation
8527 ALSO RESULTED IN THE DISCHARGE OF THE WRIT OF
between the Consortium and Antonio M. Garcia in
ATTACHMENT DESPITE THE RULINGS OF THIS HONORABLE
the Dynetics case had ipso jure discharged the

CORPORATION LAW: 7. captial structure Page 163 of 201

 COURT IN BF HOMES VS. COURT OF APPEALS, G.R. NOS. without prejudice to the effects of confusion as to the representation or on behalf of another, with the consent or
76879 AND 77143, OCTOBER 3, 1990, 190 SCRA 262, AND latter's share. (Emphasis ours.) authority of the latter.
IN OLIB VS. PASTORAL, G.R. NO. 81120, AUGUST 20, 1990,
Despite, however, its multitudinous arguments, CEIC presents FCI was merely fulfilling its obligation under the
188 SCRA 692 TO THE CONTRARY.
an erroneous interpretation of the concept of subrogation. An aforementioned Deed of Sale.
IV. RESPONDENT COURT OF APPEALS EXCEEDED ITS analysis of the situations involved would reveal the clear
Additionally, FCI is not a disinterested party as required by
JURISDICTION IN RULING ON THE MERITS OF THE MAIN inapplicability of Art. 1302 (2).
Art. 1302 (2) since the benefits of the extinguishment of the
CASE NOTWITHSTANDING THAT THOSE MATTERS WERE
Antonio Garcia sold the disputed shares to FCI for a obligation would redound to none other but itself. 45 Payment
NOT ON APPEAL BEFORE IT.
consideration of P79,207,331.28. FCI, however, did not pay of the judgment debt to SBTC resulted in the discharge of the
V. RESPONDENT COURT OF APPEALS COMMITTED SERIOUS the entire amount to Garcia as it was obligated to deliver part attachment lien on the disputed shares purchased by FCI. The
ERROR IN HOLDING THAT PETITIONER IS GUILTY OF FORUM of the purchase price directly to SBTC pursuant to the latter would then have a free and "clean" title to said shares.
SHOPPING DESPITE THE FACT THAT SC CIRCULAR NO. 28-91 following stipulation in the Deed of Sale:
In sum, CEIC, for its failure to fulfill the requirements of Art.
WAS NOT YET IN FORCE AND EFFECT AT THE TIME THE
Manner of Payment 1302 (2), was not subrogated to the rights of SBTC against
PETITION WAS FILED BEFORE RESPONDENT APPELLATE
Antonio Garcia and did not acquire SBTC's attachment lien
COURT, AND THAT ITS COUNSEL AT THAT TIME HAD Payment of the Purchase Price shall be made in accordance
over the disputed shares which, in turn, had already been
ADEQUATE BASIS TO BELIEVE THAT CERTIORARI AND NOT with the following order of preference provided that in no
lifted or discharged upon satisfaction by Garcia, through FCI,
AN APPEAL OF THE TRIAL COURT'S ORDERS WAS THE instance shall the total amount paid by the Buyer exceed
of his debt to the said bank. 46
APPROPRIATE RELIEF. 40 the Purchase Price:
The rule laid down in the case of Samahang Magsasaka,
As previously stated, the issue boils down to who is legally a. Buyer shall pay directly to the Security Bank and Trust
Inc. v. Chua Guan, 47 that as between two attaching creditors
entitled to the disputed shares of Chemphil. We shall resolve Co. the amount determined by the Supreme Court as due
the one whose claim was registered ahead on the books of
this controversy by examining the validity of the claims of and owing in favor of the said bank by the Seller.
the corporation enjoys priority, clearly has no application in
each party and, thus, determine whose claim has priority.
The foregoing amount shall be paid within fifteen (15) days the case at bench. As we have amply discussed, since CEIC
CEIC's claim from the date the decision of the Supreme Court in the was not subrogated to SBTC's right as attaching creditor,
case entitled "Antonio M. Garcia, et al. vs. Court of Appeals, which right in turn, had already terminated after Garcia paid
CEIC traces its claim over the disputed shares to the
et al." G.R. Nos. 82282-83 becomes final and his debt to SBTC, it cannot, therefore, be categorized as an
attachment lien obtained by SBTC on 2 July 1985 against
executory. 43 (Emphasis ours.) attaching creditor in the present controversy. CEIC cannot
Antonio Garcia in Civil Case No. 10398. It avers that when FCI,
resurrect and claim a right which no longer exists. The issue
CEIC's predecessor-in-interest, paid SBTC the due obligations Hence, when FCI issued the BA check to SBTC in the amount in the instant case, then, is priority between an attaching
of Garcia to the said bank pursuant to the Deed of Absolute of P35,462,869.62 to pay Garcia's indebtedness to the said creditor (the consortium) and a purchaser (FCI/CEIC) of the
Sale and Purchase of Shares of Stock, 41 FCI, and later CEIC, bank, it was in effect paying with Garcia's money, no longer disputed shares of stock and not between two attaching
was subrogated to the rights of SBTC, particularly to the with its own, because said amount was part of the purchase creditors the subject matter of the aforestated Samahang
latter's aforementioned attachment lien over the disputed price which FCI owed Garcia in payment for the sale of the Magsasaka case.
shares. disputed shares by the latter to the former. The money "paid"
by FCI to SBTC, thus properly belonged to Garcia. It is as if CEIC, likewise, argues that the consortium's attachment lien
CEIC argues that SBTC's attachment lien is superior as it was
Garcia himself paid his own debt to SBTC but through a third over the disputed Chemphil shares is null and void and not
obtained on 2 July 1985, ahead of the consortium's purported
party FCI. binding on third parties due to the latter's failure to register
attachment on 19 July 1985. More importantly, said CEIC lien
said lien in the stock and transfer books of Chemphil as
was duly recorded in the stock and transfer books of It is, therefore, of no consequence that what was used to pay mandated by the rule laid down by the Samahang Magsasaka
Chemphil. SBTC was a corporate check of FCI. As we have earlier stated, v. Chua Guan. 48
said check no longer represented FCI funds but Garcia's
CEIC's subrogation theory is unavailing.
money, being as it was part of FCI's payment for the The attachment lien acquired by the consortium is valid and
By definition, subrogation is "the transfer of all the rights of acquisition of the disputed shares. The FCI check should not effective. Both the Revised Rules of Court and the Corporation
the creditor to a third person, who substitutes him in all his be taken at face value, the attendant circumstances must Code do not require annotation in the corporation's stock and
rights. It may either be legal or conventional. Legal also be considered. transfer books for the attachment of shares of stock to be
subrogation is that which takes place without agreement but valid and binding on the corporation and third party.
The aforequoted contractual stipulation in the Deed of Sale
by operation of law because of certain acts; this is the
dated 15 July 1988 between Antonio Garcia and FCI is nothing Section 74 of the Corporation Code which enumerates the
subrogation referred to in article 1302. Conventional
more but an arrangement for the sake of convenience. instances where registration in the stock and transfer books
subrogation is that which takes place by agreement of the
Payment was to be effected in the aforesaid manner so as to of a corporation provides:
parties . . ." 42
prevent money from changing hands needlessly. Besides, the
Sec. 74. Books to be kept; stock transfer agent.
CEIC's theory is premised on Art. 1302 (2) of the Civil Code very purpose of Garcia in selling the disputed shares and his
which states: other properties was to "settle certain civil suits filed against xxx xxx xxx
him." 44
Art. 1302. It is presumed that there is legal subrogation: Stock corporations must also keep a book to be known as
Since the money used to discharge Garcia's debt rightfully the stock and transfer book, in which must be kept a record
(1) When a creditor pays another creditor who is preferred,
belonged to him, FCI cannot be considered a third party payor of all stocks in the names of the stockholders alphabetically
even without the debtor's knowledge;
under Art. 1302 (2). It was but a conduit, or as aptly arranged; the installments paid and unpaid on all stock for
(2) When a third person, not interested in the obligation, categorized by respondents, merely an agent as defined in which subscription has been made, and the date of
pays with the express or tacit approval of the debtor; Art. 1868 of the Civil Code: payment of any settlement; a statement of every
alienation, sale or transfer of stock made, the date thereof,
(3) When, even without the knowledge of the debtor, a Art. 1868. By the contract of agency a person binds himself
and by and to whom made; and such other entries as the
person interested in the fulfillment of the obligation pays, to render some service or to do something in
by-laws may prescribe. The stock and transfer book shall

CORPORATION LAW: 7. captial structure Page 164 of 201

 be kept in the principal office of the corporation or in the in Words and Phrases, second series, vol. 4, p. 978, the Our corollary inquiry is whether or not the consortium has
office of its stock transfer agent and shall be open for following appears: indeed a prior valid and existing attachment lien over the
inspection by any director or stockholder of the corporation disputed shares.
A "transfer" is the act by which the owner of a thing
at reasonable hours on business days. (Emphasis ours.)
delivers it to another with the intent of passing the rights Jaime Gonzales' /Consortium's Claim
xxx xxx xxx which he has in it to the latter, and a chattel mortgage is
Is the consortium's attachment lien over the disputed shares
not within the meaning of such term.
Section 63 of the same Code states: valid?
xxx xxx xxx. 50
Sec. 63. Certificate of stock and transfer of shares. The CEIC vigorously argues that the consortium's writ of
capital stock of stock corporations shall be divided into Although the Monserrat case refers to a chattel mortgage attachment over the disputed shares of Chemphil is null and
shares for which certificates signed by the president or over shares of stock, the same may be applied to the void, insisting as it does, that the notice of garnishment was
vice-president, countersigned by the secretary or assistant attachment of the disputed shares of stock in the present not validly served on the designated officers on 19 July 1985.
secretary, and sealed with the seal of the corporation shall controversy since an attachment does not constitute an
To support its contention, CEIC presented the sheriff's notice
be issued in accordance with the by-laws. Shares of stock absolute conveyance of property but is primarily used as a
of garnishment 55 dated 19 July 1985 which showed on its face
so issued are personal property and may be transferred by means "to seize the debtor's property in order to secure the
that said notice was received by one Thelly Ruiz who was
delivery of the certificate or certificates indorsed by the debt or claim of the creditor in the event that a judgment is
neither the president nor managing agent of Chemphil. It
owner or his attorney-in-fact or other person legally rendered." 51
makes no difference, CEIC further avers, that Thelly Ruiz was
authorized to make the transfer. No transfer, however, shall
Known commentators on the Corporation Code expound, the secretary of the President of Chemphil, for under the
be valid, except as between the parties, until the transfer is
thus: above-quoted provision she is not among the officers so
recorded in the books of the corporation so as to show the
authorized or designated to be served with the notice of
names of the parties to the transaction, the date of the xxx xxx xxx
garnishment.
transfer, the number of the certificate or certificates and
the number of shares transferred. Shares of stock being personal property, may be the
We cannot subscribe to such a narrow view of the rule on
subject matter of pledge and chattel mortgage.
proper service of writs of attachment.
No shares of stock against which the corporation holds any Such collateral transfers are however not covered by the
unpaid claim shall be transferable in the books of the registration requirement of Section 63, since our Supreme A secretary's major function is to assist his or her superior.
corporation. (Emphasis ours.) Court has held that such provision applies only to absolute He/she is in effect an extension of the latter. Obviously, as
transfers thus, the registration in the corporate books of such, one of her duties is to receive letters and notices for
Are attachments of shares of stock included in the term
pledges and chattel mortgages of shares cannot have any and in behalf of her superior, as in the case at bench. The
"transfer" as provided in Sec. 63 of the Corporation Code? We
legal effect. 52 (Emphasis ours.) notice of garnishment was addressed to and was actually
rule in the negative. As succinctly declared in the case
received by Chemphil's president through his secretary who
of Monserrat v. Ceron, 49 "chattel mortgage over shares of xxx xxx xxx
formally received it for him. Thus, in one case, 56 we ruled that
stock need not be registered in the corporation's stock and
transfer book inasmuch as chattel mortgage over shares of The requirement that the transfer shall be recorded in the the secretary of the president may be considered an "agent"
stock does not involve a "transfer of shares," and that only books of the corporation to be valid as against third of the corporation and held that service of summons on him is
absolute transfers of shares of stock are required to be persons has reference only to absolute transfers or binding on the corporation.
recorded in the corporation's stock and transfer book in order absolute conveyance of the ownership or title to a share.
Moreover, the service and receipt of the notice of
to have "force and effect as against third persons." Consequently, the entry or notation on the books of the garnishment on 19 July 1985 was duly acknowledged and
xxx xxx xxx corporation of pledges and chattel mortgages on shares is confirmed by the corporate secretary of Chemphil, Rolando
not necessary to their validity (although it is advisable to Navarro and his successor Avelino Cruz through their
57
The word "transferencia" (transfer) is defined by the do so) since they do not involve absolute alienation of respective certifications dated 15 August 1989 and 21
58
"Diccionario de la Academia de la Lengua Castellana" as ownership of stock (Monserrat vs. Ceron, 58 Phil. 469 August 1989.
"accion y efecto de transfeir" (the act and effect of [1933]; Chua Guan vs. Samahang Magsasaka, Inc., 62 Phil.
We rule, therefore, that there was substantial compliance with
transferring); and the verb "transferir", as "ceder or 472 [1935].) To affect third persons, it is enough that the
Sec. 7(d), Rule 57 of the Rules of Court.
renunciar en otro el derecho o dominio que se tiene sobre date and description of the shares pledged appear in a
una cosa, haciendole dueno de ella" (to assign or waive the public instrument. (Art. 2096, Civil Code.) With respect to a Did the compromise agreement between Antonio Garcia and
right in, or absolute ownership of, a thing in favor of chattel mortgage constituted on shares of stock, what is the consortium discharge the latter's attachment lien over the
another, making him the owner thereof). necessary is its registration in the Chattel Mortgage disputed shares?
Registry. (Act No. 1508 and Art. 2140, Civil Code.) 53
In the Law Dictionary of "Words and Phrases", third series, CEIC argues that a writ of attachment is a mere auxiliary
volume 7, p. 5867, the word "transfer" is defined as follows: CEIC's reliance on the Samahang Magsasaka case is remedy which, upon the dismissal of the case, dies a natural
misplaced. Nowhere in the said decision was it categorically death. Thus, when the consortium entered into a compromise
"Transfer" means any act by which property of one
stated that annotation of the attachment in the corporate agreement, 59 which resulted in the termination of their case,
person is vested in another, and "transfer of shares", as
books is mandatory for its validity and for the purpose of the disputed shares were released from garnishment.
used in Uniform Stock Transfer Act (Comp. St. Supp.
giving notice to third persons.
690), implies any means whereby one may be divested We disagree. To subscribe to CEIC's contentions would be to
of and another acquire ownership of stock. (Wallach vs. The only basis, then, for petitioner CEIC's claim is the Deed of totally disregard the concept and purpose of a preliminary
Stein [N.J.], 136 A., 209, 210.) Sale under which it purchased the disputed shares. It is, attachment.
however, a settled rule that a purchaser of attached property
xxx xxx xxx A writ of preliminary attachment is a provisional remedy
acquires it subject to an attachment legally and validly levied
issued upon order of the court where an action is pending
In the case of Noble vs. Ft. Smith Wholesale Grocery Co. thereon. 54
to be levied upon the property or properties of the
(127 Pac., 14, 17; 34 Okl., 662; 46 L.R.A. [N.S.], 455), cited
defendant therein, the same to be held thereafter by the
Sheriff as security for the satisfaction of whatever

CORPORATION LAW: 7. captial structure Page 165 of 201

 judgment might be secured in said action by the attaching It has been held that the lien obtained by attachment Forum Shopping in G.R. No. 113394
creditor against the defendant. 60 (Emphasis ours.) stands upon as high equitable grounds as a mortgage
We uphold the decision of the Court of Appeals finding PCIB
lien:
Attachment is a juridical institution which has for its guilty of forum-shopping. 66
purpose to secure the outcome of the trial, that is, the The lien or security obtained by an attachment even
The Court of Appeals opined:
satisfaction of the pecuniary obligation really contracted by before judgment, is a fixed and positive security, a
a person or believed to have been contracted by him, specific lien, and, although whether it will ever be made True it is, that petitioner PCIB was not a party to the appeal
either by virtue of a civil obligation emanating from available to the creditor depends on contingencies, its made by the four other banks belonging to the consortium,
contract or from law, or by virtue of some crime or existence is in no way contingent, conditioned or but equally true is the rule that where the rights and
misdemeanor that he might have committed, and the writ inchoate. It is a vested interest, an actual and substantial liabilities of the parties appealing are so interwoven and
issued, granted it, is executed by attaching and safely security, affording specific security for satisfaction of the dependent on each other as to be inseparable, a reversal of
keeping all the movable property of the defendant, or so debt put in suit, which constitutes a cloud on the legal the appealed decision as to those who appealed, operates
much thereof may be sufficient to satisfy the plaintiff's title, and is as specific as if created by virtue of a as a reversal to all and will inure to the benefit of those who
demands . . . 61 (Emphasis ours.) voluntary act of the debtor and stands upon as high did not join the appeal (Tropical Homes vs. Fortun, 169
equitable grounds as a mortgage. (Corpus Juris SCRA 80, p. 90, citing Alling vs. Wenzel, 133 111. 264-278;
The chief purpose of the remedy of attachment is to secure
Secundum, 433, and authorities therein cited.) 4 C.J. 1206). Such principal, premised upon communality of
a contingent lien on defendant's property until plaintif can,
interest of the parties, is recognized in this jurisdiction
by appropriate proceedings, obtain a judgment and have xxx xxx xxx
(Director of Lands vs. Reyes, 69 SCRA 415). The four other
such property applied to its satisfaction, or to make some
The case at bench admits of a peculiar character in the sense banks which were part of the consortium, filed their notice
provision for unsecured debts in cases where the means of
that it involves a compromise agreement. Nonetheless, the of appeal under date of March 16, 1990, furnishing a copy
satisfaction thereof are liable to be removed beyond the
rule established in the aforequoted cases still applies, even thereof upon the lawyers of petitioner. The petition
jurisdiction, or improperly disposed of or concealed, or
more so since the terms of the agreement have to be for certiorari in the present case was filed on April 10,
otherwise placed beyond the reach of
complied with in full by the parties thereto. The parties to the 1990, long after the other members of the consortium had
creditors. 62 (Emphasis ours.)
compromise agreement should not be deprived of the appealed from the assailed order of December 19, 1989.
We reiterate the rule laid down in BF Homes, protection provided by an attachment lien especially in an
We view with skepticism PCIB's contention that it did not join
Inc. v. CA 63 that an attachment lien continues until the debt instance where one reneges on his obligations under the
the consortium because it "honestly believed
is paid, or sale is had under execution issued on the judgment agreement, as in the case at bench, where Antonio Garcia
that certiorari was the more efficacious and speedy relief
or until judgment is satisfied, or the attachment discharged or failed to hold up his own end of the deal, so to speak.
available under the circumstances." 67 Rule 65 of the Revised
vacated in the same manner provided by law. We expounded
Moreover, a violation of the terms and conditions of a Rules of Court is not difficult to understand. Certiorari is
in said case that:
compromise agreement entitles the aggrieved party to a writ available only if there is no appeal or other plain, speedy and
The appointment of a rehabilitation receiver who took of execution. adequate remedy in the ordinary course of law. Hence, in
control and custody of BF has not necessarily secured the 64 instituting a separate petition for certiorari, PCIB has
In Abenojar & Tana v. CA, et al., we held:
claims of Roa and Mendoza. In the event that the deliberately resorted to forum-shopping.
receivership is terminated with such claims not having The non-fulfillment of the terms and conditions of a
PCIB cannot hide behind the subterfuge that Supreme Court
been satisfied, the creditors may also find themselves compromise agreement approved by the Court justifies
Circular 28-91 was not yet in force when it filed
without security therefor in the civil action because of the execution thereof and the issuance of the writ for said
the certiorari proceedings in the Court of Appeals. The rule
dissolution of the attachment. This should not be permitted. purpose is the Court's ministerial duty enforceable
against forum-shopping has long been established. 68Supreme
Having previously obtained the issuance of the writ in good by mandamus.
Court Circular 28-91 merely formalized the prohibition and
faith, they should not be deprived of its protection if the
Likewise we ruled in Canonizado v. Benitez: 65 provided the appropriate penalties against transgressors.
rehabilitation plan does not succeed and the civil action is
resumed. A judicial compromise may be enforced by a writ of It alarms us to realize that we have to constantly repeat our
execution. If a party fails or refuses to abide by the warning against forum-shopping. We cannot over-emphasize
xxx xxx xxx
compromise, the other party may enforce the compromise its ill-effects, one of which is aptly demonstrated in the case
As we ruled in Government of the Philippine Islands or regard it as rescinded and insist upon his original at bench where we are confronted with two divisions of the
v. Mercado: demand. Court of Appeals issuing contradictory decisions 69 one in
favor of CEIC and the other in favor of the consortium/Jaime
Attachment is in the nature of a proceeding in rem. It is If we were to rule otherwise, we would in effect create a back Gonzales.
against the particular property. The attaching creditor door by which a debtor can easily escape his creditors.
thereby acquires specific lien upon the attached property Consequently, we would be faced with an anomalous situation Forum-shopping or the act of a party against whom an
which ripens into a judgment against the res when the where a debtor, in order to buy time to dispose of his adverse judgment has been rendered in one forum, of
order of sale is made. Such a proceeding is in effect a properties, would enter into a compromise agreement he has seeking another (and possibly favorable) opinion in another
finding that the property attached is an indebted thing no intention of honoring in the first place. The purpose of theforum (other than by appeal or the special civil action
and a virtual condemnation of it to pay the owner's debt. provisional remedy of attachment would thus be lost. It would of certiorari), or the institution of two (2) or more actions or
The law does not provide the length of time an become, in analogy, a declawed and toothless tiger. proceedings grounded on the same cause on the supposition
attachment lien shall continue after the rendition of that one or the other court would make a favorable
judgment, and it must therefore necessarily continue From the foregoing, it is clear that the consortium and/or its disposition, 70 has been characterized as an act of malpractice
until the debt is paid, or sale is had under execution assignee Jaime Gonzales have the better right over the that is prohibited and condemned as trifling with the Courts
issued on the judgment or until judgment is satisfied, or disputed shares. When CEIC purchased the disputed shares and abusing their processes. It constitutes improper conduct
the attachment discharged or vacated in some manner from Antonio Garcia on 15 July 1988, it took the shares which tends to degrade the administration of justice. It has
provided by law. subject to the prior, valid and existing attachment lien in also been aptly described as deplorable because it adds to
favor of and obtained by the consortium. the congestion of the already heavily burdened dockets of

CORPORATION LAW: 7. captial structure Page 166 of 201

the The debtor, Gonzalo H. Co Toco, having defaulted in the involved was ever registered anywhere except in the office of
courts. 71 payment of said debt at maturity, the plaintiff foreclosed said the corporation, and there was no question involved there as
mortgage and delivered the certificates of stock and copies of to the right of priority among conflicting claims of creditors of
WHEREFORE, premises considered the appealed decision in
the mortgage and assignment to the sheriff of the City of the owner of the shares.
G.R. Nos. 112438-39 is hereby AFFIRMED and the appealed
Manila in order to sell the said shares at public auction. The
decision in G.R. No. 113394, insofar as it adjudged the CEIC The Chattel Mortgage Law, Act No. 1508, as amended by Act
sheriff auctioned said 5,894 shares of stock on December 22,
the rightful owner of the disputed shares, is hereby No. 2496, contains the following provision:
1932, and the plaintiff having been the highest bidder for the
REVERSED. Moreover, for wantonly resorting to forum-
sum of P14,390, the sheriff executed in his favor a certificate SEC. 4. A chattel mortgage shall not be valid against any
shopping, PCIB is hereby REPRIMANDED and WARNED that a
of sale of said shares. person except the mortgagor, his executors or
repetition of the same or similar acts in the future shall be
administrators, unless the possession of the property is
dealt with more severely. SO ORDERED. The plaintiff tendered the certificates of stock standing in the
delivered to and retained by the mortgagee or unless the
name of Gonzalo H. Co Toco to the proper officers of the
mortgage is recorded in the office of the register of deeds
corporation for cancellation and demanded that they issue
of the province in which the mortgagor resides at the time
new certificates in the name of the plaintiff. The said officers
of making the same, or, if he resides the Philippine
(the individual defendants) refused and still refuse to issue
Islands, in the province in which the property is
said new shares in the name of the plaintiff.
situated: Provided, however, That if the property is
The prayer is that a writ of mandamus be issued requiring the situated in a different province from that in which the
defendants to transfer the said 5,894 shares of stock to the mortgagor resides, the mortgage shall be recorded in the
plaintiff by cancelling the old certificates and issuing new office of the register of deeds of both the province in
G.R. No. L-42091 November 2, 1935 ones in their stead. which the mortgagor resides and that in which the
GONZALO CHUA GUAN, plaintiff-appellant, vs. SAMAHANG property is situated, and for the purposes of this Act the
The special defenses set up in the answer are as follows: that
MAGSASAKA, INC., and SIMPLICIO OCAMPO, ADRIANO City of Manila Shall be deemed to be a province.
the defendants refuse to cancel the said certificates standing
G. SOTTO, and EMILIO VERGARA, as president, in the name of Gonzalo H. Co Toco on the books of the The practical application of the Chattel Mortgage Law to
secretary and treasurer respectively of the corporation and to issue new ones in the name of the plaintiff shares of stock of a corporation presents considerable
same, defendants-appellees. because prior to the date when the plaintiff made his difficulty and we have obtained little aid from the decisions of
Buenaventura C. Lopez for appellant. demand, to wit, February 4, 1933, nine attachments had been other jurisdictions because that form of mortgage is ill suited
Domingo L. Vergara for appellees. issued and served and noted on the books of the corporation to the hypothecation of shares of stock and has been rarely
against the shares of Gonzalo H. Co Toco and the plaintiff used elsewhere. In fact, it has been doubted whether shares
BUTTE, J.: objected to having these attachments noted on the new of stock in a corporation are chattels in the sense in which
This is an appeal from a judgment of the Court of First certificates which he demanded. These attachments noted on that word is used chattel mortgage statutes. This doubt is
Instance of Nueva Ecija in an action for a writ of mandamus. the books of the corporation against the shares of Gonzalo H. reflected in our own decision in the case of Fua Cun vs.
The case is remarkable for the following reason: that the Co Toco are as follows: Summers and China Banking Corporation (44 Phil., 705), in
parties entered into a stipulation in which the defendants MISSING PAGES: 475-477. which we said:
admitted all of the allegations of the complaint and the ". . . an equity in shares of stock is of such an intangible
plaintiff admitted all of the special defenses in the answer of It will be noted that the first eight of the said writs of character that it is somewhat difficult to see how it can be
the defendants, and on this stipulation they submitted the attachment were served on the corporation and noted on its treated as a chattel and mortgaged in such a manner that the
case for decision. records before the corporation received notice from the
recording of the mortgage will furnish constructive notice to
mortgagee Chua Chiu of the mortgage of said shares dated
The complaint alleges that the defendant Samahang June 18, 1931. No question is raised as to the validity of said third parties. . . ."And we held that the chattel mortgage there
Magsasaka, Inc., is a corporation duly organized under the mortgage or of said writs of attachment and the sole question involved: "at least operated as a conditional equitable
laws of the Philippine Islands with principal office in presented for decision is whether the said mortgage takes assignment." In that case we quoted the following from
Cabanatuan, Nueva Ecija, and that the individual defendants priority over the said writs of attachment. Spalding vs. Paine's Adm'r. (81 Ky., 416), with regard to a
are the president, secretary and treasurer respectively of the chattel mortgage of shares of stock:
same; that on June 18, 1931, Gonzalo H. Co Toco was the It is not alleged that the said attaching creditors had actual "These certificates of stock are in the pockets of the
owner of 5,894 shares of the capital stock of the said notice of the said mortgage and the question therefore owner, and go with him where he may happen to locate,
corporation represented by nine certificates having a par narrows itself down to this: Did the registration of said chattel as choses in action, or evidence of his right, without any
value of P5 per share; that on said date Gonzalo H. Co Toco, a mortgage in the registry of chattel mortgages in the office of means on the part of those with whom he proposes to
resident of Manila, mortgaged said 5,894 shares to Chua Chiu the register of deeds of Manila, under date of July 23, 1931, deal on the faith of such a security of ascertaining
to guarantee the payment of a debt of P20,000 due on or give constructive notice to the said attaching creditors? whether or not this stock is in pledge or mortgaged to
before June 19, 1932. The said certificates of stock were In passing, let it be noted that the registration of the said others. He finds the name of the owner on the books of
delivered with the mortgage to the mortgagee, Chua Chiu. chattel mortgage in the office of the corporation was not the company as a subscriber of paid-up stock, amounting
The said mortgage was duly registered in the office of the necessary and had no legal effect. (Monserrat vs. Ceron, 58 to 180 shares, with the certificates in his possession, pays
register of deeds of Manila on June 23, 1931, and in the office Phil., 469.) The long mooted question as to whether or not for these certificates their full value, and has the transfer
of the said corporation on September 30, 1931. shares of a corporation could be hypothecated by placing a to him made on the books of the company, thereby
On November 28, 1931, Chua Chiu assigned all his right and chattel mortgage on the certificate representing such shares obtaining a perfect title. What other inquiry is he to make,
interest in the said mortgage to the plaintiff and the we now regard as settled by the case of Monserrat vs. so as to make his investment certain and secure? Where is
assignment was registered in the office of the register of Ceron, supra. But that case did not deal with any question he to look, in order to ascertain whether or not this stock
deeds in the City of Manila on December 28, 1931, and in the relating to the registration of such a mortgage or the effect of has been mortgaged? The chief office of the company
office of the said corporation on January 4, 1932. such registration. Nothing appears in the record of that case may be at one place today and at another tomorrow. The
even tending to show that the chattel mortgage there owner may have no fixed or permanent abode, and with

CORPORATION LAW: 7. captial structure Page 167 of 201

 his notes in one pocket and his certificates of stock in the By analogy with the foregoing and considering the ownership appellant and the judgment appealed from must be affirmed
other the one evidencing the extent of his interest in of shares in a corporation as property distinct from the without special pronouncement as to costs in this instance.
the stock of the corporation, the other his right to money certificates which are merely the evidence of such ownership,
owing him by his debtor, we are asked to say that the it seems to us a reasonable construction of section 4 of Act
mortgage is effectual as to the one and inoperative as to No. 1508 to hold that the property in the shares may be
the other." deemed to be situated in the province in which the
corporation has its principal office or place of business. If this
But the case of Fua Cun vs. Summers and China Banking
province is also the province of the owner's domicile, a single
Corporation, supra, did not decide the question here
registration sufficient. If not, the chattel mortgage should be
presented and gave no light as to the registration of a chattel
registered both at the owner's domicile and in the province
mortgage of shares of stock of a corporation under the
where the corporation has its principal office or place of
provisions of section 4 of the Chattel Mortgage Law, supra.
business. In this sense the property mortgaged is not the
Section 4 of Act No. 1508 provides two ways for executing a certificate but the participation and share of the owner in the
valid chattel mortgage which shall be effective against third assets of the corporation.
persons. First, the possession of the property mortgage must
Apart from the cumbersome and unusual method of
be delivered to and retained by the mortgagee; and, second,
hypothecating shares of stock by chattel mortgage, it appears
without such delivery the mortgage must be recorded in the
that in the present state of our law, the only safe way to
proper office or offices of the register or registers of deeds. If
accomplish the hypothecation of share of stock of a Philippine
a chattel mortgage of shares of stock of a corporation may
corporation is for the creditor to insist on the assignment and
validly be made without the delivery of possession of the
delivery of the certificate and to obtain the transfer of the
property to the mortgagee and the mere registration of the
legal title to him on the books of the corporation by the
mortgage is sufficient to constructive notice to third parties,
cancellation of the certificate and the issuance of a new one
we are confronted with the question as to the proper place of
to him. From the standpoint of the debtor this may be
registration of such a mortgage. Section 4 provides that in
unsatisfactory because it leaves the creditor as the ostensible
such a case the mortgage resides at the time of making the
owner of the shares and the debtor is forced to rely upon the
same or, if he is a non-resident, in the province in which the
honesty and solvency of the creditor. Of course, the mere
property is situated; and it also provides that if the property is
possession and retention of the debtor's certificate by the
situated in a different province from that in which the
creditor gives some security to the creditor against an
mortgagor resides the mortgage shall be recorded both in the
attempted voluntary transfer by the debtor, provided the by-
province of the mortgagor's residence and in the province
laws of the corporation expressly enact that transfers may be
where the property is situated.
made only upon the surrender of the certificate. It is to be
If with respect to a chattel mortgage of shares of stock of a noted, however, that section 35 of the Corporation Law (Act
corporation, registration in the province of the owner's No. 1459) enacts that shares of stock "may be transferred by
domicile should be sufficient, those who lend on such security delivery of the certificate endorsed by the owner or his
would be confronted with the practical difficulty of being attorney in fact or other person legally authorized to make
compelled not only to search the records of every province in the transfer." The use of the verb "may" does not exclude the
which the mortgagor might have been domiciled but also possibility that a transfer may be made in a different manner, G.R. No. L-12476 January 29, 1960
every province in which a chattel mortgage by any former thus leaving the creditor in an insecure position even though
COLLECTOR OF INTERNAL REVENUE, petitioner, vs.
owner of such shares might be registered. We cannot think he has the certificate in his possession. Moreover, the shares
ANGLO CALIFORNIA NATIONAL BANK (CROCKER-ANGLO
that it was the intention of the legislature to put this almost still standing in the name of the debtor on the books of the
NATIONAL BANK), as Treasurer for CALAMBA SUGAR
prohibitive impediment upon the hypothecation of shares of corporation will be liable to seizure by attachment or levy on
ESTATE, INC., respondent.
stock in view of the great volume of business that is done on execution at the instance of other creditors. (Cf. Uy
the faith of the pledge of shares of stock as collateral. Piaoco vs. McMicking, 10 Phil., 286, and Uson vs. Diosomito, Assistant Solicitor General Jose P. Alejandro and Special
61 Phil., 535.) This unsatisfactory state of our law is well Attorney Librada del Rosario-Natividad for petitioner.
It is a common but not accurate generalization that the situs known to the bench and bar. (Cf. Fisher, The Philippine Law of
Ozaeta, Gibbs and Ozaeta for respondent.
of shares of stock is at the domicile of the owner. The term Stock Corporations, pages 163-168.) Loans upon stock
situs is not one of fixed of invariable meaning or usage. Nor securities should be facilitated in order to foster economic REYES, J.B.L., J.:
should we lose sight of the difference between the situs of the development. The transfer by endorsement and delivery of a
shares and the situs of the certificates of shares. The situs of certificate with intention to pledge the shares covered Respondent Calamba Sugar Estate, Inc., herein represented
shares of stock for some purposes may be at the domicile of thereby should be sufficient to give legal effect to that by its trustee, the Anglo California National Bank, is a foreign
the owner and for others at the domicile of the corporation; intention and to consummate the juristic act without corporation organized and existing under the laws of the
and even elsewhere. (Cf. Vidal vs. South American Securities necessity for [Link] State of California, U.S.A., duly licensed (on May 8, 1946) to
Co., 276 Fed., 855; Black Eagle Min. Co. vs. Conroy, 94 Okla., do business in the Philippines. It has consistently filed its
199; 221 Pac,, 425 Norrie vs. Kansas City Southern Ry. Co., 7 We are fully conscious of the fact that our decisions in the income tax returns here through its resident attorney-in-fact.
Fed. [2d]. 158.) It is a general rule that for purposes of case of Monserrat vs. Ceron, supra, and in the present case On May 14, 1956, the petitioners Collector of Internal
execution, attachment and garnishment, it is not the domicile have done little perhaps to ameliorate the present uncertain Revenue the corporation of an assessment for alleged
of the owner of a certificate but the domicile of the and unsatisfactory state of our law applicable to pledges and deficiency income taxes for the years 1953, 1954 and 1955 in
corporation which is decisive. (Fletcher, Cyclopedia of the Law chattel mortgages of shares of stock of Philippine the respective amounts of P138,855.00, P131,759.00 and
of Private Corporations, vol. 11, paragraph 5106. Cf. sections corporations. The remedy lies with the legislature. P393,459.00, supposedly based upon capital again derived
430 and 450, Code of Civil Procedure.) from the respondent's sale to the Pasumil Planters, Inc., of
In view of the premises, the attaching creditors are entitled to P250,000 shares of the capital stock of the Pampanga Sugar
priority over the defectively registered mortgage of the

CORPORATION LAW: 7. captial structure Page 168 of 201

Mills (a domestic corporation) and of a promissory note, dated passed from the vendor to the vendee at said place, from Office of the Solicitor General Pompeyo Diaz and Solicitor
January 1, 1950, executed by the Pampanga Sugar Mills in the which time the incidents of ownership vested on the buyer. Pacifico P. de Castro for intervenor-appellant.
sum of $500,000.00. In an appeal by the respondent from the
The Collector argues that the sit us of shares of stock of a CONCEPCION, J.:
ruling of the Collector, the Court of Tax Appeals reversed said
corporation is considered to be at the domicide of the latter,
ruling and absolved the respondent form liability. This action involves the title to 1,600,000 shares of stock of
as held in some cases cited by him; but in the instant
the Lepanto Consolidated Mining Co., Inc., a corporation duly
This is an appeal by the Collector from that decision. problem, we are not concerned with the imposition of taxes
organized and existing under the laws of the Philippines,
upon the shares themselves, but on a sale efected
The parties stipulated that (a) the negotiations leading to the hereinafter referred to, for the sake of brevity, as the Lepanto.
abroad that resulted in capital gains, for which there is a
execution and conclusion of the agreement of sale, dated Originally, one-half of said shares of stock were claimed by
specific provision of law (Sec. 37 [e] N.I.R.C.). As stated by the
January 16, 1953, between the respondent corporation and plaintiff, Apolinario de los Santos, and the other half, by his
Tax Court, there is a distinction between the situs of personal
the Pasumil Planters, Inc., took place in San Francico, co-plaintiff Isabelo Astraquillo. During the pendency of this
properties and the situs of the income derived from the sale
California; (b) the payment on account of the sale were made case, the latter has allegedly conveyed and assigned his
or exchange of such properties.
by the Pasumil Planters, Inc., at the same foreign city; and (c) interest in and to said half claimed by him to the former. The
the sale was made under and in accordance with the laws of As to the contention that section 35 of the Corporation Law shares of stock in question are covered by several stock
that State. From the evidence presented, it also appears that (Act No. 1459) requires the transfer to be noted and entered certificates issued in favor of Vicente Madrigal, who is
on December 16, 1955, the Securities and Exchange not invalidate the transfer between the parties nor is it registered in the books of the Lepanto as owner of said stocks
Commission cancelled respondent's license to transact essential to vest title upon the vendee. The capital gains, now and whose indorsement in blank appears on the back of said
business in the Philippines, and on December 30, 1955, the sought to be taxed, arose from the severance of gain, from certificates, all of which, except certificates No. 2279
corporation was dissolved in accordance with the California the investment occasioned by the transfer of title abroad and marked Exhibit 2 covering 55,000 shares, are in plaintiffs'
law. not on account of any registration that might be effected possession. So was said Exhibit 2, up to sometime in 1945 or
later. 1946 when said possession was lost under the conditions set
The sole issue is whether the capital gains obtained from the
forth in subsequent pages.
sale constituted income from sources within or without the Wherefore, the judgment under view is hereby affirmed. No
Philippines. It was the opinion of the Tax Court that they were costs. Briefly stated, plaintiffs contend that De los Santos bought
income derived from abroad, and not subject to income tax. 55,000 shares from Juan Campos, in Manila, early in
December, 1942; that he bought 300,000 shares from Carl
It is hardly disputable that although shares of stock of a
Hess, in the same city, several days later; and that, before
corporation represent equities may consist of real as well
Christmas of 1942, be bought 800,000 shares from Carl Hess,
as personal properties therein, they are considered under
this time for the account and benefit of Astraquillo. By virtue
applicable law and jurisprudence as intangible personal
of vesting P-12, dated February 18, 1945, title to the
properties (see Art. 417 [2], Civil Code of the Philippines; Sec.
1,600,000 shares of stock in dispute was, however, vested in
35, Act No. 1459). Section 24 of the National Internal Revenue
the Alien Property Custodian of the U. S. (hereinafter referred
Codes levies income taxes on foreign corporations only on
to as the Property Custodian) as Japanese property. Hence,
income derived from sources within the Philippines; and with
plaintiffs filed their respective claims with the Property
respect to capital gains on the sale of personal properties,
Custodian. In due course, the Vested Property Claims
section 37 (e) of the same Tax Code deems the place of sale
Committee of the Philippine Alien Property Administration
as also that place or source of the capital gain:
made a "determination," dated March 9, 1948, allowing said
... Gains, profit, and income derived from the purchase of claims, which were considered and heard jointly as Claim No.
personal within and its sale without the Philippines or from 535, but, upon personal review, the Philippine Alien Property
the purchase or personal property without and its sale Administration made by said Committee and decreed that
within the Philippines, shall be treated as derived entirely "title to the shares in question shall remain in the name of the
from sources within the country in which sold. (Emphasis Philippine Alien Property Administrator." Consequently,
supplied) plaintiffs instituted the present action to establish title to the
aforementioned shares of stock. In their complaint, they pray
Construing the same provision of law (which is section 119 (e) that judgment be rendered declaring them lawful owners of
of the 1934 Act, U.S.I.R.C.), Unites States courts are in accord said shares of stock, with such dividends, profits and rights as
in disallowing the imposition of income taxes by its may have accrued thereto; requiring the defendant to render
government on capital gains where the sale takes place accounts and to transfer said shares of stock to plaintiffs'
outside its territorial jurisdiction. It is likewise the prevailing G.R. No. L-4818 February 28, 1955 names; and sentencing the former to pay the costs.
view that in ascertaining the place of sale, the determination
of when and where title to the goods passes from the seller to APOLINARIO G. DE LOS SANTOS and ISABELO The defendant herein is the Attorney General of the U. S.,
the buyer is decisive (East Coast Oil Co. vs. Comm., 31 B.T.A. ASTRAQUILLO, plaintiffs-appellees, vs. J. HOWARD successor to the "Administrator". He contends, substantially,
588, aff'd 85 F. [2d] 322, cer. den-299 U.S. 608, 81 L. Ed. 449, MCGRATH ATTORNEY GENERAL OF THE UNITED STATES, that, prior to the outbreak of the war in the Pacific, said
57 S. Ct. 234; also Disconto-Gaesellcraft vs. U.S. Steel SUCCESSOR TO THE PHILIPPINE ALIEN PROPERTY shares of stock were bought by Vicente Madrigal, in trust for,
Corporation, 267 U.S. 22; Compania General de Tabacos de ADMINISTRATION OF THE UNITED STATES, defendant- and for the benefit of, the Mitsui Bussan Kaisha (hereinafter
Filipinas vs. Collector, 279 U.S. 306, 73 L. Ed. 704, 49 S. Ct. appellant. referred to as the "Mitsuis"), a corporation organized in
304). REPUBLIC OF THE PHILIPPINES, intervenor-appellant. accordance with the laws of Japan, the true owner thereof,
with branch office in the Philippines; that on or before March,
In this case, it is admitted that the negotiation, perfection and Jose P. Laurel, Adolfo A. Scheerer, Antonio Quirino, and J. C. 1942, Madrigal delivered the corresponding stock certificates,
consummation of the contract of sale were all done in Orendain, for appellees. with his blank indorsement thereon, to the Mitsuis, which kept
California, U.S.A. It follows that title to the shares of stock Harold I. Baynton, Stanley Gilbert, Juan T. Santos, and Lino M. said certificates, in the files of its office in Manila, until the
Patajo, and Perkins, Ponce Enrile & Associates, for appellant. liberation of the latter by the American forces early in 1945;

CORPORATION LAW: 7. captial structure Page 169 of 201

that the Mitsuis had never sold, or otherwise disposed of, said with the request that he buy for the Mitsuis, from time to of the existence of mining papers and securities of the
shares of stock; and that the stock certificates time, some more shares of stock, in small lots; that Madrigal Lepanto in the offices of the Mitsuis at the Ayala Building,
aforementioned must have been stolen or looted, therefore, bought 200,000 additional shares of the Lepanto for the formerly known as the National city Bank Building in Manila,
during the emergency resulting from said liberation. Mitsuis; that, late in November or early in December, 1941, he went thereto in February 1945 and saw many documents
the stock certificates of the aforementioned 2,100,000 shares scattered on the desks and floor of said premises. Among said
Inasmuch as, pursuant to the Philippine Property Act, all
were returned to the Mitsuis, which had decided to stop papers, he noticed two stock certificates of the Lepanto, one,
property vested in the United States, or any of its officials,
buying, in view of the strained international situation then in the name of either a Japanese or Chinese, and the other, in
under the Trading with the Enemy Act, as amended, located in
prevailing; that, as branch manager of the Mitsuis, he was the the name of Vicente Madrigal, endorsed in blank. Soon,
the Philippines at the time of such vesting, or the proceeds
only official authorized to dispose of the shares in question, however, he heard voices from the stairs, whereupon he
thereof, shall be transferred to the Republic of the Philippines,
none of which was alienated by him; and that he had the departed hurriedly, for fear of being mistaken for a looter.
the latter sought permission, and was allowed, to intervene in
aforementioned stock certificates in his possession
this case and filed an answer adopting in substance the After analyzing the foregoing evidence for the defense, the
continuously until early in April 1943, when he delivered the
theory of the defendant. lower court found the same "inherently improbable" and
same to his successor in office, Kingy Miwa.
seemingly concluded that, as a consequence, it should accept
After due hearing, the Court of First Instance of Manila,
Apart from corroborating Kitajima's testimony relative to said plaintiffs' version, for which reason judgment was rendered as
presided over by Honorable Higinio B. Macadaeg, Judge,
delivery of stock certificates in April 1943, Kingy Miwa above stated. It is well settled, in this jurisdiction, that the
rendered a decision the dispositive part of which reads, as
testified that he kept the latter in his possession, as branch findings of fact particularly those relating to the credibility
follows:
manager of the Mitsuis; that said shares of stock were never of the opposing witnesses made by the Judge a quo, should
In view of the foregoing consideration, judgment is hereby sold or otherwise disposed of by the Mitsuis; that, late in not be disturbed on appeal, in the absence of strong and
rendered in favor of the plaintiffs and against the September 1944, he bade his assistant, one Miyazawa, to cogent reasons therefor. This policy is predicated upon the
defendant, declaring the former the absolute owners of the transfer all important documents to their residence and circumstance that the trial court has had an opportunity,
shares of stock of the Lepanto consolidated Mining headquarters, at Taft Avenue, Manila, although he did not denied to the appellate court to observe the behaviour of the
Company, covered by the certificates of stock, respectively, know personally whether or not the transfer was actually witnesses during the hearing, a potent factor in gauging their
in their (plaintiffs') possession. The transfer of said shares carried out; and that in January 1945, when the Japanese bias and veracity. In the case at bar, however, we notice that,
of stock in favor of the Alien Property Custodian of the U. S. were about to evacuate Manila, he told his Assistant Manager, rejecting the theory of the defense, the court of origin was
of America, now Philippine Alien Property Administration, is one Shinoda, to burn all important papers before leaving the guided, not by the conduct of the witnesses in the name
hereby declared null and void and of no effect. city. course of their testimony, but by what His Honor, the trial
Consequently, the Lepanto consolidated mining Company is Judge, regarded as the inherent weakness thereof, in the
Miguel Simon, brother of Carl Hess, from whom plaintiffs
ordered to cancel the certificates of stock issued in the evaluation of which court does not enjoy the advantage
claim to have purchased 1,100,000 shares of stock, affirmed
name of the Philippine Alien Property Custodian or already adverted to.
that Hess lived in front of his (Simon's) house; that they were
Philippine Alien Property Administrator, as the case may be.
close to each other and had long been associated in business; Moreover, the decision appealed from appears to have
Defendant shall pay the cost of the proceeding. (p. 67, R.A.)
that he was the office manager of "Hess and Zeitling" before assumed that plaintiffs' pretense must necessarily be relied
The defendant and the intervenor have appealed from this the war; that Hess used to tell him his daily transactions upon, owing to the infirmities said to have been found in the
decision. The main question for determination in this appeal is during the occupation; that at that time, Hess did not have in theory of the defense. This view suffers from a fatal defect. It
whether or not plaintiffs had purchased the shares of stock in possession any certificates of stock of the Lepanto in the overlooks that fact that the burden of proof is upon the
question. In support of the negative answer, appellants have name of Vicente Madrigal; that neither did Hess, during that plaintiffs, and that, accordingly, a decision in their favor is not
introduced the testimony of Vicente Madrigal, Matsune period, operate as broker, for being American, he was under in order unless a preponderance of the evidence supports
Kitajima, Kingy Miwa, Miguel Simon, E. A. Perkins and Victor E. Japanese surveillance, and that Hess had made, during the their claim. To put it differently, the alleged improbabilities in
Lednicky, as well as several pieces of documentary evidence. occupation, no transaction involving mining shares, except the testimony of the witnesses for the defense will not justify
when he sold 12,000 shares of the Benguet Consolidated, a judgment against the latter, if the evidence for the plaintiffs
Mr. Madrigal, whose testimony before the claims Committee inherited from his mother, sometime in 1943. is more improbable than, or, at least, as improbable as, that
of the Philippine Alien Property Administration was admitted of the defense. Such is the situation obtaining in the case at
with plaintiffs' consent, stated that he purchased the shares E. A. Perkins, a member of the law firm DeWitt, Perkins & bar. Indeed, upon careful examination of the record before us,
of stock in question, among others, for the Mitsuis and at their Ponce Enrile testified substantially as follows: On October 27, we find it impossible to share the conclusions, made in the
request; that he paid with his own funds the corresponding 1945, Leonardo Recio brought stock certificate no. 2279 decision appealed from, relative to the alleged flaws in the
price, which was later reimbursed to him by the Mitsuis; that (Exhibit 2) and offered the same for sale to Clyde DeWitt, who version of the defense.
he held the corresponding stock certificates, which were in turn, asked Perkins, whose room adjoined that of DeWitt, to
issued in his name, with the understanding that he would join them. Recio showed Exhibit 2 to DeWitt stating that he Let us, first, examine the evidence for the plaintiffs,
effect the necessary transfer, to the Mitsuis, upon demand; (Recio) wanted P0.13 per share. DeWitt handed Exhibit 2 over consisting, mainly, of their own testimony and that of
and that, shortly before the outbreak of war, he delivered said to Perkins, who, after examining the instrument, returned it to Primitivo Javier and Leonardo Recio.
stock certificates, with his blank endorsement thereon, to the DeWitt. The latter, thereafter, checked it with a
According to De los Santos, on or about December 8, 1942,
Mitsuis, to whom said stock belonged. communication of the Property Custodian and then advised
he purchased from Juan Campos, in Manila, 500,000 shares of
Recio that said Exhibit 2 was one of the stock certificates
Matsune Kitajima declared that in June 1941 he relieved one looted from the Mitsuis and that he (DeWitt) would have to stock of the Lepanto, for the aggregate sum of P30,000.00, or
Kobayashi, as manager of the branch office of the Mitsuis in report the matter to said official. As DeWitt, thereupon, about P0.06 each share, paid in cash, in exchange for the
Manila; that he then receive from Kobayashi the stock telephoned one Mr. Erickson, of the Property Custodian's corresponding stock certificates, which were delivered to him.
certificates for about 1,900,000 shares of the Lepanto, office, Recio stepped out of the room without Exhibit 2, which Several days later, he bought from Carl Hess, in Manila,
belonging to the Mitsuis, but issued in favor of the Vicente neither he or plaintiffs had ever tried to recover. 300,000 shares of the Lepanto, at the same rate. Soon after,
Madrigal, except the certificates for 200,000 shares, which he visited his daughter in Baguio, where he, likewise, saw his
were in the name of the Mitsuis; that all these certificates Victor E. Lednicky, one of the organizers and prewar directors co-plaintiff, and former secretary, Isabelo Astraquillo. Before
were in kept in a steel safe in said office of the Mitsuis; that, of the Lepanto, and present vice-president and member of its leaving Astraquillo's house, De los Santos happened to
in July 1941, he returned the stock certificates to Madrigal, board of director, asserted that, having learned from a soldier mention his aforesaid purchases of Lepanto shares, at P0.06

CORPORATION LAW: 7. captial structure Page 170 of 201

each, whereupon, Astraquillo expressed the wish to buy then advised them that said receipt had been burned with his us tangible proof of the veracity of, at least this part of
800,000 shares at the same price, the amount of which he house. plaintiffs' story. Yet, we are now told that, one day in
delivered to De los Santos the next day. Upon his return to December, 1945, Recio's house accidentally caught fire, and
Leonardo Recio said that sometime in 1945, Javier gave him
Manila, De los Santos purchased from Hess said 800,000 that the latter consumed, also, said receipt, kept in a wallet,
Exhibit 2, stating that it belonged to his uncle, who wanted to
shares, the certificates of which were turned over by the which, by accident, he had failed to bring with him. Aren't
alienate the corresponding shares of stock at P0.15, more or
former to Astraquillo, in Baguio, at about Christmas time. there too many accidents in plaintiffs' version? At any rate,
less, each, and suggesting that he offer the same to Mr.
Over 3 years later, or in January 1946, De los Santos repaired we have thus been deprived of all means to check with
DeWitt: In the latter's office, Atty. Orlina told Recio that DeWitt
to the offices of the Lepanto in Manila to ascertain whether it reasonable certainty the truth of any of the controverted
was busy and bade him (Recio) to return later. Recio delivered
accepted certificates of stock for registration. He then portions of their pretense. In other words, the same is based,
Exhibit 2 to Orlina, who gave him a receipt, which,
received a negative answer. Upon further inquiry, he learned, and must stand or fall, therefore, upon the uncorroborated
subsequently, he showed to Javier. When, soon after, he went
in February 1946, that the shares in the name of Madrigal testimony of plaintiff Apolinario de los Santos, and the
back to Orlina, the latter introduced him to Mr. DeWitt, who
were blocked. So engaged the services of Atty. A. Scheerer, credence and weight that may be given thereto. Upon a
stated that the shares of stock covered by Exhibit 2 were
who secured an order of release from the Freezing Control review of the record, we find, however, that said testimony is
included in the list of questioned shares. DeWitt, also, asked
Office of the United States Treasury Department. As he highly improbable and inherently weak, for, among other
him whether he would leave the certificate, to which Recio
brought a copy of this order to the offices of the Lepanto, on things:
replied affirmatively. While he was away, several months
or about May 1, 1946, he was advised that no transfer could
later, or shortly before Christmas, his house at Blumentrit (1) De los Santos declared that, in December, 1942, he
be affected without the authority of Clyde DeWitt, the
Street, San Juan del Monte, Rizal, and everything contained purchased 300,000 shares from Juan Campos and 1,300,000
company president. Thereupon, De los Santos caused to be
therein, including the aforementioned receipt, which was in shares from Carl Hess, at P0.06 each share. As an enterprise
filed, with the offices of the Property Custodian, the
his wallet, were destroyed by fire. controlled by Americans, the Lepanto had been seized by the
corresponding claim for the shares of stock in question, with
Japanese who, accordingly, were operating it. At that time,
the result already adverted to. It thus appears that the only evidence on the alleged sale of
there were no clear, or, even, substantial, indications that
the shares of stock in question to the plaintiffs the main
Astraquillo tried to corroborate the testimony of De los changes would take place, either in the local or in the
issue in the case at bar is the testimony of Apolinario de los
Santos, concerning the purchase of 800,000 shares of stock international situation in the near of foreseeable future. In
Santos, who now claims to be the sole owner thereof. Juan
on behalf of the former. Moreover, Astraquillo declared that, deed, the morale of the population in democratic countries,
Campos and Carl Hess, the alleged vendors, could not take
being in need of money, he came to Manila in November or particularly in the Philippines, was then at its lowest ebb. Both
the witness stand, for Hess was executed by the Japanese,
December 1945, and delivered to stock broker Leonardo Recio in Europe and in the Pacific, the Axis powers had reached in
and Campos died during the liberation of Manila. Thus, death
stock certificate No. 2279 (Exhibit 2) for 55,000 shares, with a enemy territories the highest degree of penetration attained
has sealed the lips of the only persons who could have
view to disposing of the same at a price ranging from P0.13 to during the last war. Before the world had recovered from the
positively corroborated or contradicted the aforementioned
P0.15 each. He advised Recio that, in the absence of any shock produced by the German blitzkrieg operations in the
testimony of De los Santos. Was this a mere accident of fate,
buyer, hew could see Mr. DeWitt, who, probably, would be low countries and in France, the Nazis were already knocking
as plaintiffs would have us believe? Or were Campos and Hess
interested in purchasing the shares. Sometime later, at the gates of Stalingrad entrenched in New Guinea and the
named by the plaintiffs as their immediate predecessors in
Astraquillo learned that, according to Recio, upon seeing Soloman Islands. The people had a hazy notion about the
interest precisely because, as contended by appellants, said
Exhibit 2, DeWitt retained it upon the ground that the facts pertinent to the Battle of Midway (June 3-6, 1942) and
deceased persons could no longer said testimony?
shares represented therein had been blocked by the United the implications thereof were by and large unknown. In other
States and that he (Recio) got therefor a receipt, which was For obvious reasons, the Court can not answer these words, the conditions were such as to warrant the general
subsequently lost in a fire that destroyed his (Recio's) questions with absolute certainty. It can only explore the belief that the Lepanto would remain under the authority and
dwelling. As Astraquillo hurried to Manila, he was told that possibilities and probabilities of the case, in the light of management of the Japanese Imperial forces for an indefinite
representatives of the CIC would go to Baguio to investigate. human experience. And, viewed from this angle, it can not be period of time. As a consequence, the Lepanto stock had not
So, he returned to Baguio, but he did not wait for the denied that the demise of Campos and Hess before the filing merely a doubtful value, but as admitted by Santos
investigation in that city. Late in February or early in March, of plaintiffs claim seriously impairs the weight thereof. That even, no market value at all (p. 132, t.s.n). Indeed, the
1946, he came back to Manila and asked the assistance of De the Grim Reaper had chosen to strike at one of the alleged stockholders could neither collect dividends nor exercise their
los Santos, whereupon both contacted Atty. Scheerer for the predecessors of the plaintiffs is a matter that may be voting power, or otherwise participate in the operation of the
purpose already stated. attributed to sheer fortuitousness. When, as in the case at enterprise. Moreover, there was a possibility of its assets
bar, not one, but both have thus been eliminated,, it is clear, being fully confiscated, for all practical purposes, should
Primitivo Javier narrated that, late in 1945, he received
however, that this circumstances is most unusual, and most Japan emerge victorious in the was in the Pacific, which it
Exhibit 2 from his uncle, Astraquillo, who wanted to sell the
place the Court on guard. appeared to be winning easily up to that time (December,
55,000 shares represented by said stock certificate (No. 2279)
1942).
at a price ranging from P0.12 to P0.15 each share. He, in turn, The need for caution becomes more imperative when we bear
delivered the certificate to Recio, a licensed broker. in mind that an important piece of documentary evidence, (2) Inasmuch as citizens of the United States held a majority
Subsequently, Recio reported to him that he (Recio) had which allegedly existed after liberation, and could have of the shares of stock of the Lepanto, the same had from the
brought Exhibit 2 to the office of Mr. DeWitt, whom he did not effectively corroborated one phase of the plaintiff's view point of the Japanese, an enemy character, and the
see on his first visit; that he then left Exhibit 2 in the hands of contention, had, according to their evidence, disappeared purchase of said stocks was, therefore, a hostile act. As a
a person who worked in said office, one Atty. Orlina, who through still another unfortunate turn of the wheel of fate. It matter of fact, in the proceedings before the Vested Property
issued a receipt therefor; that, when Recio came back, later will be recalled that late in 1945, Leonardo Recio, allegedly Claims Committee, the parties including plaintiffs herein
on, DeWitt told him that Exhibit 2 was defective; and that, acting on behalf of Astraquillo, offered to sell to Atty. DeWitt had stipulated "that such transfers and dealings in said stock
accordingly, Exhibit 2 was left in the possession of Mr. DeWitt. the 55,000 shares represented by stock certificate No. 2279 were prohibited by the Japanese during the occupation and
Javier relayed this information to Astraquillo, who, thereupon, (Exhibit 2). Recio testified that, having been unable to see hence were dangerous." (Record on Appeal, p. 110). Said
came to Manila. Both went to the temporary residence of DeWitt, when he (Recio) went to the latter's office, for the first transactions could jeopardize the life of the parties thereto
Recio in Sampaloc, his house in San Juan del Monte, Rizal, time, said Exhibit 2 was left by him (Recio) in the hands of and De los Santos was aware of the "highly dangerous" or
having been destroyed by fire late in December 1945. Recio Atty. Orlina who worked therein and gave him a receipt "very risky" nature of the "mere possession" of the stock
therefor. This receipt, if produced, would have surely afforded certificates in question. (pp. 141, 143, t. s. n.)

CORPORATION LAW: 7. captial structure Page 171 of 201

(3) Astraquillo is merely a former employee of De los Santos, to this effect, for the latter had no possible motive to commit Mitsuis would have caused a grave injury upon the Japanese
who had, therefore, no reason to risk his neck, not only by perjury, and was in a position to know what he was talking propaganda and thereby earned severe punishment from the
allegedly buying 800,000 shares of stock for Astraquillo, but, about. Apart from being a brother-in-law of Hess, Simon was Imperial Government. Nothing, absolutely nothing, in the
also, by avowedly bringing with him (De los Santos) the manager of the firm Hess & Zeitling, of which Hess was the record, or in contemporary history, warrants the belief that
corresponding stock certificates from Manila to Baguio, to senior partner, who used to inform him (Simon) of his (Hess) the Mitsuis, who were closely associated with the Japanese
make delivery thereof to Astraquillo, as the defense would business transactions. Government, could be guilty of such folly.
have us believe, notwithstanding the many Japanese check
(8) Campos and Hess could not have delivered the stock Let us now turn our attention to the evidence for the defense,
points in the 250 kilometers highway connecting both cities
certificates for the 1,600,000 shares of stock in question, and, beginning with the testimony of Victor E. Lednicky. It will be
and the absence of any monetary or other gain he could have
consequently, said shares of stock could not have been sold recalled that this witness claimed to have gone to the
derived from the acts he professes to have performed.
by them, to De los Santos in December 1942, inasmuch as premises of the Mitsuis, sometime in February 1945, including
(4) According to the Ballantyne schedule the accuracy of from December 1941 to April 1943, said stock certificates two (2) Lepanto certificates of stock, one of which was in the
which has not been impugned by plaintiffs herein the were continuously in the custody of Matsume Kitajima, name of Vicente Madrigal, whose blank indorsement
Japanese war notes in the Philippines had the same exchange manager of the Mitsuis in Manila, whose testimony was appeared thereon. Thus, the defense sought to prove that the
of purchase value as the currency of our legitimate corroborated by his successor in office, Kingy Miwa, to whom certificates of the shares of stock involved in this case have
government, in December, 1942 and this was conceded by Kitajima turned over the stock certificates in April 1943. The probably been looted. The lower court found Lednicky's story
De los Santos (p. 136, t. s. n.) when they claim to have sincerity of Matsume Kitajima and Kingy Miwa can not inherently improbable and then concluded that the theory of
purchased the Lepanto stocks. The P48,000 supposedly paid doubted, for neither appears to have any possible reason to the looting must, consequently, be "ruled out". To our mind,
by the De los Santos, and the identical sum allegedly trifle with the facts. Indeed, their testimony, if accepted as however, the testimony of Lednicky is not inherently
disbursed by Astraquillo, for their respective stock, true, would ultimately result in the confiscation, by the improbable. Besides, it is a matter of common knowledge, of
represented, therefore, the same amount in legal tender of Republic of the Philippines, of the shares of stock in question which judicial notice may be taken, that many offices and
the Commonwealth of the Philippines. In fact, according to and, thus, place the same beyond the reach of the Mitsuis. dwellings were looted during the liberation of Manila. The
the evidence for the plaintiffs, part of the price allegedly paid possibility that possession of the stock certificates in question
It has been intimated that Kitajima and Kingy may have
by Astraquillo, or P6,000, were in the genuine Philippine may have been secured by looting should not be "ruled out,"
testified as they did, either to protect themselves, because
money, representing his savings for 25 years. Said sum of therefore, irrespective of the credence and weight given to
they might have disposed of the shares of stock in question
P6,000 being insufficient to cover the cost of 800,000 shares the testimony of Lednicky. Actually, said certificates are
for their personal benefit, or because there had been undue
of stock, Astraquillo, it is urged, alienated other properties to included in the list of stocks certificates of the Lepanto which,
influence or pressure from the authorities presumably
raise the amount necessary thereof. It is very difficult to soon after liberation, were reported and considered looted
officers of the government of the United States. But these are
believe that the plaintiffs would have parted with P48,000 from the Mitsuis, and, accordingly, "blocked" or "frozen" by
mere speculations, without sufficient basis. Besides, judicial
each precisely when, owing to the abnormal conditions the authorities. Irrespective of the foregoing, De los Santos
notice may be taken of the circumstance that, during the
brought about by the occupation, said funds might be could not have obtained those certificates from Campos and
occupation, even minor Japanese officials could easily make
needed, at any time, to meet unforeseen emergencies of the Hess in December 1942, inasmuch, as, from December 1941
money, in the Japanese properties. Again, in December, 1942,
gravest and most vital nature for shares of stock of dubious to April 1943, Kitajima had been continuously in possession of
the Japanese in the Philippines appeared to have no doubts
value then and in the foreseeable future. said documents, none of which had been held by Hess during
that, in effect, Japan had already won the war. In short,
the occupation.
(5) We are not satisfied that either De los Santos or Kitajima and Kingy must have thought that, sooner or later,
Astraquillo possessed enough resources to have P48,000, in Japan would own the Lepanto and that, therefore, they would The lower court considered against the defense the
cash, each, in December 1942. Their evidence on this point is have to account for the shares of stock under consideration. circumstance that Lednicky, Simon and Perkins had not
too general apart from being based exclusively upon their Consequently, it is most unlikely that neither would have testified before the Vested Property Claims Committee. There
respective oral testimonies, which are absolutely misappropriated said shares of stock as suggested by the is no evidence, however, that any of them knew of the
uncorroborated to support their contention. At any rate, De plaintiffs. proceedings before said committee. Furthermore, none of
los Santos admitted that he is "not yet" rich (p. 134, t. s. n.), them has any personal interest in the outcome of this action.
The benefits which the Mitsuis and Japan may derive from a
and his testimony suggests that he did not even own the Consequently, they have no possible motive to distort the
decision against the plaintiffs inasmuch as the value of the
house in which he lived. truth, unlike De los Santos, who, as the present claimant of all
shares of stock in question would then be credited in payment
shares of stock in dispute, will de directly affected by the
(6) Campos offered to sell his stocks, according to De los of the reparation which may be demanded by the Philippines
outcome of the case at bar. His testimony, therefore, cannot
Santos, at P0.06 each (although its par value was P0.10), and/or the United States has been pointed out, in the
be more weighty than that of the aforementioned witnesses
stating that "he (Campos) needed money" (p. 43, t.s.n.), and dissenting opinion, as a possible motive for the commission of
for the defense.
advised him that Hess was, also, willing to dispose of his own perjury by Kitajima and Kingy. Besides being purely
stocks at the same price. Being, accordingly, aware that conjectural in nature, this line of thought which not even The decision appealed from criticizes the testimony of Perkins
Campos and Hess were in need of money and considering the the plaintiffs have taken would have no leg to stand on, upon the following grounds:
risks attending the transaction, it is but logical to expect De unless we assume that the Mitsuis had sold or otherwise
(1) Having taken no part in the alleged looting of Exhibit 2,
los Santos, an experienced trader in stocks, to bargain for a disposed of said stocks during the year 1942, but before the
Recio had nothing to fear in connection therewith and, so, he
lower price. Yet, the evidence for the plaintiffs shows that alleged transactions between Campos and Hess, on the one
could not have left the office of Mr. DeWitt, while the latter
neither he nor Astraquillo tried to do so, contrary to the hand, and the plaintiffs on the other, in December of that
was talking over the telephone with a representative of the
normal course of events. year. It is inconceivable, however, that the Mitsuis would part
Alien Property Custodian; .
with the stocks in question, precisely when Japanese was at
(7) De los Santos could not have purchased 1,300,000 shares
the crest of its military and political victories. Indeed, even if (2) Inasmuch as DeWitt had stated that Exhibit 2 was
of stock, from Hess, and received from him the corresponding
its officers had already foreseen, at the time, the eventual included in the list of looted stock certificates, Perkins should
stock certificates, endorsed in blank by Vicente Madrigal,
defeat of the axis powers and everything then appeared to have known that, as holder of the certificate, Recio is
for Hess had never had such stock certificates in his
indicate the contrary the Mitsuis could not have disposed presumed to be the one who stole the same. Why then
possession during the occupation. There is no plausible
of said stocks without thereby revealing their own lack of
reason to doubt the veracity of the testimony of Miguel Simon
faith in the ability of Japan to achieve final victory. Thus, the

CORPORATION LAW: 7. captial structure Page 172 of 201

plaintiffs inquire did Perkins fail to prevent Recio from the Alien Property Administration, there is a typewritten president, countersigned by the secretary or clerk and
leaving said office? name, Kingy Miwa, and above it is a signature. Will you sealed with the seal of the corporation, shall be issued in
kindly tell the Court if that is your signature or not? Please accordance with the by-laws. Shares of stock so issued are
As regards the first observation, suffice it to say that, as
look over it again. A. No. It is not mine. personal property and may be transferred by delivery of
bearer of the Exhibit 2, Recio who, according to the lower
the certificate endorsed by the owner or his attorney in fact
court, is an intelligent man must have realized the danger, Q. Please examine it carefully and tell the Court
or other person legally authorized to make the transfer. No
probably unforeseen by him, of being considered a privy to afterwards if you recognize that signature. Examine it
transfer, however, shall be valid, except as between the
the looting of said stock certificates, of which he might have carefully. A. It looks very similar to my signature.
parties, until the transfer is entered and noted upon the
been unaware before the conference with Mr. DeWitt. Hence,
Q. But would you want or are you willing to go on books of the corporation so as to show the names of the
Recio's fright and virtual flight. Verily, the testimony of Perkins
record and say that it is not your signature? A. I parties to the transaction, the date of the transfer, the
on this point is borne out by the undisputed fact that Exhibit 2
can not say. I don't exactly remember that I signed this, but number of the certificate, and the number of shares
was left by Recio in the hands of DeWitt, and that neither
it looks very similar to my signature. transferred.
Astraquillo, nor his alleged successor in interest, De los
Santos, has ever demand from DeWitt the return of said Q. You will not testify under oath that this is your No shares of stock against which the corporation holds any
certificate, or even recriminated Recio for having voluntarily signature? A. Yes. sir. unpaid claim shall be transferable on the books of the
parted with its possession, as he would have us believe, corporation. (Emphasis supplied.)
without authority therefor, as a broker or agent who was Q. What do you mean to say by "yes, sir"? Do you
swear that this is your signature or not your signature? Pursuant to this provision, a share of stock may be transferred
supposed merely to find a buyer.
A. I think this is my signature. by endorsement of the corresponding stock certificate,
As to the second observation, Perkins knew that Recio was coupled with its delivery. However, the transfer shall "not be
acting solely as a broker or agent. As such, he was not the Q. So, you are willing to go on record now that that valid, except as between the parties," until it is "entered and
real holder of Exhibit 2, and, consequently, the presumption signature appearing in Exhibit "M" is your signature? noted upon the books of the corporation." no such entry in
adverted to did not apply to him. Even if it did, however, what A. Yes, I think so. (pp. 125-126, t. s. n.) the name of the plaintiffs herein having been made, it follows
could Perkins have done? Use force or violence upon the We do not agree with its appraisal by the lower court. It is that the transfer allegedly effected by Juan Campos and Carl
person of Recio, or ask a policeman to detain him? Neither clear that, as he did not remember the execution of Exhibit M Hess in their favor is "not valid, except as between"
step, however, could have been taken without some risks. To several years before the hearing of this case, Miwa had themselves. It does not bind either Madrigal or the Mitsuis,
begin with, Perkins could not have properly taken the law in doubts about the genuineness of the signature thereon, but who are not parties to said alleged transaction. What is more,
his own hands. Had he done so, Recio could have legally used the appearance thereof, similar or identical to that of his own the same is "not valid," or, in the words of the Supreme Court
force against force. Moreover, said presumption is rebuttable signature, prevented him from denying its authenticity. This of Wisconsin (Re Murphy, 51 Wisc. 519, 8 N. W. 419) which
and would have easily been offset by the undeniable fact that does not indicate lack of veracity on his part. At any rate, were quoted approval in Uson vs. Diosomito (61 Phil., 535)
Recio had acted merely in a representative capacity. Again, plaintiffs claim to have bought the shares of stock in question "absolutely void" and, hence, as good as non-existent, insofar
why should Perkins take the initiative in the matter? Was it in December, 1942, or during the management of Kitajima, as Madrigal and the Mitsuis are concerned. For this reason,
not being handled by his associate in the law firm, Mr. DeWitt, who held the corresponding stock certificates continuously although a stock certificate is sometimes regarded as quasi-
one of the most able members of the Philippine Bar? It may from December, 1941, to April, 1943, when Miwa substituted negotiable, in the sense that it may be transferred by
not be amiss to add that the record before us discloses him, so that neither Campos nor Hess could have delivered endorsement, coupled with delivery, it is well settled that the
absolutely nothing that may cast even a shadow of doubt those certificates to De los Santos in December 1942. Apart instrument is non-negotiable, because the holder thereof
upon the honesty of Mr. Perkins. from this, if there are flaws in the proof for the defense, those takes it without prejudice to such rights or defenses as the
The language of the lower court in commenting on the of the evidence for the plaintiffs are much bigger and more registered owner or creditor may have under the law, except
testimony of Miwa was: substantial and vital. Consequently, we hold that plaintiffs insofar as such rights or defenses are subject to the
have not established their pretense by a preponderance of limitations imposed by the principles governing estoppel.
. . . In general, the testimony of Miwa is unreliable. His the evidence. Certificates of stock are not negotiable instruments (post,
behaviour in Court in denying first and then in accepting
Even, however, if Juan Campos and Carl Hess had sold the Par. 102), consequently, a transferee under a forged
later his own signature throws him to a position where the
shares of stock in question, as testified to by De los Santos, assignment acquires no title which can be asserted against
Court must look upon him with suspicion and distrust. His
the result, insofar as plaintiffs are concerned, would be the the true owner, unless his own negligence has been such
prevarication before the Court as to the genuineness of his
same. It is not disputed that said shares of stock were as to create an estoppel against him (Clarke on
own signature was probably due to the conscience of a
registered, in the records of the Lepanto, in the name of Corporations, Sec. Ed. p. 415). If the owner of the
man who came to the Court with a mental reservation, but
Vicente Madrigal. Neither it is denied that the latter was, as certificate has endorsed it in blank, and it is stolen from
who may have been compelled under the circumstances to
regards said shares of stock, a mere trustee for the benefit of him, no title is acquired by an innocent purchaser for
play the role of a willing tool. (p. 54, R.A.)
the Mitsuis. The record shows and there is no evidence to value (East Birmingham Land Co. vs. Dennis, 85 Ala. 565, 2
The following portion of Miwa's testimony illustrates the point the contrary that Madrigal had never disposed of said L.R.A. 836; Sherwood vs. mining co., 50 Calif. 412). As was
referred to in the decision appealed from: shares of stock in any manner whatsoever, except by turning said by the Supreme Court of the United States in a leading
over the corresponding stock certificates, late in 1941, to the case (Western Union Telegraph Co. vs. Davenfort, 97 U. S.
ATTY. QUIRINO: 369; 24 L. Ed. 1047)
Mitsuis, the beneficial and true owners thereof. It has,
Q. Will you please go over this paper which for moreover, been established,, by the uncontradicted "Neither the absence of blame on the part of the officers of
purposes of identification we request that it be marked as testimony of Kitajima and Miwa, the managers of the Mitsuis the company in allowing an unauthorized transfer of stock,
Exhibit M for the plaintiffs and which was marked Exhibit 6- in the Philippines, from 1941 to 1945, that the Mitsuis had nor the good faith of the purchaser of stolen property, will
b before the Vested Property Claims Committee, and tell us neither sold, conveyed, or alienated said shares of stock, nor avail as an answer to the demand of the true owner. The
if you know that document? A. No. I do not delivered the aforementioned stock certificates, to anybody great principle that no one can deprived of his property
remember this paper. during said period. Section 35 of the Corporation Law reads: without his assent, except by processes of the law,
Q. Mr. Miwa, at the bottom of this certificate or Exhibit The capital stock corporations shall be divided into shares requires, in the case mentioned, that the property
M, which was Exhibit 6b in the committee and submitted by for which certificates signed by the president or the vice- wrongfully transferred or stolen should be restored to its

CORPORATION LAW: 7. captial structure Page 173 of 201

 rightful owner." (The Philippine Law of Stock Corporations where he has no reason to doubt the latter's honesty, . . . . possessing this attribute prior thereto. Again, apart from
by Fisher, p. 132.) (Emphasis supplied.) (Emphasis supplied.) being distinct from the general Corporation Law, the
aforementioned Uniform Act is not in force in the Philippines.
In the language of Fletcher's Cyclopedia Corporations (Vol. 12, In the leading case of Knox vs. Eden Muscee American Co. (42
In this connection, it should be noted that this special piece of
pp. 521-534): N. E. 988, 992-993), the rule has been forcefully stated as
legislation was adopted in some states of the union as early
follows:
The doctrine that a bona fide purchaser of shares under a as the year 1910. The failure of the Philippine government to
forged or unauthorized transfer acquires no title as against The courts have been frequently importuned to extend the incorporate its provisions in our statute books, for a period of
the true owner does not apply where the circumstances are qualities of negotiability of stock certificates beyond the almost 45 years, is, to our mind, clear proof of the
such as to estop the latter from asserting his title. . . . limits mentioned, and clothe them with the same character unwillingness of our department to change the policy set forth
of complete negotiability as attaches to commercial paper, in section 35 of Act No. 1459. Needless to say, this fact
xxx xxx xxx
so as to make a transfer to a purchaser in good faith for negates our authority which is limited to the interpretation
A reason often given for the rule is that it is a case for the value equivalent to actual title, although there was no of the law, and its application, with all its imperfections to
application of the maxim that where one of two innocent agency in the transferor, and the certificate had been lost abandon what the dissenting opinion characterizes as the
parties must suffer by reason of a wrongful or unauthorized without the fault of the true owner, or had been obtained "civil law standpoint," and substitute, in lieu thereof, the
act, the loss must fall on the one who first trusted the by theft or robbery. But the courts have refused to accede commercial viewpoint, by applying said section 5 of the
wrongdoer and put in his hands the means of inflicting such to this view, and we have found no case entitled to be Uniform Stock Transfer Act, although not a part of the law of
loss. But "negligence which will work an estoppel of this regarded as authority which denies to the owner of a stock the land. Indeed, even in matters generally considered as
kind must be a proximate cause of the purchase or certificate which has been lost without his negligence, or falling within "commercial territory", the Roman Law concept
advancement of money by the holder of the property, and stolen, the right to reclaim it from the hands of any person has not given way in the Philippines to the Common Law
must enter into the transaction itself "; the negligence in whose possession it subsequently comes, although the approach, except when there is explicit statutory provision to
must be in or immediately connected with the transfer holder may have taken it in good faith and for value. The the contrary.
itself . Furthermore, "to establish this estoppel it must precise question has not often been presented to the
In the case at bar, neither madrigal nor the Mitsuis had
appear that the true owner had conferred upon the person courts, for the reason, probably, that they have with great
alienated shares of stock in question. It is not even claimed
who has diverted the security the indicia of ownership, or uniformity held that stock certificates were not negotiable
that either had, through negligence, given occasion for an
an apparent title or authority to transfer the title." So the instruments in the broad meaning of that phrase; but
improper or irregular disposition of the corresponding stock
owner is not guilty of negligence in merely entrusting whenever the question has a risen it has been held that the
certificates. Plaintiffs merely argue without any evidence
another with the possession of his certificate of stock, if he title of the true owner of a lost or stolen certificate may be
whatsoever thereon that Kitajima might have,
does not, by assignment or otherwise, clothe him with the asserted against any one subsequently its
or must have, assigned the certificates on or
apparent title. Nor is he deprived of his title or his remedy possession although the holder may be bona fide
before December 1942, although, as above stated, this is, not
against the corporation because he intrusts a third person purchaser. Anderson vs. Nicholas, 28 N. Y. 600;
only, improbable, under the conditions, then obtaining, but,
with the key of a box in which the certificate are kept, Power vs. Robinson, 52 Fed. 520; Biddle vs. Bayard, 13 Pa.
also., impossible, considering that, in April 1943, Kitajima
where the latter takes them from the box and by forging St. 150; Barstow vs. mining Co., 64 Cal. 388, 1 Pac. 349.
delivered the instruments to Miwa, who kept them in its
the owner's name to a power of attorney procures their See Shaw vs. Railroad Co., 101 U. S. 557. . . . It is plain, we
possession until 1945. At any rate, such assignment by Miwa
transfer on the corporate books. Nor is the mere think, that the argument in support of the judgment in this
granting for the sake of argument the accuracy of the
indorsement of an assignment and power of attorney in case, base on the complete negotiability of stock
surmise of plaintiffs herein was unauthorized by the
blank on a certificate of stock, which is afterwards lost or certificates, is not supported by, but is contrary to, the
mitsuis, who, in the light of the precedents cited above, are
stolen, such negligence as will estop the owner from decisions. If public policy requires that a further advance
not chargeable with negligence. In other words, assuming
asserting his title as against a bona fide purchaser from the should be made in more completely assimilating them to
that Kitajima had been guilty of embezzlement, by
finder or thief, or from holding the corporation liable for commercial paper in the qualities of negotiability, the
negotiating the stock certificates in question for his personal
allowing a transfer on its books, where the loss or theft of legislature, and not the courts, should so declare. Under
benefit, as claimed by the plaintiffs, the title of his assignees
the certificate was not due to any negligence on the part of the law as it has hitherto prevailed there does not seem to
and successors in interest would still be subject to the rights
the owner, although there is some dangerous and wholly have been any serious hindrance in dealing with property
of the registered owner, namely, Madrigal, and consequently,
unjustifiable dictum to the contrary. So it has been held of this character. It may, perhaps, be doubted, taking into
of the party for whose benefit and account the latter held the
that the fact that stock pledged to a bank is endorsed in consideration the interests of investors as well as dealers,
corresponding shares of stock, that is to say, the Mitsuis.
blank by the owner does not estop him from asserting title whether it would be wise to remove the protection which
thereto as against a bona fide purchaser for value who the true owner of a stock certificate now has against At any rate, at the time of the alleged sales in their favor,
derives his title from one who stole the certificate from the accident, theft, or robbery. The system of registry of plaintiffs were aware of sufficient facts to put them on notice
pledgee. And this has also been held to be true though the negotiable bonds, which prevails to a considerable extent, of the need of inquiring into the regularity of the transactions
thief was an officer of the pledgee, since his act in authorized by statutes of some of the states and of the and the title of the supposed vendors. Indeed, the certificates
wrongfully appropriating the certificate cannot be regarded United States, seems to indicate a tendency to restrict, of stock in question were in the name of madrigal. Obviously,
as a misappropriation by the bank to whose custody the rather than to extend, the range of negotiable instruments. therefore, the alleged sellers (Campos and Hess)
certificate was intrusted by the owner, even though the (Emphasis supplied.) were not registered owners of the corresponding shares of
bank may be liable to the pledgor. . . . . A person stock. Being presumed to know the law particularly the
The status of quasi-negotiability generally accorded to, and at
is not guilty of negligence in leaving a certificate of provisions of section 35 of Act No. 1459 and, as
present enjoyed by, certificates of stock, under the Philippine
stock endorsed in blank in a safe deposit box used by experienced traders in shares of stock, plaintiffs must have,
law, is in itself a recognition of the fact that the certificates
himself and another jointly, so as to be estopped from accordingly, been conscious of the consequent infirmities in
are non-negotiable. Instead of sustaining appellees' claim,
asserting his title after the certificate has been stolen by the title of the supposed vendors, or of the handicaps thereof.
section 5 of the uniform Stock Transfer Act, which "gives full
the other, and sold or pledged to a bona fide purchaser or Moreover, the aforementioned sales were
negotiability to certificates of stock," refutes said claim and
pledgee. Nor is he negligent in putting a certificate so admittedly hostile to the Japanese, who had prohibited it and
confirms the non-negotiable character of stock certificates in
endorsed in a place to which an employee had access, plaintiffs had actual knowledge of these facts and of the risks
the absence of said Unifrom Act, for, obviously, the same
attendant to the alleged transaction. In other words, plaintiffs
could not have given, negotiability to an instrument already

CORPORATION LAW: 7. captial structure Page 174 of 201

advisedly assumed those risks and, hence, they can not GLORIA M. DE ERQUIAGA, administratrix of the estate 1970, Erquiaga, through counsel, formally informed Reynoso
validly claim, against the registered stockholder, the status of of the late SANTIAGO DE ERQUIAGA & HON. FELICIANO that he was rescinding the sale of his shares in the Erquiaga
purchasers in good faith. S. GONZALES, petitioners, [Link]. COURT OF APPEALS, Development Corporation (CFI Decision, pp. 81-100, Rollo).
AFRICA VALDEZ VDA. DE REYNOSO, JOSES V. REYNOSO,
The lower court held, and plaintiffs maintain that, not being As recited by the Court of Appeals in its decision under
JR., EERNESTO , SYLVIA REYNOSO, LOURDES REYNOSO,
the registered owners of the shares of stock in question, the review, the following developments occurred thereafter:
CECILE REYNOSO, EDNA REYNOSO, ERLINDA REYNOSO
Mitsuis can not assert a better right than said plaintiffs. This
& EMILY REYNOSO, respondents. On March 30, 1970, private respondent Santiago de
pretense is untenable. Inasmuch as Madrigal, the registered
Erquiaga filed a complaint for rescission with preliminary
owner of said shares of stock, has always acknowledged that Agrava, Lucero, Gineta & Roxas for petitioners.
injunction against Jose L. Reynoso and Erquiaga
he held the same merely as an agent of, or trustee for, the
Bausa, Ampil, Suarez, Parades & Bausa for private Development Corporation, in the Court of First Instance of
mitsuis and this is not denied it follows that the latter
respondents. Sorsogon, Branch I (Civil Case No. 2446).** After issues
are entitled to invoke such rights as Madrigal had as
have been joined and after trial on the merits, the lower
registered stockholder. Upon the other hand, even the alleged GRINO-AQUINO, J.:
court rendered judgment (on September 30, 1972),*** the
sale by Juan Campos and Carl Hess to plaintiffs herein is
dispositive portion of which reads as follows:
contested by the defense and, to our mind, has not been This is a case that began in the Court of First Instance of
established by a preponderance of the evidence. Hence, as Sorsogon in 1970. Although the decision dated September 30, In view of the
the undisputed principal or beneficiary of the registered 1972 of the trial court (pp. 79-106, Rollo) became final and foregoing, judgment is
owner (Madrigal), the Mitsuis may claim his rights, which executory because none of the parties appealed, its execution hereby rendered in
cannot be exercised by the plaintiffs, not only because their has taken all of the past seventeen (17) years with the end favor of the plaintiff and
alleged title is not derived either from madrigal or from the nowhere in sight. The delay in writing finis to this case is against the defendant
Mitsuis, but, also, because it is in derogation, of said rights. attributable to several factors, not the least of which is the Jose L. Reynoso,
madrigal and the Mitsuis are not privies to the alleged sales intransigence of the defeated party. Now, worn down by this rescinding the sale of
by Campos and Hess to the plaintiffs, contrary to the latter's attrital suit, both have pleaded for a decision to end this case. 3,100 paid up shares of
pretense. Assailed in this petition for review are: stock of the Erquiaga
Development
In conclusion, when the Property Custodian issued the Vesting (a) the decision of the Court of Appeals dated May 31, 1976 Corporation to the
Order complained of, the shares of stock in question belonged in CA-G.R. No. SP 04811, entitled "Africa Valdez Vda. de defendant, and
to the Mitsuis, admittedly an enemy corporation, so that Reynoso et al. vs. Hon. Feliciano S. Gonzales and Santiago ordering:
Vesting Order is in conformity with law and should be upheld. de Erquiaga" (pp. 275-290, Rollo);
Wherefore, the decision appealed from is hereby reversed, (a) The defendant to return and reconvey to the plaintiff
and the complaint, accordingly, dismissed, with costs against (b) its resolution dated August 3, 1976, denying the motion the 3,100 paid up shares of stock of the Erquiaga
the plaintiffs-appellees. It is so ordered. for reconsideration (p. 298, Rollo); Development Corporation which now stand in his name in
(c) its resolution of August 24, 1977, ordering entry of the books of the corporation;
judgment (p. 316, Rollo); and (b) The defendant to render a full accounting of the fruits
(d) its resolution of October 4, 1977, denying the motion to he received by virtue of said 3,100 paid up shares of stock
set aside the entry of judgment. of the Erquiaga Development Corporation, as well as to
return said fruits received by him to plaintiff Santiago de
Santiago de Erquiaga was the owner of 100% or 3,100 paid- Erquiaga;
up shares of stock of the Erquiaga Development Corporation
which owns the Hacienda San Jose in Irosin, Sorsogon (p. 212, (c) The plaintiff to return to the defendant the amount of
Rollo). On November 4,1968, he entered into an Agreement P100,000.00 plus legal interest from November 4,1968, and
with Jose L. Reynoso to sell to the latter his 3,100 shares (or the amount of P310,000.00 plus legal interest from
100%) of Erquiaga Development Corporation for P900,000 December 17, 1968, until paid;
payable in installments on definite dates fixed in the contract (d) The defendant to pay the plaintiff as actual damages
but not later than November 30, 1968. Because Reynoso the amount of P12,000.00;
failed to pay the second and third installments on time, the
total price of the sale was later increased to P971,371.70 (e) The defendant to pay the plaintiff the amount of
payable on or before December 17, 1969. The difference of P50,000.00 as attorney's fees; and
P71,371.70 represented brokers' commission and interest (CFI
(f) The defendant to pay the costs of this suit and expenses
Decision, pp. 75, 81, 90, 99,Rollo).
of litigation. (Annex A-Petition.)
As of December 17, 1968, Reynoso was able to pay the total
The parties did not appeal therefrom and it became final
sum of P410,000 to Erquiaga who thereupon transferred all
and executory.
his shares (3,100 paid-up shares) in Erquiaga Development
G.R. No. 47206 September 27, 1989 Corporation to Reynoso, as well as the possession of the On March 21, 1973, the CFI of Sorsogon issued an Order,
Hacienda San Jose, the only asset of the corporation (p. 100, pertinent portions of which reads:
Rollo). However, as provided in paragraph 3, subparagraph (c)
It will be noted that both parties having decided not to
of the contract to sell, Reynoso pledged 1,500 shares in favor
appeal, the decision has become final and executory.
of Erquiaga as security for the balance of his obligation (p.
Nevertheless, the Court finds merit in the contention of
100, Rollo). Reynoso failed to pay the balance of P561,321.70
the plaintif that the payment to the defendant of the
on or before December 17, 1969, as provided in the
total sum of P410,000.00 plus the interest, should be
promissory notes he delivered to Erquiaga. So, on March 2,
held in abeyance pending rendition of the accounting by

CORPORATION LAW: 7. captial structure Page 175 of 201

 the defendant of the fruits received by him on account of aforementioned Order of March 21, 1973. On June 28, On the second count, the prayer to strike out all
the 3,100 shares of the capital stock of Erquiaga 1973, the Court of Appeals rendered judgment dismissing expenses alleged[ly] incurred by the defendants in the
Development Corporation. The same may be said with the petition with costs against the petitioners, ruling that production of the fruits of Hacienda San Jose and
respect to the sums due the plaintiff from the defendant said Order is valid and the respondent court did not commit declaring the obligation of the plaintiff under paragraph
for damages and attorney's fees. Indeed it is reasonable any grave abuse of discretion in issuing the same (Annex 2, (c) of the judgment to pay the defendant the sum of
to suppose, as contended by the plaintiff, that when such Id.). Petitioners brought the case up to the Supreme Court P410,000.00 with interest as fully compensated by the
accounting is made and the accounting, as urged by on a petition for review on certiorari which was denied by fruits earned by the defendants from the property, as
plaintiff, should refer not only to the dividends due from said tribunal in a Resolution dated February 5, 1974 (Annex well as the issuance of a writ of execution against the
the shares of stock but to the products of the hacienda 3, Id.). Petitioners' motion for reconsideration thereof was defendants to pay the plaintiffs P62,000.00 under
which is the only asset of the Erquiaga Development likewise denied by the Supreme Court on March 29,1974. paragraphs (e) and (d) and costs of litigation under
Corporation, certain sums may be found due to the paragraph (f) of the judgment of September 30, 1972, is
Upon motion of Erquiaga, the CFI of Sorsogon issued an
plaintiff from the defendant which may partially or denied.
order, dated February 12,1975, dissolving the receivership
entirely off set (sic) the amount adjudged against him in
and ordering the delivery of the possession of the Hacienda The defendants are once more directed to comply with
the decision.
San Jose to Erquiaga, the filing of bond by said Erquiaga in the order of February 12, 1975, by answering the
It is the sense of the court that the fruits referred to in the amount of P410,000.00 conditioned to the payment of interrogatories propounded by counsel for the plaintiff
the decision include not only the dividends received, if whatever may be due to the substituted heirs of deceased and allowing said counsel or his representative to
any, on the 3,100 shares of stocks but more particularly defendant Reynoso (petitioners herein) after the approval inspect, copy and photograph the documents mentioned
the products received by the defendant from the of the accounting report submitted by Reynoso. Said order by the plaintiff during reasonable hours of any working
hacienda. The hacienda and the products thereon further directed herein petitioners to allow counsel for day within twenty (20) days from receipt of this order,
produced constitute the physical assets of the Erquiaga Erquiaga to inspect, copy and photograph certain should the defendants persist in their refusal or failure to
Development Corporation represented by the shares of documents related to the accounting report (Annex B, comply with the order, the plaintiff may inform the court
stock and it would be absurd to suppose that any Petition). seasonably so that the proper action may be taken.
accounting could be made by the defendant without (Annex J, Id.)
On March 3,1975, the CFI of Sorsogon approved the
necessarily taking into account the products received
P410,000.00 bond submitted by Erquiaga and the Hence, the present petition for certiorari, prohibition and
which could be the only basis for determining whether
possession, management and control of the hacienda were mandamus instituted by the substituted defendants, heirs
dividends are due or not on account of the investment.
turned over to Erquiaga (Annex C, Petition). Petitioners of the deceased defendant Jose L. Reynoso against the CFI
The hacienda and its natural fruits as represented by the
(Reynosos) filed their motion for reconsideration which the of Sorsogon and (plaintiff) Santiago de Erquiaga. (pp. 276-
shares of stock which the defendant received as
CFI of Sorsogon denied in an Order, dated June 23, 1975 281, Rollo.)
manager and controlling stockholder of the Erquiaga
(Annex D, Id.).
Development Corporation can not be divorced from the On May 31, 1976, the Court of Appeals rendered judgment
certificates of stock in order to determine whether the In an Omnibus Motion, dated July 25,1975, filed by holding that:
defendant has correctly reported the income of the Erquiaga, and over the objections interposed thereto by
corporation or concealed part of it for his personal IN VIEW OF ALL THE FOREGOING, this court finds that the
herein petitioners (Reynosos), the CFI of Sorsogon issued
advantage. It is hardly necessary for the Court to restate respondent court had acted with grave abuse of discretion
an Order, dated October 9, 1975, the dispositive portion of
an obvious fact that on both legal and equitable grounds, or in excess of jurisdiction in issuing the assailed order of
which reads:
the Erquiaga Development Corporation and defendant October 9, 1975 (Annex A, Petition) insofar only as that part
Jose Reynoso are one and the same persons as far as the WHEREFORE, in view of the foregoing, on the first count, of the Order (1) giving private respondent voting rights on
obligation to account for the products of the hacienda is the defendants are directed (to deliver) to the plaintiff or the 3,100 shares of stock of the Erquiaga Development
concerned,' (pp. 4-6, Annex 1, Answer.) his counsel within five (5) days from receipt of this order Corporation without first divesting petitioners of their title
the 1,600 shares of stock of the Erquiaga Development thereto and ordering the registration of the same in the
In the same Order, the CFI of Sorsogon appointed a Corporation which are in their possession. Should the corporation books in the name of private respondent,
receiver upon the filing of a bond in the amount of defendants refuse or delay in delivering such shares of pursuant to Section 10, Rule 39 of the Revised Rules of
P100,000.00. The reasons of the lower court for appointing stock, as prayed for, the plaintiff is authorized: Court; (2) authorizing corporate meetings and election of
a receiver 'were that the matter of accounting of the fruits members of the Board of Directors of said corporation and
received by defendant Reynoso as directed in the decision (a) To call and hold a special meeting of the stockholders of
(3) refusing to order the reimbursement of the purchase
will take time; that plaintiff Erquiaga has shown sufficient the Erquiaga Development Corporation to elect the
price of the 3,100 shares of stock in the amount of
and justifiable ground for the appointment of a receiver in members of the Board of Directors;
P410,000.00 plus interests awarded in said final decision of
order to preserve the Hacienda which has obviously been (b) In the said meeting the plaintiff is authorized to vote not September 30, 1972 and the set-off therewith of the
mismanaged by the defendant to a point where the only the 1,500 shares of stock in his name but also the amount of P62,000.00 as damages and attorney's fees in
amortization of the loan with the Development Bank of the 1,600 shares in the name and possession of the favor of herein private respondent are concerned. Let writs
Philippines has been neglected and the arrears in payments defendants; of certiorari and prohibition issue against the aforesaid
have risen to the amount of P503,510.70 as of October 19, acts, and the writ of preliminary injunction heretofore
1972, and there is danger that the Development Bank of (c) The question as to who shall be elected members of the issued is hereby made permanent only insofar as (1), (2)
the Philippines may institute foreclosure proceedings to the Board of Directors and officers of the board is left to the and (3) above are concerned. As to all other matters
damage and prejudice of the plaintiff.' (p. 7, Id.) discretion of the plaintiff; involved in said Order of October 9, 1975, the issuance of
(d) The members of the board and the officers who are writs prayed for in the petition are not warranted and
On April 26, 1973, defendant Jose L. Reynoso died and he
elected are authorized to execute any and all contracts or therefore denied.
was substituted by his surviving spouse Africa Valdez Vda.
de Reynoso and children, as party defendants. agreements under such conditions as may be required by FINALLY, to give effect to all the foregoing, with a view of
the Development Bank for the purpose of restructuring the putting an end to a much protracted litigation and for the
Defendants filed a petition for certiorari with a prayer for a loan of the Erquiaga Development Corporation with the best interest of the parties, let a writ of mandamus issue,
writ of preliminary injunction seeking the annulment of the said bank.

CORPORATION LAW: 7. captial structure Page 176 of 201

 commanding the respondent Judge to order (1) the Clerk of accounting of the fruits of the Hacienda San Jose, violates voted for, and he will not be entitled to dividends. The
Court of the CFI of Sorsogon to execute the necessary deed the law of the case and Article 1385 of the Civil Code, alters Corporation will be protected when it pays dividend to the
of conveyance to effect the transfer of ownership of the the final order dated February 12, 1975 of the trial court, registered owner despite a previous transfer of which it had
entire 3,100 shares of stock of the Erquiaga Development and is inequitous. no knowledge. The purpose of registration therefore is two-
Corporation to private respondent Santiago Erquiaga in fold; to enable the transferee to exercise all the rights of a
II. The Court of Appeals erroneously applied the Corporation
case of failure of petitioners to comply with the Order of stockholder, and to inform the corporation of any change in
Law.
October 9, 1975 insofar as the delivery of the 1,600 shares share ownership so that it can ascertain the persons
of stock to private respondent is concerned, within five (5) III. The Court of Appeals erred in ordering entry of its entitled to the rights and subject to the liabilities of a
days from receipt hereof; and (2) upon delivery by judgment. stockholder. (Corporation Code, Comments, Notes and
petitioners or transfer by the Clerk of Court of said shares Selected cases by Campos & Lopez-Campos, p. 838,1981
of stock to private respondent, as the case may be, to issue We address first the third assignment of error for it will be Edition.)
a writ of execution ordering private respondent to pay futile to discuss the first and second if, after all, the decision
complained of is already final, and the entry of judgment The order of respondent Court directing Erquiaga to return the
petitioners the amount of P410,000.00 plus interests in
which the Court of Appeals directed to be made in its sum of P410,000 (or net P348,000 after deducting P62,000
accordance with the final decision of September 30, 1972
resolution of August 24,1977 (p. 316, Rollo) was proper. After due from Reynoso under the decision) as the price paid by
in Civil Case No. 2448, setting-off therewith the amount of
examining the records, we find that the Court of Appeals' Reynoso for the shares of stock, with legal rate of interest,
P62,000.00 adjudged in favor of private respondent, and
decision is not yet final. The entry of judgment was and the return by Reynoso of Erquiaga's 3,100 shares with the
against petitioners' predecessor-in-interest, Jose L.
improvident for the Court of Appeals, in its resolution of fruits(construed to mean not only dividends but also fruits of
Reynoso, in the same decision, as damages and attorney's
December 13, 1976, suspended the proceedings before it the corporation's Hacienda San Jose) is in full accord with Art.
fees. (pp. 289-290, Rollo.)
"pending the parties' settlement negotiations" as prayed for 1385 of the Civil Code which provides:
It may be seen from the foregoing narration of facts that as of in their joint motion (p. 313, Rollo). Without however giving
ART. 1385. Rescission creates the obligation to return the
the time the Court of Appeals rendered its decision on May them an ultimatum or setting a deadline for the submission of
things which were the object of the contract, together with
31, 1976 (now under review) only the following have been their compromise agreement, the Court of Appeals, out of the
their fruits, and the price with its interest; consequently, it
done by the parties in compliance with the final judgment in blue, issued a resolution on August 24, 1977 ordering the
can be carried out only when he who demands rescission
the main case (Civil Case No. 2446): Judgment Section of that Court to enter final judgment in the
can return whatever he may be obliged to restore.
case (p. 316, Rollo).
1. The Hacienda San Jose was returned to Erquiaga on
Neither shall rescission take place when the things which
March 3, 1975 upon approval of Erquiaga's surety bond of We hold that the directive was precipitate and premature.
are the object of the contract are legally in the possession
P410,000 in favor of Reynoso; Erquiaga received the order on September 2, 1977 and filed
of third persons who did not act in bad faith.
on September 12, 1977 (p. 317, Rollo) a motion for
2. Reynoso has returned to Erquiaga only the pledged
reconsideration which the Court of Appeals denied on October In this case, indemnity for damages may be demanded
1,500 shares of stock of the Erquiaga Development
4, 1977 (p. 322, Rollo). The order of denial was received on from the person causing the loss.
Corporation, instead of 3,100 shares, as ordered in
October 14, 1977 (p. 7, Rollo). On October 28, 1977, Erquiaga
paragraph (a) of the final judgment. The Hacienda San Jose and 1,500 shares of stock have
filed in this Court a timely motion for extension of time to file
already been returned to Erquiaga. Therefore, upon the
What the parties have not done yet are: a petition for review, and the petition was filed within the
conveyance to him of the remaining 1,600 shares, Erquiaga
extension granted by this Court.
1. Reynoso has not returned 1,600 shares of stock to (or his heirs) should return to Reynoso the price of P410,000
Erquiaga as ordered in paragraph (a,) of the decision; We now address the petitioners' first and second assignments which the latter paid for those shares. Pursuant to the
of error. rescission decreed in the final judgment, there should be
2. Reynoso has not rendered a full accounting of the fruits
simultaneous mutual restitution of the principal object of the
he has received from Hacienda San Jose by virtue of the After deliberating on the petition for review, we find no
contract to sell (3,100 shares) and of the consideration paid
3,100 shares of stock of the Erquiaga Development reversible error in the Court of Appeals' decision directing the
(P410,000). This should not await the mutual restitution of
Corporation delivered to him under the sale, as ordered in clerk of court of the trial court to execute a deed of
the fruits, namely: the legal interest earned by Reynoso's
paragraph (b) of the decision; conveyance to Erquiaga of the 1,600 shares of stock of the
P410,000 while in the possession of Erquiaga and its
Erquiaga Development Corporation still in Reynoso's name
3. Erquiaga has not returned the sum of P100,000 paid by counterpart: the fruits of Hacienda San Jose which Reynoso
and/or possession, in accordance with the procedure in
Reynoso on the sale, with legal interest from November 4, received from the time the hacienda was delivered to him on
Section 10, Rule 39 of the Rules of Court. Neither did it err in
1968 and P310,000 plus legal interest from December 17, November 4,1968 until it was placed under receivership by
annulling the trial court's order: (1) allowing Erquiaga to vote
1968, until paid (total: P410,000) as ordered in paragraph the court on March 3, 1975. However, since Reynoso has not
the 3,100 shares of Erquiaga Development Corporation
(c) of the decision; yet given an accounting of those fruits, it is only fair that
without having effected the transfer of those shares in his
Erquiaga's obligation to deliver to Reynoso the legal interest
4. Reynoso has not paid the judgment of Pl2,000 as actual name in the corporate books; and (2) authorizing Erquiaga to earned by his money, should await the rendition and approval
damages in favor of Erquiaga, under paragraph (d) of the call a special meeting of the stockholders of the Erquiaga of his accounting. To this extent, the decision of the Court of
judgment; Development Corporation and to vote the 3,100 shares,
Appeals should be modified. For it would be inequitable and
without the pre-requisite registration of the shares in his
5. .Reynoso has not paid the sum of P50,000 as attorney's name. It is a fundamental rule in Corporation Law (Section 35) oppressive to require Erquiaga to pay the legal interest
fees to Erquiaga under paragraph (e) of the judgment; and earned by Reynoso's P410,000 since 1968 or for the past 20
that a stockholder acquires voting rights only when the shares
years (amounting to over P400,000 by this time) without first
6. Reynoso has not paid the costs of suit and expenses of of stock to be voted are registered in his name in the requiring Reynoso to account for the fruits of Erquiaga's
litigation as ordered in paragraph (f) of the final judgment. corporate books.
hacienda which he allegedly squandered while it was in his
The petitioner alleges, in her petition for review, that: Until registration is accomplished, the transfer, though possession from November 1968 up to March 3, 1975.
valid between the parties, cannot be effective as against
I. The decision of the Court of Appeals requiring the WHEREFORE, the petition for review is granted. The payment
the corporation. Thus, the unrecorded transferee cannot
petitioner to pay the private respondents the sum of of legal interest by Erquiaga to Reynoso on the price of
enjoy the status of a stockholder; he cannot vote nor be
P410,000 plus interest, without first awaiting Reynoso's P410,000 paid by Reynoso for Erquiaga's 3,100 shares of

CORPORATION LAW: 7. captial structure Page 177 of 201

stock of the Erquiaga Development Corporation should be
computed as provided in the final judgment in Civil Case No.
2446 up to September 30,1972, the date of said judgment.
Since Reynoso's judgment liability to Erquiaga for attorney's
fees and damages in the total sum of P62,000 should be set
off against the price of P410,000 that Erquiaga is obligated to
return to Reynoso, the balance of the judgment in favor of
Reynoso would be only P348,000 which should earn legal rate
of interest after September 30,1972, the date of the
judgment. However, the payment of said interest by Erquiaga
should await Reynoso's accounting of the fruits received by
him from the Hacienda San Jose. Upon payment of P348,000
by Erquiaga to Reynoso, Erquiaga's P410,000 surety bond
shall be deemed cancelled. In all other respects, the decision
of the Court of Appeals in CA-G.R. No, 04811-SP is affirmed.
No pronouncement as to costs.
SO ORDERED.

CORPORATION LAW: 7. captial structure Page 178 of 201

G.R. No. 133969 January 26, 2000 The Club was furnished with a copy of said deed but the No shares of stock against which the corporation holds
transfer was not recorded in the books of the Club because any unpaid claim shall be transferable in the books of the
petitioner failed to present proof of payment of the requisite corporation.
NEMESIO GARCIA, petitioner, vs. NICOLAS JOMOUAD, Ex-
capital gains tax.
officio Provincial Sheriff of Cebu and SPOUSES JOSE
ATINON & SALLY ATINON, respondents. The sole issue in this case is similar to that raised in Uson vs.
In assailing the decision of the CA, petitioner mainly argues Diosomito,1 i.e., "whether a bona fide transfer of the shares of
that the appellate court erroneously relied on Section 63 of a corporation, not registered or noted in the books of the
KAPUNAN, J.:
the Corporation Code in upholding the levy on the subject corporation, is valid as against a subsequent lawful
certificate to satisfy the judgment debt of Dico in Civil Case attachment of said shares, regardless of whether the
In this petition for review on certiorari, Nemesio Garcia No. CEB-14033. Petitioner contends that the subject stock of attaching creditor had actual notice of said transfer or
(herein petitioner) seeks the reversal of the Decision, dated certificate, albeit in the name of Dico, cannot be levied upon not."2 In that case, we held that the attachment prevails over
27 October 1997, of the Court of Appeals in CA G.R. CV No. the execution to satisfy his judgment debt because even prior the unrecorded transfer stating thus
52255 and its Resolution, dated 22 April 1998, denying to the institution of the case for collection of sum of money
petitioner's motion for reconsideration of said decision. against him:
[w]e think that the true meaning of the language is, and
the obvious intention of the legislature in using it was, that
Petitioner filed with the Regional Trial Court, Branch 23 of 1. The spouses Atinon had knowledge that Dico already all transfers of shares should be entered, as here required,
Cebu, an action for injunction with prayer for preliminary conveyed back the ownership of the subject, certificate to on the books of the corporation. And it is equally clear to us
injunction against respondents spouses Jose and Sally Atinon petitioner; that all transfers of shares not so entered are invalid as to
and Nicolas Jomouad, ex-officio sheriff of Cebu. Said action attaching or execution creditors of the assignors, as well as
stemmed from an earlier case for collection of sum of money, to the corporation and to subsequent purchasers in good
2. Dico executed a deed of transfer, dated 18 November
docketed as Civil Case No. CEB-10433, before the RTC, Branch faith, and, indeed, as to all persons interested, except the
1992, covering the subject certificate in favor of petitioner
10 of Cebu, filed by the spouses Atinon against Jaime Dico. In parties to such transfers. All transfers not so entered on the
and the Club was furnished with a copy thereof; and
that case (collection of sum of money), the trial court books of the corporation are absolutely void; not because
rendered judgment ordering Dico to pay the spouses Atinon they are without notice or fraudulent in law or fact, but
the sum of P900,000.00 plus interests. After said judgment 3. Dico resigned as a proprietary member of the Club and because they are made so void by statute.3
became final and executory, respondent sheriff proceeded his resignation was accepted by the board of directors at
with its execution. In the course thereof, the Proprietary their meeting on 4 May 1993.
Applying the foregoing jurisprudence in this case, we hold
Ownership Certificate (POC) No. 0668 in the Cebu Country
that the transfer of the subject certificate made by Dico to
Club, which was in the name of Dico, was levied on and
The petition is without merit. petitioner was not valid as to the spouses Atinon, the
scheduled for public auction. Claiming ownership over the
judgment creditors, as the same still stood in the name of
subject certificate, petitioner filed the aforesaid action for
Dico, the judgment debtor, at the time of the levy on
injunction with prayer for preliminary injunction to enjoin Sec. 63 of the Corporation Code reads:
execution. In addition, as correctly ruled by the CA, the entry
respondents from proceeding with the auction.
in the minutes of the meeting of the Club's board of directors
Sec. 63 Certificate of stock and transfer of shares. The
noting the resignation of Dico as proprietary member thereof
After trial, the lower court rendered its Decision, dated 28 July capital stock of corporations shall be divided into shares for
does not constitute compliance with Section 63 of the
1995, dismissing petitioner's complaint for injunction for lack which certificates signed by the president or vice-president,
Corporation Code. Said provision of law strictly requires the
of merit. On appeal, the CA affirmed in toto the decision of countersigned by the secretary or assistant secretary, and
recording of the transfer in the books of the corporation, and
the RTC upon finding that it committed no reversible error in sealed with the seal of the corporation shall be issued in
not elsewhere, to be valid as against third parties.
rendering the same. Hence, this petition. accordance with the by-laws. Shares of stock so issued are
Accordingly, the CA committed no reversible error in
personal property and may be transferred by delivery of
rendering the assailed decision.
the certificate or certificates indorsed by the owner or his
Petitioner avers that Dico, the judgment debtor of the
attorney-in-fact or other person legally authorized to make
spouses Atinon, was employed as manager of his
the transfer. No transfer, however, shall be valid, except as IN VIEW OF THE FOREGOING, the Court RESOLVED to DENY
(petitioner's) Young Auto Supply. In order to assist him in
between the parties, until the transfer is recorded in the the petition. SO ORDERED.
entertaining clients, petitioner "lent" his POC, then bearing
books of the corporation showing the names of the parties
the number 1459, in the Cebu Country Club to Dico so the
to the transaction, the date of the transfer, the number of
latter could enjoy the "signing" privileges of its members. The
the certificate or certificates and the number of shares
Club issued POC No. 0668 in the name of Dico. Thereafter, G.R. No. L-33157 June 29, 1982
transferred.
Dico resigned as manager of petitioner's business. Upon BENITO H. LOPEZ, petitioner, vs. THE COURT OF APPEALS
demand of petitioner, Dico returned POC No. 0668 to him. and THE PHILIPPINE AMERICAN GENERAL INSURANCE
Dico then executed a Deed of Transfer, dated 18 November CO., INC., respondents.
1992, covering the subject certificate in favor of petitioner.

CORPORATION LAW: 7. captial structure Page 179 of 201

GUERRERO, J.: writing Committee to request Atty. Timoteo J. Sumawang, Philippine American General Insurance Co., Inc. vs. Benito H.
Assistant Vice- President and Manager of the Bonding Lopez") for reimbursement of the said amount. After hearing,
On June 2, 1959, petitioner Benito H. Lopez obtained a loan in
Department, to accommodate him in putting up the bond the said court rendered judgment dismissing the complaint
the amount of P20,000.00 from the Prudential Bank and Trust
against the security of his shares of stock with the Baguio holding:
Company. On the same date, he executed a promissory note
Military Institute, Inc. It was their understanding that if he
for the same amount, in favor of the said Bank, binding The contention of the plaintiff that the stock of the
could not pay the loan, Vice-President Abello and Pio Pedrosa
himself to repay the said sum one (1) year after the said date, defendant were merely pledged to it by the defendant is
of the Prudential Bank would buy the shares of stocks and out
with interest at the rate of 10% per annum. In addition to said not borne out by the evidence. On the contrary, it appears
of the proceeds thereof, the loan would be paid to the
promissory note, he executed Surety Bond No. 14164 in which to be contradicted by the facts of the case. The shares of
Prudential Bank.
he, as principal, and Philippine American General Insurance stock of the defendant were actually transferred to the
Co., Inc. (PHILAMGEN) as surety, bound themselves jointly On June 2, 1960, Lopez' obligation matured without it being plaintiff when it became clear after the plaintiff and the
and severally in favor of Prudential Bank for the payment of settled. Thus, the Prudential Bank made demands for defendant had been sued by the Prudential Bank that
the sum of P20,000.00. payment both upon Lopez and Philamgen. In turn, Philamgen plaintiff would be compelled to make the payment to the
sent Lopez several written demands for the latter to pay his Prudential Bank, in view of the inability of the defendant
On the same occasion, Lopez also executed in favor of
note (Exhibit H, H-1 & H-2), but Lopez did not comply with Benito H. Lopez to pay his said obligation. The certificate
Philamgen an indemnity agreement whereby he agreed "to
said demands. Hence, the Prudential Bank sometime in bearing No. 44 was cancelled and upon request of the
indemnify the Company and keep it indemnified and hold the
August, 1961 filed a case against them to enforce payment plaintiff to the Baguio Military Institute a new certificate of
same harmless from and against any and all damages, losses,
on the promissory note plus interest. stock was issued in the name of the plaintiff bearing No.
costs, stamps, taxes, penalties, charges and expenses of
171, by means of which plaintiff became the registered
whatever kind and nature which the Company shall or may at Upon receipt of the copies of complaint, Atty. Sumawang
owner of the 4,000 shares originally belonging to the
any time sustain or incur in consequence of having become confronted Emilio Abello and Pio Pedrosa regarding their
defendant.
surety upon the bond." 1 At the same time, Lopez executed a commitment to buy the shares of stock of Lopez in the event
deed of assignment of 4,000 shares of the Baguio Military that the latter failed to pay his obligations to the Prudential It is noteworthy that the transfer of the stocks of the
Institution entitled "Stock Assignment Separate from Bank. Vice-President Abello then instructed Atty. Sumawang defendant in the name of the plaintiff company was made
Certificate", which reads: to transfer the shares of stock to Philamgen and made a at the instance of Messrs. Abello and Pedrosa, who
commitment that thereafter he (Abello) and Pio Pedrosa will promised to buy the same from the plaintiff. Now that these
This deed of assignment executed by BENITO H. LOPEZ,
buy the shares of stock from it so that the proceeds could be shares of stock of the defendant had already been
Filipino, of legal age, married and with residence and postal
paid to the bank, and in the meantime Philamgen will not pay transferred in the name of the plaintiff, the defendant has
address at Baguio City, Philippines, now and hereinafter
the bank because it did not want payment under the terms of already divested himself of the said stocks, and it would
called the "ASSIGNOR", in favor of the PHILIPPINE
the bank. 3 seem that the remedy of the plaintiff is to go after Messrs.
AMERICAN GENERAL INSURANCE CO., INC., a corporation
Abello and Pedrosa on their promise to pay for the said
duly organized and existing under and by virtue of the laws Due to said commitment and instruction of Vice-President
stocks. To go after the defendant after the plaintiff had
of the Philippines, with principal offices at Wilson Building, Abello, Assistant Treasurer Marcial C. Cruz requested the
already become the owner of his shares of stock and
Juan Luna, Manila, Philippines, now and hereinafter called transfer of Stock Certificate No. 44 for 4,000 shares to
compel him to pay his obligation to the Prudential Bank
the "ASSIGNEE-SURETY COMPANY" Philamgen in a letter dated October 31, 1961. Stock
would be most unfair, unjust and illogical for it would
Certificate No. 44 in the name of Lopez was accordingly
WITNESSETH amount to double payment on his part. After the plaintiff
cancelled and in lieu thereof Stock Certificate No. 171 was
had already appropriated the said shares of stock, it has
That for and in consideration of the obligations undertaken issued by the Baguio Military Institute in the name of already lost its right to recover anything from the
by the ASSIGNEE-SURETY COMPANY under the terms and Philamgen on November 17, 1961. defendant, for the reason that the transfer of the said
conditions of SURETY BOND NO. 14164, issued on behalf of stocks was made without qualification. This transfer takes
The complaint was thereafter dismissed. But when no
said BENITO H. LOPEZ and in favor of the PRUDENTIAL the form of a reimbursement of what plaintiff had paid to
payment was still made by the principal debtor or by the
BANK & TRUST COMPANY, Manila, Philippines, in the the Prudential Bank, thereby depriving the plaintiff of its
surety, the Prudential Bank filed on November 8, 1963
amount of TWENTY THOUSAND PESOS ONLY (P20,000.00), right to go after the defendant herein. 5
another complaint for the recovery of the P20,000.00. On
Philippine Currency, and for value received, the ASSIGNOR
November 18, 1963, after being informed of said complaint,
hereby sells, assigns, and transfers unto THE PHILIPPINE Philamgen appealed to the Court of Appeals raising these
Lopez addressed the following letter to Philamgen:
AMERICAN GENERAL INSURANCE CO., INC., Four Thousand assignments of errors:
(4,000) shares of the Baguio military Institute, Inc. standing Dear Mr. Sumawang:
I The lower court erred in finding that the evidence
in the name of said Assignor on the books of said Baguio
This is with reference to yours of the 13th instant advising does not bear out the contention of plaintiff that the shares
Military Institute, Inc. represented by Certificate No. 44
me of a complaint filed against us by Prudential Bank & of stock belonging to defendant were transferred by him to
herewith and do hereby irrevocably constitutes and
Trust Co. regarding my loan of P20,000.00. In this plaintiff by way of pledge.
appoints THE PHILIPPINE AMERICAN GENERAL INSURANCE
connection, I would like to know what happened to my
CO., INC. as attorney to transfer the said stock on the books II The lower court erred in finding that plaintiff
shares of stocks of Baguio Military Academy which were
of the within named military institute with full power of company appropriated unto itself the shares of stock
pledged to your goodselves to secure said obligation. These
substitution in the premises. 2 pledged to it by defendant Benito Lopez and in finding that,
shares of stock I think are more than enough to answer for
with the transfer of the stock in the name of plaintiff
With the execution of this deed of assignment, Lopez said obligation. 4
company, the latter has already been paid or reimbursed
endorsed the stock certificate and delivered it to Philamgen.
On December 9, 1963, Philamgen was forced to pay the what it paid to Prudential Bank.
It appears from the evidence on record that the loan of Prudential Bank the sum of P27,785.89 which included the
III The lower court erred in not finding that the instant
P20,000.00 was approved conditioned upon the posting of a principal loan and accumulated interest and the Prudential
case is one where the pledge has abandoned the security
surety bond of a bonding company acceptable to the bank. Bank executed a subrogation receipt on the same date.
and elected instead to enforce his claim against the
Thus, Lopez persuaded Emilio Abello, Assistant Executive
On March 18, 1965, Philamgen brought an action in the Court pledgor by ordinary action. 6
Vice-President of Philamgen and member of the Bond Under
of First Instance of Manila (Civil Case No. 60272, "The

CORPORATION LAW: 7. captial structure Page 180 of 201

On December 17, 1970, the Court of Appeals promulgated a divestiture of the incorporeal property consisting of stocks The character of the transaction between the parties is to
decision in favor of the Philamgen, thereby upholding the from Lopez to Philamgen. The transfer appears to have been be determined by their intention, regardless of what
foregoing assignments of errors. It declared that the stock an absolute conveyance of the stocks to language was used or what the form of the transfer was. If
assignment was a mere pledge that the transfer of the stocks Philamgen whether or not Lopez defaults in the payment of it was intended to secure the payment of money, it must be
in the name of Philamgen was not intended to make it the P20,000.00 to Prudential Bank. While it is a conveyance in construed as a pledge; but if there was some other
owner thereof; that assuming that Philamgen had consideration of a contingent obligation, it is not itself a intention, it is not a pledge. However, even though a
appropriated the stocks, this appropriation is null and void as conditional conveyance. transfer, if regarded by itself, appears to have been
a stipulation authorizing it is a pactum commissorium; and absolute, its object and character might still be qualified
It is true that if Lopez should "well and truly perform and fulfill
that pending payment, Philamgen is merely holding the stock and explained by a contemporaneous writing declaring it to
all the undertakings, covenants, terms, conditions, and
as a security for the payment of Lopez' obligation. The have been a deposit of the property as collateral security. It
agreements stipulated" in his promissory note to Prudential
dispositive portion of the said decision states: has been said that a transfer of property by the debtor to a
Bank, the obligation of Philamgen under the surety bond
creditor, even if sufficient on its face to make an absolute
WHEREFORE, the decision of the lower court is hereby would become null and void. Corollarily, the stock
conveyance, should be treated as a pledge if the debt
reversed, and another one is hereby entered ordering the assignment, which is predicated on the obligation of
continues in existence and is not discharged by the
defendant to pay the plaintiff the sum of P27,785.89 with Philamgen under the surety bond, would necessarily become
transfer, and that accordingly, the use of the terms
interest at the rate of 12% per annum from December 9, null and void likewise, for want of cause or consideration
ordinarily importing conveyance, of absolute ownership will
1963, 10% of the P27,785.89 as attorney's fees and the under Article 1352 of the New Civil Code. But this is not the
not be given that effect in such a transaction if they are
costs of the suit. 7 case here because aside from the obligations undertaken by
also commonly used in pledges and mortgages and
Philamgen under the surety bond, the stock assignment had
The motion for reconsideration with prayer to set the same therefore do not unqualifiedly indicate a transfer of
other considerations referred to therein as "value received".
for oral argument having been denied, Lopez brought this absolute ownership, in the absence of clear and
Hence, based on the manifest terms thereof, it is an absolute
petition for review on certiorari presenting for resolution these unambiguous language or other circumstances excluding
transfer.
questions: an intent to pledge. 11
Notwithstanding the express terms of the "Stock Assignment
a) Where, as in this case, a party "sells, assigns and transfers" We agree with the holding of the respondent Court of Appeals
Separate from Certificate", however, We hold and rule that
and delivers shares of stock to another, duly endorsed in that the stock assignment, Exhibit C, is in truth and in fact, a
the transaction should not be regarded as an absolute
blank, in consideration of a contingent obligation of the pledge. Indeed, the facts and circumstances leading to the
conveyance in view of the circumstances obtaining at the
former to the latter, and, the obligations having arisen, the execution of the stock assignment, Exhibit C, and the
time of the execution thereof.
latter causes the shares of stock to be transferred in its name, admission of Lopez prove that it is in fact a pledge. The
what is the juridical nature of the transaction-a dation in It should be remembered that on June 2, 1959, the day Lopez appellate court is correct in ruling that the following
payment or a pledge? obtained a loan of P20,000.00 from Prudential Bank, Lopez requirements of a contract of pledge have been satisfied: (1)
executed a promissory note for ?20,000.00, plus interest at that it be constituted to secure the fulfillment of a principal
b) Where, as in this case, the debtor assigns the shares of
the rate of ten (10%) per cent per annum, in favor of said obligation; (2) that the pledgor be the absolute owner of the
stock to the creditor under an agreement between the latter
Bank. He likewise posted a surety bond to secure his full and thing pledged; and (3) that the person constituting the pledge
and determinate third persons that the latter would buy the
faithful performance of his obligation under the promissory has the free disposal of the property, and in the absence
shares of stock so that the obligations could be paid out of
note with Philamgen as his surety. In return for the thereof, that he be legally authorized for the purpose. (Article
the proceeds, was there a novation of the obligation by
undertaking of Philamgen under the surety bond, Lopez 2085, New Civil Code).
substitution of debtor? 8
executed on the same day not only an indemnity agreement
Article 2087 of the New Civil Code providing that it is also the
Philamgen failed to file its comment on the petition for review but also a stock assignment.
essence of these contracts (pledge, mortgage, and
on certiorari within the extended period which expired on
The indemnity agreement and the stock assignment must be antichresis) that when the principal obligation becomes due,
March 19, 1971. This Court thereby resolved to require Lopez
considered together as related transactions because in order the things in which the pledge or mortgage consists may be
to file his brief. 9
to judge the intention of the contracting parties, their alienated for the payment to the creditor, further supports the
Under the first assignment of error, Lopez argues in his brief: contemporaneous and subsequent acts shall be principally appellate court's ruling, which We also affirm. On this point
considered. (Article 1371, New Civil Code). Thus, considering further, the Court of Appeals correctly ruled:
That the Court of Appeals erred in holding that when that the indemnity agreement connotes a continuing
petitioner "sold, assigned, transferred" and delivered In addition to the requisites prescribed in article 2085, it is
obligation of Lopez towards Philamgen while the stock
shares of stock, duly endorsed in blank, to private necessary, in order to constitute the contract of pledge,
assignment indicates a complete discharge of the same
respondent in consideration of a contingent obligation of that the thing pledged be placed in the possession of the
obligation, the existence of the indemnity agreement
the former to the latter and the obligation having thereafter creditor, or of a third person by common agreement. (Art.
whereby Lopez had to pay a premium of P1,000.00 for a
arisen, the latter caused the shares of stock to be 2093, N.C.C.) Incorporeal rights, including shares of stock
period of one year and agreed at all times to indemnify
transferred to it, taking a new certificate of stock in its may also be pledged (Art. 2095, N.C.C.) All these requisites
Philamgen of any and all kinds of losses which the latter
name, the transaction was a pledge, and in not holding are found in the transaction between the parties leading to
might sustain by reason of it becoming a surety, is
instead that it was a dation in payment. 10 the execution of the Stock Assignment, Exhibit C. And that
inconsistent with the theory of an absolute sale for and in
it is a pledge was admitted by the defendant in his letter of
Considering the explicit terms of the deed denominated consideration of the same undertaking of Philamgen. There
November 18, 1963, Exhibit G, already quoted above,
"Stock Assignment Separate from Certificate", hereinbefore would have been no necessity for the execution of the
where he asked what had happened to his shares of stock
copied verbatim, Lopez sold, assigned and transferred unto indemnity agreement if the stock assignment was really
"which were pledged to your goodselves to secure the said
Philamgen the stocks involved "for and in consideration of the intended as an absolute conveyance. Hence, there are strong
obligation". The testimony of the defendant-appellee that it
obligations undertaken" by Philamgen "under the terms and and cogent reasons to conclude that the parties intended said
was their agreement or understanding that if he would be
conditions of the surety bond executed by it in favor of the stock assignment to complement the indemnity agreement
unable to pay the loan to the Prudential Bank, plaintiff
Prudential Bank" and "for value received". On its face, it is and thereby sufficiently guarantee the indemnification of
could sell the shares of stock or appropriate the same in full
neither pledge nor dation in payment. The document speaks Philamgen should it be required to pay Lopez' loan to
payment of its debt is a mere after-thought, conceived after
of an outright sale as there is a complete and unconditional Prudential Bank.

CORPORATION LAW: 7. captial structure Page 181 of 201

 he learned of the transfer of his stock to the plaintiff in the difficulties, for it may be made even by a person who is interest therein that is adverse to the pledgor's
books of the Baguio Military Institute. completely solvent. It merely involves a change of the title. Moreover, even where the legal title to incorporeal
object of the obligation by agreement of the parties and at property which may be pledged is transferred to a pledgee
We also do not agree with the contention of petitioner that
the same time fulfilling the same voluntarily. (8 Manresa as collateral security, he takes only a special property
"petitioner's 'sale assignment and transfer' unto private
324). 12 therein Such transfer merely performs the office that the
respondent of the shares of stock, coupled with their
delivery of possession does in case of a pledge of corporeal
endorsement in blank and delivery, comes exactly under the Considering the above jurisprudence, We find that the debt or
property.
Civil Code's definition of dation in payment, a long recognized obligation at bar has not matured on June 2, 1959 when Lopez
and deeply rooted concept in Civil Law denominated by "alienated" his 4,000 shares of stock to Philamgen. Lopez' xxx xxx xxx
Spanish commentators as 'adjudicacion en pago'". obligation would arise only when he would default in the
The pledgee has been considered as having a lien on the
payment of the principal obligation (the loan) to the bank and
According to Article 1245 of the New Civil Code, dation in pledged property. The extent of such lien is measured by
Philamgen had to pay for it. Such fact being adverse to the
payment, whereby property is alienated to the creditor in the amount of the debt or the obligation that is secured by
nature and concept of dation in payment, the same could not
satisfaction of a debt in money, shall be governed by the law the collateral, and the lien continues to exist as long as the
have been constituted when the stock assignment was
of sales. pledgee retains actual or symbolic possession of the
executed. Moreover, there is no express provision in the
property, and the debt or obligation remains unpaid.
Speaking of the concept of dation in payment, it is well to cite terms of the stock assignment between Philamgen and Lopez
Payment of the debt extinguishes the lien.
that: that the principal obligation (which is the loan) is immediately
extinguished by reason of such assignment. Though a pledgee of corporation stock does not become
Dation in payment is the delivery and transmission of
personally liable as a stockholder of the company, he may
ownership of a thing by the debtor to the creditor as an In case of doubt as to whether a transaction is a pledge or a
have the shares transferred to him on the books of the
accepted equivalent of the performance of the obligation. dation in payment, the presumption is in favor of pledge, the
corporation if he has been authorized to do so.
(2 Castan 525; 8 Manresa, 324) The property given may latter being the lesser transmission of rights and interests.
consist, not only of a thing, but also of a real right (such as Under American jurisprudence, The general property in the pledge remains in the pledgor
a usufruct) or of a credit against a third person. (Perez after default as well as prior thereto. The failure of the
A distinction might also be made between delivery of
Gonzales & Alguer :2-I Enneccerus, Kipp & Wolff 317). Thus, pledgor to pay his debt at maturity in no way affects the
property in payment of debt and delivery of such property
it has been held that the assignment to the creditor of the nature of the pledgee's rights concerning the property
as collateral security for the debt. Generally, such a
interest of the debtor in an inheritance in payment of his pledged, except that he then becomes entitled to proceed
transfer was presumed to be made for collateral security, in
debt, is valid and extinguishes the debt. (Ignacio vs. to make the security available in the manner prescribed by
the absence of evidence tending to show an intention on
Martinez, 33 Phil. 576) law or by the terms of the contract, ... . 14
the part of the parties that the transfer was in satisfaction
The modern concept of dation in payment considers it as a of the debt. This presumption of a transfer for collateral In his second assignment of error, petitioner contends that
novation by change of the object, and this is to our mind security arose particularly where the property given was the Court of Appeals erred in not holding that since private
the more juridically correct view. Our Civil Code, however, commercial paper, or some other 'specialty' chose of respondent entered into an agreement with determinate third
provides in this article that, where the debt is in money, the action, that conferred rights upon transfer by delivery of a persons whereby the latter would buy the said shares so sold,
law on sales shall govern; in this case, the act is deemed to different nature from the debt, whose value was neither assigned and transferred to the former by the petitioner for
be a sale, with the amount of the obligation to the extent intrinsic nor apparent and was not agreed upon by the the purpose of paying petitioner's obligation out of the
that it is extinguished being considered as the price. Does parties. 13 proceeds, there was a novation of the obligation by
this mean that there can be no dation in payment if the substitution of debtor.
Petitioner's argument that even assuming, arguendo that the
debt is not in money? We do not think so. It is precisely in
transaction was at its inception a pledge, it gave way to a We do not agree.
obligations which are not money debts, in which the true
dation in payment when the obligation secured came into
juridical nature of dation in payment becomes manifest. Under Article 1291 of the New Civil Code, obligations may be
existence and private respondent had the stocks transferred
There is a real novation with immediate performance of the modified by: (1) changing their object or principal condition;
to it in the corporate books and took a stock certificate in its
new obligation. The fact that there must be a prior (2) substituting the person of the debtor; (3) subrogating a
name, is without merit. The fact that the execution of the
agreement of the parties on the delivery of the thing in lieu third person in the rights of the creditor. And in order that an
stock assignment is accompanied by the delivery of the
of the original prestation shows that there is a novation obligation may be extinguished by another which substitute
shares of stock, duly endorsed in blank to Philamgen is no
which, extinguishes the original obligation, and the delivery the same, it is imperative that it be so declared in
proof that the transaction is a dation in payment. Likewise,
is a mere performance of the new obligation. unequivocal terms, or that the old and the new obligations be
the fact that Philamgen had the shares of stock transferred to
on every point incompatible with each other. (Article 1292,
The dation in payment extinguishes the obligation to the it in the books of the corporation and took a certificate in its
N.C.C.) Novation which consists in substituting a new debtor
extent of the value of the thing delivered, either as agreed name in lieu of Lopez which was cancelled does not amount
in the place of the original one, may be made even without
upon by the parties or as may be proved, unless the parties to conversion of the stock to one's own use. The transfer of
the knowledge or against the will of the latter, but not without
by agreement, express or implied, or by their silence, title to incorporeal property is generally an essential part of
the consent of the creditor. Payment by the new debtor gives
consider the thing as equivalent to the obligation, in which the delivery of the same in pledge. It merely constitutes
him the rights mentioned in Articles 1236 and 1237. (Article
case the obligation is totally extinguished. (8 Manresa 324; evidence of the pledgee's right of property in the thing
pledged. 1293, N.C.C.)
3 Valverde 174 fn
Assignment of property by the debtor to his creditors, By the contract of pledge, the pledgor does not part with Commenting on the second concept of novation, that is,
provided for in article 1255, is similar to dation in payment his general right of property in the collateral. The general substituting the person of the debtor, Manresa opines, thus:
in that both are substitute forms of performance of an property therein remains in him, and only a special In this kind of novation it is pot enough to extend the
obligation. Unlike the assignment for the benefit of property vests in the pledgee. The pledgee does not juridical relation to a third person; it is necessary that the
creditors, however, dation in payment does not involve acquire an interest in the property, except as a security for old debtor be released from the obligation, and the third
plurality of creditors, nor the whole of the property of the his debt. Thus, the pledgee holds possession of the security person or new debtor take his place in the relation. Without
debtor. It does not suppose a situation of financial subject to the rights of the pledgor; he cannot acquire any such release, there is no novation; the third person who has

CORPORATION LAW: 7. captial structure Page 182 of 201

 assumed the obligation of the debtor merely becomes a co- As to the third assignment of error which is merely the
debtor or a surety. If there is no agreement as to solidarity, consequence of the first two assignments of errors, the same
the first and the new debtor are considered obligated is also devoid of merit.
jointly. (8 Manresa 435, cited in Tolentino, Commentaries
WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision
and Jurisprudence on the Civil Code of the Philippines, Vol.
of the Court of Appeals is hereby AFFIRMED in toto, with costs
IV, p. 360)
against the petitioner.
In the case at bar, the undertaking of Messrs. Emilio Abello
SO ORDERED.
and Pio Pedrosa that they would buy the shares of stock so
that Philamgen could be reimbursed from the proceeds that it
paid to Prudential Bank does not necessarily imply the
extinguishment of the liability of petitioner Lopez. Since it was
not established nor shown that Lopez would be released from
responsibility, the same does not constitute novation and
hence, Philamgen may still enforce the obligation. As the
Court of Appeals correctly held that "(t)he representation of
Mr. Abello to Atty. Sumawang that he and Mr. Pedrosa would
buy the stocks was a purely private arrangement between
them, not an agreement between (Philamgen) and (Lopez)"
and which We hereby affirm, petitioner's second assignment
of error must be rejected.
In fine, We hold and rule that the transaction entered into by
and between petitioner and respondent under the Stock
Assignment Separate From Certificate in relation to the Surety
Bond No. 14164 and the Indemnity Agreement, all executed
and dated June 2, 1959, constitutes a pledge of the 40,000
shares of stock by the petitioner-pledgor in favor of the
private respondent-pledgee, and not a dacion en pago. It is
also Our ruling that upon the facts established, there was no
novation of the obligation by substitution of debtor.
The promise of Abello and Pedrosa to buy the shares from
private respondent not having materialized (which promise
was given to said respondent only and not to petitioner) and
no action was taken against the two by said respondent who
chose instead to sue the petitioner on the Indemnity
Agreement, it is quite clear that this respondent has
abandoned its right and interest over the pledged properties
and must, therefore, release or return the same to the
petitioner-pledgor upon the latter's satisfaction of his
obligation under the Indemnity Agreement.
It must also be made clear that there is no double payment
nor unjust enrichment in this case because We have ruled
that the shares of stock were merely pledged. As the Court of
Appeals said:
The appellant (Philam) is not enriching himself at the
expense of the appellee. True, the stock certificate of the
appellee had been in the name of the appellant but the
transfer was merely nominal, and was not intended to
make the plaintiff the owner thereof. No offer had been
made for the return of the stocks to the defendant. As the
appellant had stated, the appellee could have the stocks
transferred to him anytime as long as he reimburses the
plaintiff the amount it had paid to the Prudential Bank.
Pending payment, plaintiff is merely holding the certificates
as a pledge or security for the payment of defendant's
obligation.
The above holding of the appellate court is correct and We
affirm the same.

CORPORATION LAW: 7. captial structure Page 183 of 201

G.R. No. 37078 September 27, 1933 page 22 thereof regarding exhibit A which, according to not appear from the text of the Corporation Law that an
Ceron, was executed two months after March 25, 1930, the attempt was made to give a special signification to the word
ENRIQUE MONSERRAT, plaintiff-appellee, vs. CARLOS G.
date on which it appears to have been executed. Ceron "transfer", we shall construe it according to its accepted
CERON, ET AL., defendants. ERMA, INC., and, THE
alleges that, upon instructions of the plaintiff, he did not make meaning in ordinary parlance.
SHERIFF OF MANILA, respondents.
any notation of said document in the stock book until May 5,
The word "transferencia" (transfer) is defined by the
Juan T. Santos and Arsenio Solidum for appellants. 1931, the date on which the shares of stock in question were
"Diccionario de la Academia de la Lengua Castellana" as
Cardenas and Casal for appellee. to be sold at public auction to satisfy his debt to Matute.
"accion y efecto de transferir" (the act and effect of
VILLA-REAL, J.: On February 26, 1931, Carlos G. Ceron mortgaged to Eduardo transferring); and the verb "transferir", as "ceder o renunciar
R. Matute some shares of stock of the Manila Yellow Taxicab en otro el derecho o dominio que se tiene sobre una cosa,
This is an appeal taken by the defendant-entity, Erma, Inc., Co., Inc., among which were the 600 common shares of stock haciendole dueno de ella" (to assign or waive the right in, or
and by the sheriff of the City of Manila, from the judgment in question, for the sum of P30,000. Ceron endorsed to absolute ownership of, a thing in favor of another, making
rendered by the Court of First Instance of Manila, the Matute the certificate of stock Exhibit 1, of which Matute has him the owner thereof).
dispositive part of which reads as follows: been in possession ever since. When Ceron mortgaged the
In the Law Dictionary of "Words and Phrases", third series,
In view of the foregoing considerations, judgment is shares in question to Matute, he did not inform Matute of the volume 7, p. 589, the word "transfer" is defined as follows:
rendered in favor of the plaintiff declaring the preliminary existence of the document, Exhibit A, and the latter never had
injunction issued herein final and permanent; declaring the any knowledge thereof. When he was asked by the plaintiff "Transfer" means any act by which property of one person
plaintiff herein the owner of the 600 shares of stock, Exhibit whether he succeeded in carrying out his transaction with is vested in another, and "transfer of shares", as used in
1; declaring the mortgage constituted on the ownership of Matute, Carlos G. Ceron informed him of the aforesaid Uniform Stock Transfer Act (Comp. St. Supp., 690), implies
the shares of stock in question null and void and without mortgage at the beginning of March 1931. Ceron continued as any means whereby one may be divested of and another
force and effect, although the mortgage on the usufruct secretary of the Manila Yellow Taxicab Co., Inc., until May 5, acquire ownership of stock. (Wallach vs. Stein [N.J.], 136 A.,
enjoyed by the mortgage debtor Carlos G. Ceron in the said 1931. 209, 210.)"
600 shares of stock is hereby declared valid, with costs The first question to decide in the present appeal is whether
In view of the definitions cited above, the question arises as
against the defendants. It is so ordered. or not it is necessary to enter upon the books of the to whether or not a mortgage constituted on certain shares of
In support of this appeal, the appellants assign nine alleged corporation a mortgage constituted on common shares of stock in accordance with Act No. 1508, as amended by Act
errors in the decision of the trial court, which we shall discuss stock in order that such mortgage may be valid and may have No. 2496, is a transfer of such shares in the abovementioned
in the course of this decision. force and effect as against third persons. sense.
Some of the following facts are undisputed and others proven Section 35 of the Corporation Law provides the following: Section 3 of the aforesaid Act No. 1508, as amended by Act
by a preponderance of the evidence: No. 2496, defines the phrase "hipoteca mobiliaria" (chattel
SEC. 35. The capital stock of stock corporations shall be
mortgage) as follows:
The plaintiff herein, Enrique Monserrat, was the president and divided into shares for which certificates signed by the
manager of the Manila Yellow Taxicab Co., Inc., and the owner president or the vice-president, counter signed by the SEC. 3. A chattel mortgage is a conditional sale of personal
of P1,200 common shares of stock thereof. secretary or clerk and sealed with the seal of the property as security for the payment of a debt, or the
corporation, shall be issued in accordance with the by-laws. performance of some other obligation specified therein, the
On March 25, 1930, in consideration of the interest shown and Shares of stock so issued are personal property and may be condition being that the sale shall be avoided upon the
the financial aid extended him in the organization of the transferred by delivery of the certificate indorsed by the seller paying to the purchaser a sum of money or doing
corporation by Carlos G. Ceron, one of the defendants herein, owner or his attorney in fact or other person legally some other act named. If the condition is performed
Enrique Monserrat assigned to the former the usufruct of half authorized to make the transfer. No transfer, however, shall according to its terms the mortgage and sale immediately
of the aforesaid common shares of stock, the corresponding be valid, except as between the parties, until the transfer is become void, and the mortgage is hereby divested of his
certificate of stock No. 7, having been issued in the name of entered and noted upon the books of the corporation so as title.
said Carlos G, Ceron to that effect on March 24, 1930. (Exhibit to show the names of the parties to the transaction, the
1.) Said assignment or transfer only gave the transferee the date of the transfer the number of the certificate, and the According to the legal provision just quoted, although a
right to enjoy, during his lifetime, the profits which might be number of shares transferred. chattel mortgage, accompanied by delivery of the mortgaged
derived from the shares assigned him, prohibiting him from thing, transfers the title and ownership thereof to the
selling, mortgaging, encumbering, alienating or otherwise No share of stock against which the corporation hold, any mortgage creditor, such transfer is not absolute but
exercising any act implying absolute ownership of all or any of unpaid claim shall be transferable on the books of the constitutes a mere security for the payment of the mortgage
the shares in question, the transferor having reserved for corporation. debt, the transfer in question becoming null and void from the
himself and his heirs the right to vote derived from said time the mortgage debtor complies with his obligation to pay
The legal provision just quoted does not require any entry
shares of stock and to recover the ownership thereof at the his debt.
except of transfers of shares of stock in order that such
termination of the usufruct (Exhibit A). Stock certificate No. 7 transfers may be valid as against third persons. Now, what In the case of Noble vs. Ft. Smith Wholesale Grocery Co. (127
was recorded in the name of Carlos G. Ceron and the did the Legislature mean in using the word "transfer"? Pac., 14, 17; 34 Okl., 662; 46 L. R. A. [N.S.], 455), cited in
aforesaid deed of transfer Exhibit A, was noted by himself as
Words and Phrases, second series, vol. 4, p. 978, the following
secretary, on page 22 of the Stock and Transfer Book of the It is a rule of statutory construction that the words of a
appears:
Manila Yellow Taxicab Co., Inc. statute are to be taken in their natural, plain and ordinary
signification in accordance with the common and approved A "transfer" is the act by which owner of a thing delivers it
By way of defense, the defendants herein alleged that on usage of the language, giving to words of common use their to another with the intent of passing the rights which he
February 20, 1931, Eduardo R. Matute, president of the popularly accepted meaning and to technical terms or words has in it to the latter, and a chattel mortgage is not within
defendant corporation, Erma, Inc., and the defendant Carlos of art, their accepted special signification, unless there is the meaning of such term.
G. Ceros. appeared at the plaintiff's office on Mabini Street, reason to believe from the context of the statute that such
Manila, and there Ceron, at a distance of about three meters words have been used in another sense. (Black, Construction Therefore, the chattel mortgage is not the transfer referred to
from the plaintiff, showed Matute the stock book of the Manila and Interpretation of Laws, section 57.) Inasmuch as it does in section 35 of Act No. 1459 commonly known as the
Yellow Taxicab Co., Inc., Matute did not see the annotation on Corporation law, which transfer should be entered and noted

CORPORATION LAW: 7. captial structure Page 184 of 201

upon the books of a corporation in order to be valid, and requisite to the validity of such transfer, the notation upon
c) May 25-31, 1979. The Puyat Group claims that at
which, as has already been said, means the absolute and the aforesaid books of the corporation, of a chattel mortgage
conferences of the parties with respondent SEC Commissioner
unconditional conveyance of the title and ownership of a constituted on the shares of stock in question is not de Guzman, Justice Estanislao A. Fernandez, then a member
share of stock. necessary to its validity. of the Interim Batasang Pambansa, orally entered his
appearance as counsel for respondent Acero to which the
If, in accordance with said section 35 of the Corporation Law, Wherefore, the judgment appealed from is hereby reversed
Puyat Group objected on Constitutional grounds. Section 11,
only the transfer or absolute conveyance of the ownership of and the defendants are absolved from the complaint herein
Article VIII, of the 1973 Constitution, then in force, provided
the title to a share need be entered and noted upon the books which is dismissed with costs against the appellee. So
that no Assemblyman could appear as counsel before any
of the corporation in order that such transfer may ba valid, ordered.
administrative body, and SEC was an administrative body.
therefore, inasmuch as a chattel mortgage of the aforesaid
Incidentally, the same prohibition was maintained by the April
title is not a complete and absolute alienation of the dominion
7, 1981 plebiscite. The cited Constitutional prohibition being
and ownership thereof, its entry and notation upon the books
clear, Assemblyman Fernandez did not continue his
of the corporation is not necessary requisite to its validity.
appearance for respondent Acero.
The second question to decide is whether or not the
d) May 31, 1979. When the SEC Case was called, it turned out
defendant entity, Erma, Inc., had knowledge of the execution
that:
of the deed Exhibit A, dated March 25, 1930, wherein the
defendant Carlos G. Ceron states that the transfer to him by (i) On May 15, 1979, Assemblyman Estanislao A. Fernandez
Enrique Monserrat of 600 shares of common stock of the G.R. No. L-51122 March 25, 1982 had purchased from Augusto A. Morales ten (10) shares of
Manila Yellow Taxicab Co., Inc., covered by certificate No. 7, EUGENIO J. PUYAT, ERWIN L. CHIONGBIAN, EDGARDO P. stock of IPI for P200.00 upon request of respondent Acero to
was only for the usufruct thereof, reserving to the assignor REYES, ANTONIO G. PUYAT, JAIME R. BLANCO, RAFAEL qualify him to run for election as a Director.
the right to vote said share and binding himself not to R. RECTO and REYNALDO L. LARDIZABAL, petitioners, vs.
(ii) The deed of sale, however, was notarized only on May 30,
alienate nor encumber them. HON. SIXTO T. J. DE GUZMAN, JR., as Associate 1979 and was sought to be registered on said date.
The evidence shows that when Matute as president of Erma, Commissioner of the Securities & Exchange
(iii) On May 31, 1979, the day following the notarization of
Inc., went to the office of the Manila Yellow Taxicab Co., Inc., Commission, EUSTAQUIO T. C. ACERO, R. G. VILDZIUS,
Assemblyman Fernandez purchase, the latter had filed an
at Mabini Street, manila, on February 20, 1931, to examine ENRIQUE M. BELO, MANUEL G. ABELLO, SERVILLANO
Urgent Motion for Intervention in the SEC Case as the owner
the Stock and Transfer Book of the said corporation, for the DOLINA, JUANITO MERCADO and ESTANISLAO A.
FERNANDEZ, respondents. of ten (10) IPI shares alleging legal interest in the matter in
purpose of ascertaining the actual status of Carlos G. Ceron's
litigation.
shares of stock, Ceron as secretary of said corporation and in D E C I S I O N
charge of said stock book, showed it to him, and Matute found e) July 17, 1979. The SEC granted leave to intervene on the
nothing but that the shares in question were recorded therein MELENCIO-HERRERA, J.: basis of Atty. Fernandez ownership of the said ten shares. 1It
in the name of said Carlos G. Ceron, free from all liens and This suit for certiorari and Prohibition with Preliminary is this Order allowing intervention that precipitated the
encumbrances and no reference made to the Exhibit A. the Injunction is poised against the Order of respondent Associate instant petition for certiorari and Prohibition with Preliminary
defendant, Carlos G. Ceron himself, testified that when he Commissioner of the Securities and Exchange Commission Injunction.
mortgaged his shares, he said nothing to Erma, Inc., about (SEC) granting Assemblyman Estanislao A. Fernandez leave to
the existence of the deed, Exhibit A, for fear he might not intervene in SEC Case No. 1747. f) July 3, [Link] P. Reyes instituted a case before the
succeed in obtaining the loan he applied for, with the said Court of First Instance of Rizal (Pasig), Branch XXI, against
shares as security, and that the notation of Exhibit A in A question of novel import is in issue. For its resolution, the N.V. Verenigde Bueinzenfabrieken Excelsior De Maas and
question appearing in the books of the corporation was place following dates and allegations are being given and made: respondent Eustaquio T. C. Acero and others, to annul the sale
there only on May 5, 1931, the same date on which the 600 of Excelsiors shares in the IPI to respondent Acero (CC No.
a) May 14,1979. An election for the eleven Directors of the 33739). In that case, Assemblyman Fernandez appeared as
common shares were to have been sold at public auction,
International Pipe Industries Corporation (IPI) a private counsel for defendant Excelsior In L-51928, we ruled that
together with the preferred shares, which were delivered to
corporation, was held. Those in charge ruled that the Assemblyman Fernandez could not appear as counsel in a
the sheriff for that purpose by Erma, Inc., in view of Carlos G.
following were elected as Directors: case originally filed with a Court of First Instance as in such
Ceron's default in the payment of the loan secured by them.
From the time said shares of stocks in question were Eugenio J. Puyat Eustaquio T.C. Acero situation the Court would be one without appellate
mortgaged by Carlos G. Ceron on February 26, 1931, the Erwin L. Chiongbian R. G. Vildzius jurisdiction.
corresponding certificate has been in possession of the Edgardo P. Reyes Enrique M. Belo On September 4, 1979, the Court en banc issued a temporary
defendant entity, Erma, Inc., without any notation thereon Antonio G. Puyat Servillano Dolina Restraining Order enjoining respondent SEC Associate
relative to the deed Exhibit A. It is obvious, therefore, that the Jaime R. Blanco Juanito Mercado Commissioner from allowing the participation as an
defendant entity Erma, Inc., as a conditional purchaser of the Rafael R. Recto intervenor, of respondent Assemblyman Estanislao Fernandez
shares of stock in question given as security for the payment at the proceedings in the SEC Case.
of his credit, acquired in good faith Carlos G. Ceron's right and Those named on the left list may be called the Puyat Group;
title to the 600 common shares of stock evidenced by those on the right, the Acero Group. Thus, the Puyat Group
The Solicitor General, in his Comment for respondent
certificate No. 7 of the Manila Yellow Taxicab Co., Inc., and as would be in control of the Board and of the management of
Commissioner, supports the stand of the latter in allowing
such conditional purchaser in good faith, it is entitled to the IPI. intervention. The Court en banc, on November 6, 1979,
protection of the law. b) May 25, 1979. The Acero Group instituted at the Securities resolved to consider the Comment as an Answer to the
Petition.
In view of the foregoing considerations, we are of the opinion and Exchange Commission (SEC)quo warranto proceedings,
and so hold that, inasmuch as section 35 of the Corporation docketed as Case No. 1747 (the SEC Case), questioning the The issue which will be resolved is whether or not
Law does not require the notation upon the books of a election of May 14, 1979. The Acero Group claimed that the Assemblyman Fernandez, as a then stockholder of IPI may
corporation of transactions relating to its shares, except the stockholders votes were not properly counted. intervene in the SEC Case without violating Section 11, Article
transfer of possession and ownership thereof, as a necessary VIII of the Constitution, which, as amended, now reads:

CORPORATION LAW: 7. captial structure Page 185 of 201

SEC. 11. outcome of the SEC Case would be pure naivet. He would motions for reconsideration. Enrique Razon wanted the
still appear as counsel indirectly. appellate court's decision reversed and the trial court's
No Member of the Batasang Pambansa shall appear as
decision affirmed while Vicente Chuidian asked that all cash
counsel before any court without appellate jurisdiction before A ruling upholding the intervention would make the
and stock dividends and all the pre-emptive rights accruing to
any court in any civil case wherein the Government, or any constitutional provision ineffective. All an Assemblyman need
the 1,500 shares of stock be ordered delivered to him. The
subdivision, agency, or instrumentality thereof is the adverse do, if he wants to influence an administrative body is to
appellate court denied both motions. Hence, these petitions.
party, or in any criminal case wherein any officer or employee acquire a minimal participation in the interest of the client
of the Government is accused of an offense committed in and then intervene in the proceedings. That which the The relevant Antecedent facts are as follows:
relation to his office, or before any administrative body. Constitution directly prohibits may not be done by indirection
In his complaint filed on June 29, 1971, and amended on
or by a general legislative act which is intended to accomplish
Neither shall he, directly or indirectly be interested financially November 16, 1971, Vicente B. Chuidian prayed that
the objects specifically or impliedly prohibited. 3
in any contract with, or in any franchise or special privilege defendants Enrique B. Razon, E. Razon, Inc., Geronimo
granted by the Government, or any subdivision, agency or In brief, we hold that the intervention of Assemblyman Velasco, Francisco de Borja, Jose Francisco, Alfredo B. de
instrumentality thereof, including any government-owned or Fernandez in SEC. No. 1747 falls within the ambit of the Leon, Jr., Gabriel Llamas and Luis M. de Razon be ordered to
controlled corporation, during his term of office. prohibition contained in Section 11, Article VIII of the deliver certificates of stocks representing the shareholdings
Constitution. of the deceased Juan T. Chuidian in the E. Razon, Inc. with a
He shall not accept employment to intervene in any cause or
prayer for an order to restrain the defendants from
matter where he may be called to act on account of his office. Our resolution of this case should not be construed as, absent
disposing of the said shares of stock, for a writ of
(Emphasis supplied) the question of the constitutional prohibition against
preliminary attachment v. properties of defendants having
members of the Batasan, allowing any stockholder, or any
What really has to be resolved is whether or not, in possession of shares of stock and for receivership of the
number of stockholders, in a corporation to intervene in any
intervening in the SEC Case, Assemblyman Fernandez is, in properties of defendant corporation . . .
controversy before the SEC relating to intra-corporate
effect, appearing as counsel, albeit indirectly, before an
matters. A resolution of that question is not necessary in this xxx xxx xxx
administrative body in contravention of the Constitutional
case.
provision. In their answer filed on June 18, 1973, defendants alleged
WHEREFORE, respondent Commissioners Order granting that all the shares of stock in the name of stockholders of
Ordinarily, by virtue of the Motion for Intervention,
Atty. Estanislao A. Fernandez leave to intervene in SEC Case record of the corporation were fully paid for by defendant,
Assemblyman Fernandez cannot be said to be appearing as
No. 1747 is hereby REVERSED AND SET ASIDE. The Razon; that said shares are subject to the agreement
counsel. Ostensibly, he is not appearing on behalf of another,
temporary Restraining Order heretofore issued is hereby between defendants and incorporators; that the shares of
although he is joining the cause of the private respondents.
made PERMANENT. stock were actually owned and remained in the possession
His appearance could theoretically be for the protection of his
of Razon. Appellees also alleged . . . that neither the late
ownership of ten (10) shares of IPI in respect of the matter in No costs.
Juan T. Chuidian nor the appellant had paid any amount
litigation and not for the protection of the petitioners nor
SO ORDERED. whatsoever for the 1,500 shares of stock in question . . .
respondents who have their respective capable and respected
counsel. xxx xxx xxx
However, certain salient circumstances militate against the The evidence of the plaintiff shown that he is the
intervention of Assemblyman Fernandez in the SEC Case. He administrator of the intestate estate of Juan Telesforo
had acquired a mere P200.00 worth of stock in IPI, G.R. No. 74306 March 16, 1992 Chuidian in Special Proceedings No. 71054, Court of First
representing ten shares out of 262,843 outstanding shares. ENRIQUE RAZON, petitioner, vs. INTERMEDIATE Instance of Manila.
He acquired them after the fact that is, on May 30, 1979, APPELLATE COURT and VICENTE B. CHUIDIAN, in his Sometime in 1962, Enrique Razon organized the E. Razon,
after the contested election of Directors on May 14, 1979, capacity as Administrator of the Estate of the Inc. for the purpose of bidding for the arrastre services in
after the quo warranto suit had been filed on May 25, 1979 Deceased JUAN T. CHUIDIAN, respondents. South Harbor, Manila. The incorporators consisted of
before SEC and one day before the scheduled hearing of the
G.R. No. 74315 March 16, 1992 Enrique Razon, Enrique Valles, Luisa M. de Razon, Jose
case before the SEC on May 31, 1979. And what is more,
Tuason, Jr., Victor Lim, Jose F. Castro and Salvador Perez de
before he moved to intervene, he had signified his intention VICENTE B. CHUIDIAN, petitioner, vs. INTERMEDIATE Tagle.
to appear as counsel for respondent Eustaquio T. C. APPELLATE COURT, ENRIQUE RAZ0N, and E. RAZON,
Acero, 2 but which was objected to by petitioners. Realizing, INC., respondents. On April 23, 1966, stock certificate No. 003 for 1,500 shares
perhaps, the validity of the objection, he decided, instead, to of stock of defendant corporation was issued in the name of
intervene on the ground of legal interest in the matter Juan T. Chuidian.
under litigation. And it may be noted that in the case filed GUTIERREZ, JR., J.:
before the Rizal Court of First Instance (L-51928), he appeared On the basis of the 1,500 shares of stock, the late Juan T.
as counsel for defendant Excelsior, co-defendant of The main issue in these consolidated petitions centers on the Chuidian and after him, the plaintiff-appellant, were elected
respondent Acero therein. ownership of 1,500 shares of stock in E. Razon, Inc. covered as directors of E. Razon, Inc. Both of them actually served
by Stock Certificate No. 003 issued on April 23, 1966 and and were paid compensation as directors of E. Razon, Inc.
Under those facts and circumstances, we are constrained to registered under the name of Juan T. Chuidian in the books of
find that there has been an indirect appearance as counsel the corporation. The then Court of First Instance of Manila, From the time the certificate of stock was issued on April
before an administrative body and, in our opinion, that is now Regional Trial Court of Manila, declared that Enrique 1966 up to April 1971, Enrique Razon had not questioned
a circumvention of the Constitutional prohibition. The Razon, the petitioner in G.R. No. 74306 is the owner of the the ownership by Juan T. Chuidian of the shares of stock in
intervention was an afterthought to enable him to appear said shares of stock. The then Intermediate Appellate Court, question and had not brought any action to have the
actively in the proceedings in some other capacity. To believe now Court of Appeals, however, reversed the trial court's certificate of stock over the said shares cancelled.
the avowed purpose, that is, to enable him eventually to vote decision and ruled that Juan T. Chuidian, the deceased father The certificate of stock was in the possession of defendant
and to be elected as Director in the event of an unfavorable of petitioner Vicente B. Chuidian in G.R. No. 74315 is the Razon who refused to deliver said shares to the plaintiff,
owner of the shares of stock. Both parties filed separate

CORPORATION LAW: 7. captial structure Page 186 of 201

 until the same was surrendered by defendant Razon and xxx xxx xxx objected to, nor to strike it out on its own motion (Emphasis
deposited in a safety box in Philippine Bank of Commerce. supplied). (Marella v. Reyes, 12 Phil. 1.)
The purpose of the rule has been explained by this Court in
Defendants allege that after organizing the E. Razon, Inc., this wise: The issue as to whether or not the petitioner's testimony is
Enrique Razon distributed shares of stock previously placed admissible having been settled, we now proceed to discuss
The reason for the rule is that if persons having a claim
in the names of the withdrawing nominal incorporators to the fundamental issue on the ownership of the 1,500 shares
against the estate of the deceased or his properties were
some friends including Juan T. Chuidian of stock in E. Razon, Inc.
allowed to testify as to the supposed statements made by
Stock Certificate No. 003 covering 1,500 shares of stock him (deceased person), many would be tempted to falsely E. Razon, Inc. was organized in 1962 by petitioner Enrique
upon instruction of the late Chuidian on April 23, 1986 was impute statements to deceased persons as the latter can Razon for the purpose of participating in the bidding for the
personally delivered by Chuidian on July 1, 1966 to the no longer deny or refute them, thus unjustly subjecting arrastre services in South Harbor, Manila. The incorporators
Corporate Secretary of Attorney Silverio B. de Leon who their properties or rights to false or unscrupulous claims or were Enrique Razon, Enrique Valles, Luisa M. de Razon, Jose
was himself an associate of the Chuidian Law Office (Exhs. demands. The purpose of the law is to "guard against the Tuazon, Jr., Victor L. Lim, Jose F. Castro and Salvador Perez de
C & 11). Since then, Enrique Razon was in possession of temptation to give false testimony in regard to the Tagle. The business, however, did not start operations until
said stock certificate even during the lifetime of the late transaction in question on the part of the surviving party." 1966. According to the petitioner, some of the incorporators
Chuidian, from the time the late Chuidian delivered the said (Tongco v. Vianzon, 50 Phil. 698; Go Chi Gun, et al. v. Co withdrew from the said corporation. The petitioner then
stock certificate to defendant Razon until the time (sic) of Cho, et al., 622 [1955]) distributed the stocks previously placed in the names of the
defendant Razon. By agreement of the parties (sic) withdrawing nominal incorporators to some friends, among
The rule, however, delimits the prohibition it contemplates in
delivered it for deposit with the bank under the joint them the late Juan T. Chuidian to whom he gave 1,500 shares
that it is applicable to a case against the administrator or its
custody of the parties as confirmed by the trial court in its of stock. The shares of stock were registered in the name of
representative of an estate upon a claim against the estate of
order of August 7, 1971. Chuidian only as nominal stockholder and with the agreement
the deceased person. (See Tongco v. Vianzon, 50 Phil. 698
that the said shares of stock were owned and held by the
Thus, the 1,500 shares of stook under Stock Certificate No. [1927])
petitioner but Chuidian was given the option to buy the same.
003 were delivered by the late Chuidian to Enrique because
In the instant case, the testimony excluded by the appellate In view of this arrangement, Chuidian in 1966 delivered to the
it was the latter who paid for all the subscription on the
court is that of the defendant (petitioner herein) to the affect petitioner the stock certificate covering the 1,500 shares of
shares of stock in the defendant corporation and the
that the late Juan Chuidian, (the father of private respondent stock of E. Razon, Inc. Since then, the Petitioner had in his
understanding was that he (defendant Razon) was the
Vicente Chuidian, the administrator of the estate of Juan possession the certificate of stock until the time, he delivered
owner of the said shares of stock and was to have
Chuidian) and the defendant agreed in the lifetime of Juan it for deposit with the Philippine Bank of Commerce under the
possession thereof until such time as he was paid therefor
Chuidian that the 1,500 shares of stock in E. Razon, Inc. are parties' joint custody pursuant to their agreement as
by the other nominal incorporators/stockholders (TSN., pp.
actually owned by the defendant unless the deceased Juan embodied in the trial court's order.
4, 8, 10, 24-25, 25-26, 28-31, 31-32, 60, 66-68, July 22,
Chuidian opted to pay the same which never happened. The
1980, Exhs. "C", "11", "13" "14"). (Ro11o 74306, pp. 66- The petitioner maintains that his aforesaid oral testimony as
case was filed by the administrator of the estate of the late
68) regards the true nature of his agreement with the late Juan
Juan Chuidian to recover shares of stock in E. Razon, Inc.
Chuidian on the 1,500 shares of stock of E. Razon, Inc. is
In G.R. No. 74306, petitioner Enrique Razon assails the allegedly owned by the late Juan T. Chuidian.
sufficient to prove his ownership over the said 1,500 shares of
appellate court's decision on its alleged misapplication of the
It is clear, therefore, that the testimony of the petitioner is not stock.
dead man's statute rule under Section 20(a) Rule 130 of the
within the prohibition of the rule. The case was not
Rules of Court. According to him, the "dead man's statute" The petitioner's contention is not correct.
filed against the administrator of the estate, nor was it filed
rule is not applicable to the instant case. Moreover, the
upon claims against the estate. In the case of Embassy Farms, Inc. v. Court of Appeals (188
private respondent, as plaintiff in the case did not object to
SCRA 492 [1990]) we ruled:
his oral testimony regarding the oral agreement between him Furthermore, the records show that the private respondent
and the deceased Juan T. Chuidian that the ownership of the never objected to the testimony of the petitioner as regards . . . For an effective, transfer of shares of stock the mode
shares of stock was actually vested in the petitioner unless the true nature of his transaction with the late elder Chuidian. and manner of transfer as prescribed by law must be
the deceased opted to pay the same; and that the petitioner The petitioner's testimony was subject to cross-examination followed (Navea v. Peers Marketing Corp., 74 SCRA 65).
was subjected to a rigid cross examination regarding such by the private respondent's counsel. Hence, granting that the As provided under Section 3 of Batas Pambansa Bilang, 68
testimony. petitioner's testimony is within the prohibition of Section otherwise known as the Corporation Code of the
20(a), Rule 130 of the Rules of Court, the private respondent Philippines, shares of stock may be transferred by delivery
Section 20(a) Rule 130 of the Rules of Court (Section 23 of the
is deemed to have waived the rule. We ruled in the case to the transferee of the certificate properly indorsed. Title
Revised Rules on Evidence) States:
of Cruz v. Court of Appeals (192 SCRA 209 [1990]): may be vested in the transferee by the delivery of the duly
Sec. 20. Disqualification by reason of interest or indorsed certificate of stock (18 C.J.S. 928, cited in Rivera v.
It is also settled that the court cannot disregard evidence
relationship The following persons cannot testify as to Florendo, 144 SCRA 643). However, no transfer shall be
which would ordinarily be incompetent under the rules but
matters in which they are interested directly or indirectly, valid, except as between the parties until the transfer is
has been rendered admissible by the failure of a party to
as herein enumerated. properly recorded in the books of the corporation (Sec. 63,
object thereto. Thus:
Corporation Code of the Philippines; Section 35 of the
(a) Parties or assignors of parties to a case, or persons in
. . . The acceptance of an incompetent witness to testify in Corporation Law)
whose behalf a case is prosecuted, against an executor or
a civil suit, as well as the allowance of improper questions
administrator or other representative of a deceased person, In the instant case, there is no dispute that the questioned
that may be put to him while on the stand is a matter
or against a person of unsound mind, upon a claim or 1,500 shares of stock of E. Razon, Inc. are in the name of the
resting in the discretion of the litigant. He may assert his
demand against the estate of such deceased person or late Juan Chuidian in the books of the corporation. Moreover,
right by timely objection or he may waive it, expressly or by
against such person of unsound mind, cannot testify as to the records show that during his lifetime Chuidian was
silence. In any case the option rests with him.
any matter of fact accruing before the death of such ellected member of the Board of Directors of the corporation
Once admitted, the testimony is in the case for what it is
deceased person or before such person became of unsound which clearly shows that he was a stockholder of the
worth and the judge has no power to disregard it for the
mind." (Emphasis supplied) corporation. (See Section 30, Corporation Code) From the
sole reason that it could have been excluded, if it had been

CORPORATION LAW: 7. captial structure Page 187 of 201

point of view of the corporation, therefore, Chuidian was the lastly, to participate proportionately in the distribution of Bobby P. Yuseco for petitioners.
owner of the 1,500 shares of stock. In such a case, the the corporate assets upon the dissolution or winding up.
Arthur Canlas for private respondents.
petitioner who claims ownership over the questioned shares (Purdy's Beach on Private Corporations, sec. 554) (Pascual
of stock must show that the same were transferred to him by v. Del Saz Orozco, 19 Phil. 82, 87)
proving that all the requirements for the effective transfer of
WHEREFORE, judgment is rendered as follows: PARAS, J.:
shares of stock in accordance with the corporation's by laws,
if any, were followed (See Nava v. Peers Marketing a) In G.R. No. 74306, the petition is DISMISSED. The This is a petition for certiorari and prohibition with preliminary
Corporation, 74 SCRA 65 [1976]) or in accordance with the questioned decision and resolution of the then Intermediate injunction seeking the annulment of the following Orders of
provisions of law. Appellate Court, now the Court of Appeals, are AFFIRMED. the then Court of First Instance of Manila, Branch XXXVI: (a)
Costs against the petitioner. Order dated June 5, 1981 directing the issuance of a writ of
The petitioner failed in both instances. The petitioner did not
present any by-laws which could show that the 1,500 shares preliminary mandatory injunction requiring petitioners
b) In G.R. No. 74315, the petition is GRANTED. The questioned
of stock were effectively transferred to him. In the absence of Fujiyama Hotel & Restaurant, Inc., Isamu Akasako and
Resolution insofar as it denied the petitioner's motion to
the corporation's by-laws or rules governing effective transfer Aquilino Rivera to allow respondents Lourdes Jureidini and
clarify the dispositive portion of the decision of the then
of shares of stock, the provisions of the Corporation Law are Milagros Tsuchiya to manage the corporate property upon
Intermediate Appellate Court, now Court of Appeals is
made applicable to the instant case. filing of a bond in the amount of P30,000.00 (Rollo, pp. 43-57)
REVERSED and SET ASIDE. The decision of the appellate court
and (b) Order dated July 24, 1981 denying petitioners' motion
is MODIFIED in that all cash and stock dividends as, well as all
The law is clear that in order for a transfer of stock certificate for reconsideration and motion to dismiss for lack of
pre-emptive rights that have accrued and attached to the
to be effective, the certificate must be properly indorsed and jurisdiction but increasing the bond to P120,000.00 (Rollo, p.
1,500 shares in E. Razon, Inc., since 1966 are declared to
that title to such certificate of stock is vested in the 81).
belong to the estate of Juan T. Chuidian.
transferee by the delivery of the duly indorsed certificate of
stock. (Section 35, Corporation Code) Since the certificate of Petitioner corporation was organized and register under
SO ORDERED.
stock covering the questioned 1,500 shares of stock Philippine laws with a capital stock of P1,000,000.00 divided
registered in the name of the late Juan Chuidian was never into 10,000 shares of P100.00 par value each by the herein
indorsed to the petitioner, the inevitable conclusion is that petitioner Rivera and four (4) other incorporators. Sometime
the questioned shares of stock belong to Chuidian. The thereafter petitioner Rivera increased his subscription from
petitioner's asseveration that he did not require an the original 1,250 to a total of 4899 shares (Rollo, p. 4).
indorsement of the certificate of stock in view of his intimate Subsequently, Isamu Akasako, a Japanese national and co-
friendship with the late Juan Chuidian can not overcome the petitioner who is allegedly the real owner of the shares of
failure to follow the procedure required by law or the proper stock in the name of petitioner Aquilino Rivera, sold 2550
conduct of business even among friends. To reiterate, shares of the same to private respondent Milagros Tsuchiya
indorsement of the certificate of stock is a mandatory for a consideration of P440,000.00 with the assurance that
requirement of law for an effective transfer of a certificate of Milagros Tsuchiya will be made the President and Lourdes
stock. Jureidini a director after the purchase. Aquilino Rivera who
Moreover, the preponderance of evidence supports the was in Japan also assured private respondents by overseas
appellate court's factual findings that the shares of stock were call that he will sign the stock certificates because Isamu
given to Juan T. Chuidian for value. Juan T. Chuidian was the Akasako is the real owner. However, after the sale was
legal counsel who handled the legal affairs of the corporation. consummated and the consideration was paid with a receipt
We give credence to the testimony of the private respondent of payment therefor shown, Aquilino Rivera refused to make
that the shares of stock were given to Juan T. Chuidian in the indorsement unless he is also paid. (Rollo, pp. 51-52).
payment of his legal services to the corporation. Petitioner It also appears that the other incorporators sold their shares
Razon failed to overcome this testimony. to both respondent Jureidini and Tsuchiya such that both
In G.R. No. 74315, petitioner Vicente B. Chuidian insists that respondents became the owners of a total of 3300 shares or
the appellate court's decision declaring his deceased father the majority out of 5,649 outstanding subscribed shares of
Juan T. Chuidian as owner of the 1,500 shares of stock of E. the corporation (Rollo, pp. 4-5), and that there was no dispute
Razon, Inc. should have included all cash and stock dividends as to the legality of the transfer of the stock certificate
and all the pre-emptive rights accruing to the said 1,500 Exhibits "B-1" to "B-4" to Jureidini, all of which bear the
shares of stock. signatures of the president and the secretary as required by
the Corporation Law with the proper indorsements of the
The petition is impressed with merit. respective owners appearing thereon. Exhibits "B-1" to "B-4"
are specifically indorsed to her while Exhibits "B-2" and "B-3"
The cash and stock dividends and all the pre-emptive rights
are indorsed in blank. Aquilino Rivera admitted the
are all incidents of stock ownership.
genuineness of an the signatures of the officers of the
The rights of stockholders are generally enumerated as corporation and of an the indorsee therein. (Order dated June
follows: G.R. No. L-57586 October 8, 1986 5, 1981, Civil Case No. 13273, Rollo, pp. 51-53).
xxx xxx xxx AQUILINO RIVERA, ISAMU AKASAKO and FUJIYAMA Nonetheless, private respondents attempted several times to
register their stock certificates with the corporation but the
. . . [F]irst, to have a certificate or other evidence of his HOTEL & RESTAURANT, INC., petitioners, vs. THE HON.
latter refused to register the same. (Ibid., Rollo, pp. 54-55).
status as stockholder issued to him; second, to vote at ALFREDO C. FLORENDO, as Judge of the Court of First
Thus, private respondents filed a special civil action for
meetings of the corporation; third, to receive his Instance of Manila (Branch XXXVI), LOURDES JUREIDINI
mandamus and damages with preliminary mandatory
proportionate share of the profits of the corporation; and and MILAGROS TSUCHIYA, respondents.
injunction and/or receivership naming herein petitioners as

CORPORATION LAW: 7. captial structure Page 188 of 201

respondents, docketed as Special Civil Action No. Lourdes Jureidini and her counsel Atty. Arthur Canlas be When this case was called for hearing on February 3, 1982,
13273, "Lourdes Jureidini, et al. v. Fujiyama Hotel et al." of the declared in contempt of court for the former's alleged defiant counsel for both parties appeared and argued their causes
Court of First Instance of Manila, Branch XXXVI presided by refusal: (a) to acknowledge receipt of the Writ of Preliminary and both were required by the Court within an unextendible
respondent Judge. Petitioners' counsel Atty. Marcelino A. Injunction of August 21, 1981 and (b) to comply with the said period of ten (10) days to file their respective memoranda in
Bueno, upon receipt of the summons and a copy of the writ issued by this Court. (Rollo, pp. 174-180). support of their positions on an pending incidents of the case
aforesaid petition, filed an answer thereto with denials, at bar while the hearing on the contempt proceedings was
Comment thereon was filed by private respondents through
special and affirmative defenses and counterclaim. reset for February 10, 1982 where the personal appearance of
counsel (Rollo, pp. 185-199) in compliance with the resolution
Thereafter, a hearing was held on the application for private respondent Lourdes Jureidini through her counsel was
of the First Division dated August 17, 1981 (Rollo, p. 160),
preliminary mandatory injunction and/or receivership, after required. (Rollo, p. 279).
praying for the immediate lifting of the preliminary injunction.
which respondent Judge issued an order for a writ of
Said comment of private respondents was noted in the On February 9, 1982, counsel for private respondent Jureidini
preliminary mandatory injunction authorizing respondent
resolution of October 5, 1981 (Rollo, p. 200) which also filed an Urgent Motion and Manifestation that he was
Jureidini and Tsuchiya to manage the corporation's hotel and
required respondents to comment on the supplement to the informed by his client that she is physically exhausted and is
restaurant, upon the filing of a bond in the amount of
petition. beset with hypertension and praying that she be excused
P30,000.00. Then through another counsel Atty. Eriberto D.
from appearing at the hearing set for February 10, 1982, that
Ignacio in collaboration with their counsel of record, Atty. On October 2, 1981, comment on the manifestation and
the hearing be cancelled and the contempt incident be
Marcelino A. Bueno, petitioners (respondents therein) filed a urgent motion to declare Jureidini and her counsel in
considered submitted for decision on the basis of pleadings
motion to dismiss the petition on the ground that respondent contempt of court was filed by counsel for private respondent
previously filed. (Rollo, pp. 280-282).
Judge has no jurisdiction to entertain the case, while through (Reno, pp. 201-214) in compliance with the resolution of
Atty. Bueno, they filed a motion for reconsideration of the September 14, 1981 (Rollo, p. 181). On the same date, February 9, 1982, counsel for petitioners
Order granting the issuance of a writ of mandatory filed his Memorandum in support of his oral argument at the
preliminary injunction. Private respondents filed their In the resolution of October 26, 1981 (Reno, p. 215) the Court
hearing of February 3, 1982, (Rollo, pp. 283-287) while a
opposition to both motions and on July 24, 1981, respondent Resolved to require petitioners to file a reply to aforesaid
supplement thereto was filed on February 12, 1982. (Rollo,
Judge issued an Order denying both the motion for comment. (Rollo, p. 215).
pp. 291-294).
reconsideration and the motion to dismiss the petition but Meanwhile, supplemental comment on the supplement to the
increased the amount of the bond from P30,000.00 to At the hearing of February 10, 1982, private respondent
petition was filed by private respondents on October 14, 1981
P120,000.00 to sufficiently protect the interests of herein Lourdes Jureidini and her counsel failed to appear. Accordingly
(Rollo, pp. 216-222) reiterating their stand that it is the
petitioners. (Rollo, p. 81). the Court Resolved: (a) to IMPOSE on said counsel Atty. Canlas
ordinary court and not the Securities and Exchange
a fine of P200.00 or to suffer imprisonment if said fine is not
Hence, this petition. Commission (SEC) that has jurisdiction to entertain the case
paid; (b) to RESET the hearing on the contempt incidents on
as the controversies did not arise from the intra-corporate
March 3, 1982 and (c) to REQUIRE the presence of Atty.
After filing the petition, Atty. Eriberto D. Ignacio withdrew as relationship among the parties.
Canlas and respondent Lourdes Jureidini and of complainants
counsel for petitioners on August 6, 1981. Such withdrawal
was confirmed by petitioner Isamu Akasako (Rollo, p. 83). On On October 21, 1981, petitioner filed: (a) motion for leave to Attys. Bibiano P. Lasaca, Rodolfo A. Espiritu and Renato T.
August 10, 1981 the appearance of Isaca & Espiritu Law file reply to comment of respondents on the petition and Paqui. (Resolution of February 10, 1982, Rollo, p. 290).
Offices as counsel in substitution of former counsel Attys. supplemental petition required in the resolution of August 17,
On February 15, 1982, private respondents file their
Marcelino A. Bueno and Eriberto D. Ignacio was received by 1981 (Rollo, pp. 223-224) and (b) the attached Reply (Rollo,
memorandum in compliance with the resolution of this Court
this Court. (Rollo, p. 84); all of which were noted in the pp. 225-241). On November 25, 1981, petitioners filed their
of February 3, 1982 while petitioners on February 25, 1982
resolution of the First Division of this Court dated August 17, Reply to respondents' Comment on petitioners' manifestation
filed their reply thereto.
1981. (Rollo, p. 160). and urgent motion to declare them in contempt. (Rollo, pp.
246-257). At the hearing of March 3, 1982, both counsel as well as
The new counsel filed a Manifestation and Motion praying that private respondent Lourdes Jureidini, Attys. Bibiano P. Lesaca,
the therein attached Supplement and certified copies of the On December 7, 1981 Atty. Bobby P. Yuseco entered his
Rodolfo A. Espiritu and Renato R. Paguio appeared. Atty.
questioned orders and writs be admitted and considered as appearance as collaborating counsel for petitioners (Rollo, p.
Canlas, Lourdes Jureidini, Atty. Lesaca and a representative of
part of petitioners' original petition for certiorari and 258) and filed an urgent petition for early resolution of
the petitioners were interpellated by the Court. Thereafter,
Prohibition with Preliminary injunction. (Rollo, pp. 85-131). On petitioners' motion to hold private respondents in contempt
the incident was declared submitted for resolution.
August 14, 1981 petitioners filed an Urgent Motion for and for issuance of Order clarifying Writ of Injunction dated
(Resolution of March 3, 1982, Rollo, p. 316).
Restraining Order and Other Provisional Injunctive Reliefs August 21, 1981. (Rollo, pp. 259-261).
(Rollo, pp. 154-159). In the same resolution of August 17, On March 5, 1982, counsel for private respondents filed his
In the resolution of January 18, 1982, this case and all
1981, after deliberating on the petition and supplemental to compliance with the resolution of February 10, 1982 enclosing
pending incidents were set for hearing on February 3, 1982.
the petition, the Court Resolved: (a) to require the a check payable to this Court in the amount of P200.00 in
(Rollo, p. 268).
respondents to comment thereon (not to file a motion to payment of the fine imposed with motion for reconsideration
dismiss within ten (10) days from notice and (b) upon On February 1, 1982, Lesaca and Espiritu Law Offices filed a explaining why he should not be declared in contempt and
petitioners' filing of an injunction bond in the amount of Manifestation and Motion for Leave to withdraw as counsel for praying that the aforesaid resolution of February 10, 1982 be
P30,000.00 to issue a Writ of Preliminary Injunction enjoining petitioners. (Rollo, pp. 274-275). set aside, (Rollo, pp. 312-314). However, in the resolution of
respondents from enforcing the writ of preliminary mandatory March 10, 1982, (Rollo, p. 317) the Court acting on the
injunction dated June 23, 1981 issued in Civil Case No. compliance of Atty. Arthur Canlas with motion for
132673. (Rollo, p. 160). Said bond was filed on August 20, reconsideration, denied the motion and required the Chief of
1981 (Rollo, p. 161) and accordingly, a writ of preliminary the Docket Division to return to Atty. Canlas the check in the
injunction was issued by this Court on August 21, 1981 (Rollo, amount of P200.00 it being an out of town check, and Atty.
pp. 172-173). Canlas to pay the fine in cash, and to show cause why he
should not be disciplinary dealt with or held in contempt for
Subsequently, petitioners filed a manifestation and urgent wilful delay in paying the fine by mail through an out of town
motion on August 28, 1981 praying that private respondent check contrary to his manifestation at the hearing that he had

CORPORATION LAW: 7. captial structure Page 189 of 201

promptly paid the fine, both within forty eight hours from STOCKHOLDERS," THUS, HAVING NO PERSONALLY AT ALL, It has already been settled that an intracorporate controversy
notice. THEN PROVISIONAL RECEIVERSHIP, ALBEIT CLOTHED AS A would call for the jurisdiction of the Securities and Exchange
"WRIT OF PRELIMINARY MANDATORY INJUNCTION" WAS Commission. (Philippine School of Business Administration v.
Meanwhile, counsel for petitioners filed on April 6, 1982 an
ILLEGALLY ISSUED DE HORS ITS JURISDICTION. Lanao, 127 SCRA 781, February 24, 1984). On the other hand,
Urgent Petition for Permission to Implement Injunction Writ
an intra-corporate controversy has been defined as "one
issued on August 21, 1981 (Rollo, pp. 323-325) which was IV ASSUMING ARGUENDO THAT THE RESPONDENT COURT
which arises between a stockholder and the corporate. There
granted in the resolution of May 26, 1982 (Rollo, p. 313). In HAD JURISDICTION OVER BOTH THE PETITION FOR
is no distinction, qualification, nor any exemption
the same resolution the Court ordered Lourdes Jureidini and mandamus AS WELL AS THE PROVISIONAL RECEIVERSHIP
whatsoever." (Philex Mining Corporation v. Reyes, 118 SCRA
Milagros Tsuchiya to strictly and immediately comply with the STILL THE RESPONDENT COURT ACTED IN EXCESS OF ITS
605, November 19, 1982). This Court has also ruled that
Court's aforesaid writ of preliminary injunction; indicated that JURISDICTION OR IN GRAVE ABUSE OF ITS DISCRETION TO
cases of private respondents who are not shareholders of the
it would resolve the pending incident for contempt against GRANT RECEIVERSHIP OVER THE MANAGEMENT OF THE
corporation, cannot be a "controversy arising out of
private respondent Lourdes Jureidini when the Court decides CORPORATE BUSINESS AND ASSETS WHICH NEVER WAS
intracorporate or partnership relations between and among
the case on the merits; and gave the parties thirty (30) days NOR IS A SUBJECT MATTER OF LITIGATION.
stockholders, members or associates; between any or all of
from notice within which to submit simultaneously their
V EVEN GRANTING FOR THE SAKE OF AGRGUMENT THAT them and the corporation, partnership or association, of
respective memoranda on the merits of the case.
THE RESPONDENT COURT HAD JURISDICTION OVER THE which they are stockholders, members or associates,
On May 31, 1982, counsel for private respondent Atty. Canlas SUBJECT MATTER OF THE CASE; NONETHELESS IT WAS IN respectively." (Sunset View Condominium Corporation v.
filed in compliance with the resolution of March 10, 1982, his GRAVE ABUSE OF ITS DISCRETION TO UNILATERALLY GRANT Campos, Jr., 104 SCRA 303, April 27, 1981).
explanation and manifestation why he should not be TO A "PARTY-IN-LITIGATION," THE PRIVATE RESPONDENTS
Under Batas Pambansa Blg. 68 otherwise known as "The
disciplinarily dealt with and held in contempt of Court (Rollo, HEREIN, THE MANAGEMENT OF THE CORPORATE BUSINESS.
Corporation Code of the Philippines," shares of stock are
pp. 316-318). In the resolution of June 2, 1982, the Court (Petition and Supplemental Petition; Rollo, pp. 2-18; 88-
transferred as follows:
Resolved to set aside and lift the Order of Atty. Canlas' arrest 131).
and commitment it had issued on March 31, 1982 but found SEC. 63. Certificate of stock and transfer of shares. The
I
the explanation and manifestation of Atty. Canlas dated May capital stock of stock corporations shall be divided into
29, 1982 unsatisfactory. In view thereof, he was reprimanded The crucial issue in this case is whether it is the regular court shares for which certificates signed by the president or
for negligence and undue delay in complying with the Court's or the Securities and Exchange Commission that has vice-president, countersigned by the secretary or assistant
resolution. (Rollo, p. 319). jurisdiction over the present controversy. secretary, and sealed with the seal of the corporation shall
be issued in accordance with the by-laws. Shares of stock
On June 18, 1982, counsel for petitioners allegedly for Presidential Decree No. 902-A provides: so issued are personal property and may be transferred by
purposes of clarification as to the laws involved in the matter
Sec. 5. In addition to the regulatory and adjudicative delivery of the certificate or certificates indorsed by the
of contempt of Lourdes Jureidini, filed a pleading entitled "Re
functions of the Securities and Exchange Commission over owner or his attorney-in- fact or other person legally
Incident of Contempt against Lourdes Jureidini." (Rollo, pp.
corporations, partnerships and other forms of associations authorized to make the transfer. No transfer, however, shall
320-326) which was noted by the Court in the resolution of
registered with it as expressly granted under existing laws be valid, except as between the parties, until the transfer is
July 7, 1982. (Rollo, p. 328).
and decrees, it shall have original and exclusive jurisdiction recorded in the book of the corporation showing the names
Counsel for private respondents manifested (Rollo, p. 329), on to hear and decide cases involving of the parties to the transaction, the date of the transfer,
July 12, 1982 that they are adopting the memorandum the number of the certificate or certificates and the number
submitted in the preliminary injunction incident as their (a) ... of shares transferred.
memorandum in the main case. Said manifestation was noted (b) Controversies arising out of intra-corporate or xxx xxx xxx
in the resolution of July 26, 1982. (Rollo, p. 331). Counsel for partnership relations and among stockholders, members, or
petitioners manifested (Rollo, p. 333) that they are adopting associates; between any or all of them and the corporation, As confirmed by this Court, "shares of stock may be
their memorandum in support of argument last February 3, partnership or association of which they are stockholders, transferred by delivery to the transferee of the certificate
1982 as their combined memoranda on the merits of the members, or associates, respectively and between such properly indorsed. 'Title may be vested in the transferee by
case. Said manifestation was noted in the resolution of corporations, partnership or association and the State delivery of the certificate with a written assignment or
September 15, 1982. (Rollo, p. 334). In the resolution of insofar as it concerns their individual franchise or right to indorsement thereof ' (18 C.J. S. 928). There should be
November 29, 1982, this case was transferred to the Second exist as such entity. compliance with the mode of transfer prescribed by law (18
Division. (Rollo, p. 336). C.J.S. 930)' " (Nava v. Peers Marketing Corp. 74 SCRA 65, 69,
Nov. 25, 1976)
In their petition and supplemental petition, petitioners raised
the following issues: As the bone of contention in this case, is the refusal of
petitioner Rivera to indorse the shares of stock in question
I THE RESPONDENT COURT OF FIRST INSTANCE HAS NO
and the refusal of the Corporation to register private
JURISDICTION OVER THE PETITION FOR mandamus AND
respondents' shares in its books, there is merit in the findings
RECEIVERSHIP "AS WELL AS IN PLACING THE CORPORATE
of the lower court that the present controversy is not an
ASSETS UNDER PROVISIONAL RECEIVERSHIP IN THE GUISE
intracorporate controversy; private respondents are not yet
OF A WRIT OF PRELIMINARY MANDATORY INJUNCTION.
stockholders; they are only seeking to be registered as
II EVEN FALSELY ASSUMING THAT THE RESPONDENT COURT stockholders because of an alleged sale of shares of stock to
HAD JURISDICTION, THE PRIVATE RESPONDENTS' PRINCIPAL them. Therefore, as the petition is filed by outsiders not yet
ACTION OF mandamus IS AN IMPROPER COURSE OF members of the corporation, jurisdiction properly belongs to
ACTION. the regular courts.
III ASSUMING ARGUENDO THAT WHAT THE RESPONDENT II
COURT FOUND IS TRUE, NAMELY THAT PRIVATE
RESPONDENTS "ARE OUTSIDERS" AND "NOT YET

CORPORATION LAW: 7. captial structure Page 190 of 201

On the other hand, there is merit in petitioners' contention is an urgent and permanent necessity for the writ to prevent corporation, with Akasako as the Manager of the two
that private respondents' principal action of mandamus is an serious damage. (Pelejo v. Court of Appeals, 117 SCRA 668, restaurants in this case; the same being the last uncontested
improper course of action. Oct. 18, 1982). status which preceded the controversy. (Rollo, p. 127).
It is evident that mandamus wig not lie in the instant case A mandatory injunction which commands the performance of On the contempt incident involving private respondent
where the shares of stock in question are not even indorsed some specific act is regarded as of a more serious nature than Lourdes Jureidini, a Manifestation and Urgent Motion was filed
by the registered owner Rivera who is specifically resisting a mere prohibitive injunction, the latter being intended by petitioners to declare her in contempt of Court for
the registration thereof in the books of the corporation. Under generally to maintain the status quo only. While our courts, allegedly refusing to acknowledge receipt of the Writ of
the above ruling, even the shares of stock which were being both of law and equity, have jurisdiction to issue a Preliminary Injunction issued by this Court and for allegedly
purchased by private respondents from the other mandatory writ, it has always been held that its issuance refusing to comply therewith. Attributed to her were the
incorporators cannot also be the subject of mandamus on the would be justified only in clear cases; that it is generally following statements: "I will not obey that ... Yes, I am higher
strength of mere indorsement of the supposed owners of said improper to issue it before final hearing because it tends to than the Supreme Court ... I will obey only what my lawyer
shares in the absence of express instructions from them. The do more than maintain the status quo; that it should be tells me."
rights of the parties will have to be threshed out in an issued only where there is a willful and unlawful invasion of
In her explanation however, filed through her counsel she
ordinary action. plaintiff's right and that the latter's case is one free from
denied having uttered the statements alluded to her, the
doubt and dispute. (National Marketing v. Cloribel, 22 SCRA
III-V truth of the matter being that she was alone in the restaurant
1038, March 13, 1968).
when this Court's process server, accompanied by petitioners'
Petitioners insist that what was issued was a provisional
Respondent court in the instant case violated the lawyers, approached her and demanded that she vacate the
receivership, while private respondents maintain that the trial
fundamental rule of injunctions that a mandatory injunction premises and surrender the management of the Restaurant.
court issued a Writ of Preliminary Mandatory Injunction. Be
will not issue in favor of a party whose rights are not clear Fazed by the unusual display of lawyers she requested that
that as it may, it appears obvious that from the
and free of doubt or as yet undetermined. (Namarco v. she be given time to confer with her counsel Said request
abovementioned rulings of this Court, petitioners' contention
Cloribel, 22 SCRA 1038-1039, March 13, 1968). It will be allegedly precipitated the remark from Petitioners' counsel
that respondent Judge in the issuance thereof committed acts
recalled that the disputed shares of stock were purchased not that neither respondent herself, nor her counsel can be higher
of grave abuse of discretion, is well taken.
from the registered owner but from a Japanese national who than the Supreme Court and that any conference seeking to
In the Order dated June 5, 1981, in Civil Case No. 132673, the allegedly was the real owner thereof. It was also alleged that clarify the effect of the Writ of Preliminary Injunction would be
basis of aforesaid Writ was as follows: the registered owner was only a dummy of Akasako. it is also futile. (Rollo, pp. 174-175).
true that the trial court has already made findings to that
Finally, the Court, after assessing the evidence, finds that effect at the hearing for the issuance of the Order of June 5, It was likewise explained that respondent Jureidini did not sign
the issuance of a preliminary mandatory injunction is 1981. Nonetheless, these are contentious issues that should and acknowledge receipt of the Writ because it was not
proper. Respondents Isamu Akasako and Aquilino Rivera, properly be ventilated at the trial on the merits. As correctly addressed to her but to the lower court and to her counsel.
thru their simulated relationship, have succeeded for two stated in petitioners' motion for reconsideration, the Order of
Respondent's counsel says that the incident was concocted
years since 1979 to deprive the petitioners to participate in the trial court is in effect a judgment on the merits, declaring
and devised by the petitioners and their counsel to serve no
the profit and management of the corporation of which expressly or impliedly that petitioners are stockholders of the
salutary purpose but to scare and harass respondent Jureidini.
they are the majority stockholders considering that the Corporation at the hearing of only the incident for the
He also stated that "it is equally improper, at least in practice,
stocks certificates appearing in the name of Aquilino Rivera issuance of a Writ of Preliminary Injunction. On the other hand
for lawyers to accompany officers of the Court in serving or
(Exh. "8") is 55% to 75% of the total stocks of the if the Order amounts to a judgment on the merits, the lower
otherwise executing processes of said court as to create a
corporation by Isamu Akasako would only prolong the court should first rule on what private respondents seek, the
seeming suspicion to the public that lawyers are not involved
injustice committed against the petitioners and the registration of their shareholdings in the books of the
only professionally in the case they handle but signify their
damages they would suffer would be irreparable. The Court corporation and the issuance of new stock certificates. It is
personal interests as well." (Rollo, pp. 208-209).
is aware that preliminary mandatory injunction is the only thereafter that the subsequent act of management may
exception rather than the rule, but according to the Code be ordered and the period of finality of such a judgment When this contempt incident was heard on March 3, 1982,
Commission, in its report on page 98, "the writ of should be in accordance with the Rules of Court, giving the Atty. Arthur A. Canlas, counsel for private respondent Lourdes
preliminary mandatory injunction is called for by the fact respondents the right to an appeal or review and not be Jureidini, Jureidini herself, Atty. Bibiano P. Lesaca a
that there are at present prolonged litigation between immediately executory as the Writ of Preliminary Mandatory representative of the petitioners were interpellated by the
owner and usurper and the former is deprived of his Injunction would infer. (Rollo, p. 65). Court. Thereafter, the incident was declared submitted for
possession even when he has an immediate right thereto." resolution. (Resolution of March 3, 1982; Rollo, p. 316).
In the instant case, the right of the petitioners is clear and Another fundamental rule which appears to have been
Thereafter, counsel for petitioner filed a pleading "The
unmistakable on the law and the facts and there exists an violated in the case at bar is that no advantage may be given
Incident of Contempt of Lourdes Jureidini" in the form of a
urgent and paramount necessity for the issuing of the writ to one to the prejudice of the other, a court should not by
summation of the incident and reiteration of petitioners'
in order to prevent extreme or rather serious damage means of a preliminary injunction transfer the property in
litigation from the possession of one party to another where charges of contempt.
which ensues from withholding it. (43 C.J.S. 413)
the legal title is in dispute and the party having possession Counsel for petitioner invokes the provisions of: Section 3,
WHEREFORE, in view of the foregoing circumstances, let a asserts ownership thereto. (Rodulfo v. Alonso, 76 Phil. 225),
Rule 71 on Indirect Contempt and par. (b) thereof, on
writ of preliminary mandatory injunction issue requiring February 28, 1946). Similarly, the primary purpose of an
Disobedience of or Resistance to a Lawful Writ, Process,
respondents to allow petitioners to manage the corporate injunction is to preserve the status quo, that is the last actual
Order, Judgement or Command of a Court; or Injunction
property known as the Fujiyama Hotel & Restauarant, Inc. peaceable uncontested status which preceded the granted by a Court or Judge ... ; (2) Section 6, Rule 71
upon petitioners' filing of a bond in the amount of controversy. In the instant case, petitioner Rivera is the
regarding punishment or penalty thereof and (3) Section 5,
P30,000.00. registered majority and controlling stockholder of the Rule 135, par. (e) to compel obedience to its judgments,
A mandatory injunction is granted only on a showing (a) that corporation before the ensuing events transpired. By the orders and processes, and to the lawful orders of a judge out
the invasion of the right is material and substantial; (b) the issuance of the Writ in question he appears to have been of Court, in a case pending therein.
right of complainant is clear and unmistakable; and (c) there deprived of his rights as stockholder thereof apart from his
status as Chairman of the Board and President of the

CORPORATION LAW: 7. captial structure Page 191 of 201

On the incident itself, petitioners' counsel stressed that "Such power 'being drastic and extra-ordinary in its nature ...
present when the writ was served were attorneys for should not be resorted to ... unless necessary in the interest
petitioners Bibiano P. Lesaca, and Renato P. Paguio in the of justice.' " (Gamboa v. Teodoro, et al., supra).
company of petitioners Isamu Akasako, Akasako's assistants
In the case at bar, although private respondent Jureidini did
Furnio, Fujihara and Isamu Tajewakai and this Court's process
not immediately comply with the Writ of Injunction issued by
server, before whose presence the alleged contemptuous acts
this Court, it appears reasonable on her part to request that
were committed.
she be allowed to confer with her lawyer first before she
Counsel for petitioners also reminded the Court that the first makes any move of her own. It is likewise reasonable for
summons of the Court were answered only by counsel for counsel for private respondent to request that he be given
private respondent Jureidini while the latter feigned sickness time to file a motion for clarification with the Supreme Court.
without a medical certificate. The hearing for the contempt
It will also be noted that the testimonies produced at the
charge was reset but neither counsel for private respondent
hearing to establish the fact that she had uttered the alleged
nor the latter appeared for which non-appearance Atty. Canlas
contemptuous statements alluded to her were those of Attys.
was fined P200.00 for contempt when finally both counsel and
Lesaca and Paguio and two Japanese nationals, a one-sided
client appeared on the third day, the hearing was set.
version for the petitioners.
At that hearing, counsel for petitioners narrated that Attys.
It appears to Us that the version of counsel for private
Lesaca and Paguio and two Japanese nationals testified in
respondent is more in accord with human experience:
unison that Lourdes Jureidini not only disregarded the writ but
Jureidini who was alone in the Restaurant was fazed by the
distinctly uttered the complained of statements.
unusual display of might and by the presence of lawyers
Petitioners' counsel laid emphasis on the fact that Lourdes demanding that she vacate premises and surrender the
Jureidini is a graduate of nursing, who speaks in straight management of the Restaurant (Rollo, p. 204), this is more
polished English, capable of understanding the Writ of believable than the version of counsel for petitioners who
Mandatory Injunction of the Respondent Court served on summed her up as a person "overbearing to the point of
petitioners by herself and a Deputy Sheriff of Manila, but insolence" and capable of uttering" I am higher than the
incredibly unable to understand the Writ issued by the Supreme Court." It would therefore be more reasonable to
Supreme Court. She was assessed as "overbearing to the believe that what she uttered in that situation where she felt
point of insolence" and capable of uttering "I am higher than threatened, was more in self-defense and not an open
the Supreme Court." defiance of the Supreme Court.
There is no question that disobedience or resistance to a Jureidini cannot also be faulted for finding it difficult to
lawful writ, process, order, judgment or command of a court, understand the writ issued against her by the Supreme Court
or injunction granted by a court or judge, more particularly in as she believed that not only have she and her correspondent
this case, the Supreme Court, constitutes Indirect Contempt the legal right to manage the restaurant but the equitable
punishable under Rule 71 of the Rules of Court. (Rule 71, right as well, having been placed in possession of the
Section 3(b) and Section 6). corporate property only after posting a bond of P120,000.00.
(Rollo, pp. 197-198).
It has been held that contempt of court is a defiance of the
authority, justice or dignity of the court, such conduct as In connection with this incident, Jureidini through her counsel
tends to bring the authority and administration of the law into filed her comment on October 2, 1981 (Rollo, p. 201) contrary
disrespect or to interfere with or prejudice parties litigant or to the allegation of petitioners' counsel that it was only Atty.
their witnesses during litigation. It is defined as a Canlas who filed his comment.
disobedience to the court by setting up an opposition to its
WHEREFORE, the assailed orders of respondent Judge are SET
authority justice and dignity. It signifies not only a willful
ASIDE; the complaint (special civil action for mandamus with
disregard or disobedience of the court's orders but such
damages, etc.) should ordinarily be dismissed without
conduct as tends to bring the authority of the court and the
prejudice to the filing of the proper action; but as all parties
administration of law into disrepute or in some manner to
are already duly represented, We hereby consider the case as
impede the due administration of justice (Halili v. Court of
an ordinary civil action for specific performance, and the case
Industrial Relations, 136 SCRA 135, April 30, 1985).
is therefore remanded to the lower court for trial on the
However, it is also well settled that "the power to punish for merits; the charge of contempt against respondent Jureidini is
contempt of court should be exercised on the preservative DISMISSED but the order of Our Court restraining respondent
and not on the vindictive principle. Only occasionally should from taking over the management of the restaurant remains
the court invoke its inherent power in order to retain that until after this case is decided.
respect without which the administration of justice must falter
SO ORDERED.
or fail." (Villavicencio v. Lukban, 39 Phil. 778 [1919]; Gamboa
v. Teodoro, et al., 91 Phil. 274 [1952]; Sulit v. Tiangco, 115
SCRA 207 [1982]; Lipata v. Tutaan, 124 SCRA 880 [1983]).
"Only in cases of clear and contumacious refusal to obey
should the power be exercised. A bona fide misunderstanding
of the terms of the order or of the procedural rules should not
immediately cause the institution of contempt proceedings."

CORPORATION LAW: 7. captial structure Page 192 of 201

G.R. No. L-2808 August 31, 1951 their possession of my/our account and whether originally parties agreed that the 10,000 Batangas Minerals shares
deposited for safe custody only or for any other purpose formerly represented by Certificate No. 517 and thereafter
JOSEFA SANTAMARIA, assisted by her husband,
whatever or which may hereinafter be deposited by me/us by Certificate No. 715, have no actual market value.
FRANCISCO SANTAMARIA, Jr., plaintiff-appellee, vs. THE
in lieu of or in addition to the Stocks Shares and Securities
HONGKONG AND SHANGHAI BANKING CORPORATION The errors assigned by the defendants-appellants as
now deposited or for any other purposes whatsoever."
and R. W. TAPLIN, defendants-appellant. committed by the lower court are:
On March 11, 1937, as shown by Exhibit G. Certificate No.
Nicodemus L. Dasig and Sotto and Sotto for plaintif and I The trial court erred in finding that the plaintiff-appellee was
517, already indorsed by R.J. Campos Co. Inc. to the
appellant. not chargeable with negligence in the transaction which gave
Hongkong & Shanghai Banking Corporation, was sent by
Quijano, Rosete and Tizon for defendants and appellants. rise to this case.
the latter to the office of the Batangas Minerals, Inc. with
BAUTISTA ANGELO, J.: the request that the same be cancelled and a new II The trial court erred in holding that it was the obligation of
certificate be issued in the name of R.W. Taplin as trustee the bank to have inquired into the ownership of the certificate
This is an appeal from a decision of the Court of First Instance and nominee of the banking corporation. Robert W. Taplin when it received it from R.J. Campos & Company and in
of Manila ordering the Hongkong and Shanghai Banking was an officer of this institution in charge of the securities concluding that the bank was negligent for not having done
Corporation to pay the plaintiff the sum of P8,041.20 plus the belonging to or claimed by the bank. As per this request so.
costs of suit. The case was certified to this Court of Appeals. the Batangas Minerals, Inc. on March 12, 1937, issued
The facts of this case found by the Court of Appeals are as Certificate No. 715 in lieu of Certificate No. 517, in the III The trial court erred on ordering defendants-appellants to
follows: name of Robert W. Taplin as trustee and nominee of the pay to plaintiff the sum of P8,041.20.
Hongkong & Shanghai Banking Corporation. (Exhibits G, H, 1. Defendants-appellants contend in the first place that the
Sometime in February, 1937, Mrs. Josefa T. Santamaria I, J, 1, 4 and 5.) trial court erred in finding that the plaintiff-appellee was not
bought 10,000 shares of the Batangas Minerals, Inc.,
through the offices of Woo, Uy-Tioco & Naftaly, a stock According to Mrs. Santamaria, she made the claim to the chargeable with negligence in the transaction which gave rise
brokerage firm and pay therefore the sum of P8,041.20 as bank for her certificate, though she did not remember the to this case.
shown by receipt Exh. B. The buyer received Stock exact date, but it was most likely on the following day of A careful analysis of the facts seems to justify this contention.
Certificate No. 517, Exh. "F", issued in the name of Woo, that when she went to Cosculluela for the purpose of Certificate of stock No. 517 was made out in the name of Wo,
Uy-Tioco & Naftaly and indorsed in bank by this firm. paying her order for 10,000 shares of the Crown Mines, Inc., Uy-Tioco & Naftaly, brokers, and was duly indorsed in bank by
or else on March 13, 1937. In her interview with Taplin, the said brokers. This certificate of stock was delivered by plaintiff
On March 9, 1937, Mrs. Santamaria placed an order for the bank's representative, she informed him that the certificate to R.J. Campos & Co., Inc. to comply with a requirement that
purchase of 10,000 shares of the Crown Mines, Inc. with R.J. belonged to her, and she demanded that it be returned to she deposit something on account if she wanted to buy
Campos & Co., a brokerage firm, and delivered Certificate her. Taplin then replied that the bank did not know anything 10,000 shares of Crown Mines Inc. In making said deposit,
No. 517 to the latter as security therefor with the about the transaction had between her and R.J. Campos & plaintiff did not take any precaution to protect herself against
understanding that said certificate would be returned to her Co., Inc., and that he could not do anything until the case of the possible misuse of the shares represented by the
upon payment of the 10,000 Crown Mines, Inc. shares. Exh. the bank with Campos shall have been terminated. This certificate of stock. Plaintiff could have asked the corporation
D. is the receipt of the certificate in question signed by one declaration was not contradicted by the adverse party. that had issued said certificate to cancel it and issue another
Mr. Cosculluela, Manager of the R.J. Campos & Co., Inc.
According to certificate Exh. E, R. J. Campos & Co., Inc. "In Civil Case No. 51224, R.J. Campos & Co., Inc. was in lieu thereof in her name to apprise the holder that she was
bought for Mrs. Josefa Santamaria 10,000 shares of the declared insolvent, and on July 12, 1937, the Hongkong & the owner of said certificate. This she failed to do, and instead
Crown Mines, Inc. at .225 a share, or the total amount of Shanghai Banking Corporation asked permission in the she delivered said certificate, as it was, to R.J. Campos & Co.,
P2,250. insolvency court to sell the R.J. Campos & Co., Inc., Inc., thereby clothing the latter with apparent title to the
securities listed in its motion by virtue of the document of shares represented by said certificate including apparent
At the time of the delivery of a stock Certificate No. 517 to hypothecation Exhibit 1. In an order dated July 15, 1937, authority to negotiate it by delivering it to said company while
R.J. Campos & Co., Inc. this certificate was in the same the insolvency court granted this motion. it was indorsed in blank by the person or firm appearing on its
condition as that when Mrs. Santamaria received from Woo, face as the owner thereof. The defendant Bank had no
Uy-Tioco & Naftaly, with the sole difference that her name "On June 3, 1938, to 10,000 shares of Batangas Minerals, knowledge of the circumstances under which the certificate of
was later written in lead pencil on the upper right hand Inc. represented by Certificate No. 715, were sold to the stock was delivered to R.J. Campos & Co., Inc., and had a
corner thereof. same bank by the Sheriff for P300 at the foreclosure sale perfect right to assume that R.J. Campos & Co., Inc. was
authorized by said order. (Exhibits F, 2 and 3.) lawfully in possession of the certificate in view of the fact that
Two days later, on March 11, Mrs. Santamaria went to R.J. it was a street certificate, and was in such form as would
Campos & Co., Inc. to pay for her order of 10,000 Crown R.J. Campos, the president of R.J. Campos & Co., Inc., was
entitle any possessor thereof to a transfer of the stock on the
Mines shares and to get back Certificate No. 517. prosecuted for estafa and found guilty of this crime and
books of the corporation concerned. There is no question that,
Cosculluela then informed her that R.J. Campos & Co., Inc. was sentenced by the Manila Court of First Instance in
in this case, plaintiff made the negotiation of the certificate of
was no longer allowed to transact business due to a Criminal Case No. 54428, to an imprisonment and to
stock to other parties possible and the confidence she placed
prohibition order from Securities and Exchange indemnify the offended party, Mrs. Josefa Santamaria, in
in R.J. Campos & Co., Inc. made the wrong done possible. This
Commission. She was also inform that her Stock certificate the amount of P8,041.20 representing the value of the
was the proximate cause of the damage suffered by her. She
was in the possession of the Hongkong and Shanghai 10,000 shares of Batangas Minerals, Inc. (Exhibits I and J.)
is, therefore, estopped from claiming further title to or
Banking Corporation. The decision was later confirmed by the Court of Appeals.
interest therein as against a bona fide pledge or transferee
(Exhibits J.) The offended party and R. W. Taplin were
Certificate No. 517 came into possession of the Hongkong thereof, for it is a well-known rule that a bona fide pledgee or
among the witnesses for the prosecution in this criminal
and Shanghai Banking Corporation because R.J. Campos & transferee of a stock from the apparent owner is not
case No. 54428. (Exhibits 4.).
Co., Inc. had opened an overdraft account with this bank chargeable with knowledge of the limitations placed on it by
and to this effect it had executed on April 16, 1936 a When Mrs. Santamaria failed in her efforts to force the civil the real owner, or of any secret agreement relating to the use
document of hypothecation, Exhibit 1, by the term of which judgment rendered in her favor in the criminal case which might be made of the stock by the holder (Fletcher,
R.J. Campos & Co., Inc. pledged to the said bank "all stocks, because the accused became insolvent, she filed her Cyclopedia of Corporations, section 5562, Vol. 12, p. 521).
shares and securities which I/we may hereafter come into complaint in this case on October 11, 1940. At the trial both

CORPORATION LAW: 7. captial structure Page 193 of 201

On the other hand, it appears that this certificate of stock, certificate of stock, and could it be charged with negligence light of the law and precedents applicable in this case, the
indorsed as it was in blank by Woo, Uy-Tioco & Naftaly, stock for having failed to do so? most that plaintiff could claim is the return to her of the said
brokers, was delivered to The Hongkong and Shanghai certificate of stock (Howson vs. Mechanics Sav. Bank, 183 Atl.,
It should be noted that the certificate of stock in question was
Banking Corporation by R.J. Campos & Co., Inc., duly indorsed p. 697), the Court, regardless of the conclusions arrived at as
issued in the name of the brokerage firm-Woo, Uy-Tioco &
by the latter, pursuant to a letter of hypothecation executed above stated, is inclined to grant the formal tender made by
Naftaly and that it was duly indorsed in blank by said firm,
by R.J. Campos & Co., Inc., in favor of said Bank (Exhibit "1"). the defendant to the plaintiff of said certificate.
and that said indorsement was guaranteed by R.J. Campos &
The said certificate was delivered to the Bank in the ordinary
Co., Inc., which in turn indorsed it in blank. This certificate is Wherefore, the decision of the lower court is hereby modified
course of business, together with many other securities, and
what it is known as street certificate. Upon its face, the holder in the sense of ordering the defendant to deliver to the
at the time it was delivered, the Bank had no Knowledge that
was entitled to demand its transfer into his name from the plaintiff certificate of stock No. 715, without pronouncement
the shares represented by the certificate belonged to the
issuing corporation. The Bank was not obligated to look as to costs.
plaintiff for, as already said, it was in the form of street
beyond the certificate to ascertain the ownership of the stock
certificate which was transferable by mere delivery. The rule
at the time it received the same from R.J. Campos & Co., Inc.,
is "where one of two innocent parties must suffer by reason of
for it was given to the Bank pursuant to their letter of
a wrongful or unauthorized act, the loss must fall on the one
hypothecation. Even if said certificate had been in the name
who first trusted the wrong doer and put in his hands the
of the plaintiff but indorsed in blank, the Bank would still have
means of inflicting such loss" (Fletcher Cyclopedia of
been justified in believing that R.J. Campos & Co., Inc. had
Corporations, supra).
title thereto for the reason that it is a well-known practice that
It is therefore clear that plaintiff, in failing to take the a certificate of stock, indorsed in blank, is
necessary precautions upon delivering the certificate of stock deemed quasi negotiable, and as such the transferee thereof
to her broker, was chargeable with negligence in the is justified in believing that it belongs to the holder and
transaction which resulted to her own prejudice, and as such, transferor (Heyman vs. Hamilton National Bank, 266 S.W. G.R. No. 120138 September 5, 1997
she is estopped from asserting title to it as against the 1043; Fletcher, Cyclopedia of Corporations, Vol. 12, pp. 521- MANUEL A. TORRES, JR., (Deceased), GRACIANO J.
defendant Bank. 524, 525-527; McNeil vs. Tenth National Bank, 7 Am. Rep. TOBIAS, RODOLFO L. JOCSON, JR., MELVIN S.
341). JURISPRUDENCIA, AUGUSTUS CESAR AZURA and
2. The next contention of the defendant is that the trial court
erred in holding that it was the obligation of the defendant The only evidence in the record to show that the certificate of EDGARDO D. PABALAN, petitioners, vs. COURT OF
Bank to have inquired into the ownership of the certificate stock in question may not have belonged to R.J. Campos & APPEALS, SECURITIES AND EXCHANGE COMMISSION,
when it received it from R.J. Campos & Co., Inc. and in Co., Inc. is the testimony of the plaintiff to the effect that she TORMIL REALTY & DEVELOPMENT CORPORATION,
concluding that the Bank was negligent for not having done had approached Robert W. Taplin on March 13, 1937, and ANTONIO P. TORRES, JR., MA. CRISTINA T. CARLOS, MA.
so, contrary to the claim of the plaintiff that defendant Bank informed him that she was the true owner of said certificate LUISA T. MORALES and DANTE D.
acted negligently, if not in bad faith, in accepting delivery of and demanded the return thereof, or its value, but even MORALES, respondents.
said certificate from RJ. Campos & Co., Inc. assuming for the sake of argument that what plaintiff has KAPUNAN, J.:
stated is true, such an incident would merely show that
Let us now see the material facts on this point. Certificate No. In this petition for review on certiorari under Rule 45 of the
plaintiff has an adverse claim to the ownership of said
517 came into the possession of the defendant Bank because Revised Rules of Court, petitioners seek to annul the decision
certificate of stock, but that would not necessarily place the
R.J. Campos & Co., Inc. had opened an overdraft account with of the Court of Appeals in CA-G.R. SP. No. 31748 dated 23 May
Bank in the position to inquire as to the real basis of her
said Bank and to this effect it had executed on April 16, 1946, 1994 and its subsequent resolution dated 10 May 1995
claim, nor would it place the Bank in the obligation to
a letter of hypothecation by the terms of which R.J. Campos & denying petitioners' motion for reconsideration.
recognize her claim and return to her the certificate outright.
Co., Inc. pledged to the said Bank "all Stocks, Shares and
A mere claim and of ownership does not establish the fact of
Securities which I/we may hereafter come into their The present case involves two separate but interrelated
ownership. The right of the plaintiff in such a case would be
possession on my/our account and whether originally conflicts. The facts leading to the first controversy are as
against the transferor. In fact, this is the attitude plaintiff has
deposited for safe custody only or for any other purpose follows:
adopted when she filed a charge for estafa against Rafael J.
whatever or which may hereafter be deposited by me/us in
Campos, which culminated in his prosecution and conviction, The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the
lieu of or in addition to the Stocks, Shares, and Securities now
and it is only when she found him to be insolvent that she majority stockholder of Tormil Realty & Development
deposited or for any other purpose whatsoever." On March 13,
decided to go against the Bank. The fact that on the right Corporation while private respondents who are the children of
1937, plaintiff went to the office of the Bank to claim for her
margin of the said certificate the name of the plaintiff Judge Torres' deceased brother Antonio A. Torres, constituted
certificate. In her interview with one Robert W. Taplin, the
appeared written, granting it to be true, can not be the minority stockholders. In particular, their respective
officer in charge of the securities of that institution, she
considered sufficient reason to indicate that its owner was the shareholdings and positions in the corporation were as
informed him that the certificate belonged to her and she
plaintiff considering that said certificate was indorsed in blank follows:
demanded that it be returned to her. Taplin then replied that
by her brokers Woo, Uy-Tioco & Naftaly, was guaranteed by
the Bank did not know anything about the transaction had Name of Stockholder Number of Percentage Position(s)
indorsement in blank by R.J. Campos & Co., Inc., and was
between her and that he could not do anything until the case Shares
transferred in due course by the latter to the Bank under their
of the Bank with R.J. Campos & Co., Inc. had been terminated.
letter of hypothecation. Said indicium could at best give the Manuel A. Torres, Jr. 100,120 57.21 Dir./Pres./Chair
It further appears that when the certificate of stock was
impression that the plaintiff was the original holder of the Milagros P. Torres 33,430 19.10 Dir./Treasurer
delivered by plaintiff to R.J. Campos & Co., Inc., the manager
certificate. Josefina P. Torres 8,290 4.73 Dir./Ass. Cor-Sec.
thereof, Sebastian Cosculluela, wrote in pencil on the right
margin the name of Josefa T. Santamaria, pursuant to the The Court has noticed that the defendant Bank was willing Ma. Cristina T. Carlos 8,290 4.73 Dir./Cor-Sec.
practice followed by said firm to write on that part of the from the very beginning to compromise this case by Antonio P. Torres, Jr. 8,290 4.73 Director
certificate the name of the owner for purposes of delivering to the plaintiff certificate of stock No. 715 that was Ma. Jacinta P. Torres 8,290 4.73 Director
identification. Upon the facts thus stated, the question that issued to said Bank by the issuer corporation in lieu of the Ma. Luisa T. Morales 7,790 4.45 Director
asserts itself is: was the defendants Bank obligated to inquire original as alleged and prayed for in its amended answer to Dante D. Morales 500 .28 Director 1
who was the real owner of the shares represented by the the complaint dated April 2, 1941. Considering that in the

CORPORATION LAW: 7. captial structure Page 194 of 201

In 1984, Judge Torres, in order to make substantial savings in to compel Judge Torres to deliver to Tormil corporation the two introduced us to the stockholders namely: Milagros Torres,
taxes, adopted an "estate planning" scheme under which he (2) deeds of assignment covering the aforementioned Makati Antonio Torres, Jr., Ma. Luisa Morales, Ma. Cristina Carlos
assigned to Tormil Realty & Development Corporation (Tormil and Pasay City properties which he had unilaterally revoked and Ma. Jacinta Torres. Antonio Torres, Jr. questioned our
for brevity) various real properties he owned and his shares of and to cause the registration of the corresponding titles in the authority and personality to appear in the meeting claiming
stock in other corporations in exchange for 225,972 Tormil name of Tormil. Private respondents alleged that following the subject corporation is a family and private firm. We
Realty shares. Hence, on various dates in July and August of disappearance of the properties from the corporation's explained that our appearance there was merely in
1984, ten (10) deeds of assignment were executed by the late inventory of assets, they found that on October 24, 1986, response to the request of Manuel Torres, Jr. and that SEC
Judge Torres: Judge Torres, together with Edgardo Pabalan and Graciano has jurisdiction over all registered corporations. Manuel
Tobias, then General Manager and legal counsel, respectively, Torres, Jr., a septuagenarian, argued that as holder of the
ASSIGNMENT DATE PROPERTY ASSIGNED LOCATION
of Tormil, formed and organized a corporation named "Torres- major and controlling shares, he approved of our
SHARES TO BE ISSUED
Pabalan Realty and Development Corporation" and that as attendance in the meeting.
1. July 13, 1984 TCT 81834 Quezon City 13,252 part of Judge Torres' contribution to the new corporation, he
At about 2:30 p.m., a group composed of Edgardo Pabalan,
TCT 144240 Quezon City executed in its favor a Deed of Assignment conveying the
Atty. Graciano Tobias, Atty. Rodolfo Jocson, Jr., Atty. Melvin
same Makati and Pasay City properties he had earlier
2. July 13, 1984 TCT 77008 Manila Jurisprudencia, and Atty. Augustus Cesar Azura
transferred to Tormil.
TCT 65689 Manila 78,493 arrived. Atty. Azura told the body that they came as
TCT 109200 Manila The second controversy involving the same parties counsels of Manuel Torres, Jr. and as stockholders having
concerned the election of the 1987 corporate board of assigned qualifying shares by Manuel Torres, Jr.
3. July 13, 1984 TCT 374079 Makati 8,307 directors.
The stockholders' meeting started at 2:45 p.m. with Mr.
4. July 24, 1984 TCT 41527 Pasay The 1987 annual stockholders meeting and election of Pabalan presiding after verbally authorized by Manuel
TCT 41528 Pasay 9,855 directors of Tormil corporation was scheduled on 25 March Torres, Jr., the President and Chairman of the Board. The
TCT 41529 Pasay 1987 in compliance with the provisions of its by-laws. secretary when asked about the quorum, said that there
5. Aug. 06, 1984 El Hogar Filipino Stocks 2,000 was more than a quorum. Mr. Pabalan distributed copies of
Pursuant thereto, Judge Torres assigned from his own shares,
the president's report and the financial statements. Antonio
6. Aug. 06, 1984 Manila Jockey Club Stocks 48,737 one (l) share each to petitioners Tobias, Jocson,
Torres, Jr. requested time to study the said reports and
Jurisprudencia, Azura and Pabalan. These assigned shares
7. Aug. 07, 1984 San Miguel Corp. Stocks 50,283 brought out the question of auditing the finances of the
were in the nature of "qualifying shares," for the sole purpose
corporation which he claimed was approved previously by
8. Aug. 07, 1984 China banking Corp. Stocks 6,300 of meeting the legal requirement to be able to elect them
the board. Heated arguments ensued which also touched
(Tobias and company) to the Board of Directors as Torres'
9. Aug. 20, 1984 Ayala Corp. Stocks 7,468 on family matters. Antonio Torres, Jr. moved for the
nominees.
suspension of the meeting but Manuel Torres, Jr. voted for
10. Aug. 29, 1984 Ayala Fund Stocks 1,322 The assigned shares were covered by corresponding Tormil the continuation of the proceedings.
Stock Certificates Nos. 030, 029, 028, 027, 026 and at the
Mr. Pabalan suggested that the opinion of the SEC
225,972 2 back of each certificate the following inscription is found:
representatives be asked on the propriety of suspending
The present certificate and/or the one share it represents, the meeting but Antonio Torres, Jr. objected reasoning out
Consequently, the aforelisted properties were duly recorded
conformably to the purpose and intention of the Deed of that we were just observers.
in the inventory of assets of Tormil Realty and the revenues
generated by the said properties were correspondingly Assignment dated March 6, 1987, is not held by me under
When the Chairman called for the election of directors, the
entered in the corporation's books of account and financial any claim of ownership and I acknowledge that I hold the
Secretary refused to write down the names of nominees
records. same merely as trustee of Judge Manuel A. Torres, Jr. and
prompting Atty. Azura to initiate the appointment of Atty.
for the sole purpose of qualifying me as Director;
Jocson, Jr. as Acting Secretary.
Likewise, all the assigned parcels of land were duly registered
with the respective Register of Deeds in the name of Tormil (Signature of Assignee) 5
Antonio Torres, Jr. nominated the present members of the
Realty, except for the ones located in Makati and Pasay City. The reason behind the aforestated action was to remedy the Board. At this juncture, Milagros Torres cried out and told
the group of Manuel Torres, Jr. to leave the house.
At the time of the assignments and exchange, however, only "inequitable lopsided set-up obtaining in the corporation,
225,000 Tormil Realty shares remained unsubscribed, all of where, notwithstanding his controlling interest in the Manuel Torres, Jr., together with his lawyers-stockholders
which were duly issued to and received by Judge Torres (as corporation, the late Judge held only a single seat in the nine- went to the residence of Ma. Jacinta Torres in San Miguel
evidenced by stock certificates Nos. 17, 18, 19, 20, 21, 22, member Board of Directors and was, therefore, at the mercy Village, Makati, Metro Manila. The undersigned joined them
23, 24 & 25). 3 of the minority, a combination of any two (2) of whom would
since the group with Manuel Torres, Jr. the one who
suffice to overrule the majority stockholder in the Board's
requested for S.E.C. observers, represented the majority of
Due to the insufficient number of shares of stock issued to decision making functions." 6
the outstanding capital stock and still constituted a
Judge Torres and the alleged refusal of private respondents to
quorum.
approve the needed increase in the corporation's authorized On 25 March 1987, the annual stockholders meeting was held
capital stock (to cover the shortage of 972 shares due to as scheduled. What transpired therein was ably narrated by At the resumption of the meeting, the following were
Judge Torres under the "estate planning" scheme), on 11 Attys. Benito Cataran and Bayani De los Reyes, the official nominated and elected as directors for the year 1987-1988:
September 1986, Judge Torres revoked the two (2) deeds of representatives dispatched by the SEC to observe the
assignment covering the properties in Makati and Pasay City. 4 proceedings (upon request of the late Judge Torres) in their 1. Manuel Torres, Jr.
report dated 27 March 1987:
Noting the disappearance of the Makati and Pasay City 2. Ma. Jacinta Torres
properties from the corporation's inventory of assets and xxx xxx xxx
3. Edgardo Pabalan
financial records private respondents, on 31 March 1987, The undersigned arrived at 1:55 p.m. in the place of the
were constrained to file a complaint with the Securities and 4. Graciano Tobias
meeting, a residential bungalow in Urdaneta Village,
Exchange Commission (SEC) docketed as SEC Case No. 3153 Makati, Metro Manila. Upon arrival, Josefina Torres 5. Rodolfo Jocson, Jr.

CORPORATION LAW: 7. captial structure Page 195 of 201

 6. Melvin Jurisprudencia Petitioners promptly appealed to the SEC en banc (docketed THE DECEASED PRINCIPAL PARTY-RESPONDENT IN S.E.C.-AC
as SEC-AC No. 339). Thereafter, on 3 April 1991, during the NO. 339 AND CONSEQUENTLY, FOR WANT OF JURISDICTION
7. Augustus Cesar Azura
pendency of said appeal, petitioner Manuel A. Torres, Jr. died. OVER THE SAID DECEASED'S TESTATE ESTATE, AND
8. Josefina Torres However, notice thereof was brought to the attention of the MOREOVER, WHEN IT SOUGHT TO JUSTIFY THE NON-
SEC not by petitioners' counsel but by private respondents in SUBSTITUTION BY ITS APPLICATION OF THE CIVIL LAW
9. Dante Morales a Manifestation dated 24 April 1991. 9 CONCEPT OF NEGOTIORUM GESTIO;
After the election, it was resolved that after the meeting, On 8 June 1993, petitioners filed a Motion to Suspend (3) WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE
the new board of directors shall convene for the election of Proceedings on grounds that no administrator or legal EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. AC NO.
officers. representative of the late Judge Torres' estate has yet been 339 NOT HAVING ACTUALLY BEEN RE-EXAMINED, THAT
xxx xxx xxx 7 appointed by the Regional Trial Court of Makati where Sp. S.E.C. CASE NO. 3153 INVOLVED A SITUATION WHERE
Proc. No. M-1768 ("In Matter of the Issuance of the Last Will PERFORMANCE WAS IMPOSSIBLE (AS CONTEMPLATED
Consequently, on 10 April 1987, private respondents and Testament of Manuel A Torres, Jr.") was pending. Two UNDER ARTICLE 1191 OF THE CIVIL CODE) AND WAS NOT A
instituted a complaint with the SEC (SEC Case No. 3161) similar motions for suspension were filed by petitioners on 28 MERE CASE OF LESION OR INADEQUACY OF CAUSE (UNDER
praying in the main, that the election of petitioners to the June 1993 and 9 July 1993. ARTICLE 1355 OF THE CIVIL CODE) AS SO ERRONEOUSLY
Board of Directors be annulled. CHARACTERIZED BY THE RESPONDENT S.E.C.; and,
On 19 July 1993, the SEC en banc issued an Order denying
Private respondents alleged that the petitioners-nominees petitioners' aforecited motions on the following ground: (4) WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE
were not legitimate stockholders of Tormil because the EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. AC NO.
assignment of shares to them violated the minority Before the filing of these motions, the Commission en
339 NOT HAVING ACTUALLY BEEN EXAMINED, THAT THE
stockholders' right of pre-emption as provided in the banc had already completed all proceedings and had
RECORDING BY THE LATE JUDGE MANUEL A. TORRES, JR. OF
corporation's articles and by-laws. likewise ruled on the merits of the appealed cases. Viewed
THE QUESTIONED ASSIGNMENT OF QUALIFYING SHARES TO
in this light, we thus feel that there is nothing left to be
Upon motion of petitioners, SEC Cases Nos. 3153 and 3161 HIS NOMINEES, WAS AFFIRMED IN THE STOCK AND
done except to deny these motions to suspend
were consolidated for joint hearing and adjudication. TRANSFER BOOK BY AN ACTING CORPORATE SECRETARY
proceedings. 10
AND MOREOVER, THAT ACTUAL NOTICE OF SAID
On 6 March 1991, the Panel of Hearing Officers of the SEC On the same date, the SEC en banc rendered a decision, the ASSIGNMENT WAS TIMELY MADE TO THE OTHER
rendered a decision in favor of private respondents. The dispositive portion of which reads, thus: STOCKHOLDERS. 14
dispositive portion thereof states, thus:
WHEREFORE, premises considered, the appealed decision We shall resolve the issues in seriatim.
WHEREFORE, premises considered, judgment is hereby of the hearing panel is hereby affirmed and all motions
rendered as follows: I
pending before us incident to this appealed case are
1. Ordering and directing the respondents, particularly necessarily DISMISSED. Petitioners insist that the failure to transmit the original
respondent Manuel A. Torres, Jr., to turn over and deliver to 11 records to the Court of Appeals deprived them of procedural
SO ORDERED.
TORMIL through its Corporate Secretary, Ma. Cristina T. due process. Without the evidence and the original records of
Carlos: (a) the originals of the Deeds of Assignment dated Undaunted, on 10 August 1993, petitioners proceeded to the proceedings before the SEC, the Court of Appeals,
July 13 and 24, 1984 together with the owner's duplicates plead its cause to the Court of Appeals by way of a petition petitioners adamantly state, could not have possibly made a
of Transfer Certificates of Title Nos. 374079 of the Registry for review (docketed as CA-G.R. SP No. 31748). proper appreciation and correct determination of the issues,
of Deeds for Makati, and 41527, 41528 and 41529 of the On 23 May 1994, the Court of Appeals rendered a decision, particularly the factual issues, they had raised on appeal.
Registry of Deeds for Pasay City and/or to cause the formal the dispositive portion of which states: Petitioners also assert that since the Court of Appeals
registration and transfer of title in and over such real allegedly gave due course to their petition, the original
properties in favor of TORMIL with the proper government WHEREFORE, the petition for review is DISMISSED and the records should have been forwarded to said court.
agency; (b) all corporate books of account, records and appealed decision is accordingly affirmed. Petitioners anchor their argument on Secs. 8 and 11 of SC
papers as may be necessary for the conduct of a Circular 1-91 (dated 27 February 1991) which provides that:
SO ORDERED. 12
comprehensive audit examination, and to allow the
examination and inspection of such accounting books, From the said decision, petitioners filed a motion for 8. WHEN PETITION GIVEN DUE COURSE. The Court of
papers and records by any or all of the corporate directors, reconsideration which was denied in a resolution issued by Appeals shall give due course to the petition only when it
officers and stockholders and/or their duly authorized the Court of Appeals dated 10 May 1995. 13 shows prima facie that the court, commission, board, office or
representatives or auditors; agency concerned has committed errors of fact or law that
Insisting on their cause, petitioners filed the present petition would warrant reversal or modification of the order, ruling or
2. Declaring as permanent and final the writ of preliminary for review alleging that the Court of Appeals committed the decision sought to be reviewed. The findings of fact of the
injunction issued by the Hearing Panel on February 13, following errors in its decision: court commission, board, office or agency concerned when
1989;
(1) WHEN IT RENDERED THE MAY 23, 1994 DECISION, supported by substantial evidence shall be final.
3. Declaring as null and void the election and appointment WHICH IS A FULL LENGTH DECISION, WITHOUT THE xxx xxx xxx
of respondents to the Board of Directors and executive EVIDENCE AND THE ORIGINAL RECORD OF S.E.C. AC NO.
positions of TORMIL held on March 25, 1987, and all their 339 BEING PROPERLY BROUGHT BEFORE IT FOR REVIEW 11. TRANSMITTAL OF RECORD. Within fifteen (15) days
acts and resolutions made for and in behalf of TORMIL by AND RE-EXAMINATION, AN OMISSION RESULTING IN A from notice that the petition has been given due course, the
authority of and pursuant to such invalid appointment & CLEAR TRANSGRESSION OR CURTAILMENT OF THE RIGHTS court, commission, board, office or agency concerned shall
election held on March 25, 1987; OF THE HEREIN PETITIONERS TO PROCEDURAL DUE transmit to the Court of Appeals the original or a certified
PROCESS; copy of the entire record of the proceeding under review. The
4. Ordering the respondents jointly and severally, to pay record to be transmitted may be abridged by agreement of all
the complainants the sum of ONE HUNDRED THOUSAND (2) WHEN IT SANCTIONED THE JULY 19, 1993 DECISION OF parties to the proceeding. The Court of Appeals may require
PESOS (P100,000.00) as and by way of attorney's fees. 8 THE RESPONDENT S.E.C., WHICH IS VOID FOR HAVING or permit subsequent correction or addition to the record.
BEEN RENDERED WITHOUT THE PROPER SUBSTITUTION OF

CORPORATION LAW: 7. captial structure Page 196 of 201

Petitioners contend that the Court of Appeals had given due the petition; otherwise, it shall dismiss the same. The deceased to be substituted for the deceased, and as a
course to their petition as allegedly indicated by the following findings of fact of the court or agency concerned, when matter of fact no such substitution has ever been effected,
acts: supported by substantial evidence, shall be binding on the the trial held by the court without such legal representative
Court of Appeals. or heirs, and the judgment rendered after such trial, are
a) it granted the restraining order applied for by the herein
null and void because the court acquired no jurisdiction
petitioners, and after hearing, also the writ of preliminary 11. Transmittal of record. Within fifteen (15) days from
over the persons of the legal representative or of the heirs
injunction sought by them; under the original SC Circular No. notice that the petition has been given due course, the
upon whom the trial and the judgment are not binding. 16
1-91, a petition for review may be given due course at the Court of Appeals may require the court or agency
onset (paragraph 8) upon a mere prima facie finding of errors concerned to transmit the original or a legible certified true As early as 8 April 1988, Judge Torres instituted Special
of fact or law having been committed, and such prima copy of the entire record of the proceeding under review. Proceedings No. M-1768 before the Regional Trial Court of
facie finding is but consistent with the grant of the extra- The record to be transmitted may be abridged by Makati for the ante-mortem probate of his holographic will
ordinary writ of preliminary injunction; agreement of all parties to the proceeding. The Court of which he had executed on 31 October 1986. Testifying in the
Appeals may require or permit subsequent correction of or said proceedings, Judge Torres confirmed his appointment of
b) it required the parties to submit "simultaneous
addition to the record. (Emphasis ours.) petitioner Edgardo D. Pabalan as the sole executor of his will
memoranda" in its resolution dated October 15, 1993 (this is
and administrator of his estate. The proceedings, however,
in addition to the comment required to be filed by the The aforecited circular now formalizes the correct practice
were opposed by the same parties, herein private
respondents) and furthermore declared in the same resolution and clearly states that in resolving appeals from quasi judicial
respondents Antonio P. Torres, Jr., Ma. Luisa T. Morales and Ma.
that the petition will be decided "on the merits," instead of agencies, it is within the discretion of the Court of Appeals to
Cristina T. Carlos, 17 who are nephew and nieces of Judge
outrightly dismissing the same; have the original records of the proceedings under review be
Torres, being the children of his late brother Antonio A. Torres.
transmitted to it. In this connection petitioners' claim that the
c) it rendered a full length decision, wherein: (aa) it expressly
Court of Appeals could not have decided the case on the It can readily be observed therefore that the parties involved
declared the respondent S.E.C. as having erred in denying the
merits without the records being brought before it is patently in the present controversy are virtually the same parties
pertinent motions to suspend proceedings; (bb) it declared
lame. Indubitably, the Court of Appeals decided the case on fighting over the representation of the late Judge Torres'
the supposed error as having become a non-issue when the
the basis of the uncontroverted facts and admissions estate. It should be recalled that the purpose behind the rule
respondent C.A. "proceeded to hear (the) appeal"; (cc) it
contained in the pleadings, that is, the petition, comment, on substitution of parties is the protection of the right of
formulated and applied its own theory of negotiorum gestio in
reply, rejoinder, memoranda, etc. filed by the parties. every party to due process. It is to ensure that the deceased
justifying the non-substitution of the deceased principal party
party would continue to be properly represented in the suit
in S.E.C. AC No. 339 and moreover, its theory of di minimis II
through the duly appointed legal representative of his estate.
non curat lex (this, without first determining the true extent of
Petitioners contend that the decisions of the SEC and the In the present case, this purpose has been substantially
and the correct legal characterization of the so-called
Court of Appeals are null and void for being rendered without fulfilled (despite the lack of formal substitution) in view of the
"shortage" of Tormil shares;
the necessary substitution of parties (for the deceased peculiar fact that both proceedings involve practically the
and, (dd) it expressly affirmed the assailed decision of
petitioner Manuel A. Torres, Jr.) as mandated by Sec. 17, Rule same parties. Both parties have been fiercely fighting in the
respondent S.E.C. 15
3 of the Revised Rules of Court, which provides as follows: probate proceedings of Judge Torres' holographic will for
Petitioners' contention is unmeritorious. appointment as legal representative of his estate. Since both
Sec. 17. Death of party. After a party dies and the claim parties claim interests over the estate, the rights of the estate
There is nothing on record to show that the Court of Appeals is not thereby extinguished, the court shall order, upon were expected to be fully protected in the proceedings before
gave due course to the petition. The fact alone that the Court proper notice, the legal representative of the deceased to the SEC en banc and the Court of Appeals. In either case,
of Appeals issued a restraining order and a writ of preliminary appear and to be substituted for the deceased, within a whoever shall be appointed legal representative of Judge
injunction and required the parties to submit their respective period of thirty (30) days, or within such time as may be Torres' estate (petitioner Pabalan or private respondents)
memoranda does not indicate that the petition was given due granted. If the legal representative fails to appear within would no longer be a stranger to the present case, the said
course. The office of an injunction is merely to preserve the said time, the court may order the opposing party to parties having voluntarily submitted to the jurisdiction of the
status quo pending the disposition of the case. The court can procure the appointment of a legal representative of the SEC and the Court of Appeals and having thoroughly
require the submission of memoranda in support of the deceased within a time to be specified by the court, and participated in the proceedings.
respective claims and positions of the parties without the representative shall immediately appear for and on
necessarily giving due course to the petition. The matter of behalf of the interest of the deceased. The court charges The foregoing rationate finds support in the recent case
whether or not to give due course to a petition lies in the involved in procuring such appointment, if defrayed by the of Vda. de Salazar v. CA, 18 wherein the Court expounded
discretion of the court. opposing party, may be recovered as costs. The heirs of the thus:
deceased may be allowed to be substituted for the
It is worthy to mention that SC Circular No. 1-91 has been The need for substitution of heirs is based on the right to
deceased, without requiring the appointment of an
replaced by Revised Administrative Circular No. 1-95 (which due process accruing to every party in any proceeding. The
executor or administrator and the court may appoint
took effect on 1 June 1995) wherein the procedure for appeals rationale underlying this requirement in case a party dies
guardian ad litem for the minor heirs.
from quasi-judicial agencies to the Court of Appeals was during the pendency of proceedings of a nature not
clarified thus: Petitioners insist that the SEC en banc should have granted extinguished by such death, is that . . . the exercise of
the motions to suspend they filed based as they were on the judicial power to hear and determine a cause implicitly
10. Due course. If upon the filing of the comment or such presupposes in the trial court, amongst other essentials,
ground that the Regional Trial Court of Makati, where the
other pleadings or documents as may be required or jurisdiction over the persons of the parties. That jurisdiction
probate of the late Judge Torres' will was pending, had yet to
allowed by the Court of Appeals or upon the expiration of was inevitably impaired upon the death of the protestee
appoint an administrator or legal representative of his estate.
the period for the filing thereof, and on the bases of the pending the proceedings below such that unless and until a
petition or the record the Court of Appeals finds prima We are not unaware of the principle underlying the legal representative is for him duly named and within the
facie that the court or agency concerned has committed aforequoted provision: jurisdiction of the trial court, no adjudication in the cause
errors of fact or law that would warrant reversal or could have been accorded any validity or binding effect
It has been held that when a party dies in an action that
modification of the award, judgment, final order or upon any party, in representation of the deceased, without
survives, and no order is issued by the Court for the
resolution sought to be reviewed, it may give due course to trenching upon the fundamental right to a day in court
appearance of the legal representative or of the heirs of the

CORPORATION LAW: 7. captial structure Page 197 of 201

 which is the very essence of the constitutionally enshrined case. Said principle explicitly covers abandoned or neglected issued to the former of its 225,000 unissued shares, the
guarantee of due process. property or business. most logical course of action is to declare as null and void
the deed of revocation executed by respondent Torres.
We are not unaware of several cases where we have ruled III
(Rollo, pp. 45-46.) 21
that a party having died in an action that survives, the trial
Petitioners find legal basis for Judge Torres' act of revoking the
held by the court without appearance of the deceased's The aforequoted Civil Code provision does not apply in this
assignment of his properties in Makati and Pasay City to
legal representative or substitution of heirs and the particular situation for the obvious reason that a specific
Tormil corporation by relying on Art. 1191 of the Civil Code
judgment rendered after such trial, are null and void number of shares of stock (as evidenced by stock certificates)
which provides that:
because the court acquired no jurisdiction over the persons had already been issued to the late Judge Torres in exchange
of the legal representatives or of the heirs upon whom the Art. 1191. The power to rescind obligations is implied in for his Makati and Pasay City properties. The records thus
trial and the judgment would be binding. This general rule reciprocal ones, in case one of the obligors should not disclose:
notwithstanding, in denying petitioner's motion for comply with what is incumbent upon him.
DATE OF PROPERTY LOCATION NO. OF SHARES
reconsideration, the Court of Appeals correctly ruled that
The injured party may choose between the fulfillment and ORDER OF ASSIGNMENT ASSIGNED TO BE ISSUED
formal substitution of heirs is not necessary when the heirs
the rescission of the obligation, with the payment of COMPLIANCE*
themselves voluntarily appeared, participated in the case
and presented evidence in defense of deceased defendant. damages in either case. He may also seek rescission, even
1. July 13, 1984 TCT 81834 Quezon City) 13,252 3rd
Attending the case at bench, after all, are these particular after he has chosen fulfillment, if the latter should become
TCT 144240 Quezon City)
circumstances which negate petitioner's belated and impossible.
seemingly ostensible claim of violation of her rights to due 2. July 13, 1984 TCT 77008 Manila)
The court shall decree the rescission claimed, unless there
process. We should not lose sight of the principle TCT 65689 Manila) 78,493 2nd
be just cause authorizing the fixing of a period.
underlying the general rule that formal substitution of heirs TCT 102200 Manila)
must be effectuated for them to be bound by a subsequent This is understood to be without prejudice to the rights of
3. July 13, 1984 TCT 374079 Makati 8,307 1st
judgment. Such had been the general rule established not third persons who have acquired the thing, in accordance
because the rule on substitution of heirs and that on with articles 1385 and 1388 and the Mortgage Law. 4. July 24, 1984 TCT 41527 Pasay
appointment of a legal representative are jurisdictional TCT 41528 Pasay) 9,855 4th
Petitioners' contentions cannot be sustained. We see no
requirements per se but because non-compliance therewith TCT 41529 Pasay)
justifiable reason to disturb the findings of SEC, as affirmed by
results in the undeniable violation of the right to due the Court of Appeals: 5. August 6, 1984 El Hogar Filipino Stocks 2,000 7th
process of those who, though not duly notified of the
proceedings, are substantially affected by the decision We sustain the ruling of respondent SEC in the decision 6. August 6, 1984 Manila Jockey Club Stocks 48,737
rendered therein . . . . appealed from (Rollo, pp. 45-46) that 5th
It is appropriate to mention here that when Judge Torres died . . . the shortage of 972 shares would not be valid ground 7. August 7, 1984 San Miguel Corp. Stocks 50,238
on April 3, 1991, the SEC en banc had already fully heard the for respondent Torres to unilaterally revoke the deeds of 8th
parties and what remained was the evaluation of the assignment he had executed on July 13, 1984 and July 24,
8. August 7, 1984 China Banking Corp. Stocks 6,300
evidence and rendition of the judgment. 1984 wherein he voluntarily assigned to TORMIL real
6th
properties covered by TCT No. 374079 (Makati) and TCT No.
Further, petitioners filed their motions to suspend 41527, 41528 and 41529 (Pasay) respectively. 9. August 20, 1984 Ayala Corp. Stocks 7,468.2) 9th
proceedings only after more than two (2) years from the
death of Judge Torres. Petitioners' counsel was even remiss in A comparison of the number of shares that respondent 10. August 29, 1984 Ayala Fund Stocks 1,322.1)
his duty under Sec. 16, Rule 3 of the Revised Rules of Torres received from TORMIL by virtue of the "deeds of
assignment" and the stock certificates issued by the latter
Court. 19 Instead, it was private respondents who informed the
to the former readily shows that TORMIL had substantially TOTAL 225,972.3
SEC of Judge Torres' death through a manifestation dated 24
April 1991. performed what was expected of it. In fact, the first two *Order of stock certificate issuances by TORMIL to
issuances were in satisfaction to the properties being respondent Torres relative to the Deeds of Assignment he
For the SEC en banc to have suspended the proceedings to revoked by respondent Torres. Hence, the shortage of 972 executed sometime in July and August, 1984. 22 (Emphasis
await the appointment of the legal representative by the shares would never be a valid ground for the revocation of ours.)
estate was impractical and would have caused undue delay in the deeds covering Pasay and Quezon City properties.
the proceedings and a denial of justice. There is no telling Moreover, we agree with the contention of the Solicitor
when the probate court will decide the issue, which may still In Universal Food Corp. vs. CA, the Supreme Court held: General that the shortage of shares should not have affected
be appealed to the higher courts. The general rule is that rescission of a contract will not the assignment of the Makati and Pasay City properties which
In any case, there has been no final disposition of the be permitted for a slight or carnal breach, but only for were executed in 13 and 24 July 1984 and the consideration
properties of the late Judge Torres before the SEC. On the such substantial and fundamental breach as would for which have been duly paid or fulfilled but should have
contrary, the decision of the SEC en banc as affirmed by the defeat the very object of the parties in making the been applied logically to the last assignment of property
agreement. Judge Torres' Ayala Fund shares which was executed on 29
Court of Appeals served to protect and preserve his estate.
August 1984. 23
Consequently, the rule that when a party dies, he should be The shortage of 972 shares definitely is not substantial and
substituted by his legal representative to protect the interests fundamental breach as would defeat the very object of the IV
of his estate in observance of due process was not violated in parties in entering into contract. Art. 1355 of the Civil Code Petitioners insist that the assignment of "qualifying shares" to
this case in view of its peculiar situation where the estate was also provides: "Except in cases specified by law, lesion or the nominees of the late Judge Torres (herein petitioners)
fully protected by the presence of the parties who claim inadequacy of cause shall not invalidate a contract, unless does not partake of the real nature of a transfer or
interests therein either as directors, stockholders or heirs. there has been fraud, mistake or undue influences." There conveyance of shares of stock as would call for the
Finally, we agree with petitioners' contention that the being no fraud, mistake or undue influence exerted on "imposition of stringent requirements (with respect to the)
principle of negotiorum gestio 20 does not apply in the present respondent Torres by TORMIL and the latter having already recording of the transfer of said shares." Anyway, petitioners

CORPORATION LAW: 7. captial structure Page 198 of 201

add, there was substantial compliance with the above-stated We likewise sustain respondent SEC when it ruled, G.R. No. L-10122 August 30, 1958
requirement since said assignments were entered by the late interpreting Section 74 of the Corporation Code, as follows
LEE E. WON alias RAMON LEE, plaintiff-appellant, vs.
Judge Torres himself in the corporation's stock and transfer (Rollo, p. 45):
WACK WACK GOLF and COUNTRY CLUB, INC., defendant-
book on 6 March 1987, prior to the 25 March 1987 annual
In the absence of (any) provision to the contrary, the appellee.
stockholders meeting and which entries were confirmed on 8
corporate secretary is the custodian of corporate records.
March 1987 by petitioner Azura who was appointed Assistant Emilio Javier for appellant.
Corollarily, he keeps the stock and transfer book and
Corporate Secretary by Judge Torres. Juan T. Chuidian for appellee.
makes proper and necessary entries therein.
Petitioners further argue that: PARAS, C. J.:
Contrary to the generally accepted corporate practice,
10.10. Certainly, there is no legal or just basis for the the stock and transfer book of TORMIL was not kept by On December 2, 1942, the defendant (a non-stock
respondent S.E.C. to penalize the late Judge Torres by Ms. Maria Cristina T. Carlos, the corporate secretary but corporation) issued to Iwao Teruyama Membership Certificate
invalidating the questioned entries in the stock and transfer by respondent Torres, the President and Chairman of the No. 201 which was assigned to M. T. Reyes on April 22, 1944.
book, simply because he initially made those entries (they Board of Directors of TORMIL. In contravention to the Subsequently in the same year 1944, M. T. Reyes transferred
were later affirmed by an acting corporate secretary) and above cited provision, the stock and transfer book was and assigned said certificate to the plaintiff. On April 26,
because the stock and transfer book was in his possession not kept at the principal office of the corporation either 1955, the plaintiff filed an action in the Court of First Instance
instead of the elected corporate secretary, if the but at the place of respondent Torres. of Manila against the defendant, alleging that shortly after the
background facts herein-before narrated and the serious rehabilitation of the defendant after the war, the plaintiff
These being the obtaining circumstances, any entries
animosities that then reigned between the deceased Judge asked the defendant to register in its books the assignment in
made in the stock and transfer book on March 8, 1987 by
and his relatives are to be taken into account; favor of the plaintiff and to issue to the latter a new
respondent Torres of an alleged transfer of nominal
certificate, but that the defendant had refused and still
xxx xxx xxx shares to Pabalan and Co. cannot therefore be given any
refuses to do so unlawfully; and praying that the plaintiff be
valid effect. Where the entries made are not valid,
10.12. Indeed it was a practice in the corporate respondent, declared the owner of one share of stock of the defendant
Pabalan and Co. cannot therefore be considered
a family corporation with only a measly number of and that the latter be ordered to issue a correspondent new
stockholders of record of TORMIL. Because they are not
stockholders, for the late judge to have personal custody of certificate. On June 6, 1955, the defendant filed a motion to
stockholders, they cannot therefore be elected as
corporate records; as president, chairman and majority dismiss, alleging that from 1944, when the plaintiff's right of
directors of TORMIL. To rule otherwise would not only
stockholder, he had the prerogative of designating an action had accrued, to April 26, 1955, when the complaint
encourage violation of clear mandate of Sec. 74 of the
acting corporate secretary or to himself make the needed was filed, eleven years have elapsed, and that therefore the
Corporation Code that stock and transfer book shall be
entries, in instances where the regular secretary, who is a complaint was filed beyond the 5-year period fixed in Article
kept in the principal office of the corporation but would
mere subordinate, is unavailable or intentionally defaults, 1149 of the Civil Code. On July 30, 1955, the Court of First
likewise open the flood gates of confusion in the
which was the situation that obtained immediately prior to Instance of Manila issued an order dismissing the complaint.
corporation as to who has the proper custody of the
the 1987 annual stockholders meeting of Tormil, as the late As plaintiff's motion for reconsideration filed on August 27,
stock and transfer book and who are the real
Judge Torres had so indicated in the stock and transfer book 1955 and second motion for reconsideration filed on
stockholders of records of a certain corporation as any
in the form of the entries now in question; September 13, 1955, were both denied, the plaintiff has taken
holder of the stock and transfer book, though not the
the present appeal.
10.13. Surely, it would have been futile nay foolish for him corporate secretary, at pleasure would make entries
to have insisted under those circumstances, for the regular therein. The certificate in question contains a condition to the effect
secretary, who was then part of a group ranged against that no assignment thereof "shall be effective with respect to
The fact that respondent Torres holds 81.28% of the
him, to make the entries of the assignments in favor of his the club until such assignment is registered in the books of
outstanding capital stock of TORMIL is of no moment and
nominees; 24 the club, as provided in the By-Laws." The decisive question
is not a license for him to arrogate unto himself a duty
that arises is whether the plaintiff was bound, under said
Petitioners' contentions lack merit. lodged to (sic) the corporate secretary. 26
condition and By-Laws of the defendant or any statutory rule
It is precisely the brewing family discord between Judge Torres All corporations, big or small, must abide by the provisions of for that matter, to present and register the certificate
and private respondents his nephew and nieces that should the Corporation Code. Being a simple family corporation is not assigned to him in 1944 within any definite or fixed period.
have placed Judge Torres on his guard. He should have been an exemption. Such corporations cannot have rules and The defendant has not made herein any pretense to that
more careful in ensuring that his actions (particularly the practices other than those established by law. effect; but it contends that from the moment the certificate
assignment of qualifying shares to his nominees) comply with was assigned to the plaintiff, the latter's right to have the
WHEREFORE, premises considered, the petition for review
the requirements of the law. Petitioners cannot use the flimsy assignment registered commenced to exist. This contention is
on certiorari is hereby DENIED.
excuse that it would have been a vain attempt to force the correct, but it would not follow that said right should be
incumbent corporate secretary to register the aforestated SO ORDERED. exercised immediately or within a definite period. The
assignments in the stock and transfer book because the latter existence of a right is one thing, and the duration of said right
belonged to the opposite faction. It is the corporate is another.
secretary's duty and obligation to register valid transfers of
On the other hand, it is stated in the appealed order of
stocks and if said corporate officer refuses to comply, the
dismissal that the plaintiff sought to register the assignment
transferor-stockholder may rightfully bring suit to compel
on April 13, 1955; whereas in plaintiff's brief it is alleged that
performance. 25 In other words, there are remedies within the
it was only in February, 1955, when the defendant refused to
law that petitioners could have availed of, instead of taking
recognize the plaintiff. If, as already observed, there is no
the law in their own hands, as the cliche goes.
fixed period for registering an assignment, how can the
Thus, we agree with the ruling of the SEC en banc as affirmed complaint be considered as already barred by the Statute of
by the Court of Appeals: Limitations when it was filed on April 26, 1955, or barely a few
days (according to the lower court) and two months
(according to the plaintiff), after the demand for registration

CORPORATION LAW: 7. captial structure Page 199 of 201

and its denial by the defendant. Plaintiff's right was violated
only sometime in 1955, and it could not accordingly have
asserted any cause of action against the defendant before
that.
The defendant seems to believe that the plaintiff was
compelled immediately to register his assignment. Any such
compulsion is obviously for the benefit of the plaintiff,
because it is only after registration that the transfer would be
binding against the defendant. But we are not here concerned
with a situation where the plaintiff claims anything against
the defendant allegedly accruing under the outstanding
certificate in question between the date of the assignment to
the plaintiff and the date of the latters demand for
registration and issuance of a new certificate.
The defendant has also intimated property holdings of
Japanese nationals were vested after the liberation upon the
Alien Property Administration or Custodian; that the plaintiff
should have thereupon registered the assignment to him of
Certificate No. 201 issued to Iwao Teruyama; and that in the
meantime rights to said certificate by their pre-war registered
American owners were filed with the defendant and
correspondingly acted upon. These, however, are matters
which may affect the validity of the assignment to the plaintiff
or his right to register the same constituting special defenses,
but certainly have no bearing on the question of prescription.
Wherefore, the appealed order is hereby reversed and the
case remanded to the court of origin for further proceedings.
So ordered with costs against the defendant.

CORPORATION LAW: 7. captial structure Page 200 of 201

G.R. No. L-57707 November 19, 1982 Huenefeld filed an Opposition claiming that the refusal of a typical intra-corporate dispute. The question of damages
PHILEX MINING CORPORATION, petitioner, vs. HON. Philex to issue a replacement certificate resulted in actual raised is merely incidental to that main issue.
DOMINGO CORONEL REYES, Presiding Judge, Court of damages to him, and thus, it is no longer a case of intra-
Huenefeld's attempt to limit intra-corporate controversies
First Instance of Albay, 10th Judicial District, Branch IV, corporate conflict, but one which is civil or tortious in nature.
thus:
and RICHARD HUENEFELD, respondents.
On March 12, 1981, respondent Court issued the first
The phrase 'controversies, arising out of intra-corporate
Agrava, Lucero, Alikpala, & Ginea Law Office for petitioner. questioned Order holding in abeyance resolution of the
relations' would seem to refer to controversies, cases or
incident as the grounds alleged did not appear to be
Munoz Law Office for respondent. intramurals among or between stockholders and the
indubitable. Philex moved for reconsideration.
corporation involving the exercise of stockholders'
In the interim, Philex filed a Petition with the SEC (SEC Case privileges, rights, benefits and their duties in a corporation,
MELENCIO-HERRERA, J.: No. 002053) praying that the Commission hear the and the existence in law of a corporation.
controversy; that Huenefeld be held to have received Stock
A special civil action for certiorari seeking to set aside the Like, for instance, an example of 'controversies arising out
Certificate No. 190579 and had subsequently lost the same;
Orders of respondent Judge of the Court of First Instance of of an intra- corporate relation' are cases between
and that the provisions of RA 201, or Section 73 of the new
Albay in Civil Case No. 6400, denying petitioner's Motion to stockholders in 1) contesting or vying for a seat in the
Corporation Code, be followed for the issuance of a
Dismiss based on lack of jurisdiction on March 12, 1981, and Board of Directors, 2) questions on voting by proxy, 3)
replacement certificate, at Huenefeld's expense.
the Motion for its reconsideration on June 25, 1981. election and tenure of office and qualification of directors,
Philex informed respondent Court of the filing of the Petition 4) removal and resignation of Directors, 5) repeal and
The relevant facts follow: with the SEC and reiterated that Civil Case No. 6500 be amendment of corporate charter and by-laws, 6) questions
Private respondent, Richard Huenefeld, is a stockholder of dismissed. on corporation meetings and increase of capital stocks, etc.
petitioner Philex Mining Corporation (Philex, for short). He On June 25, 1981, respondent Court issued the second (pp. 70, 80, Rollo).
originally owned 800,000 shares of stock. challenged Order denying Philex's Motion for Reconsideration Is not well taken. The foregoing interpretation does not square
On February 15, 1979, Philex declared a 10% stock dividend. for lack of merit. with the intent of the law, which is to segregate from the
Stock Certificate No. 190579 for 80,000 shares was issued by On August 17, 1981, Philex filed the present Petition. general jurisdiction of regular Courts controversies involving
Philex in favor of Huenefeld. On April 18, 1979, Philex sent the corporations and their stockholders and to bring them to the
stock certificate to Huenefeld through its transfer agent, First On August 21, 1981, we issued a Temporary Restraining Order SEC for exclusive resolution, in much the same way that labor
Asian, Stock Transfer, Inc. (First Asian, for brevity). Huenefeld enjoining respondent Judge from further proceeding with Civil disputes are now brought to the Ministry of Labor and
claims that he never received the stock certificate. Case No. 6400. And on October 19, 1981, we resolved to give Employment (MOLE) and the National Labor Relations
due course and required the parties to submit simultaneous Commission (NLRC), and not to the Courts.
On February 6, 1980, First Asian wrote Huenefeld informing Memoranda, with which they complied.
him that the stock certificate had been delivered to him at his The Securities and Exchange Commission, on October 7,
address at Michelle Apartment, 2030 A. Mabini Street, Manila; The issue is whether respondent Court of First Instance has 1981, in resolving the Motion to Dismiss filed by Huenefeld
and that if the certificate could not be located that Huenefeld jurisdiction over the present controversy, which Philex before it, ruled:
execute an Affidavit of Loss, with the notice of loss to be contends is an intra-corporate one, but which Huenefeld xxx xxx xxx
published once a week for three (3) consecutive weeks in a denies.
newspaper of general circulation in accordance with the After a thorough consideration of the allegations and
Section 5 of Presidential Decree No. 902-A provides:
procedure prescribed BY Republic Act No. 201 (now Section arguments adduced in the motion to dismiss, as wen as
73, Corporation Code). Sec. 5. In addition to the regulatory and adjudicative petitioners opposition thereto, the Commission resolves to.
functions of the Securities and Exchange Commission over DENY said motion. It appearing that the instant suit before
On March 4, 1980, Huenefeld, through counsel, replied that us involves an intra-corporate dispute, the same is,
corporations, partnerships and other forms of associations
RA 201 is not applicable because the stock certificate was not therefore, within the original and exclusive jurisdiction of
registered with it as expressly granted under existing laws
lost in the possession of the stockholder; that assuming it the Commission to resolve. (pp. 94-95, Ibid)
and decrees; it shall have original and exclusive jurisdiction
was, the expenses of publication and premiums for the bond
to hear and decide cases involving:
should be at Philex's expense; and demanded the issuance of xxx xxx xxx
a replacement stock certificate. Huenefeld also submitted an a) ...
The controversy between the parties being clearly an intra-
Affidavit of Loss but did not comply with the other
b) Controversies arising out of intra-corporate or corporate one, it is the SEC, as held by it, and not respondent
requirements on publication.
partnership relations, between and among stockholders, Court of First Instance, that has original and exclusive
On November 3, 1980, Huenefeld commenced suit for members, or associates; between any or all of them and jurisdiction, by express mandate of the law.
Specific Performance with Damages against Philex, First Asian the corporation, partnership or association of which they
WHEREFORE, granting this Petition, the challenged Orders of
and/or the latter's General Manager, before the Court of First are stockholders, members, or associates, respectively and
respondent Judge, dated March 12, 1981 and June 25, 1981,
Instance of Albay, Branch IV, Legaspi City (Civil Case No. between such corporation, partnership or association and
are hereby annulled and set aside, and Civil Case No. 6400 of
6400), presided by respondent Judge, to compel the issuance the state insofar as it concerns their individual franchise or
the Court of First Instance of Albay is hereby ordered
of a replacement for Stock Certificate No. 190579, plus right to exist as such entity (Emphasis supplied)
dismissed. Private respondent may seek relief in SEC. Case
damages.
Evident from the foregoing is that an intra-corporate No. 2053 now pending with the Securities and Exchange
On January 27, 1981, Philex filed a Motion to Dismiss on the controversy is one which arises between a stockholder and Commission. The Temporary Restraining Order heretofore
ground that the Court of First Instance has no jurisdiction over the corporation. There is no distinction, qualification, nor any issued is hereby made permanent.
the case, the issue being one of intra-corporate relationship exemption whatsoever. The provision is broad and covers all
Costs against private respondent, Richard Huenefeld.
between a stockholder and a corporation, which under kinds of controversies between stockholders and
Presidential Decree No. 902-A, falls within the original and corporations. The issue of whether or not a corporation is SO ORDERED.
exclusive jurisdiction of the Securities and Exchange bound to replace a stockholder's lost certificate of stock is a
Commission (SEC). matter purely between a stockholder and the corporation. It is

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