SAN BEDA UNIVERSITY

COLLEGE OF LAW
MENDIOLA, MANILA

________________________________

COMPILATION OF CASE DIGESTS IN

CORPORATION
LAW
________________________________

Submitted to:
Atty. Dante O. Dela Cruz, CPA

Submitted by:
3H (A.Y. 2020-2021)
 TABLE OF CONTENTS

MODULE 1A -----------------------------------------------page 1-42

History, Concept And Attributes Of A Corporation (Sections 1-9, Revised Corporation Code)
1. Magsaysay-Labrador vs. CA, 180 SCRA 266 by Andaya
2. Sulo ng Bayan vs. Araneta, 72 SCRA 247 by Eustacquio
3. Bataan Shipyard vs. PCGG, 150 SCRA 181 by Gilo
4. Luxuria Homes vs. CA, 302 SCRA 315 by Kho
5. Concept Builders vs. NLRC, 257 SCRA 149 by Olis
6. Francisco Motors vs. CA, 309 SCRA 72 by Villena
7. Times Transportation Company vs. Santos Sotelo, by Zipagan
et. al., GR No. 163786. February 16, 2005
8. Yao, Sr. vs. People, et al., 19 June 2007 by Joson
9. Seventh Day Adventist vs. Northeastern Mindanao by Kho
Mission, 21 July 2006
10. Lim Tong Lim vs. CA, 317 SCRA 728 by Lopez
11. International Express Travel and Tour Services by Locquiao
vs. CA, October 19, 2000
12. Filipinas Broadcasting Network, Inc. vs. Ago Medical by Peralta
and Educational Center-Bicol Christian College of
Medicine, G.R. No. 141994, January 17, 2005
13. Coastal Pacific Trading, Inc. vs. Southern Rolling by Ragot
Mills Co., Inc. 497 SCRA 11, 28 July 2006
14. California Manufacturing Company, Inc. vs. by Rosales
Advanced Technology System, Inc., 824 SCRA 295
15. Dutch Movers, Inc. vs. Lequin, 824 SCRA 310 by Sy
16. Zambrano vs. Philippine Carpet Manufacturing by Villena
Corporation, 828 SCRA 144
17. International Academy of Management and by Valdez
Economics vs. Litton, 848 SCRA 437
18. The Missionary Sisters of Our Lady of Fatimavs. by Valerio
Amando V. Alzona, et al., G.R. No. 224307,
August 6, 2018

MODULE 1B ------------------------------------------------page 43-60

Formation And Organization Of A Private Corporation (Sections 10-21, Revised Corporation Code)
19. Lyceum of the Philippines vs. CA, 219 SCRA 612 by Olis
20. Ang Mga Kaanib sa Iglesia ng Dios vs. Iglesia ng by Adap
Dios Kay Kristo Jesus, December 12, 2001
21. Young Auto Supply vs. CA, 223 SCRA 670 by Bagtang
22. De La Salle Montessori International of Malolos, Inc. by Ballena
 vs. De La Salle Brothers, Inc., 855 SCRA 38
23. Roy III vs. Herbosa, 823 SCRA 133 by Beroña
24. Narra Nickel Mining vs. Redmont Consolidated by Bohol
Mines Corp., G.R. No. 195580, April 21, 2014
25. Gamboa vs. Teves, G.R. No. 176579, June 28, 2011 by Distura
Heirs of Wilson P. Gamboa vs. Teves,
G.R. No. 176579,October 9, 2012

MODULE 2 ------------------------------------------------page 61-96

Control And Management Of A Corporation (Sections 22- 34, Revised Corporation Code)
26. Grace Christian Highschool vs. CA, 281 SCRA 133 by Doctor
27. Gokongwei vs. SEC, 89 SCRA 336 by Espenida
28. People's Aircargo vs. CA, Oct. 7, 1998 by Hermosura
29. Marc II Marketing, Inc. and Lucila V. Joson v. by Joson
Alfredo M. Joson, G.R. No. 171993,
December 12, 2011
30. Sps. David, et al vs. Construction Industry and by Locquiao
Arbitration Commission, G.R. No. 159795,
July 30, 2004
31. Inter-Asia Investments Industries vs. CA, by Lopez
GR 125778, June 10, 2003
32. New Frontier Sugar Corp., et al., G.R. No. 170352, by Narawi
June 1, 2011
33. Bernas vs. Cinco, 761 SCRA 104 by Peralta
34. Federated Lpg Dealers Association vs. Del Rosario, by Ragot
808 SCRA 272
35. Wesleyan University Philippines vs. Maglaya, Sr., by Rosales
815 SCRA 171
36. Calubad vs. Ricarcen Development Corporation, by Sy
838 SCRA 303
37. Mactan Rock Industries, Inc. vs. Germo, 850 SCRA 532; by Tangonan
Ient v. Tullett Prebon (Philippines), Inc., 814 SCRA 184
38. NAPOCOR Board vs. COA, G.R. No. 242342, by Valdez
March 10, 2020

MODULE 3 -------------------------------------------------page 97-135

Corporate Powers, By-Laws and Meetings (Sections 35-58, Revised Corporation Code)
39. Nielson & Co. vs. Lepanto Consolidated by Valerio
Mining Co., 26 SCRA 540
40. Islamic Directorate vs. CA, 272 SCRA 454 by Adap
41. Dee vs. SEC, 199 SCRA 238 by Andaya
42. Ma. Corina C. Jiao, et. al. v. National Labor by Bagtang
 Relations Commission, Global Business Bank,
Inc., et. al.G.R. No. 182331, April 18, 2012
43. Loyola Grandvillas Homeowners Association by Ballena
vs. CA, 276 SCRA 681
44. China Banking Corporation vs. CA, 270 SCRA 503 by Beroña
45. Associated Bank vs. CA, 291 SCRA 511 by Bohol
46. Babst vs. CA, January 26, 2001 by Distura
47. Mindanao Savings vs. Willkom, 11 October 2010 by Doctor
48. Y-I Leisure Philippines, Inc. vs. Yu, 770 SCRA 56 by Espenida
49. Philippine Geothermal, Inc. Employees Union by Eustacquio
vs. Unocal Philippines, Inc., 804 SCRA 286
50. Sumifru vs. Baya, 822 SCRA 564 by Gilo
51. Bank of Commerce vs. Heirs of Rodolfo Dela Cruz, by Hermosura
837 SCRA 112
52. Ong vs. BPI Family Savings Bank, Inc., 852 SCRA 614 by Joson
53. SEC vs. CAP, 857 SCRA 590 by Kho

MODULE 4A ------------------------------------------------page 136-156

Subscription (Sections 59-72, Revised Corporation Code)
54. Lim Tay vs. CA, August 5, 1998 by Lopez
55. Rural Bank of Lipa vs. CA, Sept. 28, 2001 by Narawi
56. Ponce vs. Alsons Cement, Dec. 10, 2002 by Olis
57. Ong Yong, et al. vs. Tiu, et al., G.R. Nos. 144476 by Peralta
& 144629, April 8, 2003
58. F & S Velasco Company, Inc. vs. Madrid, by Ragot
774 SCRA 388
59. Anna Teng vs. SEC, 784 SCRA 216 by Rosales
60. Andaya v. Rural Bank of Cabadbaran, Inc., by Sy
799 SCRA 325
61. Tee Ling Kiat vs. Ayala Corporation, 857 SCRA 533 by Tangonan

MODULE 4B -----------------------------------------------page 157-186

Rights of Stockholders (Sections 73-85, Revised Corporation Code)
62. Lee vs. CA 205 SCRA 725 by Valdez
63. Republic vs. Sandiganbayan, April 30, 2003 by Valerio
64. Republic vs. Cocofed, December 12, 2001 by Villena
65. Evangelista vs. Santos, 86 SCRA 387 by Zipagan
66. Chua vs. CA, GR No. 150793, November 19, 2004 by Adap
67. Expert Travel & Tours, Inc. vs. Court of Appeals and by Andaya
Korean Airlines GR No. 152392, May 26, 2005
68. Gonzales vs. PNB, 122 SCRA 489 by Bagtang
69. Nestor Ching and Andrew Wellington v. Subic Bay by Ballena
 Golf and Country Club, Inc., G.R. No. 174353,
September 10, 2014
70. Lim vs. Moldex Land, Inc., 815 SCRA 619 by Beroña
71. Roque vs. People of the Philippines, 826 SCRA 618 by Bohol
72. Belo Medical Group, Inc. vs. Santos, 838 SCRA 142 by Distura
73. Villongco vs. Yabut, 854 SCRA 132 by Doctor

MODULE 5 -------------------------------------------------page 187-197

Non-Stock Corporations (Sections 86-94, Revised Corporation Code)
74. Long vs. Basa, et al., Sept. 27, 2001 by Espenida
75. Sta. Clara Homeowners' Association vs. by Eustacquio
Sps. Gaston, Jan. 23, 2002
76. Padcom vs. Ortigas Center, May 9, 2002 by Gilo
77. Tan vs. Sycip 17 August 2006, 499 SCRA 216 by Hermosura

MODULE 6--------------------------------------------------page 198-209

78. Dulay Enterprises vs. CA, 225 SCRA 678 by Zipagan
79. San Juan Structural Steel Fabricators, 296 SCRA 632 by Adap
80. Bustos vs. Millians Shoe, Inc., 824 SCRA 67 by Bagtang
81. Iglesia Evangelica vs. Bishop Lazaro, 6 July 2010 by Ballena

MODULE 7A------------------------------------------------page 210-222

82. Gelano vs. CA, 103 SCRA 90 by Berona
83. Clarion Printing House, Inc. vs. NLRC, by Bohol
GR No. 148372, June 27, 2005
84. Aguirre II vs. FQB+7, Inc., 688 SCRA 242 by Distura
85. Dela Torre vs. Primetown Property Group, Inc., by Doctor
855 SCRA 494
86. Rich v. Paloma III, 858 SCRA 27 by Espenida
87. Icon Development Corporation vs. National Life by Hermosura
Insurance, G.R. No. 220686, March 9, 2020

MODULE 7B-------------------------------------------------page 223-250

88. Facilities Management vs. De la Osa, 89 SCRA 131 by Joson
89. Home Insurance vs. Eastern Shipping Lines, 123 SCRA 424 by Locquiao
90. Mentholatum, Inc. vs. Mangaliman, 73 Phil 524 by Lopez
91. Eriks vs. CA, 267 SCRA 567 by Narawi
92. Merrill Lynch Futures, Inc. vs. CA, 211 SCRA 824 by Olis
93. Agilent Technologies Singapore vs. Integrated Silicon by Peralta
Technology Philippines Corporation,
 G.R. No. 154618, April 14, 2004
94. Expertravel & Tours, Inc. vs. Court of Appeals and by Ragot
Korean Airlines GR No. 152392, May 26, 2005
95. Cargill, Inc. vs. Intra Strata Assurance Corporation, by Rosales
615 SCRA 304
96. Global Business Holdings, Inc. vs. Surecomp Software, by Sy
B.V., 633 SCRA 94
97. Steelcase, Inc. v. Design International Selections, Inc., by Tangonan
18 April 2012
98. Air Canada vs. Commissioner of Internal Revenue, by Valdez
778 SCRA 131, G.R. No. 169507 January 11, 2016

MODULE 9-------------------------------------------------page 251-282

99. Philippine Stock Exchange vs. Court of Appeals, by Valerio
281 SCRA 232
100. Power Homes Unlimited Corporation vs. by Andaya
SEC, G.R. No. 164182, February 26, 2008
101. SEC vs. Santos, G.R. No. 195542, March 19, 2004 by Esutaquio
102. SEC vs. CJH Development Corp., G.R. No. 210316, by Gilo
November 28, 2016
103. SEC vs. Interport Services, G.R. No. 135808, by Kho
October 6, 2008
104. CEMCO Holdings, Inc. vs. National Life, by Villena
G.R. No. 171815, August 7, 2007
105. Abacus Securities vs. Ampil, G.R. No. 160016, by Tangonan
February 27, 2006
106. SEC vs. Subic Bay Golf and Country Club, by Narawi
G.R. No. 179047, March 11, 2015
107. Palanca vs. RSI, G.R. No. 241905, March 11, 2020 by Rosales
 _________________

THE CONTRIBUTORS
__________________

I. CONTENT CONTRIBUTORS
Adap, Roberto Anton C. Kho, Ricardo T.
Andaya, Clarice J. Locquiao, Maureen Nicole N.
Bagtang, Judea Ara T. Lopez, Erica Therese C.
Ballena, Fernando Jr, M. Narawi, Merriam Angela C.
Beroña, Christienne Nathalie A. Olis, Roy A.
Bohol, Bryan D. Peralta, Alhex Adrea M.
Distura, Quennie Minalete Ragot, Joanie Mae D.
Doctor, Clarisse Maita M. Rosales, Mikhaila Klaudine A.
Espenida, Mheltina Sy, Katherine Nicole C.
Eustaquio, Patricia Erika A. Tangonan, Aneliza T.
Gilo, Crhister Vince J. Valdez, Frances Loraine T.
Hermosura, Nina Alexia C. Valerio, Allan Nicolai A.
Joson, Richelle Miles B. Villena, Isabelle Gloria I.
Zipagan, Ronald Joseph II C.

II. SPECIAL CONTRIBUTORS Sy, Katherine Nicole C. - Module 2

Layout Artists Distura, Quennie Minalete - Module 3
Lopez, Erica Therese C. Narawi Merriam Angela C. - Module 4A
Tangonan, Aneliza T. Beroña, Christienne Nathalie A. - Module 4B
Hermosura, Nina Alexia C. - Module 5
Logistics
Rosales, Mikhaila Klaudine A.- Head Quality Control Leaders in Module 6-9
Narawi Merriam Angela C. Ballena, Fernando Jr, M.- Module 6
Valdez, Frances Loraine T. Beroña, Christienne Nathalie A. - Module 7A
Valerio, Allan Nicolai A. Joson, Richelle Miles B.-Module 7B
Peralta, Alhex Adrea M.- Module 7B
Quality Control Leaders in Module 1-5 Sy, Katherine Nicole C.- Module 7B
Rosales, Mikhaila Klaudine A. - Module 1A Rosales, Mikhaila Klaudine A. - Module 9
Bagtang, Judea Ara T. - Module 1B Narawi Merriam Angela C.- Module 9
Copy Editors
Tangonan, Aneliza T.-Head
Bagtang, Judea Ara T. - Module 6
Distura, Quennie Minalete- Module 7A
Hermosura, Nina Alexia C. - Module 7A
Locquiao, Maureen Nicole N.- Module 7B
Olis, Roy A.-Module 7B
Valdez, Frances Loraine T.- Module 7B
Valerio, Allan Nicolai A. - Module 9
Villena, Isabelle Gloria I.- Module 9
 _________________

AUDIOBOOK
CONTRIBUTORS
__________________

I. AUDIOBOOK NARRATORS Kho, Ricardo T.

Adap, Roberto Anton C. Locquiao, Maureen Nicole N.
Andaya, Clarice J. Lopez, Erica Therese C.
Ballena, Fernando Jr, M. Narawi, Merriam Angela C.
Beroña, Christienne Nathalie A. Peralta, Alhex Adrea M.
Bohol, Bryan D. Ragot, Joanie Mae D.
Distura, Quennie Minalete Rosales, Mikhaila Klaudine A.
Eustaquio, Patricia Erika A. Sy, Katherine Nicole C.
Gilo, Crhister Vince J. Tangonan, Aneliza T.
Hermosura, Nina Alexia C. Valdez, Frances Loraine T.
Joson, Richelle Miles B. Valerio, Allan Nicolai A.
Villena, Isabelle Gloria I.

MODULE 1A ----------------------------------------------------------------------
History, Concept And Attributes Of A Corporation (Sections 1-9, Revised Corporation Code)
1. Magsaysay-Labrador vs. CA, 180 SCRA 266 narrated by Andaya
2. Sulo ng Bayan vs. Araneta, 72 SCRA 247 narrated by Eustacquio
3. Bataan Shipyard vs. PCGG, 150 SCRA 181 narrated by Gilo
4. Luxuria Homes vs. CA, 302 SCRA 315 narrated by Kho
5. Concept Builders vs. NLRC, 257 SCRA 149 written by Olis, narrated by Adap
6. Francisco Motors vs. CA, 309 SCRA 72 narrated by Villena
7. Times Transportation Company vs. Santos Sotelo, written by Zipagan, narrated by Andaya
et. al., GR No. 163786. February 16, 2005
8. Yao, Sr. vs. People, et al., 19 June 2007 narrated by Joson
9. Seventh Day Adventist vs. Northeastern Mindanao narrated by Kho
Mission, 21 July 2006
10. Lim Tong Lim vs. CA, 317 SCRA 728 narrated by Lopez
11. International Express Travel and Tour Services narrated by Locquiao
vs. CA, October 19, 2000
12. Filipinas Broadcasting Network, Inc. vs. Ago Medical narrated by Peralta
and Educational Center-Bicol Christian College of
 Medicine, G.R. No. 141994, January 17, 2005
13. Coastal Pacific Trading, Inc. vs. Southern Rolling narrated by Ragot
Mills Co., Inc. 497 SCRA 11, 28 July 2006
14. California Manufacturing Company, Inc. vs. narrated by Rosales
Advanced Technology System, Inc., 824 SCRA 295
15. Dutch Movers, Inc. vs. Lequin, 824 SCRA 310 narrated by Sy
16. Zambrano vs. Philippine Carpet Manufacturing narrated by Villena
Corporation, 828 SCRA 144
17. International Academy of Management and narrated by Valdez
Economics vs. Litton, 848 SCRA 437
18. The Missionary Sisters of Our Lady of Fatimavs. narrated by Valerio
Amando V. Alzona, et al., G.R. No. 224307,
August 6, 2018

MODULE 1B ----------------------------------------------------------------------
Formation And Organization Of A Private Corporation (Sections 10-21, Revised Corporation Code)
19. Lyceum of the Philippines vs. CA, 219 SCRA 612 written by, narrated by Berona
20. Ang Mga Kaanib sa Iglesia ng Dios vs. Iglesia ng narrated by Adap
Dios Kay Kristo Jesus, December 12, 2001
21. Young Auto Supply vs. CA, 223 SCRA 670 written by Bagtang, narrated by Bohol
22. De La Salle Montessori International of Malolos, Inc. narrated by Ballena
vs. De La Salle Brothers, Inc., 855 SCRA 38
23. Roy III vs. Herbosa, 823 SCRA 133 narrated by Beroña
24. Narra Nickel Mining vs. Redmont Consolidated narrated by Bohol
Mines Corp., G.R. No. 195580, April 21, 2014
25. Gamboa vs. Teves, G.R. No. 176579, June 28, 2011 narrated by Distura
Heirs of Wilson P. Gamboa vs. Teves,
G.R. No. 176579,October 9, 2012

MODULE 2 -----------------------------------------------------------------------
Control And Management Of A Corporation (Sections 22- 34, Revised Corporation Code)
26. Grace Christian Highschool vs. CA, 281 SCRA 133 written by Doctor, narrated by Eustaquio
27. Gokongwei vs. SEC, 89 SCRA 336 written by Espenida, narrated by Distura
28. People's Aircargo vs. CA, Oct. 7, 1998 narrated by Hermosura
29. Marc II Marketing, Inc. and Lucila V. Joson v. narrated by Joson
Alfredo M. Joson, G.R. No. 171993,
December 12, 2011
30. Sps. David, et al vs. Construction Industry and narrated by Locquiao
Arbitration Commission, G.R. No. 159795,
July 30, 2004
31. Inter-Asia Investments Industries vs. CA, narrated by Lopez
GR 125778, June 10, 2003
 32. New Frontier Sugar Corp., et al., G.R. No. 170352, narrated by Narawi
June 1, 2011
33. Bernas vs. Cinco, 761 SCRA 104 narrated by Peralta
34. Federated Lpg Dealers Association vs. Del Rosario, narrated by Ragot
808 SCRA 272
35. Wesleyan University Philippines vs. Maglaya, Sr., written by Rosales,
815 SCRA 171 narrated by Villena
36. Calubad vs. Ricarcen Development Corporation, narrated by Sy
838 SCRA 303
37. Mactan Rock Industries, Inc. vs. Germo, 850 SCRA 532; narrated by Tangonan
Ient v. Tullett Prebon (Philippines), Inc., 814 SCRA 184
38. NAPOCOR Board vs. COA, G.R. No. 242342, narrated by Valdez
March 10, 2020

MODULE 3 -----------------------------------------------------------------------
Corporate Powers, By-Laws and Meetings (Sections 35-58, Revised Corporation Code)
39. Nielson & Co. vs. Lepanto Consolidated narrated by Valerio
Mining Co., 26 SCRA 540
40. Islamic Directorate vs. CA, 272 SCRA 454 narrated by Adap
41. Dee vs. SEC, 199 SCRA 238 narrated by Andaya
42. Ma. Corina C. Jiao, et. al. v. National Labor written by Bagtang
Relations Commission, Global Business Bank, narrated by Lopez
Inc., et. al.G.R. No. 182331, April 18, 2012
43. Loyola Grandvillas Homeowners Association narrated by Ballena
vs. CA, 276 SCRA 681
44. China Banking Corporation vs. CA, 270 SCRA 503 narrated by Beroña
45. Associated Bank vs. CA, 291 SCRA 511 narrated by Bohol
46. Babst vs. CA, January 26, 2001 narrated by Distura
47. Mindanao Savings vs. Willkom, 11 October 2010 written by Doctor, narrated by Kho
48. Y-I Leisure Philippines, Inc. vs. Yu, 770 SCRA 56 written by Espenida, narrated by Locquiao
49. Philippine Geothermal, Inc. Employees Union narrated by Eustaquio
vs. Unocal Philippines, Inc., 804 SCRA 286
50. Sumifru vs. Baya, 822 SCRA 564 narrated by Gilo
51. Bank of Commerce vs. Heirs of Rodolfo Dela Cruz, narrated by Hermosura
837 SCRA 112
52. Ong vs. BPI Family Savings Bank, Inc., 852 SCRA 614 narrated by Joson
53. SEC vs. CAP, 857 SCRA 590 narrated by Kho

MODULE 4A ----------------------------------------------------------------------
Subscription (Sections 59-72, Revised Corporation Code)
54. Lim Tay vs. CA, August 5, 1998 narrated by Lopez
55. Rural Bank of Lipa vs. CA, Sept. 28, 2001 narrated by Narawi
 56. Ponce vs. Alsons Cement, Dec. 10, 2002 written by Olis, narrated by Locquiao
57. Ong Yong, et al. vs. Tiu, et al., G.R. Nos. 144476 narrated by Peralta
& 144629, April 8, 2003
58. F & S Velasco Company, Inc. vs. Madrid, narrated by Ragot
774 SCRA 388
59. Anna Teng vs. SEC, 784 SCRA 216 narrated by Rosales
60. Andaya v. Rural Bank of Cabadbaran, Inc., narrated by Sy
799 SCRA 325
61. Tee Ling Kiat vs. Ayala Corporation, 857 SCRA 533 narrated by Tangonan

MODULE 4B ----------------------------------------------------------------------
Rights of Stockholders (Sections 73-85, Revised Corporation Code)
62. Lee vs. CA 205 SCRA 725 narrated by Valdez
63. Republic vs. Sandiganbayan, April 30, 2003 narrated by Valerio
64. Republic vs. Cocofed, December 12, 2001 narrated by Villena
65. Evangelista vs. Santos, 86 SCRA 387 written by Olis, narrated by Gilo
66. Chua vs. CA, GR No. 150793, November 19, 2004 narrated by Adap
67. Expert Travel & Tours, Inc. vs. Court of Appeals and narrated by Andaya
Korean Airlines GR No. 152392, May 26, 2005
68. Gonzales vs. PNB, 122 SCRA 489 written by Bagtang, narrated by Sy
69. Nestor Ching and Andrew Wellington v. Subic Bay narrated by Ballena
Golf and Country Club, Inc., G.R. No. 174353,
September 10, 2014
70. Lim vs. Moldex Land, Inc., 815 SCRA 619 narrated by Beroña
71. Roque vs. People of the Philippines, 826 SCRA 618 narrated by Bohol
72. Belo Medical Group, Inc. vs. Santos, 838 SCRA 142 narrated by Distura
73. Villongco vs. Yabut, 854 SCRA 132 written by Doctor, narrated by Valdez

MODULE 5 -----------------------------------------------------------------------
Non-Stock Corporations (Sections 86-94, Revised Corporation Code)
74. Long vs. Basa, et al., Sept. 27, 2001 written by Espenida, narrated by Valerio
75. Sta. Clara Homeowners' Association vs. narrated by Eustacquio
Sps. Gaston, Jan. 23, 2002
76. Padcom vs. Ortigas Center, May 9, 2002 narrated by Gilo
77. Tan vs. Sycip 17 August 2006, 499 SCRA 216 narrated by Hermosura

MODULE 6-----------------------------------------------------------------------
78. Dulay Enterprises vs. CA, 225 SCRA 678 written by Zipagan, narrated by Berona
79. San Juan Structural Steel Fabricators, 296 SCRA 632 narrated by Adap
80. Bustos vs. Millians Shoe, Inc., 824 SCRA 67 written by Bagtang, narrated by Distura
81. Iglesia Evangelica vs. Bishop Lazaro, 6 July 2010 narrated by Ballena
MODULE 7A----------------------------------------------------------------------
82. Gelano vs. CA, 103 SCRA 90 narrated by Berona
83. Clarion Printing House, Inc. vs. NLRC, narrated by Bohol
GR No. 148372, June 27, 2005
84. Aguirre II vs. FQB+7, Inc., 688 SCRA 242 narrated by Distura
85. Dela Torre vs. Primetown Property Group, Inc., written by Doctor, narrated by Narawi
855 SCRA 494
86. Rich v. Paloma III, 858 SCRA 27 written by Espenida, narrated by Peralta
87. Icon Development Corporation vs. National Life narrated by Hermosura
Insurance, G.R. No. 220686, March 9, 2020

MODULE 7B----------------------------------------------------------------------
88. Facilities Management vs. De la Osa, 89 SCRA 131 narrated by Joson
89. Home Insurance vs. Eastern Shipping Lines, 123 SCRA 424 narrated by Locquaio
90. Mentholatum, Inc. vs. Mangaliman, 73 Phil 524 narrated by Lopez
91. Eriks vs. CA, 267 SCRA 567 narrated by Narawi
92. Merrill Lynch Futures, Inc. vs. CA, 211 SCRA 824 written by Olis, narrated by Ballena
93. Agilent Technologies Singapore vs. Integrated Silicon narrated by Perlata
Technology Philippines Corporation,
G.R. No. 154618, April 14, 2004
94. Expertravel & Tours, Inc. vs. Court of Appeals and narrated by Ragot
Korean Airlines GR No. 152392, May 26, 2005
95. Cargill, Inc. vs. Intra Strata Assurance Corporation, narrated by Rosales
615 SCRA 304
96. Global Business Holdings, Inc. vs. Surecomp Software, narrated by Sy
B.V., 633 SCRA 94
97. Steelcase, Inc. v. Design International Selections, Inc., narrated by Tangonan
18 April 2012
98. Air Canada vs. Commissioner of Internal Revenue, narrated by Valdez
778 SCRA 131, G.R. No. 169507 January 11, 2016

MODULE 9-----------------------------------------------------------------------
99. Philippine Stock Exchange vs. Court of Appeals, narrated by Valerio
281 SCRA 232
100. Power Homes Unlimited Corporation vs. narrated by Andaya
SEC, G.R. No. 164182, February 26, 2008
101.SEC vs. Santos, G.R. No. 195542, March 19, 2004 narrated by Eustaquio
102. SEC vs. CJH Development Corp., G.R. No. 210316, narrated by Gilo
November 28, 2016
103. SEC vs. Interport Services, G.R. No. 135808, narrated by Kho
 October 6, 2008
104. CEMCO Holdings, Inc. vs. National Life, narrated by Villena
G.R. No. 171815, August 7, 2007
105. Abacus Securities vs. Ampil, G.R. No. 160016, narrated by Tangonan
February 27, 2006
106. SEC vs. Subic Bay Golf and Country Club, narrated by Narawi
G.R. No. 179047, March 11, 2015
107.Palanca vs. RSI, G.R. No. 241905, March 11, 2020 narrated by Rosales

II. AUDIOBOOK EDITORS

Joson, Richelle Miles B.
Distura, Quennie Minalete
Tangonan, Aneliza T.

III. LOGISTICS
Rosales, Mikhaila Klaudine A. -Head
Narawi, Merriam Angela C.
Valdez, Frances Loraine T.
Valerio, Allan Nicolai A.
 ________________________________

MODULE 1A
History, Concept And Attributes Of A Corporation

________________________________
ANDAYA, Clarice J. L-1800012

Case 1
Magsaysay-Labrador vs. CA
G.R. No. 58168; December 19, 1989 Fernan, C.J.

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

FACTS: On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow and special Administratrix

of the estate of the late Senator Genaro Magsaysay, brought before the then Court of First
Instance of Olongapo an action against Artemio Panganiban, Subic Land Corporation (SUBIC),
Filipinas Manufacturer's Bank (FILMANBANK) and the Register of Deeds of Zambales. In her
complaint, she alleged that in 1958, she and her husband acquired, thru conjugal funds, a parcel
of land with improvements, known as "Pequeña Island", covered by TCT No. 3258; that after the
death of her husband, she discovered an annotation at the back of TCT No. 3258 that [a] the land
was acquired by her husband from his separate capital; [b] the registration of a Deed of
Assignment dated June 25, 1976 purportedly executed by the late Senator in favor of SUBIC, as a
result of which TCT No. 3258 was cancelled and TCT No. 22431 issued in the name of SUBIC;
and [c] the registration of Deed of Mortgage dated April 28, 1977 in the amount of P2,700,000.00
executed by SUBIC in favor of FILMANBANK; that the foregoing acts were void and done in an
attempt to defraud the conjugal partnership considering that the land is conjugal, her marital
consent to the annotation on TCT No. 3258 was not obtained, the change made by the Register of
Deeds of the title holders was effected without the approval of the Commissioner of Land
Registration and that the late Senator did not execute the purported Deed of Assignment or his
consent thereto, if obtained, was secured by mistake, violence and intimidation. She further
alleged that the assignment in favor of SUBIC was without consideration and consequently null
and void. She prayed that the Deed of Assignment and the Deed of Mortgage be annulled and that
the Register of Deeds be ordered to cancel TCT No. 22431 and to issue a new title in her favor.

On March 7, 1979, herein petitioners, sisters of the late senator, filed a motion for intervention on
the ground that on June 20, 1978, their brother conveyed to them 1/2 of his shareholdings in
SUBIC or a total of 416,566.6 shares and as assignees of around 41% of the total outstanding
shares of such stocks of SUBIC, they have a substantial and legal interest in the subject matter of
litigation and that they have a legal interest in the success of the suit with respect to SUBIC.

On July 26, 1979, the court denied the motion for intervention, and ruled that petitioners have no
legal interest whatsoever in the matter in litigation and their being alleged assignees or transferees
of certain shares in SUBIC cannot legally entitle them to intervene because SUBIC has a
personality separate and distinct from its stockholders. On appeal, respondent Court of Appeals
found no factual or legal justification to disturb the findings of the lower court. Petitioners' motion
for reconsideration was denied. Hence, the instant recourse.

2
Invoking the principle enunciated in the case of PNB v. Phil. Veg. Oil Co., 49 Phil. 857, 862 & 853
(1927), petitioners strongly argue that their ownership of 41.66% of the entire outstanding capital
stock of SUBIC entitles them to a significant vote in the corporate affairs; that they are affected by
the action of the widow of their late brother for it concerns the only tangible asset of the corporation
and that it appears that they are more vitally interested in the outcome of the case than SUBIC.

ISSUE/S: Whether or not respondent Court of Appeals correctly denied their motion for
intervention

HELD: Yes. The CA correctly denied the motion for intervention.

This Court affirms the respondent court's holding that petitioners herein have no legal interest in
the subject matter in litigation so as to entitle them to intervene in the proceedings below. The
interest which entitles a person to intervene in a suit between other parties must be in the matter in
litigation and of such direct and immediate character that the intervenor will either gain or lose by
the direct legal operation and effect of the judgment.

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

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

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

While a share of stock represents a proportionate or aliquot interest in the property of the
corporation, it does not vest the owner thereof with any legal right or title to any of the property, his
interest in the corporate property being equitable or beneficial in nature. Shareholders are in no
legal sense the owners of corporate property, which is owned by the corporation as a distinct legal
person.
The petitioner cannot claim the right to intervene on the strength of the transfer of shares allegedly
executed by the late Senator. The corporation did not keep books and records. Perforce, no
transfer was ever recorded, much less affected as to prejudice third parties. The transfer must be
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 be valid,
except as between the parties, until the transfer is recorded in the books of the corporation
showing the names of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred."
And even assuming arguendo that there was a valid transfer, petitioners are nonetheless barred
from intervening inasmuch as their right can be ventilated and amply protected in another
proceeding.

DISPOSITIVE RULING: WHEREFORE, the instant petition is hereby DENIED. Costs against
petitioners.

3
EUSTAQUIO, Patricia Erika A. L-1800087

Case 2
Sulo ng Bayan, Inc. vs. Gregorio Araneta, Inc.
G.R. No. L-31061; August 17, 1976 Antonio, J.

Doctrine: A corporation is a distinct legal entity to be considered as separate and apart from the
individual stockholders or members who compose it, and is not affected by the personal rights,
obligations and transactions of its stockholders or members.

FACTS: On 26 April 1966, Sulo ng Bayan, Inc. filed an accion de reivindicacion with the Court of
First Instance of Bulacan, Fifth Judicial District, Valenzuela, Bulacan, against Gregorio Araneta Inc.
(GAI), Paradise Farms Inc., National Waterworks & Sewerage Authority (NAWASA), Hacienda
Caretas Inc., and the Register of Deeds of Bulacan to recover the ownership and possession of a
large tract of land in San Jose del Monte, Bulacan, containing an area of 27,982,250 sq. ms., more
or less, registered under the Torrens System in the name of GAI, et. al.'s predecessors-in-interest
(who are members of the corporation).

Plaintiff-appellant, Sulo ng Bayan, Inc. alleged that it is a corporation organized and existing under
the laws of the Philippines, with its principal office and place of business at San Jose del Monte,
Bulacan. Its membership is composed of natural persons residing at San Jose del Monte, Bulacan.
The members of the plaintiff corporation, through themselves and their predecessors-in-interest,
had pioneered in the clearing of the fore-mentioned tract of land, cultivated the same since the
Spanish regime and continuously possessed the said property openly and publicly under the
concept of ownership adverse against the whole world. Defendant-appellee Gregorio Araneta, Inc.,
sometime in the year 1958, through force and intimidation, ejected the members of the plaintiff
corporation from their possession of the aforementioned vast tract of land. Upon investigation
conducted by the members and officers of plaintiff corporation, they found out for the first time in
the year 1961 that the land in question "had been either fraudulently or erroneously included, by
direct or constructive fraud, in Original Certificate of Title No. 466 of the Land of Records of the
province of Bulacan", issued on May 11, 1916, which title is fictitious, non-existent and devoid of
legal efficacy due to the fact that "no original survey nor plan whatsoever" appears to have been
submitted as a basis thereof and that the Court of First Instance of Bulacan which issued the
decree of registration did not acquire jurisdiction over the land registration case because no notice
of such proceeding was given to the members of the plaintiff corporation who were then in actual
possession of said properties. As a consequence of the nullity of the original title, all subsequent
titles derived therefrom are therefore void.

Plaintiff-appellant consequently prayed (1) that Original Certificate of Title No. 466, as well as all
transfer certificates of title issued and derived therefrom, be nullified; (2) that "plaintiff's members"
be declared as absolute owners in common of said property and that the corresponding certificate
of title be issued to plaintiff; and (3) that defendant-appellee Gregorio Araneta, Inc. be ordered to
pay to plaintiff the damages therein specified.

4
On September 2, 1966, defendant-appellee Gregorio Araneta, Inc. filed a motion to dismiss the
amended
complaint on the grounds that: (1) the complaint states no cause of action; and (2) the cause of
action, if any, is barred by prescription and laches.

During the pendency of the motion to dismiss, plaintiff-appellant filed a motion, dated October 7,
1966, praying that the case be transferred to another branch of the Court of First Instance sitting at
Malolos, Bulacan. On January 24, 1967, the trial court issued an Order dismissing the amended
complaint on the ground of lack of cause of action and prescription. On the same date, the lower
court denied appellant's motion to transfer the case to Malolos for being moot and academic, the
court having dismissed the amended complaint.

ISSUE/S:
1. Whether the corporation (non-stock) may institute an action in behalf of its individual
members for the recovery of certain parcels of land allegedly owned by said members,
among others
2. Whether the complaint filed by the corporation in behalf of its members may be treated as a
class suit

HELD:
1. No.

It is a doctrine well-established and obtains both at law and in equity that a corporation is a
distinct legal entity to be considered as separate and apart from the individual stockholders
or members who compose it, and is not affected by the personal rights, obligations and
transactions of its stockholders or members. The property of the corporation is its property
and not that of the stockholders, as owners, although they have equities in it. Properties
registered in the name of the corporation are owned by it as an entity separate and distinct
from its members. Conversely, a corporation ordinarily has no interest in the individual
property of its stockholders unless transferred to the corporation, "even in the case of a
one-man corporation". The mere fact that one is president of a corporation does not render
the property which he owns or possesses the property of the corporation, since the
president, as individual, and the corporation are separate entities. Similarly, stockholders in
a corporation engaged in buying and dealing in real estate whose certificates of stock
entitled the holder thereof to an allotment in the distribution of the land of the corporation
upon surrender of their stock certificates were considered not to have such legal or
equitable title or interest in the land, as would support a suit for title, especially against
parties other than the corporation.

It must be noted, however, that the juridical personality of the corporation, as separate and
distinct from the persons composing it, is but a legal action introduced for the purpose of
convenience and to subserve the ends of justice. This separate personality of the
corporation may be disregarded, or the veil of corporate action pierced, in cases where it is
used as a cloak or cover for fraud or illegality, or to work an injustice, or where necessary to
achieve equity.

When "the notion of legal entity is used to defeat public convenience, justify wrong, protect

5
 fraud, or defend crime, . . . the law will regard the corporation as an association of persons,
or in the case of two corporations, merge them into one, the one being merely regarded as
part or instrumentality of the other." The same is true where a corporation is a dummy and
serves no business purpose and is intended only as a blind, or an alter ego or business
conduit for the sole benefit of the stockholders. This doctrine of disregarding the distinct
personality of the corporation has been applied by the courts in those cases when the
corporate entity is used for the evasion of taxes, or when the veil of corporate action is used
to confuse legitimate issue of employer-employee relationship, or when necessary for the
protection of creditors, in which case the veil of corporate action may be pierced and the
funds of the corporation may be garnished to satisfy the debts of a principal stockholder.
The aforecited principle is resorted to by the courts as a measure protection for third parties
to prevent fraud, illegality or injustice.

It has not been claimed that the members have assigned or transferred whatever rights they
may have on the land in question to the plaintiff corporation. Absent any showing of interest,
therefore, a corporation, like plaintiff-appellant herein, has no personality to bring an action
for and in behalf of its stockholders or members for the purpose of recovering property
which belongs to said stockholders or members in their personal capacities. It is
fundamental that there cannot be a cause of action without an antecedent primary legal
right conferred by law upon a person. Evidently, there can be no wrong without a
corresponding right, and no breach of duty by one person without a corresponding right
belonging to some other person. Thus, the essential elements of a cause of action are legal
right of the plaintiff, correlative obligation of the defendant, an act or omission of the
defendant in violation of the aforesaid legal right. Clearly, no right of action exists in favor of
plaintiff corporation, for as shown heretofore it does not have any interest in the subject
matter of the case which is material and direct so as to entitle it to file the suit as a real party
in interest.

2. No.

In order that a class suit may prosper, the following requisites must be present: (1) that the
subject matter of the controversy is one of common or general interest to many persons;
and (2) that the parties are so numerous that it is impracticable to bring them all before
court. Here, there is only one plaintiff, and the plaintiff corporation does not even have an
interest in the subject matter of the controversy, and cannot, therefore, represent its
members or stockholders who claim to own in their individual capacities ownership of the
said property. Moreover, a class suit does not lie in actions for the recovery of property
where several persons claim partnership of their respective portions of the property, as each
one could alleged and prove his respective right in a different way for each portion of the
land, so that they cannot all be held to have identical title through acquisition/prescription.

DISPOSITIVE RULING: ACCORDINGLY, the instant appeal is hereby DISMISSED with costs
against the plaintiff-appellant.

6
GILO, Crhister Vince J. L-1800085

Case 3
Bataan Shipyard and Engineering Co. vs. PCGG
G.R. No. 75885; May 27, 1987 Narvasa, J.

Doctrine: The right against self-incrimination has no application to juridical persons. Thus, a
corporation, being a juridical person created by the state, is not entitled to invoke such right.

FACTS: Petitioner Bataan Shipyard and Engineering Co. (BASECO) was a ship repair and
shipbuilding company incorporated as a domestic private corporation by a consortium of Filipino
shipowners and shipping executives. In its Articles of Incorporation, the authorized capital stock of
BASECO was P60,000,000.00 divided into 60,000 shares, of which 12,000 shares with a value of
P12,000,000.00 have been subscribed, and a sum of P3,035,000.00 has been paid by its 15
incorporators.

After its incorporation in 1972, BASECO entered into several transactions wherein the former
President Marcos allegedly intervened. Among these transactions include BASECO’s acquisition
of NASSCO’s shipyard in Bataan and all of its structures and equipments for P52 Million, but was
reduced to P28 Million thru a MOA signed bearing the word “APPROVED” in President Marcos’
handwriting followed by his usual full signature; and BASECO’s purchase of 300 hectares of land
in Mariveles from EPZA for P10 million; BASECO’s acquisition of the remaining NASSCO’s assets
thru a “Contract of Purchase and Sale” which also bore “APPROVED” in Marcos’ handwriting with
his usual full signature.

In a letter, the BASECO President suggested a spin-off company for BASECO’s shipbuilding
activities. In a separate letter, Capt. Romualdez advised that 5 stockholders had assigned their
shareholdings in blank and recommended that their replacements be effected so that “we can
register their names in the stock book prior to the implementation of your instructions to pass a
board resolution to legalize the transfers under SEC regulations. Thus, President Marcos then
authorized the spin-off.

Evidence then found in Malacanang tending to prove that President Marcos not only exercised
control over BASECO, but also that he actually owns well nigh one hundred percent of its
outstanding stock. The evidence includes certificates corresponding to more than 95% of all
outstanding shares of stock of BASECO, endorsed in blank, together with deeds of assignment of
practically all of the three corporations which hold 95.82% of all stocks of BASECO, signed by the
owners thereof, albeit not notarized.

In accordance with Executive Orders 1 and 2 issued by President Corazon, PCGG, through its
Commissioners, issued sequestration orders, takeover and other orders. BASECO was one of the
various corporations ordered to be sequestered pursuant to the sequestration order issued by
Commissioner Bautista. By virtue of such order, Mr. Balde, acting for PCGG, reiterated their earlier
request to BASECO for the production of certain documents, such as stock transfer book, legal
documents and financial statements of the corporation. BASECO opposed such order for
7
production and argues that its right against self incrimination and unreasonable searches and
seizures had been transgressed

ISSUE: Whether or not the right against self-incrimination is available to BASECO, a corporation

HELD: No. The right against self-incrimination is unavailable to BASECO being a juridical person.
It is elementary that the right against self-incrimination has no application to juridical persons.
While an individual may lawfully refuse to answer incriminating questions unless protected by an
immunity statute, it does not follow that a corporation, vested with special privileges and
franchises, may refuse to show its hand when charged with an abuse of such privileges.

The corporation is a creature of the state. It is presumed to be incorporated for the benefit of the
public. It received certain special privileges and franchises and holds them subject to the laws of
the state and the limitations of its charter. Its powers are limited by law. It can make no contract not
authorized by its charter. Its rights to act as a corporation are only preserved to it so long as it
obeys the laws of its creation. There is a reserve right in the legislature to investigate its contracts
and find out whether it has exceeded its powers. It would be a strange anomaly to hold that a
state, having chartered a corporation to make use of certain franchises, could not, in the exercise
of sovereignty, inquire how these franchises had been employed, and whether they had been
abused, and demand the production of the corporate books and papers for that purpose. The
defense amounts to this, that an officer of the corporation which is charged with a criminal violation
of the statute may plead the criminality of such corporation as a refusal to produce its books. To
state this proposition is to answer it. While an individual may lawfully refuse to answer
incriminating questions unless protected by an immunity statute, it does not follow that a
corporation, vested with special privileges and franchises may refuse to show its hand when
charged with an abuse of such privileges.

The constitutional safeguard against unreasonable searches and seizures finds no application to
the case at bar either. There has been no search undertaken by any agent or representative of the
PCGG, and of course no seizure on the occasion thereof. SC thus sustained PCGG’s act of
sequestration and takeover.

DISPOSITIVE RULING: WHEREFORE, the petition is dismissed. The temporary restraining order
issued on October 14, 1986 is lifted.

8
KHO, Ricardo T. L-1800006

Case 4
Luxuria Homes vs. CA
G.R. No. 125986 January 28, 1999 Martinez, J.

Doctrine: The court, citing jurisprudence, stated that the separate personality of the corporation
may be disregarded only when the corporation is used as a cloak or cover for fraud or illegality,
or to work injustice, or where necessary for the protection of the creditors.

To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly
and convincingly established.

FACTS: Aida M. Posadas (Posadas) entered negotiations with Jaime T. Bravo (bravo) regarding
the development of a property, co-owned by Posadas and her 2 minor children, into a residential
subdivision. With a written authorization of Posadas, Bravo started negotiations with the squatters
and other work in the agreement.

After a few months, Bravo signed as one of the witnesses to the Articles of Incorporation of Luxuria
Homes, Inc. (Luxuria) and the execution of the Deed of Assignment of the said property to Luxuria.

Bravo offered management contracts to develop the residential subdivision on the said property
but Posadas refused to accept the offer. In turn, Bravo sought the payment for all the work that has
been already done in connection with the land. However, Posadas refused to pay the amount
demanded.

James Builder Construction and Jaime T. Bravo filed a complaint for specific performance against
Posadas and Luxuria. The trial court ruled in favor of Bravo. The trial court ordered Posadas,
jointly and in solidum with Luxuria Homes, Inc., to pay the award to Bravo.

Posadas appealed to the Court of Appeals, which affirmed with modification the decision of the
trial court by deleting exemplary damages, moral damages and attorney's fees, as well as,
lowering the actual damages. Posadas' motion for reconsideration was denied, Hence, the current
petition for review.

According to the records, Posadas contracted Bravo to render various services for the initial
development of the property as shown by vouchers evidencing payments made by Posadas to
Bravo for squatter relocation, architectural design, survey and fencing.

ISSUE/S: Whether or not Luxuria may be held liable to the transaction made by Posadas and
Bravo prior to Luxuria’s incorporation regarding the property assigned to Luxuria by Posadas

HELD: No. Luxuria could not be held jointly and severally liable with Posadas as Luxuria and
Posadas have a separate personality.

9
The Court stated that to disregard the separate juridical personality of a corporation, the
wrongdoing must be clearly and convincingly established. It cannot be presumed. According to the
cited case of Bayer-Roxas v. Court of Appeals, the court stated that the separate personality of the
corporation may be disregarded only when the corporation is used as a cloak or cover for fraud or
illegality, or to work injustice, or where necessary for the protection of the creditors.

Here, Bravo alleges that the incorporation of Luxuria and the transfer of the property is for the
purpose of evading payment and defrauding creditors. However, the Court disagrees with the
allegation as the demand letters were made a year and a half after the execution of the Deed of
Assignment of the property, and the issuance of the Articles of Incorporation of Luxuria. Further,
the Deed of Assignment and the Articles of Incorporation of Luxuria were both signed by Bravo as
witness. Bravo cannot argue that the incorporation of Luxuria as well as the assignment of the
property is for the purpose of defrauding creditors as said incorporation and transfer were done
with the full knowledge of Bravo himself. Thus, Bravo failed to show proof that Posadas acted in
bad faith.

Moreover, one of the ways in piercing the veil of corporate fiction is through the doctrine of alter
ego. Here, Posadas is not the majority stockholder of Luxuria Homes, Inc., as Posadas owns
approximately 33% only of the capital stock. Hence, Posadas cannot be considered as an alter
ego of Luxuria.

The Court also added that since Luxuria was not a party to any of the supposed transactions, not
even to the agreement to negotiate with and relocate the squatters, Luxuria cannot be held liable,
jointly and in solidum, to pay Bravo. Since Posadas is the only one who executed a contract with
Bravo to render the subject services, only Posadas is liable to pay the award.

DISPOSITIVE RULING: WHEREFORE, the petition is PARTIALLY GRANTED. The assailed

decision dated March 15, 1996, of respondent Honorable Court of Appeals and its Resolution
dated August 12, 1996, are MODIFIED ordering PETITIONER AIDA M. POSADAS to pay
PRIVATE RESPONDENTS the amount of P435,000.00 as balance for the preparation of the
architectural design, site development plan and survey. All other claims of respondents are hereby
DENIED for lack of merit.

10
OLIS, ROY A. L-1800113

Case 5
Concept Builders vs. NLRC
G.R. No. 108734; May 29, 1996 Hermosisima Jr., J.

Doctrine: The corporate mask may be lifted and the corporate veil may be pierced when a
corporation is just but the alter ego of a person or of another corporation. Where badges of fraud
exist; where public convenience is defeated; where a wrong is sought to be justified thereby, the
corporate fiction or the notion of legal entity should come to naught. The law in these instances
will regard the corporation as a mere association of persons and, in case of two corporations,
merge them into one.

Thus, where a sister corporation is used as a shield to evade a corporation’s subsidiary liability
for damages, the corporation may not be heard to say that it has a personality separate and
distinct from the other corporation. The piercing of the corporate veil comes into play.

FACTS: Petitioner Concept Builders, Inc., a domestic corporation engaged in the construction
business. Private respondents were employed by said company as laborers, carpenters and
riggers.

In November 1981, private respondents were served individual written notices of termination of
employment by petitioner, effective on November 30, 1981. It was stated in the individual notices
that their contracts of employment had expired and the project in which they were hired had been
completed.

NLRC, however, found that at the time of the termination of private respondent’s employment, the
project in which they were hired had not yet been finished and completed. Petitioner had to
engage the services of sub-contractors whose workers performed the functions of private
respondents. Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor
practice and non-payment of their legal holiday pay, overtime pay and thirteenth-month pay
against petitioner.

NLRC ordered petitioner to reinstate private respondents and to pay them back wages. The writ of
execution was partially satisfied and an alias writ of execution was ordered to satisfy the balance
of the judgment award. However, the alias Writ of Execution cannot be enforced by the sheriff
because all the employees inside petitioner’s premises in Valenzuela claimed that they were
employees of Hydro Pipes Philippines, Inc. (HPPI) and not by petitioner. Thus, NLRC issued a
break-open order against Concept Builders and HPPI.

Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the
execution of its decision despite a third-party claim on the levied property. Petitioner further
contends that the doctrine of piercing the corporate veil should not have been applied, in this case,
in the absence of any showing that it created HPPI in order to evade its liability to private
respondents.
11
ISSUE/S: Whether or not the doctrine of piercing the veil of a corporation should be applied in this
case

HELD: Yes. It is a fundamental principle of corporation law that a corporation is an entity separate
and distinct from its stockholders and from other corporations to which it may be connected But,
this separate and distinct personality of a corporation is merely a fiction created by law for
convenience and to promote justice. So, when the notion of separate juridical personality is used
to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device to
defeat the labor laws, this separate personality of the corporation may be disregarded or the veil of
corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a
business conduit or an alter ego of another corporation.

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

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as
follows:

1. Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiff’s legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust
loss complained of.

The absence of any one of these elements prevents ‘piercing the corporate veil. ‘ in
applying the ‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with
reality and not form, with how the corporation operated and the individual defendant’s
relationship to that operation.

In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations
on April 29, 1986, it filed an Information Sheet with the Securities and Exchange Commission on
May 15, 1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On
the other hand, HPPI, the third-party claimant, submitted on the same day, a similar information
sheet stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila.

12
Clearly, petitioner ceased its business operations in order to evade the payment to private
respondents of backwages and to bar their reinstatement to their former positions. HPPI is
obviously a business conduit of petitioner corporation and its emergence was skillfully orchestrated
to avoid the financial liability that already attached to petitioner corporation.

In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of
the execution, private respondents had no other recourse but to apply for a break-open order after
the third-party claim of HPPI was dismissed for lack of merit by the NLRC.

Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open
order issued by the Labor Arbiter.

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

13
VILLENA, Isabelle Gloria I. L-1800005

Case 6
Francisco Motors vs. CA
G.R. No. 100812; June 25, 1999 Quisumbing, J.

Doctrine: A corporation has a separate personality distinct from its stockholders and from other
corporations to which it may be connected. However, under the doctrine of piercing the veil of
corporate entity, the corporation's separate juridical personality may be disregarded: when the
corporate identity is used to defeat public convenience, justify wrong, protect fraud, or defend
crime; where the corporation is a mere alter ego or business conduit of a person; or where the
corporation is so organized and controlled and its affairs are so conducted as to make it merely
an instrumentality, agency, conduit or adjunct of another corporation. In such cases, its distinct
personality may be ignored, and the courts will treat the corporation as a mere aggrupation of
persons and the liability will directly attach to them.

However, the doctrine of piercing the veil of corporate fiction cannot work to hold a corporation to
answer for the personal liability of its individual directors, officers and incorporators.

FACTS: Petitioner Francisco Motors Corporation filed a complaint against private respondents
Sps. Gregorio and Librada Manuel to recover P3,412.06 representing the balance of the jeep body
purchased by the Manuels from petitioner; an additional sum of P20,454.80 representing the
unpaid balance on the cost of repair of the vehicle; and P6,000.00 for cost of suit and attorney’s
fees.

In their answer, private respondents interposed a permissive counterclaim for unpaid legal services
by Atty. Gregorio Manuel in the amount of P50,000 which was not paid by the incorporators,
directors and officers of petitioner. He asserted that, while he was petitioner’s Assistant Legal
Officer, he represented members of the Francisco family in the intestate estate proceedings of the
late Benita Trinidad. However, even after the termination of the proceedings, his services were not
paid.

The RTC allowed both claims for money. On appeal, the CA sustained the RTC’s decision. Hence,
this petition for review.

Petitioner argued that being a corporation, it should not be held liable for the attorney’s fees
because these fees were owed by the incorporators, directors and officers of the corporation in
their personal capacity as heirs of Benita Trinidad. Petitioner stressed that the personality of the
corporation, vis-à-vis the individual persons who hired the services of private respondent, is
separate and distinct, hence, the liability of said individuals did not become an obligation
chargeable against petitioner.

Respondents contend that the doctrine of piercing the veil of corporate fiction should be applied.

14
ISSUE/S: Whether or not Francisco Motors should be held liable for attorney’s fees claimed by
Atty. Manuel despite the fact that his services were rendered for the Francisco family who are
incorporators, directors and officers of Francisco Motors

HELD: No. Francisco Motors should not be held liable for the attorney’s fees claimed by Atty.
Manuel.

A corporation has a separate personality distinct from its stockholders and from other corporations
to which it may be connected. However, under the doctrine of piercing the veil of corporate entity,
the corporation's separate juridical personality may be disregarded: when the corporate identity is
used to defeat public convenience, justify wrong, protect fraud, or defend crime; where the
corporation is a mere alter ego or business conduit of a person; or where the corporation is so
organized and controlled and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation. In such cases, its distinct personality may be
ignored, and the courts will treat the corporation as a mere aggrupation of persons and the liability
will directly attach to them

Given the facts and circumstances of this case, the doctrine of piercing the corporate veil has no
relevant application. The rationale behind piercing a corporation’s identity in a given case is to
remove the barrier between the corporation from the persons comprising it to thwart the fraudulent
and illegal schemes of those who use the corporate personality as a shield for undertaking certain
proscribed activities. However, in the case at bar, instead of holding certain individuals or persons
responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a
corporation which is being ordered to answer for the personal liability of certain individual directors,
officers and incorporators concerned. The estate proceedings did not involve any business of
petitioner.

The personality of the corporation and those of its incorporators, directors and officers in their
personal capacities ought to be kept separate in this case. The claim for legal fees against the
concerned individual incorporators, officers and directors could not be properly directed against the
corporation without violating basic principles governing corporations. Moreover, every action —
including a counterclaim — must be prosecuted or defended in the name of the real party in
interest. It is plainly an error to lay the claim for legal fees of private respondent Gregorio Manuel
at the door of petitioner rather than individual members of the Francisco family.

DISPOSITIVE RULING: WHEREFORE, the petition is hereby GRANTED and the assailed
decision is hereby REVERSED insofar only as it held Francisco Motors Corporation liable for the
legal obligation owing to private respondent Gregorio Manuel; but this decision is without prejudice
to his filing the proper suit against the concerned members of the Francisco family in their personal
capacity. No pronouncement as to costs.

15
ZIPAGAN II, Ronald Joseph C. L-170229

Case 7
Times Transportation Company vs. Santos Sotelo, et. al.
G.R. No. 163786; February 16, 2005 Ynares-Santiago, J.

Doctrine: We hold that piercing the corporate veil is warranted only in cases when the separate
legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime,
such that in the case of two corporations, the law will regard the corporations as merged into
one. It may be allowed only if the following elements concur: (1) control—not mere stock control,
but complete domination—not only of finances, but of policy and business practice in respect to
the transaction attacked; (2) such control must have been used to commit a fraud or a wrong to
perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust
act in contravention of a legal right; and (3) the said control and breach of duty must have
proximately caused the injury or unjust loss complained of.

FACTS: Prior to the closure of Petitioner Times Transportation Company, Inc. (Times) in 1997, the
Times Employees Union (TEU) was formed and issued a certificate of union registration. Times
challenged the legitimacy of TEU by filing a petition for the cancellation of its union registration.
TEU held a strike in response to Times’ alleged attempt to form a rival union and its dismissal of
the employees identified to be active union members. Upon petition by Times, then Labor
Secretary referred the matter to the NLRC for compulsory arbitration. A return-to-work order was
likewise issued on March 10, 1997.

In a certification election held on July 1, 1997, TEU was certified as the sole and exclusive
collective bargaining. Times refused on the ground that the decision of the Med-Arbiter upholding
the validity of the certification election was not yet final and executory. TEU filed a Notice of Strike
on August 8, 1997. Another conciliation/mediation proceeding was conducted for the purpose of
settling the brewing dispute. In the meantime, Time’s management implemented a retrenchment
program.

TEU held a strike vote on the ground of unfair labor practice on the part of Times. For alleged
participation in what it deemed was an illegal strike, Times terminated all the 123 striking
employees. DOLE Secretary Quisumbing issued the second return-to-work order certifying the
dispute to the NLRC. While the strike was ended, the employees were no longer admitted back to
work.In the meantime, on December 12, 1997, Mencorp Transport Systems, Inc. (Mencorp) had
acquired ownership over Times’ Certificates of Public Convenience and a number of its bus units
by virtue of several deeds of sale. Mencorp is controlled and operated by Mrs. Virginia Mendoza,
daughter of Santiago Rondaris, the majority stockholder of Times.

NLRC held that while the first strike was legal, the second was not. Times and TEU both appealed
the decision of the NLRC, which the Court of Appeals affirmed. It held that respondents Times
Company, Inc. and Santiago Rondaris as the officer administratively held liable of the unfair labor
practice and respondents Times Company, Inc. and/or Santiago Rondaris to pay jointly and
severally said complainants.
16
On the propriety of the piercing of the corporate veil, Times claims that "to drag Mencorp, Spouses
Mendoza and Rondaris into the picture on the purported ground that a fictitious sale of Times’
assets in their favor was consummated with the end in view of frustrating the ends of justice and
for purposes of evading compliance with the judgment is ... the height of judicial arrogance." The
Court of Appeals believes otherwise and reckons that Times and Mencorp failed to adduce
evidence to refute allegations of collusion between them.

ISSUE/S: Whether or not the doctrine of piercing of corporate veil shall apply in this case

HELD: Yes. The Court held that piercing the corporate veil is warranted only in cases when the
separate legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, such that in the case of two corporations, the law will regard the corporations as merged
into one. It may be allowed only if the following elements concur: (1) control—not mere stock
control, but complete domination—not only of finances, but of policy and business practice in
respect to the transaction attacked; (2) such control must have been used to commit a fraud or a
wrong to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an
unjust act in contravention of a legal right; and (3) the said control and breach of duty must have
proximately caused the injury or unjust loss complained of.

The following findings of the Labor Arbiter, which were cited and affirmed by the Court of Appeals,
have not been refuted by Times, to wit:
1. The sale was transferred to a corporation controlled by V. Mendoza, the daughter of respondent
S. Rondaris of [Times] where she is/was also a director, as proven by the articles of incorporation
of Mencorp;
2. All of the stockholders/incorporators of [Mencorp]: Reynaldo M. Mendoza, Virginia R. Mendoza,
Vernon Gerard R. Mendoza, Vivian Charity R. Mendoza, Vevey Rosario R. Mendoza are all
relatives of respondent S. Rondaris;
3. The timing of the sale evidently was to negate the employees/complainants/members’ right to
organization as it was effected when their union (TEU) was just organized/requesting Times to
bargain;
5. Mencorp never obtained a franchise since its supposed incorporation in 10 May 1994 but at
present, all the buses of Times are already being run/operated by respondent Mencorp, the
franchise of Times having been transferred to it.

The Court upheld the findings of the labor arbiter and the Court of Appeals. The sale of Times’
franchise as well as most of its bus units to a company owned by Rondaris’ daughter and family
members, right in the middle of a labor dispute, is highly suspicious. It is evident that the
transaction was made in order to remove Times’ remaining assets from the reach of any judgment
that may be rendered in the unfair labor practice cases filed against it.

DISPOSITIVE RULING: WHEREFORE, premises considered, the petition is DENIED. The

decision of the Court of Appeals in CA-G.R. SP No. 75291 dated January 30, 2004 and its
resolution dated May 24, 2004, are hereby AFFIRMED in toto.

17
JOSON, Richelle Miles B. L-170133

Case 8
Yao, Sr. vs. People, et al.
G.R. No. 168306; June 19, 2007 Chico-Nazario, J.

Doctrine: It is an elementary and fundamental principle of corporation law that a

corporation is an entity separate and distinct from its stockholders, directors or officers.
However, when the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an
association of persons; or, in the case of two corporations, merge them into one.

FACTS: Petitioners William C. Yao, Sr., Luisa C. Yao, Richard C. Yao, William C. Yao, Jr. and
Roger C. Yao (the Yaos) are incorporators and officers of MASAGANA GAS CORPORATION
(MASAGANA), an entity engaged in the refilling, sale and distribution of LPG products. Private
respondents Petron Corporation (Petron) and Pilipinas Shell Petroleum Corporation (Pilipinas
Shell) are two of the largest bulk suppliers and producers of LPG in the Philippines. Their LPG
products are sold under the marks “GASUL” and “SHELLANE”, respectively.

NBI Agent Ritche N. Oblanca filed two applications for search warrant with the Regional Trial Court
(RTC), Branch 17 of Cavite City against petitioners and other occupants of the MASAGANA
compound for alleged violation of Section 155, in relation to Section 170 of the Intellectual
Property Code of the Philippines. The two applications for search warrant uniformly alleged
that per information, belief, and personal verification of Oblanca, the petitioners are actually
producing, selling, offering for sale and/or distributing LPG products using steel cylinders
owned by, and bearing the tradenames, trademarks, and devices of Petron and Pilipinas
Shell, without authority and in violation of the rights of the said entities. After conducting the
preliminary investigation, the Presiding Judge found probable cause and correspondingly issued
Search Warrants No. 2-2003 and No. 3-2003. The search warrants commanded any peace
officer to make an immediate search of the MASAGANA compound and to seize the items
listed therein. Several NBI operatives proceeded to the MASAGANA compound and served the
search warrants on petitioners.

MASAGANA, as third party claimant, filed with the RTC a Motion for the Return of Motor
Compressor and LPG Refilling Machine. It claimed that it is the owner of the said motor
compressor and LPG refilling machine; that these items were used in the operation of its
legitimate business; and that their seizure will jeopardize its business interests. The RTC
denied the said motion. It resolved that MASAGANA cannot be considered a third party
claimant whose rights were violated as a result of the seizure since the evidence disclosed
that petitioners are stockholders of MASAGANA and that they conduct their business
through the same juridical entity. It maintained that to rule otherwise would result in the
misapplication and debasement of the veil of corporate fiction. It also stated that the veil
of corporate fiction cannot be used as a refuge from liability. After their Motions for
Reconsideration were denied, petitioners filed a Petition for Certiorari before the Court of Appeals,
which was also denied by the same court. Hence, this Petition for Review on Certiorari.
18
ISSUE/S: Whether or not MASAGANA GAS CORPORATION may be considered as third party
claimant in the case.

HELD: No. It is an elementary and fundamental principle of corporation law that a

corporation is an entity separate and distinct from its stockholders, directors or officers.
However, when the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an association
of persons; or, in the case of two corporations, merge them into one. In other words, the
law will not recognize the separate corporate existence if the corporation is being used
pursuant to the foregoing unlawful objectives. This non-recognition is sometimes referred to
as the doctrine of piercing the veil of corporate entity or disregarding the fiction of
corporate entity. Where the separate corporate entity is disregarded, the corporation will be
treated merely as an association of persons and the stockholders or members will be
considered as the corporation, that is, liability will attach personally or directly to the
officers and stockholders.

As the Court finds, the petitioners, as directors/officers of MASAGANA, are utilizing the latter
in violating the intellectual property rights of Petron and Pilipinas Shell. Thus, petitioners
collectively and MASAGANA should be considered as one and the same person for liability
purposes. Consequently, MASAGANA's third party claim serves no refuge for petitioners.

Even if we were to sustain the separate personality of MASAGANA from that of the
petitioners, the effect will be the same. The law does not require that the property to be
seized should be owned by the person against whom the search warrants is directed.
Ownership, therefore, is of no consequence, and it is sufficient that the person against
whom the warrant is directed has control or possession of the property sought to be
seized. Hence, even if, as petitioners claimed, the properties seized belong to MASAGANA
as a separate entity, their seizure pursuant to the search warrants is still valid.

DISPOSITIVE RULING: WHEREFORE, the petition is DENIED. The Decision and Resolution of
the Court of Appeals in CA-G.R. SP No. 79256, dated 30 September 2004 and 1 June 2005,
respectively, are hereby AFFIRMED. Costs against petitioners.

19
KHO, Ricardo T. L-1800006

Case 9
Seventh Day Adventist vs. Northeastern Mindanao Mission
G.R. No. 150416 July 21, 2006 Corona, J.

Doctrine:
Corporate existence begins only from the moment a certificate of incorporation is issued.

The requirements to be a de facto corporation are:

(a) the existence of a valid law under which it may be incorporated;
(b) an attempt in good faith to incorporate; and
(c) assumption of corporate powers.

The filing of articles of incorporation and the issuance of the certificate of incorporation are
essential for the existence of a de facto corporation.

FACTS: Felix Cosio and Felisa Cuysona (sps. Cosio) owns a parcel of land covered by Transfer
Certificate of Title No. 4468. The sps. Cosio donated the land to the South Philippine Union
Mission of Seventh Day Adventist Church (SPUM). Part of the deed of donation read:

The donation was allegedly accepted by one Liberato Rayos, an elder of the Seventh Day
Adventist Church, on behalf of the donee.

After 21 years, the same parcel of land was sold by the spouses Cosio to the Seventh Day
Adventist Church of Northeastern Mindanao Mission (NEMM). The TCT No. 4468 was thereafter
issued in the name of NEMM.

SPUM’s successor-in-interest, asserted ownership over the property which was opposed by
NEMM who argued that at the time of the donation, SPUM could not legally be done because, not
having been incorporated yet, it had no juridical personality. Neither were the successors a
member of the local church then, hence, the donation could not have been made particularly to
them.

SPUM filed a case for cancellation of title, quieting of ownership and possession, declaratory relief
and reconveyance with prayer for preliminary injunction and damages. The trial court upheld the
sale in favor of NEMM.

The case was appealed to the Court of Appeals which affirmed the decision of the trial court with
modification. Hence, the present case.

ISSUE/S:
1. Whether or not the donation of Sps. Cosio to SPUM is valid considering at the time of the
donation SPUM is not yet incorporated.

20
2. Whether or not SPUM may be considered as a de facto corporation which would make SPUM
benefit from the donation of Sps. Cosio.

HELD:
1. NO, the donation was not valid as SPUM was inexistent at the time of incorporation which
means it does not have any juridical personality.

Corporate existence begins only from the moment a certificate of incorporation is issued. No
certificate of incorporation was ever issued to SPUM or their supposed predecessor-in-interest at
the time of the donation. The alleged succesor-in-interest obviously could not have claimed
succession to an entity that never came to exist. Neither could the principle of separate juridical
personality apply since there was never any corporation to speak of. Also, some of the
representatives of SPUM were not even members of the local church then, thus, they could not
even claim that the donation was particularly for them.

2. NO, the Court did not agree that SPUM is a de facto corporation, as they did not comply with the
requirement that there should be an attempt to incorporate.

According to the court, the requirements to be a de facto corporation are:

(a) the existence of a valid law under which it may be incorporated;
(b) an attempt in good faith to incorporate; and
(c) assumption of corporate powers.

While there existed the old Corporation Law (Act 1459), a law under which SPUM could have been
organized, no proof was given that there was an attempt to incorporate at that time.

The filing of articles of incorporation and the issuance of the certificate of incorporation are
essential for the existence of a de facto corporation. The court has held that an organization not
registered with the Securities and Exchange Commission (SEC) cannot be considered a
corporation in any concept, not even as a corporation de facto. It was admitted that at the time of
the donation, SPUM were not registered with the SEC, nor did they even attempt to organize to
comply with legal requirements.

Further the court added that the doctrine exists to protect the public dealing with supposed
corporate entities, not to favor the defective or non-existent corporation.

Since, the donation is an act of liberality whereby a person disposes gratuitously of a thing or right
in favor of another person who accepts it. No donation can be made to an entity that does not exist
nor could there be any acceptance of said donation by the non-existent entity.

Here, the deed of donation was not in favor of any informal group of SDA members but a
supposed SPUM which, at the time, had neither juridical personality nor capacity to accept such
gift. Thus, there is no donation to the SPUM by the spouses Cosio.

DISPOSITIVE RULING: WHEREFORE, the petition is hereby DENIED.

21
LOPEZ, Erica Therese C. L-1800319

Case 10
Lim Tong Lim vs. CA
G.R. No. 136448; November 3, 1999 Panganiban, J.

Doctrine: The doctrine of corporation by estoppel may apply to the alleged corporation and to a
third party. In the first instance, an unincorporated association, which represented itself to be a
corporation, will be estopped from denying its corporate capacity in a suit against it by a third
person who relied in good faith on such representation.

On the other hand, a third party who, knowing an association to be unincorporated, nonetheless
treated it as a corporation and received benefits from it, may be barred from denying its
corporate existence in a suit brought against the alleged corporation.

FACTS: On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered
into a Contract for the purchase of fishing nets of various sizes from the Philippine Fishing Gear
Industries, Inc. (herein respondent). They claimed that they were engaged in a business venture
with Petitioner Lim Tong Lim, who however was not a signatory to the agreement. The buyers,
however, failed to pay for the fishing nets and the floats; hence, private respondent filed a
collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary
attachment. The suit was brought against the three in their capacities as general partners, on the
allegation that "Ocean Quest Fishing Corporation" was a nonexistent corporation as shown by a
Certification from the Securities and Exchange Commission. The lower court issued a Writ of
Preliminary Attachment, which the sheriff enforced by attaching the fishing nets on board F/B
Lourdes.

On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear
Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners,
were jointly liable to pay respondent. The trial court ruled that a partnership among Lim, Chua and
Yao existed based (1) on the testimonies of the witnesses presented and (2) on a Compromise
Agreement executed by the three in Civil Case No. 1492-MN which Chua and Yao had brought
against Lim in the RTC of Malabon, Branch 72. The trial court noted that the Compromise
Agreement was silent as to the nature of their obligations, but that joint liability could be presumed
from the equal distribution of the profit and loss.

In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing
business and may thus be held liable as such for the fishing nets and floats purchased by and for
the use of the partnership.

ISSUE: Whether or not, by their acts, Lim, Chua and Yao could be deemed to have entered into a
partnership

HELD: Yes. Lim, Chua and Yao are deemed to have entered into a partnership.

22
Article 1767 of the Civil Code provides:
"ARTICLE 1767. By the contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing the
profits among themselves."

From the factual findings of both lower courts, it is clear that there was, among petitioners, Chua
and Yao, a partnership engaged in the fishing business. They purchased the boats, which
constituted the main assets of the partnership, and they agreed that the proceeds from the sales
and operations thereof would be divided among them.
Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to
Chua and Yao, and not to him. The Supreme Court disagreed.

Section 21 of the Corporation Code of the Philippines provides:

"SECTION 21. Corporation by estoppel. — All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as general partners for
all debts, liabilities and damages incurred or arising as a result thereof: Provided however,
That when any such ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality.
"One who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation."

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In
the first instance, an unincorporated association, which represented itself to be a corporation, will
be estopped from denying its corporate capacity in a suit against it by a third person who relied in
good faith on such representation. It cannot allege lack of personality to be sued to evade its
responsibility for a contract it entered into and by virtue of which it received advantages and
benefits.
On the other hand, a third party who, knowing an association to be unincorporated, nonetheless
treated it as a corporation and received benefits from it, may be barred from denying its corporate
existence in a suit brought against the alleged corporation. In such case, all those who benefited
from the transaction made by the ostensible corporation, despite knowledge of its legal defects,
may be held liable for contracts they impliedly assented to or took advantage of.
Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat
which has earlier been proven to be an asset of the partnership. Clearly, under the law on
estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be without
valid existence, are held liable as general partners.

Technically, it is true that petitioner did not directly act on behalf of the corporation. However,
having reaped the benefits of the contract entered into by persons with whom he previously had an
existing relationship, he is deemed to be part of said association and is covered by the scope of
the doctrine of corporation by estoppel.

DISPOSITIVE RULING: WHEREFORE, the Petition is DENIED and the assailed Decision
AFFIRMED. Costs against petitioner.

23
LOCQUIAO, Maureen Nicole N. L-1800303

Case 11
International Express Travel and Tour Services vs. CA
G.R. No. 119002; October 19, 2000 Kapunan, J.

Doctrine: Before a corporation may acquire juridical personality, the State must give its consent
either in the form of a special law or general enabling act. The Supreme Court cannot agree with
the view of the appellate court that the Federation came into existence upon the passage of RA
3135 and PD 604 as nowhere in these laws provides for the creation of the Defration. These
laws only recognize the existence of sports associations and provide that such entities may
acquire juridical personality.

FACTS: Petitioner offered its services as a travel agency to private respondent, Philippine Football
Federation, which the latter accepted. Petitioner then secured the athletes and official’s airline
tickets to the South East Asian Games in Kuala Lumpur as well as the People’s Republic of China
and Brisbane, totaling to P449, 654.83, which the Federation paid in four partial payments,
however, after the fourth payment, not further payments were made despite repeated demands.

Petitioner filed a civil case before the RTC of Manila against private respondent and Henri Khan as
President of the Federation, in his personal capacity, for the unpaid balance. Khan did not deny the
allegations of the petitioner, however he averred that the petitioner has no cause of action against
him either in his personal or official capacity as president of the Federation. He maintained that he
merely acted as an agent of the Federation which has a separate and distinct juridical personality.
Trial court rendered in favor of the petitioner and declared Kahn personally liable.

Defendant would have been correct in his contention if the Federation is a corporation. However,
none of the plaintiffs nor Kahna adduced any evidence proving the corporate existence of the
defendant. Complaint stated that the plaintiff is a sport’s association, which was not denied by
Kahn. Khan being the President should have personal knowledge of its corporate existence, but he
did not deny the statement that the Federation is a sport’s association.

A voluntary unincorporated association has no power to enter into, or to ratify, a contract. The
contract entered into by its offices or agents on its behalf is not binding or enforceable against it.
Hence, officers or agents will be held personally liable.

The Court of Appeals revised the decision of the trial court. CA recognized the juridical existence
of the Federation. Since petitioner failed to prove that Kahn guaranteed the obligation of the
Federation, he should not be held liable for the same as said entity has a separate and distinct
personality from its officers.

ISSUE/S: Whether or not the Philippine Football Federation has a juridical personality

HELD: No. The Philippine Football Federation does not have a juridical personality.

24
Under Sec. 14 of RA 3135 and Sec. 8 of PD 604, the functions, powers, and duties of National
sport’s associations are : 1. To adopt a constitution and by-laws for their internal organization and
government; 2. To raise funds by donations, benefits, and other means for their purposes. 3. To
purchase, sell, lease or otherwise encumber property both real and personal, for the
accomplishment of their purpose; 4. To affiliate with international or regional sports' Associations
after due consultation with the executive committee; 13. To perform such other acts as may be
necessary for the proper accomplishment of their purposes and not inconsistent with this Act.

The powers and functions granted to national sports associations clearly indicate that these
entities may acquire a juridical personality. The power to purchase, sell, lease and encumber
property are acts which may only be done by persons, whether natural or artificial, with juridical
capacity. However, while we agree with the appellate court that national sports associations may
be accorded corporate status, such does not automatically take place by the mere passage of
these laws.

Before a corporation may acquire juridical personality, the State must give its consent either in the
form of a special law or general enabling act. The Supreme Court cannot agree with the view of
the appellate court that the Federation came into existence upon the passage of RA 3135 and PD
604 as nowhere in these laws provides for the creation of the Defration. These laws only
recognize the existence of sports associations and provide that such entities may acquire juridical
personality.

The provisions cited in this case provides that before an entity may consider a national sports
association, such entity must be recognized by the accrediting organization. With this, it follows
that private respondents should be held liable for the unpaid obligations of the Federation. It is
settled that in corporation law, any person acting or purporting to act on behalf of a corporation
which has no valid existence assumes such privileges and becomes Federation.

DISPOSITIVE RULING: Wherefore, the decision appealed from is reversed and set aside. The
decision of the RTC of Manila is hereby reinstated.

25
Peralta, Alhex Adrea M. L-1800280
Case 12
Filipinas Broadcasting Network, Inc. vs. Ago Medical and Educational Center-Bicol Christian College of
Medicine
G.R. No. 141994; January 17, 2005 Carpio, J.

Doctrine: Item 7 of Article 2219 of the Civil Code expressly authorizes the recovery of moral
damages in cases of libel, slander or any other form of defamation. Article 2219(7) does not
qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person such as a
corporation can validly complain for libel or any other form of defamation and claim for moral
damages.

FACTS: Rima and Alegre are the hosts of "Exposé," a radio documentary program aired every
morning, and owned by Filipinas Broadcasting Network, Inc. (FBNI). During the program, Rima
and Alegre exposed alleged complaints from students, teachers and parents against Ago Medical
and Educational Center-Bicol Christian College of Medicine (AMEC) and its administrators.

AMEC and Angelita Ago, the Dean of AMEC’s College of Medicine, found the statements
defamatory and filed a complaint for damages against FBNI, Rima and Alegre. The trial court
rendered a decision finding FBNI and Alegre liable for libel except Rima. The trial court held that
the broadcasts are libelous per se. In holding FBNI liable for libel, the trial court found that FBNI
failed to exercise diligence in the selection and supervision of its employees.

On the other hand, the Court of Appeals adjudged FBNI, Rima and Alegre solidarily liable to pay
AMEC moral damages, attorney’s fees and costs of suit.

ISSUE/S: Whether or not AMEC is entitled to moral damages even if it is a corporation

HELD: Yes. A juridical person is generally not entitled to moral damages because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded feelings, serious
anxiety, mental anguish or moral shock.

Nevertheless, AMEC’s claim for moral damages falls under item 7 of Article 2219 of the Civil Code.
This provision expressly authorizes the recovery of moral damages in cases of libel, slander or any
other form of defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or
juridical person. Therefore, a juridical person such as a corporation can validly complain for libel or
any other form of defamation and claim for moral damages.

Moreover, where the broadcast is libelous per se, the law implies damages. In such a case,
evidence of an honest mistake or the want of character or reputation of the party libeled goes only
in mitigation of damages. Neither in such a case is the plaintiff required to introduce evidence of
actual damages as a condition precedent to the recovery of some damages. In this case, the
broadcasts are libelous per se. Thus, AMEC is entitled to moral damages.

26
DISPOSITIVE RULING: WHEREFORE, we DENY the instant petition. We AFFIRM the Decision
of 4 January 1999 and Resolution of 26 January 2000 of the Court of Appeals in CA-G.R. CV No.
40151 with the MODIFICATION that the award of moral damages is reduced from P300,000 to
P150,000 and the award of attorney's fees is deleted. Costs against petitioner. SO ORDERED.

27
RAGOT, Joanie Mae D. L-170251

Case 13
Coastal Pacific Trading, Inc. vs. Southern Rolling Mills Co., Inc.
GR No. 118692; July 28, 2006 Panganiban, C.J.

Doctrine: Directors of a corporation are in a position of trust; thus, they owe it a duty of loyalty.
This trust relationship sprang from the fact that they have control and guidance over its corporate
affairs and property.

FACTS: Respondent Southern Rolling mills was engaged in the business of steel processing,
which was later renamed as Visayan Integrated Steel Corporation (VISCO). VISCO obtained two
loans, one from DBP and the other from the respondent banks, wherein both obligations were
secured by real estate mortgage over VISCO’s three parcels of land including machineries and
equipment.

VISCO defaulted in its obligations which prompted the consortium banks to file for a petition for
Foreclosure of Mortgage was filed by Consortium. Negotiations were conducted between the
parties for the conversion of the unpaid loan into equity in the corporation wherein the creditor
banks were given the management of and control over VISCO. The latter was reorganized wherein
respondent banks acquired more than 90 percent of its equity.

A processing agreement was entered into by VISCO with the petitioner. VISCO was able to
process 1600 metric tons of hot rolled sheets into block iron sheets out of the 3000 metric tons that
were agreed upon.

By virtue of a letter written by the representative of the FEBTC to the director of the VISCO, the
account with FEBTC was changed from BOARD OF TRUSTEES VISCO CONSORTIUM BANKS
to BOARD OF TRUSTEES CONSORTIUM BANKS.

In order to pay for its indebtedness, the members of the VISCO approved the sale of the two
generator sets to Filmag wherein it was agreed upon that the proceeds of the sale would be used
to pay VISCO’s indebtedness. However consortium agreed to the following payment procedure:
FILMAG pays to VISCO; VISCO pays the Consortium; and then the Consortium pays the DBP
with the arrangement that the Consortium subrogates to the rights of the DBP as first mortgagee to
the VISCO plant.

Petitioner filed a complaint for Recovery of Property and Damages with Preliminary Injunction and
Attachment on the ground that VISCO fraudulently misapplied or converted the finished steel
sheets entrusted to it.

While the petitioner's case was pending, DBP executed a Deed of Assignment of Mortgage Rights
Interest and participation in favor of Respondent Consortium of Banks. The deed stated that, in
consideration of the payment made, all of DBP's rights under the mortgage agreement with VISCO
were being transferred and conveyed to the Consortium. Thus did the latter obtain DBP's recorded
primary lien over the real and chattel properties of VISCO.
28
The Court of Appeals ruled on the validity of the Consortium’s mortgage, foreclosure and
assignments.

ISSUE/S: Whether or not the assignment of mortgage, the extrajudicial foreclosure proceedings
and the sale of the properties of VISCO were done to defraud the latter’s creditors.

HELD: Yes. As directors of VISCO, the officials of the Consortium were in a position of trust; thus,
they owed it a duty of loyalty. This trust relationship sprang from the fact that they had control and
guidance over its corporate affairs and property. Their duty was more stringent when it became
insolvent or without sufficient assets to meet its outstanding obligations that arose. Because they
were deemed trustees of the creditors in those instances, they should have managed the
corporation's assets with strict regard for the creditors' interests. When these directors became
corporate creditors in their own right, they should not have permitted themselves to secure any
undue advantage over other creditors. In the instant case, the Consortium miserably failed to
observe its duty of fidelity towards VISCO and its creditors.

Fraud was proven when the Directors of VISCO took steps to hide the latter’s unexpended funds
through eliminating entirely the name of VISCO in the FEBTC account so that the account name
would read "Board of Trustees Consortium of Banks." Clearly, this particular move was found to be
necessary to avoid a takeover by the government, which was also a creditor of VISCO.

Furthermore, the assignment of mortgage in favor of the Consortium also bears the earmarks of
fraud. Initially, respondent banks had agreed that VISCO should sell two of its generator sets, so
that the proceeds could be utilized to pay DBP. However, a payment procedure was subsequently
agreed upon. If DBP had been directly paid by VISCO, the latter could have freed up its properties
to the satisfaction of all its other creditors.

The last step in the payment procedure explains the reason for this preferred though roundabout
manner of payment. This final step entitled the Consortium to obtain DBP's primary lien through an
assignment by allowing it to pay VISCO's loan to the bank, without incurring additional expenses.

To be sure, there was undue advantage. The payment scheme devised by the Consortium
continued the efficacy of the primary lien, this time in its favor, to the detriment of the other
creditors.

DISPOSITIVE RULING: WHEREFORE, the Petition is GRANTED. The assailed Decision of the
Court of Appeals and its Resolution are hereby REVERSED and SET ASIDE.

29
ROSALES, Mikhaila Klaudine A. L-1800031

Case 14
California Manufacturing Company, Inc. vs. Advanced Technology System, Inc.
G.R. No. 202454; April 25, 2017 Sereno, J.

Doctrine: Mere ownership by a single stockholder of even all or nearly all of the capital stocks of
a corporation, by itself, is not sufficient ground to disregard the corporate veil. The
instrumentality or control test of the alter ego doctrine requires not mere majority or complete
stock control, but complete domination of finances, policy and business practice with respect to
the transaction in question. The corporate entity must be shown to have no separate mind, will,
or existence of its own at the time of the transaction.

FACTS: Petitioner California Manufacturing Company, Inc. (CMCI) is a domestic corporation

engaged in food and beverage manufacturing. Respondent Advanced Technology System, Inc.
(ATSI) is a domestic corporation engaged in fabricating and distributing food processing
machinery, equipment, and related products.

CMCI leased from ATSI a Prodopak machine, which was used to pack products in 20-ml pouches.
CMCI was consistently paying the rentals until it allegedly defaulted on its obligation without just
cause. ATSI filed a Complaint for Sum of Money against CMCI to collect the unpaid rentals. CMCI
moved for the dismissal of the complaint on the ground of extinguishment of obligation through
legal compensation. According to CMCI, ATSI was one and the same with Processing Partners
and Packaging Corporation (PPPC). CMCI claimed that PPPC, as toll packer of CMCI products,
had an obligation to pay the mobilization fund that it advanced from CMCI. Further, it claimed that
PPPC’s Executive Vice President Felicisima proposed to set off PPPC’s obligation to pay the
mobilization fund with the rentals for the Prodopak machine. According to CMCI, such proposal
was binding on both PPPC and TSI, given that Felicisima was an officer and majority stockholder
of the two corporations. The RTC ruled in favor of ATSI, holding that legal compensation does not
apply because PPPC had a separate legal personality from ATSI. On appeal, the CA affirmed the
trial court’s ruling.

Petitioner CMCI argues that the separate corporate personalities of ATSI and PPPC should be
disregarded for the following reasons: (1) interlocking board of directors, incorporators, and
majority stockholder; (2) control of the two corporations by the Spouses Celones; and (3) that the
two corporations were mere alter egos or business conduits of each other.

ISSUE/S: Whether or not ATSI and PPPC are mere alter egos or business conduits of each other,
such that their separate personalities should be disregarded

HELD: No. ATSI and PPPC are not mere alter egos or business conduits of each other. Their
separate personalities should not be disregarded.

Any piercing of the corporate veil must be done with caution. It must be certain that the corporate
fiction was misused to such an extent that injustice, fraud, or crime was committed against
30
another, in disregard of rights. Moreover, the wrongdoing must be clearly and convincingly
established.

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat
of public convenience as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect
fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit
or adjunct of another corporation.

CMCI 's alter ego theory rests on the alleged interlocking boards of directors and stock ownership
of the two corporations. The CA, however, rejected this theory based on the settled rule that mere
ownership by a single stockholder of even all or nearly all of the capital stocks of a corporation, by
itself, is not sufficient ground to disregard the corporate veil. The instrumentality or control test of
the alter ego doctrine requires not mere majority or complete stock control, but complete
domination of finances, policy and business practice with respect to the transaction in question.
The corporate entity must be shown to have no separate mind, will, or existence of its own at the
time of the transaction.

Without question, the Spouses Celones are incorporators, directors, and majority stockholders of
the ATSI and PPPC. But that is all that CMCI has proven. There is no proof that PPPC controlled
the financial policies and business practices of ATSI when Felicisima proposed to set off the
unpaid million mobilization fund with CMCI's rental of Prodopak machines; or when the lease
agreement between CMCI and ATSI commenced.

The fraud test, which is the second of the three-prong test to determine the application of the alter
ego doctrine, requires that the parent corporation's conduct in using the subsidiary corporation be
unjust, fraudulent or wrongful. Under the third prong, or the harm test, a causal connection
between the fraudulent conduct committed through the instrumentality of the subsidiary and the
injury suffered or the damage incurred by the plaintiff has to be established. None of these
elements have been demonstrated in this case.

DISPOSITIVE RULING: WHEREFORE, the Decision dated 25 August 2011 and Resolution dated
21 June 2012 issued by the Court of Appeals in CA-G.R. CV No. 94409 are AFFIRMED. The
instant Petition is DENIED for lack of merit.

31
SY, Katherine Nicole C. L-1800266

Case 15
Dutch Movers, Inc. vs. Lequin
G.R. No. 210032; April 25, 2017 Del Castillo, J.

Doctrine: As a general rule, a corporation has a separate and distinct personality from its
stockholders, and from other corporations it may be connected with. Nevertheless, as an
exception, if the corporation's personality "is used to defeat public convenience, justify wrong,
protect fraud or defend crime, or is used as a device to defeat the labor laws”, such personality
may be disregarded or the veil of corporate fiction may be pierced attaching personal liability
against responsible person.

FACTS: One of the petitioners in this case is Dutch Movers, Inc. (DMI) – a domestic corporation
engaged in hauling liquefied petroleum gas. Respondent Edilberto Lequin was employed by DMI
as truck driver and the rest of respondents as helpers. In this case, respondents argued that they
were illegally dismissed as their termination was without cause and only on the pretext of closure
because DMI, on December 28, 2004, only informed them that DMI would cease its hauling
operation without giving them any reason.

Labor Arbiter (LA) Mangandog dismissed the case for lack of cause of action. However, the NLRC
reversed and set aside the LA Decision. It ruled that respondents were illegally dismissed because
DMI simply placed them on standby, and no longer provided them with work. Hence, the NLRC
ordered DMI to reinstate complainants to their former positions. The NLRC Decision became final
and executory.

Pending resolution of the Motion for Writ of Execution filed by the respondents, respondents filed a
Manifestation and Motion to Implead wherein they prayed that petitioners Spouses Cesar Lee and
Yolanda Lee (spouses Lee), and the officers named in DMI's AOI, which included Edgar N. Smith
and Millicent C. Smith (spouses Smith), be impleaded, and be held solidarity liable with DMI in
paying the judgment awards because upon investigation, they discovered that DMI no longer
operates. Furthermore, they insisted that petitioners Spouses Lee are the ones who managed and
operated DMI, and consistently represented to respondents that they were the owners of DMI.
They further averred that the Articles of Incorporation (AOI) of DMI ironically did not include
petitioners as its directors or officers; and those named directors and officers were persons
unknown to them.

In their Opposition to Motion to Implead, spouses Smith alleged that as part of their services as
lawyers, they lent their names to petitioners to assist them in incorporating DMI. Allegedly, after
such undertaking, spouses Smith promptly transferred their supposed rights in DMI in favor of
petitioners spouses Lee.

Therefore, LA Savari issued an Order holding petitioners liable for the judgment awards. LA Savari
decreed that petitioners spouses Lee represented themselves to respondents as the owners of
DMI; and were the ones who managed the same. However, the NLRC quashed the Writ of

32
Execution insofar as it held petitioners spouses Lee liable to pay the judgment awards. It ruled that
the Writ of Execution should only pertain to DMI since petitioners were not held liable to pay the
awards under the final and executory NLRC Decision. It added that petitioners could not be sued
personally for the acts of DMI because the latter had a separate and distinct personality from the
persons comprising it. On the other hand, the Court of Appeals reversed and set aside the NLRC
Resolutions, and accordingly affirmed the Writ of Execution impleading petitioners spouses Lee as
party-respondents liable to answer for the judgment awards.

Aggrieved by the Court of Appeal’s Decision, petitioners filed a Petition for Review on Certiorari
before the Supreme Court arguing that that there is no basis to pierce the veil of corporate fiction
because DMI had a separate and distinct personality from the officers comprising it. Respondents,
on the other hand, counter that petitioners were identified as the ones who owned and managed
DMI and therefore, they should be held liable to pay the judgment awards.

ISSUE: Whether or not it is proper to pierce the veil of corporate fiction of Dutch Movers, Inc., in
the case at bar

HELD: Yes. It is proper to pierce the veil of the corporate fiction of Dutch Movers, Inc., in the case
at bar.

The Supreme Court held that the veil of corporate fiction must be pierced and accordingly,
petitioners should be held personally liable for judgment awards. In considering the foregoing
events, the Court is not unmindful of the basic tenet that a corporation has a separate and distinct
personality from its stockholders, and from other corporations it may be connected with. However,
such personality may be disregarded, or the veil of corporate fiction may be pierced attaching
personal liability against responsible person if the corporation's personality "is used to defeat
public convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat
the labor laws x x x." By responsible person, we refer to an individual or entity responsible for, and
who acted in bad faith in committing illegal dismissal or in violation of the Labor Code; or one who
actively participated in the management of the corporation. Also, piercing the veil of corporate
fiction is allowed where a corporation is a mere alter ego or a conduit of a person, or another
corporation.

In the case at bar, the veil of corporate fiction must be pierced and accordingly, petitioners spouses
Lee should be held personally liable for judgment awards because the peculiarity of the situation
shows that they controlled DMI; they actively participated in its operation such that DMI existed not
as a separate entity but only as business conduit of petitioners. As will be shown below, petitioners
controlled DMI by making it appear to have no mind of its own, and used DMI as a shield in
evading legal liabilities, including payment of the judgment awards in favor of respondents.

First, petitioners spouses Lee and DMI jointly filed their Position Paper, Reply, and Rejoinder in
contesting respondents' illegal dismissal. If only to prove that they were not part of DMI, petitioners
spouses Lee could have revealed who operated it, and from whom they derived the information
embodied in their pleadings. Such failure to reveal gives the Court reasons to give credence to
respondents' firm stand that petitioners are no strangers to DMI, and that they were the ones who
managed and operated it.

33
Second, the declarations made by spouses Smith further bolster that petitioners and no other
controlled DMI as they categorically identified petitioners spouses Lee as the owners and
managers of DMI. In their Motion to Quash, however, petitioners neither denied the allegation of
spouses Smith nor adduced evidence to establish that they were not the owners and managers of
DMI. They simply insisted that they could not be held personally liable because of the immutability
of the final and executory NLRC Decision, and of the separate and distinct personality of DMI.

Third, piercing the veil of corporate fiction is allowed, and responsible persons may be impleaded,
and be held solidarily liable even after final judgment and on execution, provided that such persons
deliberately used the corporate vehicle to unjustly evade the judgment obligation, or resorted to
fraud, bad faith, or malice in evading their obligation.

While it is true that one's control does not by itself result in the disregard of corporate fiction;
however, considering the irregularity in the incorporation of DMI, then there is sufficient basis to
hold that such corporation was used for an illegal purpose, including evasion of legal duties to its
employees, and as such, the piercing of the corporate veil is warranted. The act of hiding behind
the cloak of corporate fiction will not be allowed in such situation where it is used to evade one's
obligations, which "equitable piercing doctrine was formulated to address and prevent."

Clearly, petitioners should be held liable for the judgment awards as they resorted to such
schemes to countermand labor laws by causing the incorporation of DMI but without any indication
that they were part thereof. Therefore, the Supreme Court held that Dutch Movers, Inc. and
spouses Cesar Lee and Yolanda Lee are solidarily liable to pay respondents' separation pay for
every year of service.

DISPOSITIVE RULING: WHEREFORE, the Petition is DENIED. The July 1, 2013 Decision and
November 13, 2013 Resolution of the Court of Appeals in CA-G.R. SP 113774 are AFFIRMED
with MODIFICATION that instead of reinstatement, Dutch Movers, Inc. and spouses Cesar Lee
and Yolanda Lee are solidarily liable to pay respondents' separation pay for every year of service.

34
VILLENA, Isabelle Gloria I. L-1800005

Case 16
Zambrano vs. Philippine Carpet Manufacturing Corporation
G.R. No. 224099; June 21, 2017 Mendoza, J.

Doctrine: In connection with the third instance where the doctrine of piercing the corporate veil
applies, there is a three-pronged test to determine the application of the alter ego theory, which
is also known as the instrumentality theory, namely:
1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its
own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate
the violation of a statutory or other positive legal duty, or dishonest and unjust act in
contravention of plaintiff's legal right; and
3. The aforesaid control and breach of duty must have proximately caused the injury or unjust
loss complained of.

Although ownership by one corporation of all or a great majority of stocks of another corporation
and their interlocking directorates may serve as indicia of control, by themselves and without
more, these circumstances are insufficient to establish an alter ego relationship.

Where one corporation sells or otherwise transfers all its assets to another corporation for value,
the latter is not, by that fact alone, liable for the debts and liabilities of the transferor.

FACTS: Petitioners were employees of private respondent Philippine Carpet Manufacturing

Corporation (Phil Carpet). On January 3, 2011, they were notified of the termination of their
employment effective February 3, 2011 on the ground of cessation of operation due to serious
business losses. They were of the belief that their dismissal was without just cause and in violation
of due process because the closure of Phil Carpet was a mere pretense to transfer its operations
to its wholly owned and controlled corporation, Pacific Carpet Manufacturing Corporation (Pacific
Carpet). They filed complaints for illegal dismissal and unfair labor practice.

Phil Carpet countered that it permanently closed and totally ceased its operations because there
had been a steady decline in the demand for its products due to global recession, stiffer
competition, and the effects of a changing market.

The Labor Arbiter dismissed the complaints, ruling that the closure was truly dictated by economic
necessity as evidenced by its audited financial statements. Ruling on the petition for certiorari, the
CA held that the petitioners' claim that their termination was a mere pretense because Phil Carpet
continued operation through Pacific Carpet was unfounded because mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not
of itself sufficient ground for disregarding the separate corporate personality. Hence, this petition.

35
ISSUE/S: Whether or not the Court, by reason of Pacific Carpet being a subsidiary of Phil Carpet,
must apply the doctrine of piercing the corporate veil to make the former liable for the obligations
of the latter

HELD: No. The Court cannot apply the doctrine of piercing the corporate veil for the sole reason
that Pacific Carpet is a subsidiary of Phil Carpet.

Any application of the doctrine of piercing the corporate veil should be done with caution. A court
should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction
was misused to such an extent that injustice, fraud, or crime was committed against another, in
disregard of rights. The wrongdoing must be clearly and convincingly established; it cannot be
presumed.

The doctrine of piercing the corporate veil applies only in three basic areas, namely:
1. defeat of public convenience as when the corporate fiction is used as a vehicle for the
evasion of an existing obligation;
2. fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend
a crime;
3. alter ego cases, where a corporation is merely a farce since it is a mere alter ego or
business conduit of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.

In connection with the third instance, there is a three-pronged test to determine the application of
the alter ego theory, which is also known as the instrumentality theory, namely:
1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no separate mind, will or existence
of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
act in contravention of plaintiff's legal right; and
3. The aforesaid control and breach of duty must have proximately caused the injury or unjust
loss complained of.
These tests are respectively called the “control” test, “fraud” test, and “harm” test.

The Court held that none of the tests was satisfactorily met in this case. The petitioners failed to
present substantial evidence to prove their allegation that Pacific Carpet is a mere alter ego of Phil
Carpet.

Although ownership by one corporation of all or a great majority of stocks of another corporation
and their interlocking directorates may serve as indicia of control, by themselves and without more,
these circumstances are insufficient to establish an alter ego relationship or connection between
Phil Carpet on the one hand and Pacific Carpet on the other hand, that will justify the puncturing of
the latter's corporate cover. Mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding
the separate corporate personality. Existence of interlocking directors, corporate officers and

36
shareholders is not enough justification to pierce the veil of corporate fiction in the absence of
fraud or other public policy considerations.

It must be noted that Pacific Carpet was registered with the Securities and Exchange Commission
on January 29, 1999, such that it could not be said that Pacific Carpet was set up to evade Phil
Carpet's liabilities. As to the transfer of Phil Carpet's machines to Pacific Carpet, settled is the rule
that "where one corporation sells or otherwise transfers all its assets to another corporation for
value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor."

DISPOSITIVE RULING: WHEREFORE, the petition is DENIED. The January 8, 2016 Decision
and April 11, 2016 Resolution of the Court of Appeals in CA-G.R. SP No. 140663, are AFFIRMED
in toto.

37
Valdez, Frances Loraine T. L-1800027

Case 17
International Academy of Management and Economics vs. Litton
G.R. No. 191525; December 13, 2017 Sereno, C.J.

Doctrine:
a. The piercing of the corporate veil is premised on the fact that the corporation concerned
must have been properly served with summons or properly subjected to the jurisdiction of
the court a quo.

b. The piercing of the corporate veil may apply to corporations as well as natural persons
involved with corporations. Since the law does not make a distinction between a stock
and non-stock corporation, neither should there be a distinction in case the doctrine of
piercing the veil of corporate fiction has to be applied. Moreover, the "corporate mask may
be lifted and the corporate veil may be pierced when a corporation is just but the alter ego
of a person or of another corporation.

FACTS: Atty. Santos was a lessee to 2 buildings owned by Litton, A.I.D. Building and Litton
Apartments. Because he owed the latter rental arrears and payment of realty taxes, Litton filed a
complaint for unlawful detainer before MeTC Manila. The trial ruled in favor of Litton and ordered
Santos to vacate the premises and pay various sums of money representing unpaid arrears, realty
taxes, penalty and attys fees. Judgment was not executed, so Litton filed an action for revival of
judgment, which was granted by the RTC. Santos then appealed the decision to the CA, which
affirmed the same.

The sheriff levied a piece of real property in Makati registered in the name of petitioner I/AME. An
annotation was included in its title indicating that such was “only up to the extent of the share of
Emmanuel T. Santos.”

I/AME filed a Motion to Lift or Remove Annotations Inscribed in the TCT, claiming that it has a
separate and distinct personality from santos. The motion was first denied, and later reversed by
the MeTC. Litton elevated the case to the RTC, which reinstated the denial of the motion. On
appeal, the CA upheld the RTC decision when the trial court pierced the corporate veil of I/AME.
Hence, this petition.

Petitioner’s contention: It was denied due process when it was dragged into the case and its real
property made an object of a writ of execution in a judgment against Santos. It also argues that the
doctrine of piercing the corporate veil may not apply to non-stock, nonprofit corporations such as
itself since there are no stock holders to hold liable but only members. Lastly, it argues that the
doctrine does not apply to natural persons such as Santos because as a human being, he has no
corporate veil shrouding or covering his person.

ISSUE/S:

38
 1. Whether or not there was a violation of due process when the Court pierces the corporate
veil of I/AME and its property was made to answer for the liability of Santos
2. Whether or not the doctrine of piercing the veil of corporate fiction applies to non-stock
corporations and to natural persons

HELD:
1. No. The piercing of the corporate veil cannot be subjected to a writ of execution meant for
another in violation of its right to due process. This is subject to an exception: if it is shown
"by clear and convincing proof that the separate and distinct personality of the corporation
was purposefully employed to evade a legitimate and binding commitment and perpetuate a
fraud or like wrongdoings." A party whose corporation is vulnerable to piercing of its
corporate veil cannot argue violation of due process.

In this case, Santos had an existing obligation as the lessee, which he refused and was not
able to comply with. Santos used I/AME as a means to defeat judicial processes and to
evade his obligation to Litton. Thus, I/AME is vulnerable to the piercing of its corporate veil.

2. Yes. The doctrine of piercing the veil of corporate fiction applies to non-stock corporations
and natural persons. In determining the propriety of applicability of piercing the veil of
corporate fiction, this Court, in a number of cases, did not put in issue whether a corporation
is a stock or non-stock corporation. While I/AME is an educational institution, it still is a
registered corporation conducting its affairs as such.

Moreover, the doctrine likewise applies to natural persons involved with corporations. In this
case, the Court agreed with CA that I/AME and Santos are alter egos of each other. It was
revealed in the MeTC that Santos falsely represented himself as President of I/AME in the
Deed of Absolute Sale when he bought the Makati real property, at a time when I/AME had
not yet existed.

Meanwhile, "in a traditional veil-piercing action, a court disregards the existence of the
corporate entity so a claimant can reach the assets of a corporate insider. In a reverse
piercing action, however, the plaintiff seeks to reach the assets of a corporation to satisfy
claims against a corporate insider. Reverse-piercing makes the corporation liable for the
debt of the shareholders.

Two types of reverse piercing:

1. Outsider reverse piercing – occurs when a party with a claim against an individual or
corporation attempts to be repaid with assets of a corporation owned or substantially
controlled by the defendant
2. Insider reserve piercing – the controlling members will attempt to ignore the
corporate fiction in order to take advantage of a benefit available to the corporation,
such as an interest in a lawsuit or protection of personal assets

Outsider reverse veil-piercing is applicable in the instant case. Litton, as judgment creditor, seeks
the Court's intervention to pierce the corporate veil of I/AME in order to make its Makati real
property answer for a judgment against Santos, who formerly owned and still substantially controls
I/AME. Outsider reverse veil-piercing extends the traditional veil-piercing doctrine to permit a

39
third-party creditor to pierce the veil to satisfy the debts of an individual out of the corporation's
assets.

DISPOSITIVE RULING: WHEREFORE, in view of the foregoing, the instant petition is DENIED.
The CA Decision in CA-G.R. SP No. 107727 dated 30 October 2009 and its Resolution on 12
March 2010 are hereby AFFIRMED. The MeTC Order dated 29 October 2004 is hereby
REINSTATED.

40
Valerio, Allan Nicolai A. L-170387

Case 18
The Missionary Sisters of Our Lady of Fatima vs. Amando V. Alzona, et al.
G.R. No. 224307; August 6, 2018 Reyes, Jr., J.

Doctrine:
De Facto Corporation
Jurisprudence settled that "[t]he filing of articles of incorporation and the issuance of the
certificate of incorporation are essential for the existence of a de facto corporation." In fine, it is
the act of registration with the SEC through the issuance of a certificate of incorporation that
marks the beginning of an entity's corporate existence.

Corporation by Estoppel
The doctrine of corporation by estoppel is founded on principles of equity and is designed to
prevent injustice and unfairness. It applies when a non-existent corporation enters into contracts
or dealings with third persons.

One who assumes an obligation to an ostensible corporation as such, cannot resist performance
thereof on the ground that there was in fact no corporation.

Jurisprudence dictates that the doctrine of corporation by estoppel applies for as long as there is
no fraud and when the existence of the association is attacked for causes attendant at the time
the contract or dealing sought to be enforced was entered into, and not thereafter.

FACTS: The Missionary Sisters of Our Lady of Fatima (petitioner), otherwise known as the Peach
Sisters of Laguna, is a religious and charitable group established under the patronage of the
Roman Catholic Bishop of San Pablo on May 30, 1989. The petitioner came into being as a
corporation by virtue of a Certificate issued by the Securities and Exchange Commission (SEC) on
August 31, 2001. Mother Ma. Concepcion R. Realon (Mother Concepcion) is the petitioner's
Superior General. The respondents, on the other hand, are the legal heirs of the late Purificacion
Y. Alzona (Purificacion). Purificacion, a spinster, donated her house and lot at F. Mercado Street
and Riceland at Banlic, both at Calamba, Laguna, to the petitioner through Mother Concepcion.
Thereafter, at the request of Purificacion, Mother Concepcion went to see Atty. Nonato Arcillas
(Atty. Arcillas), who advised and followed by Mother Concepcion in filling an registration application
by their group to the SEC. Subsequently, Purificacion executed a Deed of Donation Inter Vivos
(Deed) in favor of the petitioner, conveying her properties in favor of the petitioner. The donation
was accepted on even date by Mother Concepcion for and in behalf of the petitioner. Thereafter,
Purificacion died without any issue, and survived only by her brother of full blood, Amando, who
nonetheless died during the pendency of this case and is now represented and substituted by his
legal heirs, joined as herein respondents. In the case at bar, Amando filed a Complaint before the
RTC, seeking to annul the Deed executed between Purificacion and the petitioner, on the ground
that at the time the donation was made, the latter was not registered with the SEC and therefore
has no juridical personality and cannot legally accept the donation.

41
ISSUE/S:
1. Whether or not the petitioner is a de facto corporation
2. Whether or not the petitioner has juridical personality and cannot legally accept the
donation.

HELD:
1. No.

Jurisprudence settled that "[t]he filing of articles of incorporation and the issuance of the
certificate of incorporation are essential for the existence of a de facto corporation." In fine,
it is the act of registration with the SEC through the issuance of a certificate of incorporation
that marks the beginning of an entity's corporate existence.

Petitioner filed its Articles of Incorporation and by-laws on August 28, 2001. However, the
SEC issued the corresponding Certificate of Incorporation only on August 31, 2001, two (2)
days after Purificacion executed a Deed of Donation on August 29, 2001. Clearly, at the
time the donation was made, the Petitioner cannot be considered a corporation de facto.

2. Yes.

The Court finds that for the purpose of accepting the donation, the petitioner is deemed
vested with personality to accept, and Mother Concepcion is clothed with authority to act on
the latter's behalf.

A review of the attendant circumstances reveals that it calls for the application of the
doctrine of corporation by estoppel as provided for under Section 21 of the Corporation
Code, which provides that: “One who assumes an obligation to an ostensible corporation as
such, cannot resist performance thereof on the ground that there was in fact no
corporation.”

The doctrine of corporation by estoppel is founded on principles of equity and is designed to

prevent injustice and unfairness. It applies when a non-existent corporation enters into
contracts or dealings with third persons. Jurisprudence dictates that the doctrine of
corporation by estoppel applies for as long as there is no fraud and when the existence of
the association is attacked for causes attendant at the time the contract or dealing sought to
be enforced was entered into, and not thereafter.

In this controversy, Purificacion dealt with the petitioner as if it were a corporation. This is
evident from the fact that Purificacion executed two (2) documents conveying her properties
in favor of the petitioner – first, on October 11, 1999 via handwritten letter, and second, on
August 29, 2001 through a Deed; the latter having been executed the day after the
petitioner filed its application for registration with the SEC.

DISPOSITIVE RULING: WHEREFORE, in consideration of the foregoing disquisitions, the instant

petition for review on certiorari is GRANTED. Accordingly, the Decision dated January 7, 2016 and
Resolution dated April 19, 2016 of the Court of Appeals in CA-G.R. CV No. 101944, are hereby
REVERSED and SET ASIDE.

42
 ________________________________

MODULE 1B
Formation and Organization of a Private Corporation

________________________________
OLIS, Roy A. L-1800113

Case 19
Lyceum of the Philippines vs. CA
G.R. No. 101897, March 05, 1993 Feliciano, J.

Doctrine: The policy underlying the prohibition in Section 18 against the registration of a
corporate name which is "identical or deceptively or confusingly similar" to that of any existing
corporation or which is "patently deceptive" or "patently confusing" or "contrary to existing laws,"
is the avoidance of fraud upon the public which would have occasion to deal with the entity
concerned, the evasion of legal obligations and duties, and the reduction of difficulties of
administration and supervision over corporations.

True enough, the corporate names of private respondent entities all carry the word "Lyceum" but
confusion and deception are effectively precluded by the appending of geographic names to the
word "Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the
general public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be
confused with the Lyceum of the Philippines.

FACTS: Petitioner is an educational institution duly registered with the Securities and Exchange
Commission ("SEC"). When it first registered with the SEC on 21 September 1950, it used the
corporate name Lyceum of the Philippines, Inc. and has used that name ever since.

Petitioner had sometime before commenced in the SEC a proceeding against the Lyceum of
Baguio, Inc. to require it to change its corporate name and to adopt another name not "similar [to]
or identical" with that of petitioner. SEC held that the corporate name of petitioner and that of the
Lyceum of Baguio, Inc. were substantially identical because of the presence of a "dominant" word,
i.e., "Lyceum," the name of the geographical location of the campus being the only word which
distinguished one from the other corporate name. The SEC also noted that petitioner had
registered as a corporation ahead of the Lyceum of Baguio, Inc. in point of time, and ordered the
latter to change its name to another name "not similar or identical with" the names of previously
registered entities.

The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court but was
dismissed for lack of merit. Entry of judgment in that case was made on 21 October 1977.

Armed with a Supreme Court resolution, on 24 February 1984, petitioner instituted proceedings
before the SEC to compel the private respondents, which are also educational institutions, to
delete the word "Lyceum" from their corporate names and permanently enjoin them from using
"Lyceum" as part of their respective names.

ISSUE/S: Whether or not petitioner is entitled to legally enforce exclusive right to use the word
“lyceum” in its corporate name.

44
HELD: No. The Articles of Incorporation of a corporation must, among other things, set out the
name of the corporation. Section 18 of the Corporation Code establishes a restrictive rule insofar
as corporate names are concerned:

"Section 18. Corporate name. -- No corporate name may be allowed by the

Securities and Exchange Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law or is patently deceptive, confusing or contrary to
existing laws. When a change in the corporate name is approved, the Commission
shall issue an amended certificate of incorporation under the amended name."
(Underscoring supplied)

The policy underlying the prohibition in Section 18 against the registration of a corporate name
which is "identical or deceptively or confusingly similar" to that of any existing corporation or which
is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the avoidance of
fraud upon the public which would have occasion to deal with the entity concerned, the evasion of
legal obligations and duties, and the reduction of difficulties of administration and supervision over
corporations.

We do not consider that the corporate names of private respondent institutions are "identical with,
or deceptively or confusingly similar" to that of the petitioner institution. True enough, the corporate
names of private respondent entities all carry the word "Lyceum" but confusion and deception are
effectively precluded by the appending of geographic names to the word "Lyceum." Thus, we do
not believe that the "Lyceum of Aparri" can be mistaken by the general public for the Lyceum of the
Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum of the
Philippines.

Neither can the petitioner claim that the word "Lyceum" has acquired a secondary meaning
whereby the word “Lyceum”, although originally a generic, has become appropriable by petitioner
to the exclusion of other institutions like private respondents herein. The number alone of the
private respondents in the case at bar suggests strongly that petitioner's use of the word "Lyceum"
has not been attended with the exclusivity essential for applicability of the doctrine of secondary
meaning. It may be noted also that at least one of the private respondents, i.e., the Western
Pangasinan Lyceum, Inc., used the term "Lyceum" seventeen (17) years before the petitioner
registered its own corporate name with the SEC and began using the word "Lyceum." It follows
that if any institution had acquired an exclusive right to the word "Lyceum," that institution would
have been the Western Pangasinan Lyceum, Inc. rather than the petitioner institution.

DISPOSITIVE RULING: WHEREFORE, the petitioner having failed to show any reversible error
on the part of the public respondent Court of Appeals, the Petition for Review is DENIED for lack of
merit, and the Decision of the Court of Appeals dated 28 June 1991 is hereby AFFIRMED. No
pronouncement as to costs.

45
ADAP, Roberto Anton C. L-170042

Case 20
Ang Mga Kaanib sa Iglesia ng Dios vs. Iglesia ng Dios Kay Kristo Jesus
GR Number 137592, December 12, 2001 Ynares-Santiago, J.

Doctrines:
● Parties organizing a corporation must choose a name at their peril; and the use of a name
similar to one adopted by another corporation, whether a business or a nonprofit
organization, if misleading or likely to injure in the exercise of its corporate functions,
regardless of intent, may be prevented by the corporation having a prior right, by a suit for
injunction against the new corporation to prevent the use of the name.
● The SEC has the authority to de-register at all times and under all circumstances
corporate names which, in its estimation, are likely to spawn confusion.

The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc." in petitioner's name
are, as correctly observed by the SEC, merely descriptive of and also referring to the members,
or kaanib, of respondent who are likewise residing in the Philippines. These words can hardly
serve as an effective differentiating medium necessary to avoid confusion or difficulty in
distinguishing petitioner from respondent. This is especially so, since both petitioner and
respondent corporations are using the same acronym --- H.S.K.; not to mention the fact that both
are espousing religious beliefs and operating in the same place. Parenthetically, it is well to
mention that the acronym H.S.K. used by petitioner stands for "Haligi at Saligan ng
Katotohanan."

FACTS: Respondent (Church of God in Christ Jesus, the Pillar and Ground of Truth), is a non
stock religious corporation registered in 1936. In 1976, one Eliseo Soriano and others
disassociated themselves from respondent and registered a new corporation named Iglesia ng
Dios kay Kristo Hesus, Haligi at Saligan ng Katotohanan. Respondent petitioned the SEC to
compel this corporation to change its name. The SEC ordered this corporation to change its
corporate name.

While the above case was pending, Soriano registered in 1980 petitioner corporation, Ang mga
Kaanib sa Iglesia ng Dios kay Kristo Hesus, H.S.K., sa Bansang Pilipinas. “HSK” stands for Haligi
at Saligan ng Katotohanan. Respondent petitioned SEC to compel petitioner to change its
corporate name. Petitioner was declared in default for filing a MtD instead of answer. SEC ordered
petitioner to change its name. SEC En Banc affirmed. CA affirmed. Hence this petition.

ISSUE/S: Whether the differences in petitioner’s name with that of respondent (i.e. “Ang mga
kaanib”, Saligan vs. Suhay, “Sa bansang Pilipinas”) are enough to distinguish petitioner
corporation from respondent.

HELD: No. Section 18 of the Corporation Code provides:

Corporate Name. --- No corporate name may be allowed by the Securities and
Exchange Commission if the proposed name is identical or deceptively or confusingly
46
 similar to that of any existing corporation or to any other name already protected by law
or is patently deceptive, confusing or is contrary to existing laws. When a change in the
corporate name is approved, the Commission shall issue an amended certificate of
incorporation under the amended name.

Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate Names states:
(d) If the proposed name contains a word similar to a word already used as part of the
firm name or style of a registered company, the proposed name must contain two other
words different from the name of the company already registered;

Parties organizing a corporation must choose a name at their peril; and the use of a name similar
to one adopted by another corporation, whether a business or a nonprofit organization, if
misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may be
prevented by the corporation having a prior right, by a suit for injunction against the new
corporation to prevent the use of the name.

Moreover, the SEC has the authority to de-register at all times and under all circumstances
corporate names which in its estimation are likely to spawn confusion. It is the duty of the SEC to
prevent confusion in the use of corporate names not only for the protection of the corporations
involved but more so for the protection of the public.

Petitioner claims that it added not only 2 but 8 words to its registered name: “Ang Mga Kaanib”,
“Sa Bansang Pilipinas, Inc.” which distinguished it from respondent.

The Court held that additional words are merely descriptive. These additional words are merely
descriptive of and also referring to the members, or kaanib, of respondents who are likewise
residing in PH. These are not effective differentiating mediums. In holding out their corporate name
to the public, petitioner highlights the dominant words “Iglesia ng Dios kay Kristo Hesus, Haligi at
Saligan ng Katotohanan, thus showing that the additional words Ang mga Kaanib and Sa Bansang
Pilipinas are merely descriptive of the members of respondent. Both corporations also use the
same acronym- HSK, and both also espouse religious beliefs and operate in the same place.

The words “Saligan” and “Suhay” are synonymous, both meaning ground, foundation, or support.
Thus, this case is on all fours with Universal Mills Corporation v. Universal Textile Mills, Inc. where
SC ruled that the corporate names Universal Mills Corporation and Universal Textile Mills, Inc., are
so similar that even under the test of "reasonable care and observation" confusion may arise.
Another contention of the petitioner was that ordering petitioner to change its corporate name
violates its right to religious freedom.

The Court held that the SEC merely compelled petitioner to abide by SEC’s guidelines in the
approval of corporate names, namely its undertaking to manifest its willingness to change its
corporate name in the event another person, firm, or entity has acquired a prior right to the use of
said firm name or one confusingly similar to it.

DISPOSITIVE RULING: WHEREFORE, in view of all the foregoing, the instant petition for review
is DENIED. The appealed decision of the Court of Appeals is AFFIRMED in toto.

47
BAGTANG, Judea Ara T. L-1800350

Case 21
Young Auto Supply vs. CA
G.R. No. 104175; June 25, 1993 Quiason, J.:

Doctrine: A corporation is in a metaphysical sense a resident of the place where its principal
office is located as stated in the articles of incorporation. The Corporation Code precisely
requires each corporation to specify in its articles of incorporation the "place where the principal
office of the corporation is to be located which must be within the Philippines" (Sec. 14 [3]). The
purpose of this requirement is to fix the residence of a corporation in a definite place, instead of
allowing it to be ambulatory.

FACTS: Young Auto Supply Co. Inc. (YASCO) represented by Nemesio Garcia, its president,
Nelson Garcia and Vicente Sy, sold all of their shares of stock in Consolidated Marketing &
Development Corporation (CMDC) to Roxas. The purchase price of P8,000,000.00 was payable
as follows: a down payment of P4,000,000.00 and the balance of P4,000,000.00 in four postdated
checks. The first check representing the down payment, was honored by the drawee bank but the
four other checks representing the balance were dishonored. Out of the proceeds of the sale,
YASCO received P600,000.00. Petitioners filed a complaint against Roxas in the Regional Trial
Court, Branch 11, Cebu City, praying that Roxas be ordered to pay petitioners the sum of
P3,400,000.00 or that full control of the three markets be turned over to YASCO and Garcia. The
complaint also prayed for the forfeiture of the partial payment of P4,600,000.00 and the payment of
attorney’s fees and costs Roxas filed a motion to dismiss on the ground that xxx (3) the venue was
improperly laid. The trial court denied Roxas’ motion to dismiss. The Court of Appeals ordered the
dismissal of the complaint on the ground of improper venue. In holding that the venue was
improperly laid in Cebu City, the Court of Appeals relied on the address of YASCO, as appearing in
the Deed of Sale dated October 28, 1987, which is "No. 1708 Dominga Street, Pasay City." This
was the same address written on YASCO’s letters and several commercial documents in the
possession of Roxas.

ISSUE/S: Whether or not the venue was improper

HELD: No. A corporation has no residence in the same sense in which this term is applied to a
natural person. But for practical purposes, a corporation is in a metaphysical sense a resident of
the place where its principal office is located as stated in the articles of incorporation. The
Corporation Code precisely requires each corporation to specify in its articles of incorporation the
"place where the principal office of the corporation is to be located which must be within the
Philippines" (Sec. 14 [3]). The purpose of this requirement is to fix the residence of a corporation in
a definite place, instead of allowing it to be ambulatory.

In Clavecilla Radio System v. Antillon, 19 SCRA 379 ([1967]), the Court explained that to allow an
action to be instituted in any place where the corporation has branch offices, would create
confusion and work untold inconvenience to said entity. By the same token, a corporation cannot

48
be allowed to file personal actions in a place other than its principal place of business unless such
a place is also the residence of a co-plaintiff or a defendant.

There are two plaintiffs in the case at bench: a natural person and a domestic corporation. Both
plaintiffs aver in their complaint that they are residents of Cebu City, thus:
"1.1 Plaintiff Young Auto Supply Co., Inc. ("YASCO") is a domestic corporation duly
organized and existing under Philippine laws with principal place of business at M.J.
Cuenco Avenue, Cebu City. It also has a branch office at 1708 Dominga Street, Pasay City,
Metro Manila.
"Plaintiff Nemesio Garcia is of legal age, married, Filipino citizen and with business address
at Young Auto Supply Co., Inc., M.J. Cuenco Avenue, Cebu City. . . ."

The Article of Incorporation of YASCO (SEC Reg. No. 22083) states: “That the place where the
principal office of the corporation is to be established or located is at Cebu City, Philippines (as
amended on December 20, 1980 and further amended on December 20, 1984).

With the finding that the residence of YASCO for purposes of venue is in Cebu City, where its
principal place of business is located, it becomes unnecessary to decide whether Garcia is also a
resident of Cebu City and whether Roxas was in estoppel from questioning the choice of Cebu City
as the venue.

DISPOSITIVE RULING: WHEREFORE, the petition is GRANTED. The decision of the Court of
Appeals appealed from is SET ASIDE and the Order dated February 8, 1991 of the Regional Trial
Court is REINSTATED. SO ORDERED.

49
BALLENA, Fernando Jr, M. L-170308

Case 22
De La Salle Montessori International of Malolos, Inc. vs. De La Salle Brothers, Inc
GR Number 205548, February 7, 2018 Jardeleza, J.

Doctrines:
● To fall within the prohibition of Section 18 of the Corporation Code of the Philippines, two
requisites must be proven, to wit: (1) that the complainant corporation acquired a prior
right over the use of such corporate name; and (2) the proposed name is either: (a)
identical, or (b) deceptively or confusingly similar to that of any existing corporation or (b)
deceptively or confusingly similar to that of any existing corporation or to any other name
already protected by law; or (c) patently deceptive, confusing or contrary to existing law.
● In determining the existence of confusing similarity in corporate names, the test is
whether the similarity is such as to mislead a person using ordinary care and
discrimination. In so doing, the Court must look to the record as well as the names
themselves.
The Court's ruling in Lyceum of the Philippines does not apply. Here, the phrase "De La Salle" is
not generic in relation to respondents. It is not descriptive of respondent's business as institutes
of learning, unlike the meaning ascribed to "Lyceum." Moreover, respondent De La Salle
Brothers, Inc. was registered in 1961 and the De La Salle group had been using the name
decades before petitioner's corporate registration. In contrast, there was no evidence of the
Lyceum of the Philippines, Inc.'s exclusive use of the word "Lyceum," as in fact another
educational institution had used the word 17 years before the former registered its corporate
name with the SEC. Also, at least nine other educational institutions included the word in their
corporate names.

FACTS: Petitioner De La Salle Montessori International of Malolos, Inc. reserved with the SEC its
corporate name De La Salle Montessori International Malolos, Inc. after which the SEC indorsed
petitioner's articles of incorporation and by-laws to the DepEd which were not objected to by the
latter. Consequently, the SEC issued a certificate of incorporation to petitioner. Later on,
respondents De La Salle Brothers, Inc., et al., filed a petition with the SEC seeking to compel
petitioner to change its corporate name. They claim that petitioner's corporate name is misleading
or confusingly similar to that which respondents have acquired a prior right to use, and that
respondents' consent to use such name was not obtained. According to respondents, petitioner's
use of the dominant phrases "La Salle" and "De La Salle" gives an erroneous impression that De
La Salle Montessori International of Malolos, Inc. is part of the "La Salle" group, which violates
Section 18 of the Corporation Code of the Philippines. Moreover, being the prior registrant,
respondents have acquired the use of said phrases as part of their corporate names and have
freedom from infringement of the same.
SEC OGC: Issued an Order directing petitioner to change or modify its corporate name. It
concluded that respondents' use of the phrase "De La Salle" or "La Salle" is arbitrary, fanciful,
whimsical and distinctive, and thus legally protectable. It also disagreed with petitioner's

50
argument that the case of Lyceum of the Philippines, Inc. v. Court of Appeals applies since the
word "lyceum" is clearly descriptive of the very being and defining purpose of an educational
corporation, unlike the term "De La Salle" or "La Salle." Hence, the Court held in that case that
the Lyceum of the Philippines, Inc. cannot claim exclusive use of the name "lyceum."
SEC EN BANC: Affirmed decision of SEC OGC. It held, among others, that petitioner failed to
establish that the term "De La Salle" is generic for the principle enunciated in Lyceum of the
Philippines to apply.
CA: Affirmed in toto the decision of SEC OGC and SEC En Banc. Hence, this petition.

ISSUES:
1) Whether the CA erred in not applying the ruling in the Lyceum of the Philippines case which
petitioner argues have "the same facts and events" as in this case?

2) Whether petitioner acquired prior right over the use of the corporate name as against the
respondents?

3) Whether the petitioner has the right to use the phrase De La Salle in its corporate name?

HELD:
1) No, the Court's ruling in Lyceum of the Philippines does not apply. The Court there held
that the word "Lyceum" today generally refers to a school or institution of learning. It is as generic
in character as the word "university." Since "Lyceum" denotes a school or institution of learning, it
is not unnatural to use this word to designate an entity which is organized and operating as an
educational institution. Moreover, the Lyceum of the Philippines, Inc.'s use of the word "Lyceum"
for a long period of time did not amount to mean that the word had acquired secondary meaning in
its favor because it failed to prove that it had been using the word all by itself to the exclusion of
others. More so, there was no evidence presented to prove that the word has been so identified
with the Lyceum of the Philippines, Inc. as an educational institution that confusion will surely arise
if the same word were to be used by other educational institutions. Here, the phrase "De La Salle"
is not generic in relation to respondents. It is not descriptive of respondent's business as institutes
of learning, unlike the meaning ascribed to "Lyceum." Moreover, respondent De La Salle Brothers,
Inc. was registered in 1961 and the De La Salle group had been using the name decades before
petitioner's corporate registration. In contrast, there was no evidence of the Lyceum of the
Philippines, Inc.'s exclusive use of the word "Lyceum," as in fact another educational institution
had used the word 17 years before the former registered its corporate name with the SEC. Also, at
least nine other educational institutions included the word in their corporate names. There is thus
no similarity between the Lyceum of the Philippines case and this case that would call for a similar
ruling.
2) No, the petitioner did not acquire prior right over the use of the corporate name as
against the respondents. The Court held that to fall within the prohibition of Section 18 of the
Corporation Code of the Philippines, two requisites must be proven, to wit: (1) that the
complainant corporation acquired a prior right over the use of such corporate name; and (2) the
proposed name is either: (a) identical, or (b) deceptively or confusingly similar to that of any
existing corporation or (b) deceptively or confusingly similar to that of any existing corporation or
to any other name already protected by law; or (c) patently deceptive, confusing or contrary to
existing law. With respect to the first requisite, the Court has held that the right to the exclusive
51
use of a corporate name with freedom from infringement by similarity is determined by priority of
adoption. In this case, respondents' corporate names were registered on the following dates: (1)
De La Salle Brothers, Inc. on October 9, 1961; (2) De La Salle University, Inc. on December 19,
1975 (3) La Salle Academy, Inc. on January 26, 1960; (4) De La Salle-Santiago Zobel School,
Inc. on October 7, 1976; and (5) De La Salle Canlubang, Inc. on August 5, 1998 . On the other
hand, the petitioner was issued a Certificate of Registration only on July 5, 2007. It being clear
that respondents are the prior registrants, they certainly have acquired the right to use the words
``De La Salle" or "La Salle" as part of their corporate names.The second requisite is also
satisfied since there is a confusing similarity between petitioner's and respondents' corporate
names. While these corporate names are not identical, it is evident that the phrase "De La Salle"
is the dominant phrase used.
3) No, the petitioner has no right to use the phrase De La Salle in its corporate name. In
determining the existence of confusing similarity in corporate names, the test is whether the
similarity is such as to mislead a person using ordinary care and discrimination. In so doing, the
Court must look to the record as well as the names themselves. Petitioner's assertion that the
words "Montessori International of Malolos, Inc." are four distinctive words that are not found in
respondents' corporate names so that their corporate name is not identical, confusingly similar,
patently deceptive or contrary to existing laws, does not avail. As correctly held by the SEC
OGC, all these words, when used with the name "De La Salle," can reasonably mislead a person
using ordinary care and discretion into thinking that petitioner is an affiliate or a branch of, or is
likewise founded by, any or all of the respondents, thereby causing confusion. Petitioner's
argument that it obtained the words "De La Salle" from the French word meaning "classroom,"
while respondents obtained it from the French priest named Saint Jean Baptiste de La Salle,
similarly does not hold water. The phrase "De La Salle" is not merely a generic term.
Respondents' use of the phrase being suggestive and may properly be regarded as fanciful,
arbitrary and whimsical, it is entitled to legal protection. Petitioner's use of the phrase "De La
Salle" in its corporate name is patently similar to that of respondents that even with reasonable
care and observation, confusion might arise. The Court notes not only the similarity in the parties'
names, but also the business they are engaged in. They are all private educational institutions
offering pre-elementary, elementary and secondary courses. As aptly observed by the SEC En
Banc, petitioner's name gives the impression that it is a branch or affiliate of respondents. It is
settled that proof of actual confusion need not be shown. It suffices that confusion is probable or
likely to occur.

DISPOSITIVE RULING: WHEREFORE, the Petition is DENIED. The assailed Decision of the CA
dated September 27, 2012 is AFFIRMED. SO ORDERED.

52
BERONA, Christienne Nathalie A. L-1800245

Case 23
Roy III v. Herbosa
G.R. No. 207246. November 22, 2016 Caguioa, J.

Doctrine: Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required
in the Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights, is required. The Gamboa Decision held that
preferred shares are to be factored in only if they are entitled to vote in the election of directors.
If preferred shares have no voting rights, then they cannot elect members of the board of
directors, which wields control of the corporation. As to the right of non-voting preferred shares
to vote in the 8 instances enumerated in Section 6 of the Corporation Code, the Gamboa
Decision considered them but, in the end, did not find them significant in resolving the issue of
the proper interpretation of the word "capital" in Section 11, Article XII of the Constitution.

FACTS: On June 28, 2011, the Court issued its decision in the case of in Gamboa v. Finance
Secretary Teves, the dispositive portion of which ruled that the term "capital" in Section 11, Article
XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of
directors, and thus in the present case only to common shares, and not to the total outstanding
capital stock (common and non-voting preferred shares). On November 6, 2012, the SEC posted a
Notice in its website inviting the public to attend a public dialogue and to submit comments on the
draft memorandum circular (attached thereto) on the guidelines to be followed in determining
compliance with the Filipino ownership requirement in public utilities pursuant to the Court's
directive in the Gamboa Decision. On January 8, 2013, the SEC received a copy of the Entry of
Judgment from the Court certifying that on October 18, 2012, the Gamboa Decision had become
final and executory. However, the SEC posted another Notice in its website soliciting from the
public comments and suggestions on the draft guidelines. Petitioner Atty. Jose M. Roy III
submitted his written comments on the draft guidelines.

On May 20, 2013, the SEC, through respondent Chairperson Teresita J. Herbosa, issued SEC-MC
No. 8 entitled "Guidelines on Compliance with the Filipino-Foreign Ownership Requirements
Prescribed in the Constitution and/or Existing Laws by Corporations Engaged in Nationalized and
Partly Nationalized Activities." Section 2 of SEC-MC No. 8 provides:

Section 2. All covered corporations shall, at all times, observe the constitutional or statutory
ownership requirement. For purposes of determining compliance therewith, the required
percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding
shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding
shares of stock, whether or not entitled to vote in the election of directors.

Corporations covered by special laws which provide specific citizenship requirements shall
comply with the provisions of said law.

53
Petitioner Roy, as a lawyer and taxpayer, filed the Petition, assailing the validity of SEC-MC No. 8
for not conforming to the letter and spirit of the Gamboa Decision and Resolution and for having
been issued by the SEC with grave abuse of discretion. Petitioner Roy seeks to apply the 60-40
Filipino ownership requirement separately to each class of shares of a public utility corporation,
whether common, preferred non-voting, preferred voting or any other class of shares.

Respondent PLDT posited that the Petition should be dismissed because it violates the doctrine of
hierarchy of courts as there are no compelling reasons to invoke the Court's original jurisdiction; it
is prematurely filed because petitioner Roy failed to exhaust administrative remedies before the
SEC; the principal actions/remedies of mandamus and declaratory relief are not within the
exclusive and/or original jurisdiction of the Court; the petition for certiorari is an inappropriate
remedy since the SEC issued SEC-MC No. 8 in the exercise of its quasi-legislative power; it
deprives the necessary and indispensable parties of their constitutional right to due process; and
the SEC merely implemented the dispositive portion of the Gamboa Decision.

On June 18, 2014, the Philippine Stock Exchange, Inc. ("PSE") filed its Motion to Intervene arguing
that in the Gamboa ruling, "capital" refers only to shares entitled to vote in the election of directors,
and excludes those not so entitled; and the dispositive portion of the decision is the controlling
factor that determines and settles the questions presented in the case. The PSE further argued
that adopting a new definition of "capital" will prove disastrous for the Philippine stock market. The
Court granted the Motion to Intervene filed by PSE.

ISSUE/S: Whether or not the SEC gravely abused its discretion in ruling that PLDT is compliant
with the constitutional limitation on foreign ownership

HELD: No. In the Gamboa Case, the Court directly answered the issue and consistently defined
the term "capital" as follows:

. . . The term "capital" in Section 11, Article XII of the Constitution refers only to shares of stock
entitled to vote in the election of directors, and thus in the present case only to common shares,
and not to the total outstanding capital stock comprising both common and non-voting preferred
shares.

Considering that common shares have voting rights which translate to control, as opposed to
preferred shares which usually have no voting rights, the term "capital" in Section 11, Article XII of
the Constitution refers only to common shares. However, if the preferred shares also have the right
to vote in the election of directors, then the term "capital" shall include such preferred shares
because the right to participate in the control or management of the corporation is exercised
through the right to vote in the election of directors. In short, the term "capital" in Section 11, Article
XII of the Constitution refers only to shares of stock that can vote in the election of directors.

For the most part of the Gamboa Resolution, the Court reiterated that both the Voting Control Test
and the Beneficial Ownership Test must be applied to determine whether a corporation is a
"Philippine national" and that a "Philippine national," is "a Filipino citizen, or a domestic corporation
"at least sixty percent (60%) of the capital stock outstanding and entitled to vote," is owned by
Filipino citizens. A domestic corporation is a "Philippine national" only if at least 60% of its voting
stock is owned by Filipino citizens." The Court also reiterated that, from the deliberations of the

54
Constitutional Commission, it is evident that the term "capital" refers to controlling interest of a
corporation, and the framers of the Constitution intended public utilities to be majority
Filipino-owned and controlled.

Section 2 of SEC-MC No. 8 clearly incorporates the Voting Control Test or the controlling interest
requirement. In fact, Section 2 goes beyond requiring a 60-40 ratio in favor of Filipino nationals in
the voting stocks; it moreover requires the 60-40 percentage ownership in the total number of
outstanding shares of stock, whether voting or not. SEC-MC No. 8 simply implemented, and is fully
in accordance with, the Gamboa Decision and Resolution. Mere legal title is insufficient to meet
the 60 percent Filipino-owned "capital" required in the Constitution. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required.
Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of
the voting rights, is constitutionally required for the State's grant of authority to operate a public
utility.

The "beneficial owner or beneficial ownership" definition in the SRC-IRR is understood only in
determining the respective nationalities of the outstanding capital stock of a public utility
corporation in order to determine its compliance with the percentage of Filipino ownership required
by the Constitution.

The Gamboa Decision held that preferred shares are to be factored in only if they are entitled to
vote in the election of directors. If preferred shares have no voting rights, then they cannot elect
members of the board of directors, which wields control of the corporation. As to the right of
non-voting preferred shares to vote in the 8 instances enumerated in Section 6 of the Corporation
Code, the Gamboa Decision considered them but, in the end, did not find them significant in
resolving the issue of the proper interpretation of the word "capital" in Section 11, Article XII of the
Constitution.

DISPOSITIVE RULING: WHEREFORE, the subject Motion for Reconsideration is hereby DENIED
WITH FINALITY. No further pleadings or motions shall be entertained in this case. Let entry of final
judgment be issued immediately. SO ORDERED.

55
Bohol, Bryan D. L-170449

Case 24
Narra Nickel Mining vs. Redmont Consolidated Mines Corp.
G.R. No. 195580, April 21, 2014 Sandoval-Gutierrez, J.

Doctrine: The "control test" is still the prevailing mode of determining whether or not a
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution,
entitled to undertake the exploration, development and utilization of the natural resources of the
Philippines. When in the mind of the Court there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it may
apply the "grandfather rule."

FACTS: Sometime in December 2006, respondent Redmont Consolidated Mines Corp.

(Redmont), a domestic corporation organized and existing under Philippine laws, took interest in
mining and exploring certain areas of the province of Palawan. After inquiring with the Department
of Environment and Natural Resources (DENR), it learned that the areas where it wanted to
undertake exploration and mining activities were already covered by Mineral Production Sharing
Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.

On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3)
separate petitions for the denial of petitioners’ applications for MPSA designated as AMA-IVB-153,
AMA-IVB-154 and MPSA IV-1-12.

In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and
Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation.
Redmont reasoned that since MBMI is a considerable stockholder of petitioners, it was the driving
force behind petitioners’ filing of the MPSAs over the areas covered by applications since it knows
that it can only participate in mining activities through corporations which are deemed Filipino
citizens. Redmont argued that given that petitioners’ capital stocks were mostly owned by MBMI,
they were likewise disqualified from engaging in mining activities through MPSAs, which are
reserved only for Filipino citizens.

WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro
Mining and Development, Inc., and Narra Nickel Mining and Development Corp. as,
DISQUALIFIED for being considered as Foreign Corporations. Their Mineral Production Sharing
Agreement (MPSA) are hereby x x x DECLARED NULL AND VOID.

The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a
100% Canadian company and declared their MPSAs null and void. In the same Resolution, it gave
due course to Redmont’s EPAs. Thereafter, on February 7, 2008, the POA issued an Order
denying the Motion for Reconsideration filed by petitioners.

Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of
Appeal and Memorandum of Appeal with the Mines Adjudication Board (MAB) while Narra
separately filed its Notice of Appeal and Memorandum of Appeal.

56
ISSUE/S: Whether or not Narra, Tesoro and McArthur being foreign corporations, based on the
"Grandfather Rule" is contrary to law, particularly with the express mandate of the Foreign
Investments Act of 1991, as amended, and the FIA Rules.

HELD: No. The main issue in this case is centered on the issue of petitioners’ nationality, whether
Filipino or foreign. In their previous petitions, they had been adamant in insisting that they were
Filipino corporations, until they submitted their Manifestation and Submission dated October 19,
2012 where they stated the alleged change of corporate ownership to reflect their Filipino
ownership. Thus, there is a need to determine the nationality of petitioner corporations.

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000
shares are registered in the name of a corporation or partnership at least 60% of the capital stock
or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as
owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the
corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be
counted as owned by Filipinos and the other 50,000 shall be recorded as belonging to aliens.

To establish the actual ownership, interest or participation of MBMI in each of the petitioners'
corporate structure, they have to be "grandfathered."

Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro and
Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their
equity interests. Such conclusion is derived from grandfathering petitioners’ corporate owners,
namely: MMI, SMMI and PLMDC. Going further and adding to the picture, MBMI’s Summary of
Significant Accounting Policies statement– –regarding the "joint venture" agreements that it
entered into with the "Olympic" and "Alpha'' groups––involves SMMI, Tesoro, PLMDC and Narra.
Noticeably, the ownership of the "layered" corporations boils down to MBMI, Olympic or
corporations under the "Alpha'' group wherein MBMI has joint venture agreements with, practically
exercising majority control over the corporations mentioned. In effect, whether looking at the
capital structure or the underlying relationships between and among the corporations, petitioners
are NOT Filipino nationals and must be considered foreign since 60% or more of their capital
stocks or equity interests are owned by MBMI.

DISPOSITIVE RULING: WHEREFORE, the Decision of the Court of Appeals is AFFIRMED. The
trial court, RTC, Branch 72, Malabon City, is ordered to allow Esperanza Alvarez to testify against
petitioner, her husband, in Criminal Case No. 19933-MN. Costs against petitioner.

57
DISTURA, Quennie Minalete B. L-170503

Case 25
Gamboa vs. Teves
GR Number 176579, June 28, 2011 Carpio, J.

Doctrine: The term "capital" in Section 11, Article XII of the 1987 Constitution refers to shares
with voting rights, as well as with full beneficial ownership.

FACTS: This resolves the motions for reconsideration of the 28 June 2011 Decision filed by the
Philippine Stock Exchange's (PSE) President, Manuel Pangilinan, Napoleon Nazareno, and the
Securities and Exchange Commission (collectively, movants).

Movants contend that the term "capital" in Section 11, Article XII of the Constitution has long been
settled and defined to refer to the total outstanding shares of stock, whether voting or non-voting.
In fact, movants claim that the SEC, which is the administrative agency tasked to enforce the
60-40 ownership requirement in favor of Filipino citizens in the Constitution and various statutes,
has consistently adopted this particular definition in its numerous opinions. Movants point out that
with the 28 June 2011 Decision, the Court in effect introduced a "new" definition or "midstream
redefinition" of the term "capital" in Section 11, Article XII of the Constitution.

ISSUE/S:
1) Whether or not there was a redefinition of the term “capital.”
2) Whether or not the right to elect directors, coupled with beneficial ownership, translates to
effective control.

HELD:
1) No. Until the present case there has never been a Court ruling categorically defining the
term "capital" found in the various economic provisions of the 1935, 1973 and 1987
Philippine Constitution.

Compliance with the constitutional limitation on engaging in nationalized activities must be

determined by ascertaining if 60% of the investing corporations outstanding capital stock is
owned by "Filipino citizens", or as interpreted, by natural or individual Filipino citizens. If
such investing corporation is in turn owned to some extent by another investing corporation,
the same process must be observed. One must not stop until the citizenships of the
individual or natural stockholders of layer after layer of investing corporations have been
established, the very essence of the Grandfather Rule. Lastly, it was the intent of the
framers of the 1987 Constitution to adopt the Grandfather Rule. Both the Voting Control
Test and the Beneficial Ownership Test must be applied to determine whether a corporation
is a "Philippine national."

The Constitution expressly declares as State policy the development of an economy

"effectively controlled" by Filipinos. Consistent with such State policy, the Constitution
explicitly reserves the ownership and operation of public utilities to Philippine nationals, who
58
 are defined in the Foreign Investments Act of 1991 as Filipino citizens, or corporations or
associations at least 60 percent of whose capital with voting rights belongs to Filipinos.
The FIAs implementing rules explain that "[f]or stocks to be deemed owned and held by
Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate
voting rights is essential." In effect, the FIA clarifies, reiterates and confirms the
interpretation that the term "capital" in Section 11, Article XII of the 1987 Constitution refers
to shares with voting rights, as well as with full beneficial ownership. This is precisely
because the right to vote in the election of directors, coupled with full beneficial ownership
of stocks, translates to effective control of a corporation.

Under Section 11, Article XII of the 1987 Constitution, to own and operate a public
utility a corporations capital must at least be 60 percent owned by Philippine
nationals.

DEFINITION OF "PHILIPPINE NATIONAL"

Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA) clearly defines a
"Philippine national" as a Filipino citizen, or a domestic corporation "at least sixty
percent (60%) of the capital stock outstanding and entitled to vote" is owned by
Filipino citizens. A domestic corporation is a "Philippine national" only if at least 60% of its
voting stock is owned by Filipino citizens.

2) Yes. The right to elect directors, coupled with beneficial ownership, translates to effective
control. The 28 June 2011 Decision declares that the 60 percent Filipino ownership required
by the Constitution to engage in certain economic activities applies not only to voting control
of the corporation, but also to the beneficial ownership of the corporation. To repeat, the
SC held:

Mere legal title is insufficient to meet the 60 percent Filipino-owned

"capital" required in the Constitution. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of
the voting rights, is required. The legal and beneficial ownership of 60
percent of the outstanding capital stock must rest in the hands of Filipino
nationals in accordance with the constitutional mandate. Otherwise, the
corporation is "considered as non-Philippine nationals."

Since the constitutional requirement of at least 60 percent Filipino ownership applies not
only to voting of the corporation but also to the beneficial ownership of the corporation, it is
therefore imperative that such requirement apply uniformly and across the board to all
classes of shares, regardless of nomenclature and category, comprising the capital of a
corporation. Under the Corporation Code, capital stock consists of all classes of shares
issued to stockholders, that is, common shares as well as preferred shares, which may
have different rights, privileges or restrictions as stated in the articles of incorporation.

Thus, if a corporation, engaged in a partially nationalized industry, issues a mixture

of common and preferred non-voting shares, at least 60 percent of the common
shares and at least 60 percent of the preferred non-voting shares must be owned by

59
 Filipinos. Of course, if a corporation issues only a single class of shares, at least 60
percent of such shares must necessarily be owned by Filipinos. In short, the 60-40
ownership requirement in favor of Filipino citizens must apply separately to each
class of shares, whether common, preferred non-voting, preferred voting or any other
class of shares.

DISPOSITIVE RULING: WHEREFORE, we PARTLY GRANT the petition and rule that the term
"capital" in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to
vote in the election of directors, and thus in the present case only to common shares, and not to
the total outstanding capital stock (common and non-voting preferred shares). Respondent
Chairperson of the Securities and Exchange Commission is DIRECTED to apply this definition of
the term "capital" in determining the extent of allowable foreign ownership in respondent Philippine
Long Distance Telephone Company, and if there is a violation of Section 11, Article XII of the
Constitution, to impose the appropriate sanctions under the law.

60
________________________________

MODULE 2
Control and Management of A Corporation

________________________________
62
DOCTOR, Clarisse Maita M. L-160075

Case 26
Grace Christian Highschool vs. CA
G.R. No. 108905; October 23, 1997 Mendoza, J.

Doctrine: The board of directors of corporations must be elected from among the stockholders
or members. There may be corporations in which there are unelected members in the board but
it is clear that in the examples cited by petitioner, the unelected members sit as ex officio
members, i.e., by virtue of and for as long as they hold a particular office.

FACTS: Petitioner is an educational institution while private respondent, Grace Village Association
Inc. is an organization of lot and/or building owners, lessees and residents at Grace Village,
Beltran and Go were its president and chairman of committee on elections respectively when the
suit was brought.

The 1968 by-laws of the corporation provides that the members shall elect by plurality vote and
secret balloting the 11 members of the board of directors to serve for one year until their
successors are duly elected and qualified.

In 1975, there was a proposed amendment to the by-laws which entitles the representative of
petitioner school a permanent seat in the board of directors. The proposal was never presented to
the general membership for approval. Nevertheless, for fifteen (15) years from 1975 to 1990,
petitioner’s representative has been recognized as a permanent director of the association.

In 1990, the committee on election informed the petitioner school’s principal that the directors
should be elected by the members of the association and that notices were sent out to the other
members that the provision for the 1968 by-laws of the association would be observed. Petitioner
requested the committee on elections to change the notice of election by following the procedure
in previous elections as the notice for the 1990 elections would run counter to the practice in
previous years and the 1975 by-laws which would unlawfully deprive its vested right to a
permanent seat in the board. The SEC rendered an opinion to the effect that the practice of
allowing unelected members in the board was contrary to the existing by-laws of the association
and to Sec. 92 of the Corporation Code (B.P. Blg. 68).

ISSUE/S: Whether or not Grace Christian Highschool is entitled to a permanent seat in the board.

HELD: NO. The board of directors of corporations must be elected from among the stockholders
or members. There may be corporations in which there are unelected members in the board, but it
is clear that in the examples cited by petitioner, the unelected members sit as ex officio members,
i.e., by virtue of and for as long as they hold a particular office. But in the case of petitioner, there is
no reason at all for its representative to be given a seat in the board nor does petitioner claim a
right to such seat by virtue of an office held. In fact, it was not given such seat in the beginning. It
was only in 1975 that a proposed amendment to the by-laws sought to give it one.

63
Since the provision in question is contrary to law, the fact that for fifteen years it has not been
questioned or challenged but, on the contrary, appears to have been implemented by the members
of the association cannot forestall a later challenge to its validity. Neither can it attain validity
through acquiescence because, if it is contrary to law, it is beyond the power of the members of the
association to waive its invalidity. For that matter the members of the association may have
formally adopted the provision in question, but their action would be of no avail because no
provision of the by-laws can be adopted if it is contrary to law. It is probable that, in allowing the
petitioner's representative to sit on the board, the members of the association were not aware that
this was contrary to law. Nor can the petitioner claim a vested right to sit in the board on the basis
of "practice." Practice, no matter how long continued, cannot give rise to any vested right if it is
contrary to law.

DISPOSITIVE RULING: Wherefore, the decision of the Court of Appeals is AFFIRMED.

64
ESPENIDA, Mheltina Deniece L-1800137

Case 27
Gokongwei v. SEC
G.R. No. L-45911; April 11, 1979 Antonio, J.

Doctrine: In this jurisdiction, under Section 21 of the Corporation Law, a corporation may
prescribe in its by-laws “the qualifications, duties and compensation of directors, officers and
employees…” This must necessarily refer to a qualification in addition to that specified by section
30 of the Corporation Law, which provides that “every director must own in his right at least one
share of the capital stock of the stock corporation of which he is a director…”

FACTS: On October 22, 1976, petitioner as a stockholder of San Miguel Corporation, filed with the
SEC a petition for “declaration of nullity of amended by-laws, cancellation of certificate of filing of
amended by-laws, injunction and damages with prayer for a preliminary injunction” against the
majority of the members of the Board of Directors and San Miguel Corporation as an unwilling
petitioner. Petitioner claimed that prior to the amendment of the by-laws, petitioner had all the
qualifications to be a director of respondent corporation, being a substantial stockholder thereof;
that as a stockholder, petitioner had acquired rights inherent in stock ownership and that in
amending the by-laws, respondents purposely provided for petitioner’s disqualification and
deprived him of his vested right hence the amended by-laws are null and void. Respondents filed
their opposition to the petition, denying the material averments thereof and stating that in August
1972, the Universal Robina Corporation, a corporation engaged in business competitive to that of
respondent corporation, began acquiring shares therein and that in October 1972, the
Consolidated Foods Corporation likewise began acquiring shares in respondent corporation. On
January 12, 1976, petitioner, who is the president and controlling shareholder of Robina and CFC
purchased 5,000 shares of stock of respondent corporation and that in the stockholder’s meeting
of March 18, 1976, petitioner was rejected by the stockholders in his bid to secure a seat in the
Board of Directors on the basic issue that petitioner is engaged was engaged in a competitive
business and his securing a seat would have subjected respondent corporation to grave
disadvantages. But still, petitioner vowed to secure a seat at the next annual meeting; that
thereafter the Board of Directors amended the by-laws.

ISSUE:
Whether or not the provisions of the amended by-laws of respondent corporation disqualifying a
competitor from nomination or election to the Board of Directors are valid and reasonable.

HELD: Yes, the provisions of the amended by-laws were valid and reasonable. In this jurisdiction,
under Section 21 of the Corporation Law, a corporation may prescribe in its by-laws “the
qualifications, duties and compensation of directors, officers and employees…” This must
necessarily refer to a qualification in addition to that specified by section 30 of the Corporation
Law, which provides that “every director must own in his right at least one share of the capital
stock of the stock corporation of which he is a director…” Section 21 of the Corporation Law
expressly provides that a corporation may make by-laws for the qualifications of directors. Thus, it
has been held that an officer of a corporation cannot engage in a business in direct competition
65
with that of the corporation where he is a director by utilizing information he has received as such
officer, under “the established law that a director or officer of a corporation may not enter into a
competing enterprise which cripples or injures the business of the corporation of which he is an
officer or director.”

It is also well established that corporate officers “are not permitted to use their position of trust and
confidence to further their private interests.” The doctrine of corporate opportunity is precisely a
recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was
acting for two entities with competing interests. This doctrine rests fundamentally on the
unfairness, in particular circumstances, of an officer or director taking advantage of an opportunity
for his own personal profit when the interest of the corporation justly calls for protection. It is not
denied that a member of the Board of Directors of the San Miguel Corporation has access to
sensitive and highly confidential information. It is obviously to prevent the creation of an
opportunity for an officer or director of San Miguel Corporation, who is also the officer or owner of
a competing corporation, from taking advantage of the information which he acquires as director to
promote his individual or corporate interests to the prejudice of San Miguel Corporation and its
stockholders, that the questioned amendment of the by-laws was made. Certainly, where two
corporations are competitive in a substantial sense, it would seem improbable, if not impossible,
for the director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations
and place the performance of his corporation duties above his personal concerns.

DISPOSITIVE RULING: Wherefore, on the matter of the validity of the amended by-laws of
respondent San Miguel Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio,
Santos, Abad Santos and De Castro, voted to sustain the validity per se of the amended by-laws in
question and to dismiss the petition.

66
HERMOSURA,Nina Alexia C. L-170070

Case 28
People’s Aircargo v. CA, Stefani Sano
G.R No. 117847; October 7, 1998 Panganiban, J.

Doctrine: Contracts entered into by a corporate president without express prior board approval
bind the corporation, when such officer’s apparent authority is established and when these
contracts are ratified by the corporation.

FACTS: Petitioner People’s Aircargo is a domestic corporation operating as a customs bonded

warehouse. Antonio Punsalan, Jr., the corporation president, with the aim of obtaining a license,
solicited a proposal from private respondent Stefani Sano, a consultant for Industrial Engineering,
for the preparation of a feasibility study for his proposed MIA Warehousing Project. Respondent
then presented a letter-proposal (First Contract) stating that the engineering consultancy services
would total in the amount of P350,000.

Cheng Yong, the majority stockholder of the petitioner, objected to the respondent's offer but
despite the objection, President Punsalan confirmed the agreement with the respondent. Upon
President Punsalan’s request, respondent sent another letter-proposal (Second Contract), with the
services now amounting to P400,000.

Petitioner submitted said operations manual to the Bureau of Customs in connection with the
former’s application to operate a bonded warehouse; thereafter the Bureau issued to it a license to
operate, enabling it to become one of the three public customs bonded warehouses at the
international airport.

After sometime, petitioner’s president resigned and sold his shares from the corporation.
Meanwhile, the private respondent filed a collection suit against the petitioner. He alleged that he
had prepared an operations manual for petitioner, conducted a seminar-workshop for its
employees and delivered to it a computer program; but that, despite demand, petitioner refused to
pay him for his services.

Petitioner, in its answer, denied that the private respondent had prepared an operations manual
and a computer program or conducted a seminar-workshop for its employees. It further alleged
that the letter-agreement was signed by Punsalan without authority, “in collusion with private
respondent in order to unlawfully get some money from petitioner and despite his knowledge that a
group of employees of the company had been commissioned by the board of directors to prepare
an operations manual.

RTC declared that the Second Contract was simulated and unenforceable. CA reversed the RTC’s
ruling. According to CA, the evidence on record shows that the president of petitioner-corporation
had entered into the First Contract, which was similar to the Second Contract. Thus, the petitioner
had clothed its president with apparent authority to enter into the disputed agreement. As it had
also become the practice of the petitioner-corporation to allow its president to negotiate and
execute contracts necessary to secure its license as a customs bonded warehouse without prior

67
board approval, the board itself, by its acts and through acquiescence, practically laid aside the
normal requirement of prior express approval. The Second Contract was declared valid and
binding on the petitioner, which was held liable to private respondent in the full amount of
P400,000.

ISSUE: Whether or not the subject contract is unenforceable, because Punsalan, as its president,
was not authorized by its board of directors to enter into said contract.

HELD: No. The Court upheld the validity of the contract. Contracts entered into by a corporate
president without express prior board approval bind the corporation, when such officer’s apparent
authority is established and when these contracts are ratified by the corporation.

The authority of such individuals to bind the corporation is generally derived from law, corporate
bylaws or authorization from the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business, viz.:

“A corporate officer or agent may represent and bind the corporation in transactions with third
persons to the extent that the authority to do so has been conferred upon him, and this includes
powers which have been intentionally conferred, and also such powers as, in the usual course of
the particular business, are incidental to, or may be implied from, the powers intentionally
conferred, powers added by custom and usage, as usually pertaining to the particular officer or
agent, and such apparent powers as the corporation has caused persons dealing with the officer
or agent to believe that it has conferred.”

In the case at bar, the petitioner, through its president Antonio Punsalan, Jr., entered into the First
Contract without first securing board approval. Despite such lack of board approval, petitioner did
not object to or repudiate said contract, thus “clothing” its president with the power to bind the
corporation.

If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of
an apparent authority, it holds him out to the public as possessing the power to do those acts; and
thus, the corporation will, as against anyone who has in good faith dealt with it through such agent,
be estopped from denying the agent’s authority. Furthermore, the private respondent prepared an
operations manual and conducted a seminar for the employees of the petitioner in accordance with
their contract. Petitioner accepted the operations manual, submitted it to the Bureau of Customs
and allowed the seminar for its employees. As a result of its aforementioned actions, petitioner
was given by the Bureau of Customs a license to operate a bonded warehouse. Granting
arguendo then that the Second Contract was outside the usual powers of the president,
petitioner’s ratification of said contract and acceptance of benefits have made it binding,
nonetheless. The enforceability of contracts under Article 1403(2) is ratified “by the acceptance of
benefits under them” under Article 1405.

DISPOSITIVE RULING: WHEREFORE, the petition is hereby DENIED and the assailed Decision
AFFIRMED. Costs against petitioner. SO ORDERED.

68
JOSON, Richelle Miles B. L-170133

Case 29
Marc II Marketing, Inc. and Lucila V. Joson v. Alfredo M. Joson
G.R. No. 171993; December 12, 2011 Perez, J.

Doctrine:
In the case of Easycall Communications Phils., Inc. v. King, the Court held that in the
context of Presidential Decree No. 902-A, corporate officers are those officers of a
corporation who are given that character either by the Corporation Code or by the
corporation's by-laws. Accordingly, the corporate officers in the context of PD No. 902-A
are exclusively those who are given that character either by the Corporation Code or by
the corporation's bylaws. A different interpretation can easily leave the way open for the
Board of Directors to circumvent the constitutionally guaranteed security of tenure of the
employee by the expedient inclusion in the bylaws of an enabling clause on the creation
of just any corporate officer position.

As a rule, corporation has a personality separate and distinct from its officers,
stockholders and members such that corporate officers are not personally liable for their
official acts unless it is shown that they have exceeded their authority. However, this
corporate veil can be pierced when the notion of the legal entity is used as a means to
perpetrate fraud, an illegal act, as a vehicle for the evasion of an existing obligation, and
to confuse legitimate issues.

FACTS: Petitioner Marc II Marketing, Inc. (petitioner corporation), a corporation duly organized
and existing under and by virtue of the laws of the Philippines, took over the business of Marc
Marketing, Inc. which was made non-operational following its incorporation and registration with
the Securities and Exchange Commission (SEC). Petitioner Lucila V. Joson is the President and
majority stockholder of petitioner corporation. She was also the former President and majority
stockholder of the defunct Marc Marketing, Inc. Respondent Alfredo M. Joson was the General
Manager, incorporator, director and stockholder of petitioner corporation.

Pending the incorporation of petitioner corporation, respondent was designated as the General
Manager of Marc Marketing, Inc. which was then in the process of winding up its business. For
occupying said position, respondent was among its corporate officers by express provision of its
bylaws.

On August 15, 1994, Marc II Marketing, Inc. was officially incorporated and registered with the
SEC. Respondent continued to discharge his duties as General Manager but this time under Marc
II Marketing, Inc. Under the bylaws of Marc II Marketing, Inc., its corporate officers are the
following: Chairman, President, one or more VP, Treasurer and Secretary.

On June 30, 1997, petitioner corporation decided to stop and cease its operations, as evidenced
by an Affidavit of Non-Operation. Concomitantly, respondent was apprised of the termination of his
services as General Manager since his services would no longer be necessary for the winding up
of its affairs. Respondent filed a Complaint for Reinstatement and Money Claim against petitioners
before the Labor Arbiter. In his complaint, respondent averred that petitioner Lucila dismissed him

69
from his employment due to the feeling of hatred she harbored towards his family. The same was
rooted in the filing by petitioner Lucila’s estranged husband, who happened to be respondent’s
brother, of a Petition for Declaration of Nullity of their Marriage.

Petitioners filed a Motion to Dismiss grounded on the Labor Arbiter’s lack of jurisdiction as the
case involved an intra-corporate controversy. The Labor Arbiter rendered a decision declaring
respondent’s dismissal from employment illegal and ordered the petitioners to jointly and severally
pay the respondent his claims. Upon appeal, the National Labor Relations Commission (NLRC)
reversed the decision of the Labor Arbiter and denied respondent’s Motion for Reconsideration
filed before it. Respondent filed a Petition for Certiorari before the Court of Appeals. The Court of
Appeals declared that the Labor Arbiter has jurisdiction over the present controversy and upheld
the findings of the Labor Arbiter that respondent was a mere employee of petitioner corporation,
who has been illegally dismissed from employment without valid cause and without due process.
Hence, this Petition for Review on Certiorari.

ISSUE/S:
1. Whether respondent’s removal as petitioner corporation’s General Manager involved a
purely intra-corporate controversy over which the RTC has jurisdiction.

2. Whether petitioner Lucila shall be held solidarily liable with the corporation as to the
payment of respondent’s claims.

HELD:
1. No. The dismissal of a corporate officer is always regarded as a corporate act
and/or an intra-corporate controversy. Under Section of Presidential Decree No.
902-A, intra-corporate controversies are those controversies arising out of
intra-corporate or partnership relations, between and among stockholders, members or
associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates, respectively; and
between such corporation, partnership or association and the State insofar as it
concerns their individual franchise or right to exist as such entity. It also includes
controversies in the election or appointments of directors, trustees, officers or
managers of such corporations, partnerships or associations. In determining whether
the SEC (now the RTC) has jurisdiction over the controversy, the status or
relationship of the parties and the nature of the question that is the subject of their
controversy must be taken into consideration.

In the case of Easycall Communications Phils., Inc. v. King, the Court held that in the
context of Presidential Decree No. 902-A, corporate officers are those officers of a
corporation who are given that character either by the Corporation Code or by the
corporation's by-laws. Section 25 of the Corporation Code specifically enumerated who
are these corporate officers, to wit: (1) president; (2) secretary; (3) treasurer; and (4)
such other officers as may be provided for in the by-laws.

In Matling Industrial and Commercial Corp. vs Coros, the Court held that conformably with
Section 25, a position must be expressly mentioned in the by-laws in order to be
considered as a corporate office. Thus, the creation of an office pursuant to or

70
 under a by-law enabling provision is not enough to make a position a corporate
office. This interpretation is the correct application of Section 25 of the Corporation
Code Corporation Code, which plainly states that the corporate officers are the
President, Secretary, Treasurer and such other officers as may be provided for in
the by-laws. Accordingly, the corporate officers in the context of PD No. 902-A are
exclusively those who are given that character either by the Corporation Code or by
the corporation's bylaws. A different interpretation can easily leave the way open for
the Board of Directors to circumvent the constitutionally guaranteed security of tenure
of the employee by the expedient inclusion in the bylaws of an enabling clause on
the creation of just any corporate officer position. A careful perusal of petitioner
corporation's by-laws, particularly paragraph 1, Section 1, Article IV, would explicitly
reveal that its corporate officers are composed only of: (1) Chairman; (2) President;
(3) one or more Vice-President; (4) Treasurer; and (5) Secretary. The position of
General Manager was not among those enumerated. Paragraph 2, Section 1, Article
IV of petitioner corporation's by-laws, empowered its Board of Directors to appoint
such other officers as it may determine necessary or proper. It is by virtue of this
enabling provision that petitioner corporation's Board of Directors allegedly approved
a resolution to make the position of General Manager a corporate officer, and,
thereafter, appointed respondent thereto making him one of its corporate officers. All
of these acts were done without first amending its by-laws so as to include the
General Manager in its roster of corporate officers. With the given circumstances and
in conformity with Matling Industrial and Commercial Corporation v. Coros, this Court
rules that respondent was not a corporate officer of petitioner corporation because
his position as General Manager was not specifically mentioned in the roster of
corporate officers in its corporate by-laws. The enabling clause in petitioner
corporation's by-laws empowering its Board of Directors to create additional officers,
and the alleged subsequent passage of a board resolution to that effect cannot
make such position a corporate office. Matling clearly enunciated that the board of
directors has no power to create other corporate offices without first amending the
corporate by-laws so as to include therein the newly created corporate office.
Though the board of directors may create appointive positions other than the
positions of corporate officers, the persons occupying such positions cannot be
viewed as corporate officers under Section 25 of the Corporation Code.

In view thereof, this Court holds that unless and until petitioner corporation's by-laws
is amended for the inclusion of General Manager in the list of its corporate officers,
such position cannot be considered as a corporate office within the realm of Section
25 of the Corporation Code.

Accordingly, respondent's dismissal as petitioner corporation's General Manager did

not amount to an intra-corporate controversy. Jurisdiction therefore properly belongs
with the Labor Arbiter and not with the RTC.

2. Yes. As a rule, corporation has a personality separate and distinct from its officers,
stockholders and members such that corporate officers are not personally liable for
their official acts unless it is shown that they have exceeded their authority.
However, this corporate veil can be pierced when the notion of the legal entity is

71
 used as a means to perpetrate fraud, an illegal act, as a vehicle for the evasion of
an existing obligation, and to confuse legitimate issues.

Based on the prevailing circumstances in this case, petitioner Lucila, being the
President of petitioner corporation, acted in bad faith and with malice in effecting
respondent's dismissal from employment. Although petitioner corporation has a valid
cause for dismissing respondent due to cessation of business operations, however,
the latter's dismissal therefrom was done abruptly by its President, petitioner Lucila.
Respondent was not given the required one-month prior written notice that petitioner
corporation will already cease its business operations. As can be gleaned from the
records, respondent was dismissed outright by petitioner Lucila on the same day
that petitioner corporation decided to stop and cease its business operations. Worse,
respondent was not given separation pay considering that petitioner corporation's
cessation of business was not due to business losses or financial reverses.

DISPOSITIVE RULING: WHEREFORE, premises considered, the Decision and Resolution dated
20 June 2005 and 7 March 2006, respectively, of the Court of Appeals in CA-G.R. SP No. 76624
are hereby AFFIRMED with the MODIFICATION finding respondent’s dismissal from employment
legal but without proper observance of due process. Accordingly, petitioner corporation, jointly and
solidarily liable with petitioner Lucila, is hereby ordered to pay respondent the following; (1)
separation pay equivalent to one month pay or at least one-half month pay for every year of
service, whichever is higher, to be computed from the commencement of employment until
termination; and (2) nominal damages in the amount of ₱50,000.00.

This Court, however, finds it proper to still remand the records to the Labor Arbiter to conduct
further proceedings for the sole purpose of determining the compensation that respondent was
actually receiving during the period that he was the General Manager of petitioner corporation for
the proper computation of his separation pay.

72
LOCQUIAO, Maureen Nicole N. L-1800303

Case 30
Sps. David, et al vs. Construction Industry and Arbitration Commission
GR No. 159795, July 30, 2004 Puno, J.:

Doctrine: Petitioner-Spouses cannot be held jointly and severally liable with petitioner CGI in the
payment of the arbitral award as they are merely its corporate officers.

As a general rule, the personal liability of a corporate director, trustee or officer, along with a
corporation, may so validly attach when he assents to a patently unlawful act of the corporation
or for bad faith or gross negligence in directing its affairs.

FACTS: Respondent-Spouses Narciso and Aida Quiambao engaged the services of petitioner CGI
to design and construct a five-storey office/residential building in Tondo, Manila. Petitioner is a
corporation engaged in the construction business, with Spouses Roberto and Evelyn David as its
President and Treasurer. The completion of the construction was scheduled on or before July 16
but was extended to November.

Petitioners then failed to follow the specifications and plans as previously agreed upon.
Respondents demanded the correction of the errors but the petitioners failed to comply which
prompted the respondent to rescind the contract after paying almost 75% of the cost of
construction.

Respondent engaged the services of another contractor, RRA and Associates to inspect and
assess the actual accomplishment of petitioners in the building’s construction. RRA and
Associates found out that petitioners revised and deviated from the structural plan of the building
without notice to or approval by the respondents.

Respondents filed a case against the petitioner before the RTC of Manila for breach of contract.
They then agreed to submit the case for arbitration to the CIAC. The arbitrator rendered judgment
against the petitioner. The Quiambaos were awarded a total of P4,884,418.89 against
respondents. Respondents were likewise awarded for the value of materials and equipment left at
the site totalling to P6,086,299.95.

Deducting the awards, respondents are hereby ordered to pay, jointly and severally,
P4,073,229.94. Petitioners appealed to the CA which affirmed the arbitrator’s decision.

ISSUE:
Whether or not the petitioners are jointly and severally liable with co-petitioner coordinated, in clear
violation of the Doctrine of Separate Juridical Personality.

HELD: Yes. The said issue is a question of fact, the case at bar does not raise any genuine issue
of law. Petitioner-Spouses cannot be held jointly and severally liable with petitioner CGI in the
payment of the arbitral award as they are merely its corporate officers.
73
As a general rule, the personal liability of a corporate director, trustee or officer, along with a
corporation, may so validly attach when he assents to a patently unlawful act of the corporation or
for bad faith or gross negligence in directing its affairs.

Factual findings of construction arbitrators are final and conclusive and not reviewable by this
Court on appeal, except when the petitioner proves affirmatively that : 1. The award was procured
by corruption, fraud, or other undue means; 2. There was evident partiality or corruption of the
arbitrators; 3. Arbitrators were guilty of misconduct; 4. One or more arbitrators were disqualified to
act; and 5. Arbitrators exceeded their powers.

Voluntary arbitration involves the reference of a dispute to an impartial body, which the parties
choose themselves. The Court will not review factual findings of an arbitral tribunal upon the artful
allegation that such body has misapprehended facts and will not pass upon issues which are
issues of fact, no matter how cleverly disguised as legal questions.

DISPOSITIVE RULING: Wherefore, the petition is dismissed for lack of merit.

74
LOPEZ, Erica Therese C. L-1800319

Case 31
Inter-asia Investments Industries, Inc.,, Vs. Court Of Appeals And Asia Industries, Inc.,
GR NO. 125778, June 10, 2003 Carpio-Morales, J.

Doctrine: A corporate officer or agent may represent and bind the corporation in transactions
with third persons to the extent that [the] authority to do so has been conferred upon him, and
this includes powers as, in the usual course of the particular business, are incidental to, or may
be implied from, the powers intentionally conferred, powers added by custom and usage, as
usually pertaining to the particular officer or agent, and such apparent powers as the corporation
has caused person dealing with the officer or agent to believe that it has conferred.

FACTS: Inter-Asia Industries, Inc. (petitioner), by a Stock Purchase Agreement sold to Asia
Industries, Inc. (private respondent) for and in consideration of the sum of P19,500,000.00 all its
right, title and interest in and to all the outstanding shares of stock of FARMACOR, INC.
(FARMACOR). The Agreement was signed by Leonides P. Gonzales and Jesus J. Vergara,
presidents of petitioner and private respondent, respectively.

The Agreement, as amended, provided that pending submission by SGV of FARMACORs audited
financial statements as of October 31, 1978, private respondent may retain the sum of
P7,500,000.00 out of the stipulated purchase price of P19,500,000.00; that from this retained
amount of P7,500,000.00, private respondent may deduct any shortfall on the Minimum
Guaranteed Net Worth of P12,000,000.00; and that if the amount retained is not sufficient to make
up for the deficiency in the Minimum Guaranteed Net Worth, petitioner shall pay the difference
within 5 days from date of receipt of the audited financial statements.

Respondent paid petitioner a total amount of P 12,000,000.00: P5,000,000.00 upon the signing of
the Agreement, and P7,000,000.00 on November 2, 1978. From the STATEMENT OF INCOME
AND DEFICIT, it appears that FARMACOR had, for the ten months ended October 31, 1978, a
deficit of P11,244,225.00.

The adjusted contract price, therefore, amounted to P6,225,775.00 which is the difference
between the contract price of P19,500,000.00 and the shortfall in the guaranteed net worth of
P13,224,225.00. Private respondent having already paid petitioner P12,000,000.00, it was entitled
to a refund of P5,744,225.00.

Petitioner thereafter proposed, by letter of January 24, 1980, signed by its president, that private
respondents' claim for refund be reduced to P4,093,993.00, it promising to pay the cost of the
Northern Cotabato Industries, Inc. (NOCOSII) superstructures in the amount of P759,570.00. To
the proposal, respondent agreed. Petitioner, however, weiched on its promise. Petitioners total
liability thus stood at P4,853,503.00 (P4,093,993.00 plus P759,570.00) exclusive of interest.

Private respondent filed a complaint against petitioner with the Regional Trial Court of Makati, one
of the two causes of action was for the recovery of above-said amount of P4,853,503.0017 plus
interest. The RTC ruled in favor of private respondents. The CA affirmed the RTC’s decision.
75
Petitioner argues that the January 24, 1980 letter-proposal (for the reduction of private
respondents claim for refund upon petitioners promise to pay the cost of NOCOSII superstructures
in the amount of P759,570.00) which was signed by its president has no legal force and effect
against it as it was not authorized by its board of directors, it citing the Corporation Law which
provides that unless the act of the president is authorized by the board of directors, the same is not
binding on it.

ISSUE:
Whether or not the letter of the president of the petitioner is binding on the petitioner.

HELD: Yes. The January 24, 1980 letter signed by petitioners president is valid and binding.
Being a juridical entity, a corporation may act through its board of directors, which exercises almost
all corporate powers, lays down all corporate business policies and is responsible for the efficiency
of management, as provided in Section 23 of the Corporation Code of the Philippines:

SEC. 23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees x x x.

Under this provision, the power and responsibility to decide whether the corporation should enter
into a contract that will bind the corporation is lodged in the board, subject to the articles of
incorporation, bylaws, or relevant provisions of law. However, just as a natural person may
authorize another to do certain acts for and on his behalf, the board of directors may validly
delegate some of its functions and powers to officers, committees or agents. The authority of such
individuals to bind the corporation is generally derived from law, corporate bylaws or authorization
from the board, either expressly or impliedly by habit, custom or acquiescence in the general
course of business, viz:

A corporate officer or agent may represent and bind the corporation in transactions with third
persons to the extent that the authority to do so has been conferred upon him, and this includes
powers as, in the usual course of the particular business, are incidental to, or may be implied from,
the powers intentionally conferred, powers added by custom and usage, as usually pertaining to
the particular officer or agent, and such apparent powers as the corporation has caused person
dealing with the officer or agent to believe that it has conferred.

Apparent authority is derived not merely from practice. Its existence may be ascertained through
(1) the general manner in which the corporation holds out an officer or agent as having the power
to act or, in other words the apparent authority to act in general, with which it clothes him; or (2) the
acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof,
within or beyond the scope of his ordinary powers. It requires presentation of evidence of similar
act(s) executed either in its favor or in favor of other parties. It is not the quantity of similar acts
which establishes apparent authority, but the vesting of a corporate officer with power to bind the
corporation.

76
DISPOSITIVE RULING: WHEREFORE, the instant petition is PARTLY GRANTED. The assailed
decision of the Court of Appeals affirming that of the trial court is modified in that the award of
attorney’s fees in favor of private respondent is deleted. The decision is affirmed in other respects.

77
NARAWI, Merriam Angela C. L-170626

Case 32
Megan Sugar Corporation v. RTC of Iloilo; New Frontier Sugar Corp. and Equitable PCI Bank
G.R. No. 170352; June 1, 2011 Peralta, J.

Doctrine: A corporation may be held in estoppel from denying as against innocent third persons
the authority of its officers or agents who have been clothed by it with ostensible or apparent
authority. Atty. Sabig may not have been armed with a board resolution, but the appearance of
Concha (MEGAN’s director and general manager) made the parties assume that MEGAN had
knowledge of Atty. Sabig's actions and, thus, clothed Atty. Sabig with apparent authority such
that the parties were made to believe that the proper person and entity to address was Atty.
Sabig.

Apparent authority, or what is sometimes referred to as the "holding out" theory, or doctrine of
ostensible agency, imposes liability, not as the result of the reality of a contractual relationship,
but rather because of the actions of a principal or an employer in somehow misleading the public
into believing that the relationship or the authority exists.

FACTS: New Frontier Sugar Corporation (NFSC) obtained a loan from Equitable PCI Bank
(EPCIB), secured by a real estate mortgage over NFSC’s land and a chattel mortgage over
NFSC’s sugar mill. Due to liquidity problems and continued indebtedness to EPCIB, NFSC entered
into a MOA with Central Iloilo Milling Corporation (CIMICO), whereby the latter agreed to take-over
the operation and management of the NFSC. However, CIMICO failed to pay its obligations under
the MOA, prompting NFSC to file a complaint. CIMICO countered by filing a case for sum of
money and/or breach of contract.

Meanwhile, EPCIB instituted extra-judicial foreclosure proceedings due to NFSC's failure to pay.
During public auction, EPCIB was the sole bidder and was thus able to buy the entire property and
consolidate the titles in its name. Then, EPCIB sold the property to Passi Iloilo Sugar Central.
Nevertheless, upon the motion of CIMICO, the RTC issued a restraining order allowing CIMICO to
continue its possession over the property. Afterwards, CIMICO and petitioner Megan Sugar
Corporation (MEGAN) entered into a MOA whereby MEGAN assumed CIMICO's rights, interests
and obligations over the property.

Passi Sugar filed a Motion for Intervention. During the hearing on the said motion, Atty. Sabig
entered his appearance as counsel for MEGAN. Several counsels objected to Atty. Sabig's
appearance since MEGAN was not a party to the proceedings; however, Atty. Sabig explained to
the court that MEGAN had purchased the interest of CIMICO and manifested that his statements
would bind MEGAN.

The RTC issued an Order granting EPCIB's motion for the placement of millers' share in escrow.
Atty. Sabig filed an Omnibus Motion for Reconsideration and Clarification but was denied.
Aggrieved, MEGAN filed a petition for certiorari which was dismissed for lack of merit. MEGAN
points out that its board of directors did not issue a resolution authorizing Atty. Sabig to represent
the corporation before the RTC. It contends that Atty. Sabig was an unauthorized agent and as
such his actions should not bind the corporation.
78
ISSUE/S: Whether or not the acts of Atty. Sabig should bind MEGAN even though there was no
board resolution authorizing him to represent the corporation

HELD: Yes, the acts of Atty. Sabig bound the corporation. While it is true, as claimed by MEGAN,
that Atty. Sabig said in court that he was only appearing for the hearing of Passi Sugar's motion for
intervention and not for the case itself, his subsequent acts, coupled with MEGAN's inaction and
negligence to repudiate his authority, effectively bars MEGAN from assailing the validity of the RTC
proceedings under the principle of estoppel.

MEGAN can no longer deny the authority of Atty. Sabig as they have already clothed him with
apparent authority to act on their behalf. When Atty. Sabig entered his appearance, he was
accompanied by Concha, MEGAN's director and general manager. A corporation may be held in
estoppel from denying as against innocent third persons the authority of its officers or agents who
have been clothed by it with ostensible or apparent authority. Atty. Sabig may not have been
armed with a board resolution, but the appearance of Concha made the parties assume that
MEGAN had knowledge of Atty. Sabig's actions and, thus, clothed Atty. Sabig with apparent
authority such that the parties were made to believe that the proper person and entity to address
was Atty. Sabig. Apparent authority, or what is sometimes referred to as the "holding out" theory, or
doctrine of ostensible agency, imposes liability, not as the result of the reality of a contractual
relationship, but rather because of the actions of a principal or an employer in somehow
misleading the public into believing that the relationship or the authority exists.

Furthermore, MEGAN never repudiated the authority of Atty. Sabig when all the motions, pleadings
and court orders were sent not to the office of Atty. Sabig but to the office of MEGAN, who in turn,
would forward all of the same to Atty. Sabig. One of the instances of estoppel is when the principal
has clothed the agent with indicia of authority as to lead a reasonably prudent person to believe
that the agent actually has such authority. With the case of MEGAN, it had all the opportunity to
repudiate the authority of Atty. Sabig since all motions, pleadings and court orders were sent to
MEGAN's office. However, MEGAN never questioned the acts of Atty. Sabig and even took time
and effort to forward all the court documents to him. It bears to point out that MEGAN was
negligent when it did not assail the authority of Atty. Sabig within a reasonable time.

MEGAN's challenge to Atty. Sabig's authority and the RTC's jurisdiction was a mere afterthought
after having received an unfavorable decision from the RTC. Certainly, it would be unjust and
inequitable to the other parties if this Court were to grant such a belated jurisdictional challenge.

DISPOSITIVE RULING: WHEREFORE, premises considered, the petition is DENIED. The August
23, 2004 Decision and October 12, 2005 Resolution of the Court of Appeals, in CA-G.R. SP No.
75789, are AFFIRMED.

79
Peralta, Alhex Adrea M. L-1800280

Case 33
Bernas v. Cinco
G.R. Nos. 163356-57, G.R. Nos. 163368-69, July 01, 2015 Perez, J.

Doctrine/s:

a. As to removal of directors of a corporation

Sec. 28 of the Corporation Codel laid down the rules on the removal of the Directors of the
corporation by providing, inter alia, the persons authorized to call the meeting and the number of
votes required for the purpose of removal, thus: “Any director or trustee of a corporation may be
removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3)
of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at
least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take
place either at a regular meeting of the corporation or at a special meeting called for the
purpose, and in either case, after previous notice to stockholders or members of the corporation
of the intention to propose such removal at the meeting. A special meeting of the stockholders or
members of a corporation for the purpose of removal of directors or trustees, or any of them,
must be called by the secretary on order of the president or on the written demand of the
stockholders representing or holding at least a majority of the outstanding capital stock, or, if it
be a non-stock corporation, on the written demand of a majority of the members entitled to vote.
Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse
to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to
the stockholders or members by any stockholder or member of the corporation signing the
demand. Notice of the time and place of such meeting, as well as of the intention to propose
such removal, must be given by publication or by written notice prescribed in this Code. Removal
may be with or without cause: Provided, That removal without cause may not be used to deprive
minority stockholders or members of the right of representation to which they may be entitled
under Section 24 of this Code.”

b. As to powers of the Board of Directors

It is the Board of Directors that is the directing and controlling body of the corporation. It is a
creation of the stockholders and derives its power to control and direct the affairs of the
corporation from them. The board of directors, in drawing to itself the power of the corporation,
occupies a position of trusteeship in relation to the stockholders, in the sense that the board
should exercise not only care and diligence, but utmost good faith in the management of the
corporate affairs. The underlying policy of the Corporation Code is that the business and affairs
of a corporation must be governed by a board of directors whose members have stood for
election, and who have actually been elected by the stockholders, on an annual basis. Only in
that way can the continued accountability to shareholders, and the legitimacy of their decisions
that bind the corporation’s stockholders, be assured. The shareholder vote is critical to the
theory that legitimizes the exercise of power by the directors or officers over the properties that

80
they do not own.

The Corporation Code is categorical in stating that a corporation exercises its powers through its
board of directors and/or its duly authorized officers and agents, except in instances where the
Corporation Code requires stockholders' approval for certain specific acts: SEC. 23. The Board
of Directors or Trustees. - Unless otherwise provided in this Code, the corporate powers of all
the corporations formed under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of directors and trustees.

A corporation’s board of directors is understood to be that body which (1) exercises all powers
provided for under the Corporation Code; (2) conducts all business of the corporation; and (3)
controls and holds all the property of the corporation. Its members have been characterized as
trustees or directors clothed with fiduciary character.

c. As to Ultra Vires Acts of a Corporation

Illegal acts of a corporation which contemplate the doing of an act which is contrary to law,
morals or public order, or contravenes some rules of public policy or public duty, are, like similar
transactions between individuals, void. They cannot serve as basis for a court action, nor
acquire validity by performance, ratification or estoppel.

A distinction should be made between corporate acts or contracts which are illegal and those
which are merely ultra vires. The former contemplates the doing of an act which is contrary to
law, morals or public policy or public duty, and are, like similar transactions between individuals,
void. They cannot serve as the basis of a court action nor acquire validity by performance,
ratification or estoppel. Mere ultra vires acts, on the other hand, or those which are not illegal or
void ab initio, but are not merely within the scope of the articles of incorporation, are merely
voidable and may become binding and enforceable when ratified by the stockholders.

FACTS: The petitioners in G.R. Nos. 163356-57, Bernas, Cheng, Africa, Maramara, Frondoso,
Macrohon and Lim, (Bernas Group) were among the members of the Board of Directors and
Officers of the Makati Sports Club (MSC), a domestic corporation. The terms of petitioners were to
expire either in 1998 or 1999.

On the other hand, the petitioners in G.R. Nos. 163368-69 Cinco, Librea, and Pardo (Cinco Group)
are the members and stockholders of the corporation who were elected as members of the Board
of Directors and Officers of MSC during the December 17, 1997 Special Stockholders Meeting.

The case arose because of rumored anomalies in handling the corporate funds. The stockholders
of the corporation representing at least 100 shares sought the assistance of the Oversight
Committee of the Makati Sports Club (MSCOC) to call for a special stockholders meeting for the
purpose of removing the sitting officers and then consequently electing new ones. The MSCOC
called a Special Stockholders’ Meeting and sent out notices to all stockholders and members
stating the time, place and purpose of the meeting. During the meeting, the Bernas Group were
removed from office and the Cinco Group were in turn elected.

81
The Bernas Group initiated an action before the Securities Investigation and Clearing Department
(SICD) of the Securities Commission (SEC) to nullify the December 17, 1997 Special Stockholders
Meeting. The Bernas group cited Section 28 of the Corporation Code, arguing that the meeting
was improperly called since the authority to call a meeting lies with the corporate secretary and not
with the MSCOC.

In the meantime, an investigation was conducted by the newly-elected directors on the alleged
anomalies. After finding Bernas guilty of irregularities, the Board expelled him from the club by
selling his shares at a public auction.

MSC held its Annual Stockholders’ Meeting, which was attended by stockholders representing 2/3
of the outstanding shares, in April of 1998. During the meeting, the majority approved, confirmed
and ratified the calling and holding of the December 17, 1997 Special Stockholders’ Meeting as
well as the acts and resolutions adopted therein. In 1999, the Annual Stockholders’ Meeting of
MSC was supervised by the SEC because of the filing of several petitions for and against the
removal of the Bernas Group. In this meeting, the stockholders approved, ratified and confirmed
the holding of the December 17, 1997 Special Stockholders’ Meeting again. During the 2000
Annual Stockholders’ Meeting, the December 17, 1997 Special Stockholders’ Meeting was ratified
by the stockholders again.

In May of 2000, SICD nullified the expulsion of Bernas from the corporation and the sale of his
share at the public auction, holding that the December 17, 1997 Special Stockholders’ Meeting
and the annual stockholders’ meeting conducted in 1998 and 1999 are invalid.

The SEC En Banc, on appeal, reversed the SICD and validated the holding of the December 17,
1997 Special Stockholders' Meeting as well as the annual stockholders' meeting in 1998 and 1999.
The Court of Appeals on the other hand declared the December 17, 1997 Special Stockholders’
Meeting invalid but it affirmed the actions taken during the 1998, 1999 and 2000 annual
stockholders’ meetings.

ISSUE/S:Whether or not the members of the Bernas Group were properly removed from the Board
of Directors during the December 17, 1997 meeting; Whether or not the December 17, 1997
meeting was properly called and valid

HELD: No. Sec. 28 of the Corporation Codel laid down the rules on the removal of the Directors of
the corporation by providing, inter alia, the persons authorized to call the meeting and the number
of votes required for the purpose of removal, thus: “Any director or trustee of a corporation may be
removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3)
of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at
least two-thirds (2/3) of the members entitled to vote: Provided, That such removal shall take place
either at a regular meeting of the corporation or at a special meeting called for the purpose, and in
either case, after previous notice to stockholders or members of the corporation of the intention to
propose such removal at the meeting. A special meeting of the stockholders or members of a
corporation for the purpose of removal of directors or trustees, or any of them, must be called by
the secretary on order of the president or on the written demand of the stockholders representing
or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation, on
the written demand of a majority of the members entitled to vote. Should the secretary fail or

82
refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there
is no secretary, the call for the meeting may be addressed directly to the stockholders or members
by any stockholder or member of the corporation signing the demand. Notice of the time and place
of such meeting, as well as of the intention to propose such removal, must be given by publication
or by written notice prescribed in this Code. Removal may be with or without cause: Provided, That
removal without cause may not be used to deprive minority stockholders or members of the right of
representation to which they may be entitled under Section 24 of this Code.”

Furthermore, under the by laws of MSC, only the President and the Board of Directors are
authorized to call a special meeting. In cases where the person authorized to call a meeting
refuses, fails or neglects to call a meeting, then the stockholders representing at least 100 shares,
upon written request, may file a petition to call a special stockholder’s meeting. In this case, there
is no dispute that the December 1997 Special Stockholders’ Meeting was neither called by the
President nor the Board of Directors but by the MSCOC, which is an oversight committee of the
corporation. Nowhere in the by laws does it state that it is authorized to exercise corporate
powers, such as calling a special meeting.
It is the Board of Directors that is the directing and controlling body of the corporation. It is a
creation of the stockholders and derives its power to control and direct the affairs of the
corporation from them. The board of directors, in drawing to itself the power of the corporation,
occupies a position of trusteeship in relation to the stockholders, in the sense that the board should
exercise not only care and diligence, but utmost good faith in the management of the corporate
affairs. The underlying policy of the Corporation Code is that the business and affairs of a
corporation must be governed by a board of directors whose members have stood for election, and
who have actually been elected by the stockholders, on an annual basis. Only in that way can the
continued accountability to shareholders, and the legitimacy of their decisions that bind the
corporation’s stockholders, be assured. The shareholder vote is critical to the theory that
legitimizes the exercise of power by the directors or officers over the properties that they do not
own.
The Corporation Code is categorical in stating that a corporation exercises its powers through its
board of directors and/or its duly authorized officers and agents, except in instances where the
Corporation Code requires stockholders' approval for certain specific acts: SEC. 23. The Board of
Directors or Trustees. - Unless otherwise provided in this Code, the corporate powers of all the
corporations formed under this Code shall be exercised, all business conducted and all property of
such corporations controlled and held by the board of directors and trustees. A corporation’s board
of directors is understood to be that body which (1) exercises all powers provided for under the
Corporation Code; (2) conducts all business of the corporation; and (3) controls and holds all the
property of the corporation. Its members have been characterized as trustees or directors clothed
with fiduciary character.
The defect in the calling of the meeting goes into the very authority of the persons who made the
call for the meeting. It is apt to recall that illegal acts of a corporation which contemplate the doing
of an act which is contrary to law, morals or public order, or contravenes some rules of public
policy or public duty, are, like similar transactions between individuals, void. They cannot serve as
basis for a court action, nor acquire validity by performance, ratification or estoppel. The void
election of 17 December 1997 cannot be ratified by the subsequent Annual Stockholders’ Meeting.

83
A distinction should be made between corporate acts or contracts which are illegal and those
which are merely ultra vires. The former contemplates the doing of an act which is contrary to law,
morals or public policy or public duty, and are, like similar transactions between individuals, void.
They cannot serve as the basis of a court action nor acquire validity by performance, ratification or
estoppel. Mere ultra vires acts, on the other hand, or those which are not illegal or void ab initio,
but are not merely within the scope of the articles of incorporation, are merely voidable and may
become binding and enforceable when ratified by the stockholders. The 17 December 1997
Meeting belongs to the category of the latter, that is, it is void ab initio and cannot be validated.
The case would have been different if the petitioning stockholders went directly to the SEC and
sought its assistance to call a special stockholders’ meeting citing the previous refusal of the
Corporate Secretary to call a meeting. Where there is an officer authorized to call a meeting and
that officer refuses, fails, or neglects to call a meeting, the SEC can assume jurisdiction and issue
an order to the petitioning stockholder to call a meeting pursuant to its regulatory and
administrative powers to implement the Corporation Code. This is clearly provided for by Section
50 of the Corporation Code.
Nevertheless, 1998 Annual Stockholders Meeting was valid because it was sanctioned by Section
8 of the MSC by laws. Unlike in Special Stockholders Meeting wherein the by laws mandated that
such meeting shall be called by specific persons only, no such specific requirement can be
obtained under Section 8. The 1999 Annual Stockholders Meeting is likewise valid because in
addition to the fact that it was conducted in accordance to Section 8 of the MSC by laws, such
meeting was supervised by the SEC in the exercise of its regulatory and administrative powers to
implement the Corporation Code. Considering that a new set of officers were already duly elected
in 1998 and 1999 Annual Stockholders Meetings, the Bernas Group cannot be permitted to use
the holdover principle as a shield to perpetuate in office. Members of the group had no right to
continue as directors of the corporation unless reelected by the stockholders in a meeting called
for that purpose every year.
Therefore, (1) since the December 17, 1997 was invalidly called, it failed to produce any legal
effects and did not effectively remove the Bernas Group as directors of the Makati Sports Club,
Inc.; (2) the expulsion of Bernas as well as the public auction of his shares is void and without legal
effect; (3) the ratification of the removal of the Bernas Group, the expulsion of Bernas and the sale
of his share in the 1998, 1999 and 2000 meetings is void and produces no effect as they were not
the proper party to cause the ratification; and (4) all other actions of the Cinco Group and
stockholders taken during meetings held in 1998, 1999 and 2000, including the election of the
Cinco Group as directors after the expiration of the term of office of Bernas Group as directors, are
valid.
DISPOSITIVE RULING: WHEREFORE, premises considered, the petitions of Jose A. Bernas,
Cecile H. Cheng, Victor Africa, Jesus B. Maramara, Jose T. Frondoso, Ignacio A. Macrohon and
Paulino T. Lim in G.R. Nos. 163356-57 and of Jovencio Cinco, Ricardo Librea and Alex Y. Pardo in
G.R. Nos. 163368-69 are hereby DENIED. The assailed Decision dated 28 April 2003 and
Resolution dated 27 April 2004 of the Court of Appeals are hereby AFFIRMED.

84
RAGOT, Joanie Mae D. L-170251

Case 34
Federated Lpg Dealers Association vs. Del Rosario
GR NO. 202639, NOV. 9, 2016 Del-castillo, J.

Doctrine:
Sec. 4 of BP 33 enumerates the persons who may be held liable for violations of the law, viz[.]:
(1) the president, (2) general manager, (3) managing partner, (4) such other officer charged with
the management of the business affairs of the corporation or juridical entity, or (5) the employee
responsible for such violation.

A member of the Board of Directors of a corporation, cannot, by mere reason of such

membership, be held liable for the corporation's probable violation of BP 33. If one is not the
President, General Manager or Managing Partner, it is imperative that it first be shown that
he/she falls under the catch-all "such other officer charged with the management of the business
affairs," before he/she can be prosecuted.

The board of directors of a corporation is generally a policy making body. They are not directly
engaged or charged with the running of the recurring business affairs of the corporation.

FACTS: Petitioner sought the assistance of the Criminal Investigation and Detection Group,
Anti-Fraud and Commercial Crimes Division (CIDG-AFCCD) of the Philippine National Police on
the alleged unauthorized refilling of LPG without authorization, underfilling of LPG products and
refilling LPG cylinders without giving any receipt committed by ACCS Ideal Gas Corporation
wherein an investigation and surveillance were conducted.
A search warrant was subsequently issued against the officers of ACCS Ideal Gas Corporation
(ACCS) for violation of BP 33. In the surveillance and investigation were conducted both by the
CIDG-AFCCD and a team of paralegal investigators it was revealed that they were underfilled by
0.4 kg to 1.3 kg.

P/Supt. Esguerra subsequently filed with the Department of Justice (DOJ) Complaints-Affidavits
against Antonio and respondents for illegal trading of petroleum products and for underfilling of
LPG cylinders under Section 2 (a) and 2 (c), respectively, of BP 33, as amended.

In his Counter-Affidavit, Antonio admitted that he was the General Manager of ACCS but denied
that the company was engaged in illegal trading and underfilling. Antonio asserted that the herein
respondents were merely incorporators of ACCS who have no active participation in the operation
of the business of the corporation. Respondents also corroborated the statements of Antonio that
they were merely incorporators/stockholders of the ACCS

On the other hand, P/Supt. Esguerra stressed that pursuant to Section 4 of BP 33, the President,
General Manager, Managing Partner, or such other officer charged with the management of the
business affairs of the corporation, or the employee responsible for the violation shall be criminally
liable. Thus, Antonio, being the General Manager, is criminally liable. Anent the respondents,
P/Supt. Esguerra averred that the Articles of Incorporation (AOI) of ACCS provides that there shall
85
be five incorporators who shall also serve as the directors. Considering that respondents were
listed in the AOI as incorporators, they are thus deemed as the directors of ACCS. And since the
By-Laws of ACCS provides that all business shall be conducted and all property of the corporation
controlled and held by the Board of Directors, and also pursuant to Section 23 of the Corporation
Code, respondents are likewise criminally liable.

The Department of Justice approved the finding of probable cause albeit only against Antonio and
only for the charge of illegal trading. The CA sustained the Secretary of Justice and dismissed the
petition.

ISSUE/S: Whether or not respondents as members of the Board of Directors of ACCS can be
criminally prosecuted for the latter’s alleged violation of BP 33 as amended.

HELD: NO, only Antonio as the general manager can be criminally liable.

Sec. 4 of BP 33, as amended enumerated persons who may be held liable for violations of the law
viz[.]: (1) the president, (2) general manager, (3) managing partner, (4) such other officer charged
with the management of the business affairs of the corporation or juridical entity, or (5) the
employee responsible for such violation.

This stands to reason for the board of directors of a corporation is generally a policy
making body. Even if the corporate powers of a corporation are reposed in the board of directors
under the first paragraph of Sec. 23 of the Corporation Code, it is of common knowledge and
practice that the board of directors is not directly engaged or charged with the running of the
recurring business affairs of the corporation.

Depending on the powers granted to them by the Articles of Incorporation, the members of the
board generally do not concern themselves with the day-to-day affairs of the corporation, except
those corporate officers who are charged with running the business of the corporation and are
concomitantly members of the board, like the President.

A member of the Board of Directors of a corporation, cannot, by mere reason of such membership,
be held liable for the corporation's probable violation of BP 33. If one is not the President, General
Manager or Managing Partner, it is imperative that it first be shown that he/she falls under the
catch-all "such other officer charged with the management of the business affairs," before he/she
can be prosecuted.

True, Section 1 of Article III thereof contains a general statement that the corporate powers of
ACCS shall be exercised, all business conducted, and all property of the corporation controlled
and held by the Board of Directors. Notably, however, the same provision likewise significantly
vests the Board with specific powers that were generally concerned with policy making from which
it can reasonably be deduced that the Board only concerns itself in the business affairs by setting
administrative and operational policies. It is actually the President under Section 2, 41 Article IV of
the said by-laws who is vested with wide latitude in controlling the business operations of the
corporation. But since there is no allegation or showing that any of the respondents was the
President of ACCS, none of them, therefore, can be considered as an officer charged with the
management of the business affairs even in so far as the By-Laws of the subject corporation is
concerned.
86
Here, there is no dispute that neither of the respondents was the President, General Manager, or
Managing Partner of ACCS. The Complaint-Affidavit attached to the records merely states that
respondents were members of the Board of Directors based on the AOI of ACCS. At any rate, the
Court has gone through the
By-Laws of ACCS and found nothing therein which would suggest that respondents were directly
involved in the day-to-day operations of the corporation.

Clearly, therefore, it is only Antonio, who undisputedly was the General Manager — a position
among those expressly mentioned as criminally liable under paragraph 4, Section 3 of BP 33, as
amended — can be prosecuted for ACCS' perceived violations of the said law

DISPOSITIVE RULING: WHEREFORE, the Petition for Review on Certiorari is PARTLY

GRANTED . The assailed decision and Resolution of the Court of Appeals AFFIRMED with
MODIFICATION that the State Prosecutor is ORDERED to take cognizance of the
Complaint-Affidavit for Underfilling under Section 2 (c), BP 33, as amended, docketed but only
insofar as Antonio G. Del Rosario is concerned.

87
ROSALES, Mikhaila Klaudine A. L-1800031

Case 35
Wesleyan University-Philippines v. Maglaya, Sr.
G.R. No. 212774; January 23, 2017 Peralta, J.

Doctrine: That the creation of the position is under the corporation's charter or by-laws, and that
the election of the officer is by the directors or stockholders must concur in order for an individual
to be considered a corporate officer, as against an ordinary employee or officer. One who is
included in the by-laws of a corporation in its roster of corporate officers is an officer of said
corporation and not a mere employee

FACTS: Petitioner Wesleyan University-Philippines (WUP) is a non-stock, non-profit,

non-sectarian educational corporation duly organized and existing under the Philippine laws.
Respondent Atty. Guillermo Maglaya, Sr. was appointed as a corporate member, and elected as a
member of the Board. He was also later elected as President of the University.

In a Memorandum, the incumbent Bishops appraised all corporate members of the expiration of
their terms. Respondent Maglaya learned that the Bishops created an Ad Hoc Committee to plan
the turnover of the administration of WUP in view of an alleged “gentleman’s agreement.”
Thereafter, the Bishops issued a formal notice introducing the new corporate members, trustees,
and officers. Respondent was informed of the termination of his services and authority as
President of WUP.

Respondent filed an illegal dismissal case against WUP, claiming that he was unceremoniously
dismissed in a wanton, reckless, oppressive, and malevolent manner. The Labor Arbiter ruled in
favor of WUP, holding that because the employer-employee relationship is merely incidental, it is
the regular courts which have jurisdiction. The NLRC reversed the decision and ruled that the case
falls within the jurisdiction of the labor tribunals.

Petitioner argues that respondent was a corporate officer, and thus the issue is deemed an
intra-corporate dispute which falls within the jurisdiction of the trial courts, and not with the labor
tribunal.

ISSUE/S: Whether or not respondent is a corporate officer and not a mere employee, such that the
issue between the parties is an intra-corporate dispute, which falls within the jurisdiction of the trial
courts

HELD: Yes. Respondent is a corporate officer and not a mere employee.

Corporate officers" in the context of Presidential Decree No. 902-A are those officers of the
corporation who are given that character by the Corporation Code or by the corporation's by-laws.
This Court expounded that an "office" is created by the charter of the corporation and the officer is
elected by the directors or stockholders, while an "employee" usually occupies no office and
generally is employed not by action of the directors or stockholders but by the managing officer of
the corporation who also determines the compensation to be paid to such employee.
88
From the foregoing, that the creation of the position is under the corporation's charter or by-laws,
and that the election of the officer is by the directors or stockholders must concur in order for an
individual to be considered a corporate officer, as against an ordinary employee or officer. It is only
when the officer claiming to have been illegally dismissed is classified as such corporate officer
that the issue is deemed an intra-corporate dispute which falls within the jurisdiction of the trial
courts.

It is apparent from the By-laws of WUP that the president was one of the officers of the
corporation, and was an honorary member of the Board. He was appointed by the Board and not
by a managing officer of the corporation. We held that one who is included in the by-laws of a
corporation in its roster of corporate officers is an officer of said corporation and not a mere
employee.

The alleged "appointment" of Maglaya instead of "election" as provided by the by-laws neither
convert the president of university as a mere employee, nor amend its nature as a corporate
officer. With the office specifically mentioned in the by-laws, the NLRC erred in taking cognizance
of the case, and in concluding that Maglaya was a mere employee and subordinate official.

DISPOSITIVE RULING: WHEREFORE, the petition for review on certiorari filed by petitioner
Wesleyan University-Philippines is hereby GRANTED. The assailed Resolution dated January 20,
2014 of the Court of Appeals in CA-G.R. SP No. 129196 is hereby REVERSED and SET ASIDE.
Respondent Atty. Guillermo T. Maglaya, Sr. is hereby ORDERED to REIMBURSE the petitioner
the amount of P2,505,208.75 awarded by the National Labor Relations Commission.

89
SY, Katherine Nicole C. L-1800266

Case 36
Calubad vs. Ricarcen Development Corporation
G.R. NO. 202364, August 30, 2017 Leonen, J.

Doctrine: The doctrine of apparent authority provides that even if no actual authority has
been conferred on an agent, his or her acts, as long as they are within his or her apparent scope
of authority, bind the principal. However, the principal's liability is limited to third persons who are
reasonably led to believe that the agent was authorized to act for the principal due to the
principal's conduct. Therefore, when a corporation intentionally or negligently clothes its agent
with apparent authority to act on its behalf, it is estopped from denying its agent's apparent
authority as to innocent third parties who dealt with this agent in good faith.

FACTS: The respondent in this case is Ricarcen Development Corporation – a domestic

corporation engaged in renting out real estate. Marilyn R. Soliman was its president from 2001 to
August 2003. Being a family corporation, the other members of the board of directors of Ricarcen,
during that time, were Marilyn’s mother, her brother, her aunt, and her sisters. To note, Ricarcen
was the registered owner of a parcel of land located at 53 Linaw St., Sta. Mesa Heights, Quezon
City which was subdivided into two lots covered by Transfer of Certificate of Title (TCT) No.
RT.-84937 (166018).

On the other hand, the petitioner in this case is Arturo C. Calubad – a creditor of Ricarcen. On
October 15, 2001, Marilyn, acting on Ricarcen's behalf as its president, took out a P4,000,000.00
loan from Calubad. This loan was secured by a real estate mortgage over Ricarcen's Quezon City
property covered by TCT No. RT-84937 (166018), as evidenced by a Deed of Real Estate
Mortgage. On two separate dates, Ricarcen, again acting through Marilyn, took out an additional
loan of P1,000,000.00 and P2,000,000.00 from Calubad with the same property used as security
and under the same terms and conditions as those of the original Deed of Real Estate Mortgage.

Marilyn presented Calubad with a Board Resolution dated October 15, 2001 to prove her authority
to execute the three (3) mortgage contracts in Ricarcen's behalf. This Resolution empowered her
to borrow money and use the Quezon City property as collateral for the loans. Marilyn also
presented two (2) Secretary's Certificates dated December 6, 2001 and May 8, 2002, executed by
Marilyn's sister and Ricarcen's corporate secretary, Elizabeth.

Later on, Ricarcen failed to pay its loan. For this reason, Calubad initiated extrajudicial foreclosure
proceedings on the real estate mortgage, as a result, Calubad became the owner of the subject
property being the highest bidder during the scheduled auction sale. Consequently, Ricarcen's
board of directors removed Marilyn as president upon confirming that the Quezon City property
had indeed been mortgaged, foreclosed, and sold to Calubad as a result of Marilyn's actions.

For this reason, Ricarcen filed its Complaint for Annulment of Real Estate Mortgage and
Extrajudicial Foreclosure of Mortgage and Sale with Damages against Calubad contending that it
never authorized its former president Marilyn to obtain loans from Calubad or use the Quezon City
property as collateral for the loans. The Regional Trial Court (RTC) granted Ricarcen's complaint

90
and annulled the mortgage contracts, extrajudicial foreclosure, and sale by public auction. It held
that Marilyn failed to present a special power of attorney as evidence of her authority from
Ricarcen. This was affirmed by the Court of Appeals.

Hence, Calubad filed a Petition for Review on Certiorari before the Supreme Court arguing that
Ricarcen is barred by estoppel from denying Marilyn's authority to enter into a contract of loan and
mortgage with Calubad because it clothed Marilyn with apparent authority to deal with him and use
the Quezon City property as collateral in its behalf as evidenced by the Board Resolution dated
October 15, 2001, and three (3) Secretary's Certificate dated October 15, 2001, December 6,
2001, and May 8, 2002 respectively, which were signed by Elizabeth in her capacity as Ricarcen's
corporate secretary.

Ricarcen, on the other hand, consistently claimed that it never authorized its former president
Marilyn to obtain loans from Calubad or use the Quezon City property as collateral for the loans.

ISSUE: Whether or not Ricarcen Development Corporation clothed Marilyn R. Soliman with
apparent authority to act on its behalf hence, it is estopped from denying or disowning the authority
of Marilyn, its former President, from entering into a contract of loan and mortgage with Arturo C.
Calubad.

HELD: YES. Ricarcen Development Corporation clothed Marilyn with apparent authority to act on
its behalf. Thus, it is estopped from denying or disowning the authority of Marilyn, its former
President, from entering into a contract of loan and mortgage with Arturo C. Calubad. The
Supreme Court held that as a corporation, Ricarcen exercises its powers and conducts its
business through its board of directors, as provided for by Section 23 of the Corporation Code:

Section 23. The board of directors or trustees. - Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled
and held by the board of directors or trustees to be elected from among the holders
of stocks, or where there is no stock, from among the members of the corporation,
who shall hold office for one (1) year until their successors are elected and qualified.

However, the board of directors may validly delegate its functions and powers to its officers or
agents. The authority to bind the corporation is derived from law, its corporate by-laws, or directly
from the board of directors, "either expressly or impliedly by habit, custom or acquiescence in the
general course of business."

Law and jurisprudence recognize actual authority and apparent authority as the two (2) types of
authorities conferred upon a corporate officer or agent in dealing with third persons.

Actual authority can either be express or implied. Express actual authority refers to the power
delegated to the agent by the corporation, while an agent's implied authority can be measured by
his or her prior acts which have been ratified by the corporation or whose benefits have been
accepted by the corporation.

On the other hand, apparent authority is based on the principle of estoppel. The doctrine of
apparent authority provides that even if no actual authority has been conferred on an agent, his
or her acts, as long as they are within his or her apparent scope of authority, bind the principal.
91
However, the principal's liability is limited to third persons who are reasonably led to believe that
the agent was authorized to act for the principal due to the principal's conduct. Apparent authority
is determined by the acts of the principal and not by the acts of the agent. Thus, it is incumbent
upon Calubad to prove how Ricarcen's acts led him to believe that Marilyn was duly authorized to
represent it.

In the case at bar, Calubad has sufficiently proved how Ricarcen's acts led him to believe that
Marilyn was duly authorized to represent it. As the former president of Ricarcen, it was within
Marilyn's scope of authority to act for and enter into contracts in Ricarcen's behalf. Her broad
authority from Ricarcen can be seen with how the corporate secretary entrusted her with blank yet
signed sheets of paper to be used at her discretion. She also had possession of the owner's
duplicate copy of the land title covering the property mortgaged to Calubad, further proving her
authority from Ricarcen. Furthermore, on various dates, Ricarcen paid and issued several Banco
de Oro checks payable to Calubad, which the latter claimed were the monthly interest payments of
the mortgage loans.

For this reason, Calubad could not be faulted for continuing to transact with Marilyn, even agreeing
to give out additional loans, because Ricarcen clearly clothed her with apparent authority.
Likewise, it reasonably appeared that Ricarcen's officers knew of the mortgage contracts entered
into by Marilyn in Ricarcen's behalf as proven by the issued Banco De Oro checks as payments for
the monthly interest and the principal loan.

Ricarcen claimed that it never granted Marilyn the authority to transact with Calubad or use the
Quezon City property as collateral for the loans, but its actuations say otherwise. It appears as if
Ricarcen and its officers gravely erred in putting too much trust in Marilyn. However, Calubad, as
an innocent third party dealing in good faith with Marilyn, should not be made to suffer because of
Ricarcen's negligence in conducting its own business affairs.

DISPOSITIVE RULING:
WHEREFORE, the Petition is GRANTED. The assailed January 25, 2012 Decision and June 20,
2012 Resolution of the Court of Appeals in CA-GR. CV No. 93185 are REVERSED and SET
ASIDE. Ricarcen Development Corporation's Amended Complaint in Civil Case No. Q-03-50584
before Branch 218, Regional Trial Court, Quezon City is hereby DISMISSED for lack of merit.

92
TANGONAN, Aneliza T. L-1800115

Case 37
Mactan Rock Industries, Inc., vs Germo
G.R. No. 228799. January 10, 2018. Perlas-bernabe, J

Doctrine: It is a basic rule that a corporation is a juridical entity which is vested with legal and
personality separate and distinct from those acting for and in behalf of, and from the people
comprising it.

As a general rule, directors, officers, or employees of a corporation cannot be held personally

liable for the obligations incurred by the corporation, unless it can be shown that such
director/officer/employee is guilty of negligence or bad faith, and that the same was clearly and
convincingly proven.

Thus, before a director or officer of a corporation can be held personally liable for corporate
obligations, the following requisites must concur: (1) the complainant must allege in the
complaint that the director or officer assented to patently unlawful acts of the corporation, or that
the officer was guilty of gross negligence or bad faith; and (2) the complainant must clearly and
convincingly prove such unlawful acts, negligence or bad faith. In this case, Tompar's assent to
patently unlawful acts of the MRII or that his acts were tainted by gross negligence or bad faith
was not alleged in Germo' s complaint, much less proven in the course of trial. Therefore, the
deletion of Tompar's solidary liability with MRII is in order.

FACTS: This case stemmed from a Complaint for sum of money and damages filed by Germo
against MRII - a domestic corporation engaged in supplying water, selling industrial maintenance
chemicals, and water treatment and chemical cleaning services - and its President/Chief Executive
Officer (CEO), Tompar.

MRII allegedly never paid Germo his rightful commissions amounting to P2,225,969.56 as of
December 2009, inclusive of interest. Hence, Germo filed the instant complaint praying that
MRII and Tompar be made to pay him the amounts of P2,225,969.56 as unpaid commissions
with legal interest from the time they were due until fully paid, P1,000,000.00 as moral
damages, P1,000,000.00 as exemplary damages, and the costs of suit.

ISSUE/S: Whether or not Tompar, MRII’s President should be held solidarily liable with MRII?

HELD: NO. Be that as it may, the Court finds that the courts a quo erred in concluding that
Tompar, in his capacity as then-President/CEO of MRII, should be held solidarily liable with MRII
for the latter's obligations to Germo. It is a basic rule that a corporation is a juridical entity which is
vested with legal and personality separate and distinct from those acting for and in behalf of, and
from the people comprising it. As a general rule, directors, officers, or employees of a
corporation cannot be held personally liable for the obligations incurred by the corporation,
unless it can be shown that such director/officer/employee is guilty of negligence or bad
faith, and that the same was clearly and convincingly proven. Thus, before a director or officer
of a corporation can be held personally liable for corporate obligations, the following requisites
must concur: (1) the complainant must allege in the complaint that the director or officer assented

93
to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad
faith; and (2) the complainant must clearly and convincingly prove such unlawful acts, negligence
or bad faith.

In this case, Tompar's assent to patently unlawful acts of the MRII or that his acts were
tainted by gross negligence or bad faith was not alleged in Germo' s complaint, much less
proven in the course of trial. Therefore, the deletion of Tompar's solidary liability with MRII is
in order.

DISPOSITIVE RULING: Wherefore, the petition is PARTLY GRANTED.

94
VALDEZ, Frances Loraine T. L-1800027

Case 38
NAPOCOR Board vs. COA
GR No. 242342, March 10, 2020 J.C. Reyes, Jr., J

Doctrine: The doctrine of qualified political agency could not be extended to the acts of the
Board of Directors despite some of its members being themselves the appointees of the
President to the Cabinet. Such Cabinet members sat on the Board of Directors ex officio , or by
reason of their office or function, not because of their direct appointment to the Board by the
President. Evidently, it was the law, not the President, that sat them in the Board.

FACTS: The National Power Corporation (NPC) Board of Directors authorized the payment of
Employee Health and Wellness Program and Related Financial Assistance (EHWPRFA) to
qualified officials and employees of the NPC. The EHWPRFA is a monthly benefit equivalent to
P5,000.00 to be released on a quarterly basis. The petitioners received a copy of ND No. NPC-11-
004-10, which disallowed the payment of EHWPRFA for the first quarter of 2010 amounting to
P29,715,000.00. The disallowance was because it was a new benefit and did not have prior
approval from the Office of the President as required under Memorandum Order No. 20.
Aggrieved, petitioners filed an appeal before the COA Corporate Government Sector-Cluster 3
which affirmed ND No. NPC-11-004-10. Unsatisfied, petitioners filed a petition for review before
the COA.

The COA upheld ND No. NPC-11-004- 10. It explained that the EHWPRFA was a new benefit
granted to NPC personnel since it was a cash benefit. The COA noted that the benefits under the
NPC Star Program, implemented under NPC Circular No. 2006-04 consisted of non-cash grants. It
emphasized that the EHWPRFA was a mere allowance or financial assistance which was not
categorically related to the activities or health program included in the NPC Star Program. Further,
the COA ruled that whether the EHWPRFA was a new benefit or an extension to an existing
benefit, the grant and payment thereof still needed to comply with the requirements under Section
6 of PD No. 1597, which requires the approval of the President through the Department of Budget
and Management. In addition, it elucidated that the doctrine of qualified political agency was
inapplicable in the present case. The COA expounded that while some members of the board of
NPC are department secretaries, they were not acting as such, but as mere members of the board
when they approved the grant of EHWPRFA. However, the COA appreciated good faith in favor of
the passive recipients who merely received the benefit, but had not participated in the approval
and release thereof.

Hence, this present petition.

ISSUE/S: Whether or not the doctrine of qualified political agency applies to a cabinet secretary's
act performed in connection with his or her position as an ex officio member of a board.

HELD: No. The doctrine of qualified political agency does not apply to a cabinet secretary's act
performed in connection with his or her position as an ex officio member of a board.
95
Contrary to petitioners' assumption, no absurd situation arises in still requiring presidential
approval in the grant of the EHWPRFA. In assenting to the grant of EHWPRFA as part of the
National Power Board, the Budget Secretary was not acting as the alter ego of the President as it
was in connection with his ex officio position as member of the board. Thus the approval or
disapproval of the DBM Secretary as required under the law would not have the effect of one
member of the board overturning the votes of the majority of the board since it is, by legal fiat,
actually the act of the President exercised through his alter ego.

In Atty. Manalang-Demigillo v. Trade and Investment Development of the Philippines Corporation ,

the Court had differentiated the effects of the secretaries' actions as members of the cabinet and
actions performed in an ex officio capacity, to wit:

The doctrine of qualified political agency essentially postulates that the heads of the various
executive departments are the alter egos of the President, and, thus, the actions taken by
such heads in the performance of their official duties are deemed the acts of the President
unless the President himself should disapprove such acts. This doctrine is in recognition of
the fact that in our presidential form of government, all executive organizations are adjuncts
of a single Chief Executive; that the heads of the Executive Departments are assistants and
agents of the Chief Executive; and that the multiple executive functions of the President as
the Chief Executive are performed through the Executive Departments. The doctrine has
been adopted here out of practical necessity, considering that the President cannot be
expected to personally perform the multifarious functions of the executive office.

Under the circumstances, when the members of the Board of Directors effected the assailed 2002
reorganization, they were acting as the responsible members of the Board of Directors of
TIDCORP constituted pursuant to PD 1080, as amended by Republic Act No. 8494, not as the
alter egos of the President. We cannot stretch the application of a doctrine that already delegates
an enormous amount of power. Also, it is settled that the delegation of power is not to be lightly
inferred.

DISPOSITIVE RULING: WHEREFORE, the February 16, 2017 Decision and the March 15, 2018
Resolution of the Commission on Audit in Decision No. 2017-035 and Decision No. 2018-257,
respectively, are AFFIRMED with MODIFICATION. The certifying and approving officers, as well
as all the employees of the National Power Corporation who received the disallowed benefit, are
liable for the amount of disallowance. They must reimburse the amount they received through
salary deduction, or through whatever mode of payment the Commission on Audit may deem just
and proper under the circumstances.

96
________________________________

MODULE 3
Corporate Powers, By-Laws and Meetings

________________________________
Valerio, Allan Nicolai A. L-170387

Case 39
NIELSON & COMPANY, INC. v. LEPANTO CONSOLIDATED MINING COMPANY
G.R. No. L-21601. December 28, 1968 ZALDIVAR, J.:

Doctrine:
Distribution of Stock Dividend
A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or
authorizing such dividend. It is, what the term itself implies, a distribution of the shares of stock
of the corporation among the stockholders as dividends. A stock dividend of a corporation is a
dividend paid in shares of stock instead of cash, and is properly payable only out of surplus
profits. So, a stock dividend is actually two things: (1) a dividend, and (2) the enforced use of the
dividend money to purchase additional shares of stock at par.
It is apparent that stock dividends are issued only to stockholders. This is so because only
stockholders are entitled to dividends. They are the only ones who have a right to a proportional
share in that part of the surplus which is declared as dividends.

FACTS:
Lepanto seeks the reconsideration of the decision rendered by the Court, on the matters pertaining
to the management contract they contracted with petitioner Nielson & Co. Lepanto assails that the
court erred in ordering them to issue and deliver to Nielson & Co. shares of stock together with
fruits thereof. In its motion for reconsideration, Lepanto contends that the payment to Nielson of
stock dividends as compensation for its services under the management contract is a violation of
the Corporation Law, and that it was not, and it could not be, the intention of Lepanto and Nielson
— as contracting parties — that the services of Nielson should be paid in shares of stock taken out
of stock dividends declared by Lepanto.

ISSUE/S:
WoN payment to Nielson of stock dividends as compensation for its services under the
management contract is a violation of the Corporation Law

HELD:

Section 16 of the Corporation Law, the consideration for which shares of stock may be issued are:
(1) cash; (2) property; and (3) undistributed profits.

Shares of stock are given the special name "stock dividends" only if they are issued in lieu of
undistributed profits. If shares of stocks are issued in exchange of cash or property then those
shares do not fall under the category of "stock dividends." A corporation may legally issue shares
of stock in consideration of services rendered to it by a person not a stockholder, or in payment of
its indebtedness. A share of stock issued to pay for services rendered is equivalent to a stock
issued in exchange for property, because services are equivalent to property. Likewise a share of
stock issued in payment of indebtedness is equivalent to issuing a stock in exchange for cash. But
98
a share of stock thus issued should be part of the original capital stock of the corporation upon its
organization, or part of the stocks issued when the increase of the capitalization of a corporation is
properly authorized.
Those shares of stock may be issued to a person who is not a stockholder, or to a person already
a stockholder in exchange for services rendered or for cash or property. But a share of stock
coming from stock dividends declared cannot be issued to one who is not a stockholder of a
corporation.
A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or
authorizing such dividend. It is, what the term itself implies, a distribution of the shares of stock of
the corporation among the stockholders as dividends. A stock dividend of a corporation is a
dividend paid in shares of stock instead of cash, and is properly payable only out of surplus profits.
So, a stock dividend is actually two things: (1) a dividend, and (2) the enforced use of the dividend
money to purchase additional shares of stock at par.

It is apparent that stock dividends are issued only to stockholders. This is so because only
stockholders are entitled to dividends. They are the only ones who have a right to a proportional
share in that part of the surplus which is declared as dividends.
And so, in the case at bar Nielson cannot be paid in shares of stock which form part of the stock
dividends of Lepanto for services it rendered under the management contract. We sustain the
contention of Lepanto that the understanding between Lepanto and Nielson was simply to make
the cash value of the stock dividends declared as the basis for determining the amount of
compensation that should be paid to Nielson, in the proportion of 10% of the cash value of the
stock dividends declared.

DISPOSITIVE RULING:
IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the decision of the court
a quo and enter in lieu thereof another, ordering the appellee Lepanto to pay the appellant Nielson
the different amounts as specified.

99
Roberto Anton C. Adap L-170042

Case 40
Islamic Directorate of the PH v. CA
GR Number; 117897, May 14, 1997 HERMOSISIMA, JR.,J

Doctrine: Tandang Sora property constitutes the only property of IDP. Thus, it is a sale of all
corporate property of IDP falling within S40. The twin requirements of majority vote of the
legitimate BoT and 2/3 vote of the members were not met as the Carpizo group was a fake BoT
and those whose names and signatures were affixed by Carpizo group, together with the sham
board resolution authorizing the sale, were not bona fide members of IDP as they were made to
appear. Apparently, there are only 15 official members of the petitioner corporation including the
eight (8) members of the Board of Trustees.

FACTS:
In 1971, Islamic leaders of all Muslim major tribal groups in the Philippines organized and
incorporated the ISLAMIC DIRECTORATE OF THE PHILIPPINES (IDP), the primary purpose of
which is to establish an Islamic Center in Quezon City for, the construction of a Mosque and Arabic
School and other religious infrastructure to facilitate the practice of Islamic faith in QC. The Libyan
government donated money to IDP to purchase land at Culiat, Tandang Sora, QC to be used as a
center for the Islamic populace. The land, with an area of 49,652m2, was registered in IDP’s
name.

In 1971, the IDP board of trustees was composed of Senator Mamintal Tamano et al. (Tamano
group). In 1972, martial law was declared by Marcos. Most of the members of Tamano group flew
to the Middle East to escape political persecution.

The SEC ruled that Carpizo and Abbas groups’ elections are void- Thereafter, 2 Muslim groups
sprung, Carpizo group, headed by Engr. Carpizo, and Abbas group, led by Atty. Abbas, both
claiming to be the legitimate IDP. In a suit between the two groups, SEC ruled that both Carpizo
and Abbas group’s elections as IDP board are void. SEC then authorized the IDP members to
adopt by-laws after which adoption they can elect board of trustees. But neither group took the
necessary steps prescribed by SEC, thus no valid election of the board took place.

It was stated in the SEC case 4012- Without being elected as board of trustees of IDP, Carpizo
group signed a board resolution, authorizing the sale of 2 lands to respondent Iglesia ni Cristo
(INC) for P22M thru a deed of absolute sale in 1989. In 1991, petitioner 1971 IDP Board of
trustees Tamano group filed a petition in SEC (SEC Case 4012) to declare this sale void.

The Civil case Q-90-6937 contained that meanwhile, INC filed an action for specific performance
(Case Q-90-6937) against Carpizo group to compel it to deliver possession to INC. Tamano group
sought to intervene. RTC denied, ruling that the issues being raised are intra-corporate and thus
SEC has jurisdiction. RTC ruled that INC was the owner and SC later affirmed (GR 107751),
ordering that one Ligon deliver the titles to the property to INC.

100
Finally, in the SEC Case 4012, SEC eventually ruled that the deeds of sale are void. INC’s motion
to intervene in this case was denied. It filed a R65 certiorari with CA. CA reversed the SEC ruling.
Hence this petition for review by Tamano group.

ISSUE/S:
Whether the sale of the property to INC by Carpizo group, whose election as board of trustees of
IDP was declared void by SEC, is valid.

HELD: No.

The SC ruling in GR 107751 is not res judicata since there is no identity of parties. The principal
parties in GR 107751 was mortgagee Ligon as petitioner and INC as respondent.

Moreover, although it is true that Civil Case Q-90-6937, which gave rise to GR 107751, was
entitled Iglesia ni Kristo v. Islamic Directorate of the PH, IDP cannot be considered a formal party
thereto for the simple reason that it was not duly represented by a legitimate board of trustees in
that case. Thus, Case Q-90-6937 did not become final and executory insofar as the true IDP is
concerned since IDP, for want of legitimate representation, was deprived of its day in court.
Matters adjudged in cause do not prejudice those who were not parties to it.

The SEC has authority to pass upon the issue as to who among the different contending groups is
the legitimate BoT of IDP since this falls within its original and exclusive jurisdiction under PD
902-A, S3 and 5(c):
"Section 3. The Commission shall have absolute jurisdiction, supervision and control over
all corporations, partnerships or associations, who are the grantees of primary franchises
and/or a license or permit issued by the government to operate in the Philippines . . ."
xxx xxx xxx
Section 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have original
and exclusive jurisdiction to hear and decide cases involving:
xxx xxx xxx
c) Controversies in the selection or appointment of directors, trustees, officers, or managers
of such corporations, partnerships or associations xxx.

SEC here ruled that Carpizo group’s election as BoT is void, in effect finding Carpizo group a
bogus BoT. Thus, Carpizo group is bereft of any authority to bind IDP in any kind of transaction
including the sale to INC. Thus, all acts carried out by the Carpizo BoT, particularly the sale of the
Tandang Sora property, is void for being done without the consent of IDP through a legitimate BoT
(Art. 1318, consent, requisite of contracts).
There is also failure to comply with S40 of CorpCode (*S39, RCC):
"Sec. 40. Sale or other disposition of assets. — xxx, a corporation may, by a majority vote of
its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its property and assets, xxx, when authorized by the vote
of the stockholders representing at least two-third (2/3) of the outstanding capital stock; or in

101
 case of non-stock corporation, by the vote of at least two-thirds (2/3) of the members, in a
stockholders' or members' meeting duly called for the purpose.

In this case, the Tandang Sora property constitutes the only property of IDP. Thus, it is a sale of all
corporate property of IDP falling within S40. The twin requirements of majority vote of the
legitimate BoT and 2/3 vote of the members were not met as the Carpizo group was a fake BoT
and those whose names and signatures were affixed by Carpizo group, together with the sham
board resolution authorizing the sale, were not bona fide members of IDP as they were made to
appear. Apparently, there are only 15 official members of the petitioner corporation including the
eight (8) members of the Board of Trustees.

DISPOSITIVE RULING:
WHEREFORE, the petition is GRANTED. The Decision of the public respondent Court of Appeals
dated October 28, 1994 in CA-G.R. SP No. 33295 is SET ASIDE. The Decision of the Securities
and Exchange Commission dated July 5, 1993 in SEC Case No. 4012 is REINSTATED. The
Register of Deeds of Quezon City is hereby ordered to cancel the registration of the Deed of
Absolute Sale in the name of respondent Iglesia Ni Cristo, if one has already been made. If new
titles have been issued in the name of Iglesia Ni Cristo, the Register of Deeds is hereby ordered to
cancel the same, and issue new ones in the name of petitioner Islamic Directorate of the
Philippines. Petitioner corporation is ordered to return to private respondent whatever amount has
been initially paid by INC as consideration for the property with legal interest, if the same was
actually received by IDP. Otherwise, INC may run after Engineer Farouk Carpizo and his group for
the amount of money paid.

102
ANDAYA, CLARICE J. L-1800012

Case 41
DEE v. SECURITIES AND EXCHANGE COMMISSION
GR Number 60502. July 16, 1991 PARAS, J.

Doctrine: The SEC can take cognizance of a case, the controversy must pertain to any of the
following relationships: (a) between corporation, partnership or association and the public; (b)
between the corporation, partnership, or association and its stockholders, partners, members or
oAcers; (c) between the corporation, partnership or association and the state insofar as its
franchise, permit or license to operate is concerned; and (d) among the stockholders, partners,
or associates themselves.

FACTS: Naga Telephone Company, Inc. was organized in 1954, the authorized capital was
P100,000.00. In 1974 Naga Telephone Co., Inc. (Natelco for short) decided to increase its
authorized capital to P3,000,000.00. As required by the Public Service Act, Natelco Jled an
application for the approval of the increased authorized capital with the then Board of
Communications. On January 8, 1975, a decision was rendered in said case, approving the said
application subject to certain conditions, among which was that the issuance of the shares of
stocks will be for a period of one year from the date hereof, after which no further issues will be
made without previous authority from this Board.

Pursuant to the approval given by the then Board of Communications, Natelco filed its Amended
Articles of Incorporation with the Securities and Exchange Commission (SEC for short). When the
amended articles were filed with the SEC, the original authorized capital of P100,000.00 was
already paid. Of the increased capital of P2,900,000.00 the subscribers subscribed to P580,000.00
of which P145,000 was fully paid. The capital stock of Natelco was divided into 213,000 common
shares and 87,000 preferred shares, both at a par value of P10.00 per share.

On April 12, 1977, Natelco entered into a contract with Communication Services, Inc. (CSI for
short) for the "manufacture, supply, delivery and installation" of telephone equipment. In
accordance with this contract, Natelco issued 24,000 shares of common stocks to CSI on the
same date as part of the down payment. On May 5, 1979, another 12,000 shares of common
stocks were issued to CSI. In both instances, no prior authorization from the Board of
Communications, now the National Telecommunications Commission, was secured pursuant to the
conditions imposed by the decision in BOC.

On May 19, 1979, the stockholders of the Natelco held their annual stockholders' meeting to elect
their seven directors to their Board of Directors, for the year 1979-1980. In this election Pedro
Lopez Dee (Dee for short) was unseated as Chairman of the Board and President of the
Corporation, but was elected as one of the directors, together with his wife, Amelia Lopez Dee. In
the election CSI was able to gain control of Natelco when the latter's legal counsel, Atty. Luciano
Maggay (Maggay for short) won a seat in the Board with the help of CSI. In the reorganization Atty.
Maggay became president.

103
Petitioner Dee having been unseated in the election, filed a petition in the SEC docketed as SEC
Case No. 1748, questioning the validity of the elections of May 19, 1979 upon the main ground
that there was no valid list of stockholders through which the right to vote could be determined. As
prayed for in the petition a restraining order was issued by the SEC placing petitioner and the other
officers of the 1978-1979 Natelco Board in hold-over capacity.

The SEC restraining order was elevated to the Supreme Court in G.R. No. 50885 where the
enforcement of the SEC restraining order was restrained. During the tenure of the Maggay Board,
from June 22, 1979 to March 10, 1980, it did not reform the contract of April 12, 1977, and entered
into another contract with CSI for the supply and installation of additional equipment but also
issued to CSI 113,800 shares of common stock.

Subsequently, the Supreme Court dismissed the petition in G.R. No. 50885 upon the ground that
the same was premature and the Commission should be allowed to conduct its hearing on the
controversy. The dismissal of the petition resulted in the unseating of the Maggay group from the
board of directors of Natelco in a "hold-over" capacity.

In the course of the proceedings in SEC Case No. 1748, respondent hearing officer issued an
order on June 23, 1981, declaring: (1) that CSI is a stockholder of Natelco and, therefore, entitled
to vote; (2) that unexplained 16,858 shares of Natelco appear to have been issued in excess to
CSI which should not be allowed to vote; (3) that 82 shareholders with their corresponding number
of shares shall be allowed to vote; and (4) consequently, ordering the holding of special
stockholder' meeting to elect the new members of the Board of Directors for Natelco based on the
Jndings made in the order as to who are entitled to vote.

From the foregoing order dated June 23, 1981, petitioner Dee filed a petition for certiorari/appeal
with the SEC en banc. Commission en banc rendered a decision which resolves to sustain the
order of the Hearing Officer; to dismiss the petition/appeal for lack of merit; and order new
elections as the Hearing Officer shall set after consultations with Natelco officers.

On April 21, 1982, petitioner filed a motion for reconsideration. Likewise, private respondent
Natelco filed its motion for reconsideration. Pending resolution of the motions for reconsideration,
on May 4, 1982, respondent hearing officer without waiting for the decision of the commission en
banc, to become final and executory rendered an order stating that the election for directors would
be held on May 22, 1982. On May 20, 1982, the SEC en banc denied the motions for
reconsideration.

On May 25, 1982, the SEC recognized the fact that elections were duly held, and proclaimed that
the following are the "duly elected directors" of the Natelco for the term 1982-1983. Despite service
of the order of May 25, 1982, the Lopez Dee group headed by Messrs. Justino De Jesus and Julio
Lopez Dee kept insisting no elections were held and refused to vacate their positions. On May 28,
1982, the SEC issued another order directing the hold-over directors and officers to turn over their
respective posts to the newly elected directors and officers and directing the Sheriff of Naga City,
with the assistance of PC and INP of Naga City, and other law enforcement agencies of the City or
of the Province of Camarines Sur, to enforce the aforesaid order.

104
On May 29, 1982, the Sheriff of Naga City, assisted by law enforcement agencies, installed the
newly elected directors and officers of the Natelco, and the hold-over officers peacefully vacated
their respective offices and turned-over their functions to the new officers. The trial judge issued an
order dated September 10, 1982 directing the respondents in the contempt charge to "comply
strictly, under pain of being subjected to imprisonment until they do so". The order also
commanded the Deputy Provincial Sheriff, with the aid of the PC Provincial Commander of
Camarines Sur and the INP Station Commander of Naga City to "physically remove or oust from
the offices or positions of directors and officers of NATELCO, the aforesaid respondents and to
reinstate and maintain, the hold-over directors and oAcers of NATELCO referred to in the order.
The order of re-implementation was issued, and, finally, the Maggay group has been restored as
the officers of the Natelco. Hence, these petitions involve the same parties and practically the
same issues. Consequently, in the resolution of the Court En Banc dated August 23, 1983, G.R.
No. 63922 was consolidated with G.R. No. 60502.

ISSUE/S: Whether or not the Securities and Exchange Commission has the power and
jurisdiction to declare null and void shares of stock issued by NATELCO to CSI?

HELD: Yes. The SEC has the power and jurisdiction to declare null and void the shares of
stock issued by NATELCO to CSI.

The SEC can take cognizance of a case, the controversy must pertain to any of the following
relationships: (a) between corporation, partnership or association and the public; (b) between the
corporation, partnership, or association and its stockholders, partners, members or oAcers; (c)
between the corporation, partnership or association and the state insofar as its franchise, permit or
license to operate is concerned; and (d) among the stockholders, partners, or associates
themselves.

The jurisdiction of the SEC is limited to matters intrinsically connected with the regulation of
corporations, partnerships and associations and those dealing with internal affairs of such entities;
P.D. 902-A does not confer jurisdiction to SEC over all matters affecting corporations. The
jurisdiction of the SEC in SEC Case No. 1748 is limited to deciding the controversy in the election
of the directors and officers of Natelco. Thus, the SEC was correct when it refused to rule on
whether the issuance of the shares of Natelco stocks to CSI violated Sec. 20 (h) of the Public
Service Act.

The issuance of 113,800 shares of Natelco stock to CSI made during the pendency of SEC Case
No. 1748 in the Securities and Exchange Commission was valid. This Court in Benito vs. SEC, et
al., has ruled that:
"Petitioner bewails the fact that in view of the lack of notice to him of such subsequent
issuance, he was not able to exercise his right of pre-emption over the unissued shares.
However, the general rule is that pre-emptive right is recognized only with respect to new
issues of shares, and not with respect to additional issues of originally authorized shares.
This is on the theory that when a corporation at its inception offers its Jrst shares, it is
presumed to have offered all of those which it is authorized to issue. An original subscriber
is deemed to have taken his shares knowing that they form a deJnite proportionate part of

105
 the whole number of authorized shares. When the shares left unsubscribed are later
reoffered, he cannot therefore (sic) claim a dilution of interest.

The questioned issuance of the 113,800 stocks is not invalid even assuming that it was made
without notice to the stockholders as claimed by the petitioner. The power to issue shares of stocks
in a corporation is lodged in the board of directors and no stockholders meeting is required to
consider it because additional issuance of shares of stocks does not need approval of the
stockholders. Consequently, no pre-emptive right of Natelco stockholders was violated by the
issuance of the 113,800 shares to CSI.

Petitioner insists that no meeting and election were held in Naga City on May 22, 1982 as directed
by the respondent Hearing Officer. There is evidence of the fact that the Natelco special
stockholders' meeting and election of members of the Board of Directors of the corporation were
held at its office in Naga City on May 22, 1982 as shown when the Hearing Officer issued an order
on May 25, 1982, declaring the stockholders named therein as corporate oAcers duly elected for
the term 1982-1983.

It is, therefore, very clear from the records that an election was held on May 22, 1982 at the
Natelco OAces in Naga City and its oAcers were duly elected, thereby rendering the issue of
election moot and academic, not to mention the fact that the election of the Board of
Directors/OAcers has been held annually, while this case was dragging for almost a decade.

DISPOSITIVE RULING: PREMISES CONSIDERED, both petitions are hereby DISMISSED for
lack of merit.

106
Bagtang, Judea Ara T. L-1800350

Case 42
Ma. Corina C. Jiao, et. al. v. National Labor Relations Commission, Global Business Bank, Inc., et. al.
G.R. No. 182331, April 18, 2012 REYES, J.

Doctrine: As a rule, a corporation that purchases the assets of another will not be liable for the
debts of the selling corporation, provided the former acted in good faith and paid adequate
consideration for such assets, except when any of the following circumstances is present: (1)
where the purchaser expressly or impliedly agrees to assume the debts; (2) where the
transaction amounts to a consolidation or merger of the corporations; (3) where the purchasing
corporation is merely a continuation of the selling corporation; and (4) where the selling
corporation fraudulently enters into the transaction to escape liability for those debts.

FACTS:

The petitioners were regular employees of the Philippine Banking Corporation (Philbank), each
with at least ten years of service in the company. Pursuant to its Memorandum dated August 28,
1970, Philbank established a Gratuity Pay Plan (Old Plan) for its employees. On March 8, 1991,
Philbank implemented a new Gratuity Pay Plan (New Gratuity Plan). In February 2000, Philbank
merged with Global Business Bank, Inc. (Globalbank), with the former as the surviving corporation
and the latter as the absorbed corporation, but the bank operated under the name Global Business
Bank, Inc. As a result of the merger, complainants’ respective positions became redundant. A
Special Separation Program (SSP) was implemented and the petitioners were granted a
separation package equivalent to one and a half month’s pay (or 150% of one month’s salary) for
every year of service based on their current salary. Before the petitioners could avail of this
program, they were required to sign two documents, namely, an Acceptance Letter and a Release,
Waiver, Quitclaim.

As their positions were included in the redundancy declaration, the petitioners availed of the SSP,
signed acceptance letters and executed quitclaims in Globalbank’s favor in consideration of their
receipt of separation pay equivalent to 150% of their monthly salaries for every year of service.

In August 2002, respondent Metropolitan Bank and Trust Company (Metrobank) acquired the
assets and liabilities of Globalbank through a Deed of Assignment of Assets and Assumption of
Liabilities.

Subsequently, the petitioners filed separate complaints for non-payment of separation pay with
prayer for damages and attorney’s fees before the National Labor Relations Commission (NLRC).

Metrobank denied any liability, citing the absence of an employment relationship with the
petitioners. It argued that its acquisition of the assets and liabilities of Globalbank did not include
the latter’s obligation to its employees. Moreover, Metrobank pointed out that the petitioners’
employment with Globalbank had already been severed before it took over the latter’s banking
operations.

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The LA absolved Metrobank from liability, finding that the petitioners had already been separated
from Globalbank when Metrobank took over the former’s banking operations. Moreover, the
liabilities that Metrobank assumed were limited to those arising from banking operations and
excluded those pertaining to Globalbank’s employees or to claims of previous employees.

ISSUE/S:
Whether or not Metrobank can be held liable

HELD: No.

The Court held that Metrobank cannot be held liable for the petitioners’ claims.

As a rule, a corporation that purchases the assets of another will not be liable for the debts of the
selling corporation, provided the former acted in good faith and paid adequate consideration for
such assets, except when any of the following circumstances is present: (1) where the purchaser
expressly or impliedly agrees to assume the debts; (2) where the transaction amounts to a
consolidation or merger of the corporations; (3) where the purchasing corporation is merely a
continuation of the selling corporation; and (4) where the selling corporation fraudulently enters
into the transaction to escape liability for those debts.

Under the Deed of Assignments of Assets and Assumption of Liabilities between Globalbank and
Metrobank, the latter accepted the former’s assets in exchange for assuming its liabilities. The
liabilities that Metrobank assumed, which were clearly set out in Annex "A" of the instrument, are:
deposit liabilities; interbank loans payable; bills payable; manager’s checks and demand drafts
outstanding; accrued taxes, interest and other expenses; and deferred credits and other liabilities.

Based on this enumeration, the liabilities that Metrobank assumed can be characterized as those
pertaining to Globalbank’s banking operations. They do not include Globalbank’s liabilities to pay
separation pay to its former employees. This must be so because it is understood that the same
liabilities ended when the petitioners were paid the amounts embodied in their respective
acceptance letters and quitclaims. Hence, this obligation could not have been passed on to
Metrobank.

The petitioners insist that Metrobank is liable because it is the "parent" company of Globalbank
and that majority of the latter’s board of directors are also members of the former’s board of
directors.

While the petitioners’ allegations are true, one fact cannot be ignored – that Globalbank has a
separate and distinct juridical personality. The petitioners’ own evidence – Global Business
Holdings, Inc.’s General Information Sheet filed with the Securities and Exchange Commission –
bears this out.

Even then, the petitioners would want this Court to pierce the veil of corporate identity in order to
hold Metrobank liable for their claims.

What the petitioners desire, the Court cannot do. This fiction of corporate entity can only be
disregarded in cases when it is used to defeat public convenience, justify wrong, protect fraud, or
defend crime. Moreover, to justify the disregard of the separate juridical personality of a
corporation, the wrongdoing must be clearly and convincingly established.
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In the instant case, none of these circumstances is present such as to warrant piercing the veil of
corporate fiction and treating Globalbank and Metrobank as one.

DISPOSITIVE RULING: WHEREFORE, the foregoing premises considered, the petition is

DENIED. The assailed Resolutions dated November 7, 2007 and March 26, 2008, respectively, of
the Court of Appeals in CA-G.R. SP No. 101065 are AFFIRMED. SO ORDERED.

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 BALLENA, FERNANDO JR, M. L-170308
Case 43
Loyola Grandvillas Homeowners Association vs. CA
GR Number 117188; Date: August 7, 199 ROMERO, J.

Doctrine: Although the Corporation Code requires the filing of by-laws, it does not expressly
provide for the consequences of the non-filing of the same within the period provided for in
Section 46. However, such omission has been rectified by Presidential Decree No. 902-A, the
pertinent provisions on the jurisdiction of the SEC, even under the foregoing express grant of
power and authority, there can be no automatic corporate dissolution simply because the
incorporators failed to abide by the required filing of by-laws embodied in Section 46 of the
Corporation Code. There is no outright "demise" of corporate existence. Proper notice and
hearing are cardinal components of due process in any democratic institution, agency or society.
In other words, the incorporators must be given the chance to explain their neglect or omission
and remedy the same. As the "rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders or
members and directors and officers with relation thereto and among themselves in their relation
to it," by-laws are indispensable to corporations in this jurisdiction. These may not be essential to
corporate birth but certainly, these are required by law for an orderly governance and
management of corporations. Nonetheless, failure to file them within the period required by law
by no means tolls the automatic dissolution of a corporation.

FACTS: Loyola Grand Villas Homeowners Association (LGVHA) was organized as the association
of homeowners and residents of the Loyola Grand Villas. It was organized by the developer of the
subdivision and its first president was Victorio V. Soliven, himself the owner of the developer. For
unknown reasons, however, LGVHAI did not file its corporate by-laws. The officers of the LGVHAI
tried to register its by-laws but they failed to do so. The latter discovered that there were two other
organizations within the subdivision — the North Association and the South Association. According
to private respondents, a non-resident and Soliven himself, respectively headed these
associations.When Soliven inquired about the status of LGVHAI, the head of the legal department
of the HIGC, informed him that LGVHAI had been automatically dissolved for two reasons. First, it
did not submit its by-laws within the period required by the Corporation Code and, second, there
was non-user of corporate charter because HIGC had not received any report on the association's
activities. Apparently, this information resulted in the registration of the South Association with the
HIGC. These developments prompted the officers of the LGVHAI to lodge a complaint with the
HIGC. They questioned the revocation of LGVHAI's certificate of registration without due notice
and hearing and concomitantly prayed for the cancellation of the certificates of registration of the
North and South Associations by reason of the earlier issuance of a certificate of registration in
favor of LGVHAI.

HIGC: Ruled in favor of LGVHAI and revoked the certificate of registration of North and South
Association.

HIGC APPEALS BOARD: Dismissed the appeal of South Association.

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CA: Affirmed the resolution of the HIGC Appeals Board. It held that under the Corporation Code, a
private corporation commences to have corporate existence and juridical personality from the date
the SEC issues a certificate of incorporation under its official seal. The requirement for the filing of
by-laws under Section 46 of the Corporation Code within one month from official notice of the
issuance of the certificate of incorporation presupposes that it is already incorporated, although it
may file its by-laws with its articles of incorporation. While Section 46, in prescribing that by-laws
must be adopted within the period prescribed therein, may be interpreted as a mandatory
provision, particularly because of the use of the word 'must,' its meaning cannot be stretched to
support the argument that automatic dissolution results from non-compliance. Hence, this petition.

ISSUE: Whether the LGVHAI's failure to file its by-laws within the period prescribed by Section 46
of the Corporation Code had the effect of automatically dissolving the said corporation?

HELD: No, failure to file by laws within one month does not automatically dissolve the
corporation. The deliberations of the Batasang Pambansa No. 68 demonstrates clearly that
automatic corporate dissolution for failure to file the by-laws on time was never the intention of the
legislature. Moreover, even without resorting to the records of deliberations of the Batasang
Pambansa, the law itself provides the answer to the issue propounded by petitioner. Although the
Corporation Code requires the filing of by-laws, it does not expressly provide for the consequences
of the non-filing of the same within the period provided for in Section 46. However, such omission
has been rectified by Presidential Decree No. 902-A, the pertinent provisions on the jurisdiction of
the SEC, even under the foregoing express grant of power and authority, there can be no
automatic corporate dissolution simply because the incorporators failed to abide by the required
filing of by-laws embodied in Section 46 of the Corporation Code. There is no outright "demise" of
corporate existence. Proper notice and hearing are cardinal components of due process in any
democratic institution, agency or society. In other words, the incorporators must be given the
chance to explain their neglect or omission and remedy the same. Moreso, that the failure to file
by-laws is not provided for by the Corporation Code but in another law is of no moment. P.D. No.
902-A, which took effect immediately after its promulgation on March 11, 1976, is very much
apposite to the Code. As the "rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders or members
and directors and officers with relation thereto and among themselves in their relation to it,"
by-laws are indispensable to corporations in this jurisdiction. These may not be essential to
corporate birth but certainly, these are required by law for an orderly governance and management
of corporations. Nonetheless, failure to file them within the period required by law by no means
tolls the automatic dissolution of a corporation.

DISPOSITIVE RULING: WHEREFORE, the instant petition for review on certiorari is hereby
DENIED and the questioned Decision of the Court of Appeals AFFIRMED. This Decision is
immediately executory. Costs against petitioner. SO ORDERED.

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Beroña, Christienne Nathalie A. L-1800245

Case 44
China Banking Corporation vs. CA
G.R. No. 117604; March 26, 1997 Kapunan, J:

Doctrine: The general rule is that third persons are not bound by the by-laws of a corporation
since they are not privy thereto. The exception to this is when third persons have actual or
constructive knowledge of the same. In order to be bound, the third party must have acquired
knowledge of the pertinent by-laws at the time the transaction or agreement between said third
party and the shareholder was entered into.

FACTS: Galicano Calapatia, Jr. (Calapatia), a stockholder of private respondent Valley Golf &
Country Club, Inc. (VGCCI), pledged his Stock Certificate No. 1219 to petitioner China Banking
Corporation. Calapatia later obtained a loan of P20,000.00 from petitioner, the payment of which
was secured by the pledge agreement. Due to Calapatia's failure to pay, petitioner filed a petition
for extrajudicial foreclosure. Petitioner informed VGCCI of the foreclosure proceedings and
requested that the pledged stock be transferred to its name and the same be recorded in the
corporate books. However, VGCCI wrote to the petitioner expressing its inability to accede to
petitioner's request in view of Calapatia's unsettled accounts with the club. Despite the foregoing, a
public auction was held and the petitioner emerged as the highest bidder at P20,000.00.
Consequently, petitioner was issued the corresponding certificate of sale. VGCCI caused to be
published in the newspaper Daily Express a notice of auction sale of a number of its stock
certificates, including Calapatia's own share of stock. Thereafter, VGCCI informed Calapatia of the
termination of his membership due to the sale of his shares of stock in the auction. When the
petitioner requested that a new certificate of stock be issued in its name, VGCCI replied that "for
reason of delinquency" Calapatia's stock was sold at a public auction for P25,000.00.

Petitioner protested the sale by VGCCI of the subject share of stock and thereafter filed a case,
but the Regional Trial Court of Makati dismissed the complaint for lack of jurisdiction over the
subject matter on the theory that it involves an intra-corporate dispute. Petitioner filed a complaint
with the Securities and Exchange Commission (SEC) for the nullification of the sale of Calapatia's
stock by VGCCI, the cancellation of any new stock certificate issued pursuant thereto, for the
issuance of a new certificate in petitioner's name, and for damages, attorney's fees and costs of
litigation. SEC Hearing Officer Manuel P. Perea rendered a decision in favor of VGCCI. Petitioner
appealed to the SEC en banc and the Commission issued an order reversing the decision of its
hearing officer. The Court of Appeals rendered its decision nullifying and setting aside the orders of
the SEC and its hearing officer on ground of lack of jurisdiction over the subject matter and,
consequently, dismissed petitioner's original complaint. VGCCI claims a prior right over the subject
share anchored mainly on Sec. 3, Art VIII of its by-laws which provides that "after a member shall
have been posted as delinquent, the Board may order his/her/its share sold to satisfy the claims of
the Club . . ." It is pursuant to this provision that VGCCI also sold the subject share at public
auction, of which it was the highest bidder. VGCCI caps its argument by asserting that its
corporate by-laws should prevail.

ISSUE/S: Whether or not petitioner bank is bound by the by-laws of VGCCI

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HELD: No. In order to be bound, the third party must have acquired knowledge of the pertinent
by-laws at the time the transaction or agreement between said third party and the shareholder was
entered into, in this case, at the time the pledge agreement was executed. VGCCI could have
easily informed the petitioner of its by-laws when it sent notice formally recognizing petitioner as
pledgee of one of its shares registered in Calapatia's name. Petitioner's belated notice of said
by-laws at the time of foreclosure will not suffice.

In the case of Fleisher v. Botica Nolasco, 47 Phil. 584, the Supreme Court held that the by-law
restricting the transfer of shares cannot have any effect on the transferee of the shares in question
as he "had no knowledge of such by-law when the shares were assigned to him. He obtained them
in good faith and for a valuable consideration. He was not a privy to the contract created by the
by-law between the shareholder and the Botica Nolasco, Inc. Said by-law cannot operate to defeat
his right as a purchaser."

Appellant-petitioner bank as a third party can not be bound by appellee-respondent's by-laws. It

must be recalled that when appellee-respondent communicated to appellant-petitioner bank that
the pledge agreement was duly noted in the club's books there was no mention of the
shareholder-pledgor's unpaid accounts. The transcript of stenographic notes reveals that the
pledgor became delinquent only in 1975, after the contract of pledge was perfected. Thus,
appellant-petitioner was in good faith when the pledge agreement was contracted. The
Commission en banc believes that for the exception to the general accepted rule that third persons
are not bound by by-laws to be applicable and binding upon the pledgee, knowledge of the
provisions of the VGCCI By-laws must be acquired at the time the pledge agreement was
contracted. Knowledge of said provisions, either actual or constructive, at the time of foreclosure
will not affect pledgee's right over the pledged share.

A bona fide pledgee takes free from any latent or secret equities or liens in favor either of the
corporation or of third persons, if he has no notice thereof, but not otherwise. He also takes it free
of liens or claims that may subsequently arise in favor of the corporation if it has notice of the
pledge, although no demand for a transfer of the stock to the pledgee on the corporate books has
been made.

DISPOSITIVE RULING: Wherefore, premises considered, the assailed decision of the Court of
Appeals is REVERSED and the order of the SEC en banc dated 4 June 1993 is hereby
AFFIRMED.

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Bohol, Bryan D. L-170449
Case 45
Associated Bank vs CA and Lorenzo Sarmiento, Jr.
G.R. No. 12379, June 29, 1998 Panganiban, J.

Doctrine: Ordinarily, in the merger of two or more existing corporations, one of the combining
corporations survives and continues the combined business, while the rest are dissolved and all
their rights, properties and liabilities are acquired by the surviving corporation. Although there is
a dissolution of the absorbed corporations, there is no winding up of their affairs or liquidation of
their assets, because the surviving corporation automatically acquires all their rights, privileges
and powers, as well as their liabilities.

FACTS: In 1975, the Associated Banking Corporation and Citizens Bank and Trust Company
decided to merge into one corporation naming it as Associated Citizens Bank, as the surviving
bank. In 1977, the private respondent, Lorenzo Sarmiento, Jr. issued a promissory note in favor of
Citizens Bank and Trust Company. The former undertook to pay the latter the sum of
P2,500,000.00 payable on or before March 6, 1978. Under the promissory note, Lorenzo
Sarmiento, Jr agreed to pay an interest at 14% per annum. Lorenzo Sarmiento, Jr. was able to pay
a portion of the obligation. Lorenzo Sarmiento defaulted in paying the obligation to the petitioner,
Associated Bank demanded that immediate payment should be made but Lorenzo failed to pay the
amount due despite repeated demands of the petitioner, Associated Bank. Thus, Associated Bank
filed a complaint against Lorenzo Sarmiento, Jr. for collection of the amount due. In Lorenzo’s
answer to the complaint, he contended that Associated Bank did not have a cause of action in
filing the complaint because Associated Bank was not the real party of interest. Lorenzo argued
that the issued promissory note was issued in favor of Citizens Bank and Trust Company.
However, Associated Bank disputed such defense. It claimed that as the surviving corporation, it
had the right to enforce a contract entered into by the absorbed company subsequent to the date
of the merger agreement.

The Regional Trial Court ruled in favor of the petitioner and ordered the private respondent,
Lorenzo Sarmiento, Jr. to pay the former of the amount due including interest, attorney’s fees, and
cost of suit. On appeal, the Court of Appeals reversed and set aside the ruling of the Regional Trial
Court declaring that Associated Bank had no cause of action because Associated Bank was not
privy to the contract between Lorenzo Sarmiento, Jr. and Citizens Bank and Trust Company.

ISSUE/S: Whether or not the Associated Bank has cause of action against Lorenzo Sarmiento, Jr.
when the former absorbed Citizens Bank and Trust Company thereby acquiring all the rights of
Citizens Bank and Trust Company against Lorenzo Sarmiento, Jr.

HELD: Yes. The Supreme Court ruled that the Associated Bank has a valid cause of action
against Lorenzo Sarmiento, Jr. The failure of Lorenzo Sarmiento, Jr. to honor his obligation under
the promissory note constitutes a violation of Associate Bank’s right to collect the proceeds of the
loan extended to the former.

According to the Supreme Court, the merger of two or more existing corporations, one of the
combining corporations survives and continues the combined business, while the rest are
114
dissolved and all their rights, properties, and liabilities are acquired by the surviving corporation,
there is no winding up of their affairs or liquidation of their assets, because the surviving
corporation automatically acquires all their rights, privileges, and powers, as well as their liabilities.

DISPOSITIVE RULING: WHEREFORE, the petition is GRANTED. The assailed Decision is SET
ASIDE and the Decision of RTC-Manila, Branch 48, in Civil Case No. 26465 is hereby
REINSTATED.

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DISTURA, Quennie Minalete B. L-170503

Case 46
Babst vs. CA
GR Number: 99398; January 26, 2001 Yanres-Santiago, J.

Doctrine: The authority granted by BPI to its account officer to attend the creditors’ meeting was
an authority to represent the bank, such that when he failed to object to the substitution of
debtors, he did so on behalf of and for the bank.

FACTS: This case stemmed from a complaint that was commenced principally to enforce payment
of a promissory note and three domestic letters of credit which Elizalde Steel Consolidated, Inc.
(ELISCON) executed and opened with the Commercial Bank and Trust Company (CBTC). The
former obtained a loan from the latter in the amount of P8,015,900.84, with interest at the rate of
14% per annum, evidenced by a promissory note. ELISCON defaulted in its payments, leaving an
outstanding indebtedness in the amount of P2,795,240.67.

The letters of credit were opened for ELISCON by CBTC using the credit facilities of Pacific
Multi-Commercial Corporation (MULTI) with the said bank. Antonio Roxas Chua and Chester G.
Babst executed a Continuing Suretyship, whereby they bound themselves jointly and severally
liable to pay any existing indebtedness of MULTI to CBTC to the extent of P8,000,000.00 each.
Then, CBTC opened for ELISCON in favor of National Steel Corporation (NSC) three domestic
letters of credit which ELISCON used to purchase tin black plates from NSC. ELISCON defaulted
in its obligation to pay the amounts of the letters of credit.

Subsequently, the Bank of the Philippine Islands (BPI) and CBTC entered into a merger. ELISCON
encountered financial difficulties and became heavily indebted to the Development Bank of the
Philippines (DBP). In order to settle its obligations, ELISCON and DBP executed a Deed of
Cession of Property in Payment of Debt. DBP formally took over the assets of ELISCON.
Consequently, BPI, as successor-in-interest of CBTC, instituted with the RTC-Makati a complaint
for sum of money against ELISCON, MULTI, and Babst.

ISSUE/S: Whether or not BPI consented to the assumption by DBP of the obligations of ELISCON.

HELD: Yes. Article now 1293 of the Civil Code does not state that the creditor’s consent to the
substitution of the new debtor for the old be express, or given at the time of the substitution.

In the case at bar, Babst, MULTI and ELISCON all maintain that due to the failure of BPI to register
its objection to the take-over by DBP of ELISCON’s assets, at the creditors’ meeting held in June
1981 and thereafter, it is deemed to have consented to the substitution of DBP for ELISCON as
debtor. The SC agrees with the contention of Babst, MULTI, and ELISCON. Indeed, the authority
granted by BPI to its account officer to attend the creditors’ meeting was an authority to
represent the bank, such that when he failed to object to the substitution of debtors, he did
so on behalf of and for the bank.

Even granting arguendo that the said account officer was not so empowered, BPI could have
subsequently registered its objection to the substitution, especially after it had already learned that
DBP had taken over the assets and assumed the liabilities of ELISCON. Its failure to do so can
only mean an acquiescence in the assumption by DBP of ELISCON’s obligations. As repeatedly

116
pointed out by ELISCON and MULTI, BPI’s objection was to the proposed payment formula, not to
the substitution itself.

AS TO THE CONTRACT OF SURETY

While a surety is solidarily liable with the principal debtor, his obligation to pay only arises upon the
principal debtor’s failure or refusal to pay. A contract of surety is an accessory promise by which a
person binds himself for another already bound, and agrees with the creditor to satisfy the
obligation if the debtor does not. A surety is an insurer of the debt; he promises to pay the
principal’s debt if the principal will not pay.

In the case at bar, there was no indication that the principal debtor will default in payment. In fact,
DBP, which had stepped into the shoes of ELISCON, was capable of payment. Its authorized
capital stock was increased by the government. More importantly, the National Development
Company took over the business of ELISCON and undertook to pay ELISCON’s creditors, and
earmarked for that purpose the amount of P4,015,534.54 for payment to BPI.

Notwithstanding the fact that a reliable institution backed by government funds was offering to pay
ELISCON’s debts, not as mere surety but as substitute principal debtor, BPI, for reasons known
only to itself, insisted in going after the sureties.

AS TO THE VALIDITY OF NOVATION

BPI’s conduct evinced a clear and unmistakable consent to the substitution of DBP for ELISCON
as debtor. Hence, there was a valid novation which resulted in the release of ELISCON from its
obligation to BPI, whose cause of action should be directed against DBP as the new debtor.

Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new obligation that takes the place of the former; it is
merely modificatory when the old obligation subsists to the extent it remains compatible with the
amendatory agreement. The original obligation having been extinguished, the contracts of
suretyship executed separately by Babst and MULTI, being accessory obligations, are likewise
extinguished. Hence, BPI should enforce its cause of action against DBP.

ESTABLISHING BPI’S RIGHT OF ACTION

There is no question that there was a valid merger between BPI and CBTC. It is settled that in the
merger of two existing corporations, one of the corporations survives and continues the business,
while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving
corporation. Hence, BPI has a right to institute the case a quo.

DISPOSITIVE RULING: WHEREFORE, the consolidated petitions are GRANTED. The appealed
Decision of the Court of Appeals, which held ELISCON, MULTI and Babst solidarily liable for
payment to BPI of the promissory note and letters of credit, is REVERSED and SET ASIDE. BPI’s
complaint against ELISCON, MULTI and Babst is DISMISSED.

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DOCTOR, Clarisse Maita M. L-160075

Case 47
Mindanao Savings vs. Willkom
G.R. No. 178618; October 11, 2010 Nachura, J.

Doctrine: The steps necessary to accomplish a merger or consolidation, as provided for in

Sections 76, 77, 78, and 79 of the Corporation Code, are:

(1) The board of each corporation draws up a plan of merger or consolidation. Such plan must
include any amendment, if necessary, to the articles of incorporation of the surviving corporation,
or in case of consolidation, all the statements required in the articles of incorporation of a
corporation.

(2) Submission of plan to stockholders or members of each corporation for approval. A meeting
must be called and at least two (2) weeks’ notice must be sent to all stockholders or members,
personally or by registered mail. A summary of the plan must be attached to the notice. Vote of
two-thirds of the members or of stockholders representing two-thirds of the outstanding capital
stock will be needed. Appraisal rights, when proper, must be respected.

(3) Execution of the formal agreement, referred to as the articles of merger o[r] consolidation, by
the corporate officers of each constituent corporation. These take the place of the articles of
incorporation of the consolidated corporation, or amend the articles of incorporation of the
surviving corporation.

(4) Submission of said articles of merger or consolidation to the SEC for approval.

(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two
weeks before.

(6) Issuance of certificate of merger or consolidation.

FACTS: First Iligan Savings and Loan Association, Inc (FISLAI) and the Davao Savings and Loan
Association, Inc (DSLAI) are banks registered under the SEC. FISLAI and DSLAI entered into a
merger, with DSLAI as the surviving corporation. However, the articles of merger were not
registered and approved with the SEC due to incomplete documentation. Thereafter, by way of
amendment to its Articles of Incorporation, DSLAI changed its corporate name to Mindanao
Savings and Loan Association, Inc. (MSLAI).

MSLAI’s business failed and the Monetary Board of the Central Bank of the Philippines found that
its financial condition was one of insolvency thus the latter ordered its liquidation. Prior to MSLAI’s
closure, Uy filed with the RTC an action for the collection of sum of money against FISLAI. The
RTC rendered a decision in favor of Uy while the CA made modifications as to the payment.

The sheriff levied six (6) parcels of land and the notice of sale was subsequently published.
Willkom was the highest bidder. He eventually sold one of the subject parcels of land to Go.
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Petitioner, represented by PDIC filed before the RTC a complaint for Annulment of Sheriff’s Sale,
Cancellation of Title and Reconveyance of Properties against respondents. It alleged that the
assets of an institution placed under receivership or liquidation such as MSLAI should be deemed
in custodia legis and should be exempt from any order of garnishment, levy, attachment, or
execution.

Respondents averred that MSLAI had no cause of action against them because MSLAI is a
separate and distinct entity from FISLAI. In addition, they contended that the merger between
FISLAI and DSLAI (now MSLAI) did not take effect considering that they did not comply with the
procedure and formalities for merger or consolidation as prescribed under the Corporation Code.

ISSUE/S: Whether or not the merger between FISLAI and DSLAI (now MSLAI) was valid and
effective?

HELD: No

Ordinarily, in the merger of two or more existing corporations, one of the corporations survives and
continues the combined business, while the rest are dissolved and all their rights, properties, and
liabilities are acquired by the surviving corporation. Although there is a dissolution of the absorbed
or merged corporations, there is no winding up of their affairs or liquidation of their assets because
the surviving corporation automatically acquires all their rights, privileges, and powers, as well as
their liabilities.

The merger, however, does not become effective upon the mere agreement of the constituent
corporations. Since a merger or consolidation involves fundamental changes in the corporation, as
well as in the rights of stockholders and creditors, there must be an express provision of law
authorizing them.

The steps necessary to accomplish a merger or consolidation, as provided for in Sections 76, 77,
78, and 79 of the Corporation Code, are:

(1) The board of each corporation draws up a plan of merger or consolidation. Such plan must
include any amendment, if necessary, to the articles of incorporation of the surviving corporation,
or in case of consolidation, all the statements required in the articles of incorporation of a
corporation.

(2) Submission of plan to stockholders or members of each corporation for approval. A meeting
must be called and at least two (2) weeks’ notice must be sent to all stockholders or members,
personally or by registered mail. A summary of the plan must be attached to the notice. Vote of
two-thirds of the members or of stockholders representing two-thirds of the outstanding capital
stock will be needed. Appraisal rights, when proper, must be respected.

(3) Execution of the formal agreement, referred to as the articles of merger o[r] consolidation, by
the corporate officers of each constituent corporation. These take the place of the articles of
incorporation of the consolidated corporation, or amend the articles of incorporation of the
surviving corporation.

(4) Submission of said articles of merger or consolidation to the SEC for approval.
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(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two
weeks before.

(6) Issuance of certificate of merger or consolidation.

Clearly, the merger shall only be effective upon the issuance of a certificate of merger by the SEC,
subject to its prior determination that the merger is not inconsistent with the Corporation Code or
existing laws. Where a party to the merger is a special corporation governed by its own charter, the
Code particularly mandates that a favorable recommendation of the appropriate government
agency should first be obtained.

In this case, it is undisputed that the articles of merger between FISLAI and DSLAI were not
registered with the SEC due to incomplete documentation. Consequently, the SEC did not issue
the required certificate of merger. Even if it is true that the Monetary Board of the Central Bank of
the Philippines recognized such merger, the fact remains that no certificate was issued by the
SEC. Such merger is still incomplete without the certification.

The issuance of the certificate of merger is crucial because not only does it bear out SEC’s
approval but it also marks the moment when the consequences of a merger take place. By
operation of law, upon the effectivity of the merger, the absorbed corporation ceases to exist but its
rights and properties, as well as liabilities, shall be taken and deemed transferred to and vested in
the surviving corporation.

There being no merger between FISLAI and DSLAI (now MSLAI), for third parties such as
respondents, the two corporations shall not be considered as one but two separate corporations.

DISPOSITIVE RULING: Wherefore, premises considered, the petition is denied.

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Espenida, Mheltina Deniece B. L-1800137

Case 48
Y-I Leisure Philippines Inc. v. James Yu
G.R. No. 207161; September 08, 2015 Mendoza, J.

Doctrine: Section 40 suitably reflects the business-enterprise transfer under the exception of the
Nell Doctrine because the purchasing or transferee corporation necessarily continued the
business of the selling or transferor corporation. Given that the transferee corporation acquired
not only the assets but also the business of the transferor corporation, then the liabilities of the
latter are inevitably assigned to the former.

FACTS: Mt. Arayat Development Co. Inc. (MADCI) was a real estate development corporation
while respondent James Yu was a businessman who was interested to buy golf and country club
shares. In 1997, Yu bought 500 golf and 150 country club shares for a total price of Php
650,000.00. Upon full payment of the shares, Yu discovered that the supposed site of the golf and
country club was non-existent. Yu demanded then from MADCI a refund of his payment which was
not fulfilled. This prompted Yu to file with the RTC a complaint for collection of sum of money and
damages with prayer for preliminary attachment against MADCI and Sangil (president). In Sangil’s
answer, he said that the return of the money was no longer possible because its approval had
been blocked by the new set of officers of MADCI.

After the pre-trial, Yu filed an amended complaint impleading YIL, Y-I Leisure Phils., Inc. (YILPI)
and Y-I Club & Resorts, Inc. (YICRI). According to Yu, all the assets of MADCI were sold to YIL,
YILPI and YICRI and was done in fraud of MADCI’s creditors. However, they answered that as a
mere stockholder of MADCI, they could not be held responsible for the liabilities of the corporation
and the transfer was not done to defraud MADCI’s creditors.

The RTC ruled that because MADCI did not deny its contractual obligation with Yu, it must be
liable for the return of his payments. On appeal, the CA partly granted the appeals and modified
the RTC decision by holding YIL, YILPI and YICRI jointly and severally liable for satisfaction of the
claim.

ISSUE/S: WON the transfer of all or substantially all of the assets of the corporation includes the
assumption of corporate liabilities.

HELD: Yes, the transfer of all or substantially all of the assets of the corporation includes the
assumption of corporate liabilities. The Nell Doctrine provides that generally, where one
corporation sells or otherwise transfers all of its assets to another corporation, the latter is not
liable for the debts and liabilities of the transferor, except: (1) Where the purchaser expressly or
impliedly agrees to assume such debts; (2) where the transaction amounts to a consolidation or
merger of the corporations; (3) where the purchasing corporation is merely a continuation of the
selling corporation; and (4) where the transaction is entered into fraudulently in order to escape
liability for such debts. The legal basis of the last in the four exceptions to the Nell Doctrine, where

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the purchasing corporation is merely a continuation of the selling corporation, is challenging to
determine. In his book, Philippine Corporate Law, Dean Cesar Villanueva explained that this
exception contemplates the “business-enterprise transfer.” In such transfer, the transferee
corporation’s interest goes beyond the assets of the transferor’s assets and its desire to acquire
the latter’s business enterprise, including its goodwill. In other words, the transferee purchases not
only the assets of the transferor, but also its business. As a result of the sale, the transferor is
merely left with its juridical existence, devoid of its industry and earning capacity. The proper
provision of law that is contemplated by this exception would be Section 40 of the Corporation
Code.

DISPOSITIVE RULING: WHEREFORE, the petition is DENIED.

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Eustaquio, Patricia Erika A. L-1800087
Case 49
Philippine Geothermal, Inc. Employees Union vs. UNOCAL Philippines, Inc. (Chevron Geothermal
Philippines Holdings, Inc.)
GR Number: 190187 September 28, 2016 Leonen, J.

Doctrine: The merger of a corporation with another does not operate to dismiss the employees
of the corporation absorbed by the surviving corporation. This is in keeping with the nature and
effects of a merger as provided under law and the constitutional policy protecting the rights of
labor. The employment of the absorbed employees subsists. Necessarily, these absorbed
employees are not entitled to separation pay on account of such merger in the absence of any
other ground for its award.

FACTS: Philippine Geothermal, Inc. Employees Union was a legitimate labor union that stands as
the bargaining agent of the rank-and-file employees of Unocal Philippines.

Unocal Philippines, formerly known as Philippine Geothermal, Inc., was a foreign corporation
incorporated under the laws of the State of California, United States of America, licensed to do
business in the Philippines for the "exploration and development of geothermal resources as
alternative sources of energy." It was a wholly owned subsidiary of Union Oil Company of
California (Unocal California), which, in turn, was a wholly owned subsidiary of Union Oil
Corporation (Unocal Corporation). Unocal Philippines operates two (2) geothermal steam elds in
Tiwi, Albay and Makiling, Banahaw, Laguna, owned by the National Power Corporation.

On April 4, 2005, Unocal Corporation executed an Agreement and Plan of Merger (Merger
Agreement) with Chevron Texaco Corporation (Chevron) and Blue Merger Sub, Inc. (Blue Merger).
Blue Merger was a wholly owned subsidiary of Chevron. Under the Merger Agreement, Unocal
Corporation merged with Blue Merger, and Blue Merger became the surviving corporation.
Chevron then became the parent corporation of the merged corporations. After the merger, Blue
Merger, as the surviving corporation, changed its name to Unocal Corporation. On January 31,
2006, Unocal Philippines executed a Collective Bargaining Agreement with the Union.

However, on October 20, 2006, the Union wrote Unocal Philippines asking for the separation
benefits provided for under the Collective Bargaining Agreement. According to the Union, the
Merger Agreement of Unocal Corporation, Blue Merger, and Chevron resulted in the closure and
cessation of operations of Unocal Philippines and the implied dismissal of its employees. Unocal
Philippines refused the Union's request and asserted that the employee members were not
terminated and that the merger did not result in its closure or the cessation of its operations.

On February 5, 2007, the parties agreed to submit their dispute for voluntary arbitration before the
Department of Labor and Employment, with the Secretary of Labor and Employment as Voluntary
Arbitrator.

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After the parties submitted their respective position papers, the Secretary of Labor rendered the
Decision on January 15, 2008 ruling that the Union's members were implicitly terminated from
employment as a result of the Merger Agreement. The Secretary of Labor found that the merger
resulted in new contracts and a new employer for the Union's members. The new contracts
allegedly required the employees' consent; otherwise, there was no employment contract to speak
of. Thus, the Secretary of Labor awarded the Union separation pay under the Collective
Bargaining Agreement. Unocal Philippines led before the Court of Appeals a Petition for Review
questioning the Secretary of Labor's Decision.

The Court of Appeals granted the appeal of Unocal Philippines and reversed the Decision of the
Secretary of Labor. It held that Unocal Philippines had a separate and distinct juridical personality
from its parent company, Unocal Corporation, which was the party that entered into the Merger
Agreement. The Court of Appeals ruled that Unocal Philippines remained undissolved and its
employees were unaffected by the merger. It found that this was evidenced by the Union's
assumption of its role as the duly recognized bargaining representative of all rank-and-file
employees a few months after the merger.

It ruled that in any case, the Collective Bargaining Agreement only provided for the payment of
separation pay if a reduction in workforce results from redundancy, retrenchment or installation of
labor-saving devices, or closure and cessation of operations, all of which did not occur in this case.

Petitioner Philippine Geothermal, Inc. Employees Union claims that respondent Unocal
Philippines, Inc. changed its theory of the case when, in the proceedings before the Secretary of
Labor, it claimed that it entered into a merger and not a sale, but later, in its appeal before the
Court of Appeals, argued that it was not a party to the merger.

Petitioner asserts that the Court of Appeals erred in allowing respondent to change its theory of the
case on appeal and in deciding the case on the basis of this changed theory. Petitioner claims that
the merger resulted in (a) "the severance of the juridical tie that existed between the employees
and its original employer, Unocal Corporation," and (b) the implied termination of the employment
of the Union's members, who had the right to waive their continued employment with the absorbing
corporation

Respondent argues that The Memorandum of Agreement, the Collective Bargaining Agreement,
and the contemporaneous acts of the parties show that respondent shall pay separation pay only
in case the employees actually lose their jobs due to redundancy, retrenchment or installation of
labor-saving devices, or closure and cessation of operation. As these circumstances did not occur,
the respondent cannot grant petitioner's members separation pay.

ISSUE/S: Whether the Merger Agreement executed by Unocal Corporation, Blue Merger, and
Chevron resulted in the termination of the employment of petitioner's members.

HELD: No. The SC found that whether or not respondent is a party to the Merger Agreement,
there is no implied dismissal of its employees as a consequence of the merger.

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A merger is a consolidation of two or more corporations, which results in one or more corporations
being absorbed into one surviving corporation. The separate existence of the absorbed corporation
ceases, and the surviving corporation "retains its identity and takes over the rights, privileges,
franchises, properties, claims, liabilities and obligations of the absorbed corporation(s)."

If respondent is a subsidiary of Unocal California, which, in turn, is a subsidiary of Unocal

Corporation, then the merger of Unocal Corporation with Blue Merger and Chevron does not affect
respondent or any of its employees. Respondent has a separate and distinct personality from its
parent corporation. Nonetheless, if respondent is indeed a party to the merger, the merger still
does not result in the dismissal of its employees.

The effects of a merger are provided under Section 80 of the Corporation Code. Although this
provision does not explicitly state the merger's effect on the employees of the absorbed
corporation, Bank of the Philippine Islands v. BPI Employees Union-Davao Chapter-Federation of
Unions in BPI Uniban the SC has ruled that the surviving corporation automatically assumes the
employment contracts of the absorbed corporation, such that the absorbed corporation's
employees become part of the manpower complement of the surviving corporation. Section 80 of
the Corporation Code provides that the surviving corporation shall possess all the rights,
privileges, properties, and receivables due to the absorbed corporation. Moreover, all interests of,
belonging to, or due to the absorbed corporation "shall be taken and deemed to be transferred to
and vested in such surviving or consolidated corporation without further act or deed." The surviving
corporation likewise acquires all the liabilities and obligations of the absorbed corporation as if it
had itself incurred these liabilities or obligations.

This acquisition of all assets, interests, and liabilities of the absorbed corporation necessarily
includes the rights and obligations of the absorbed corporation under its employment contracts.
Consequently, the surviving corporation becomes bound by the employment contracts entered into
by the absorbed corporation. These employment contracts are not terminated. They subsist unless
their termination is allowed by law. This interpretation is consistent with the constitutional
provisions and policies on work and labor. These constitutional provisions ensure that workers'
rights are protected as they are imbued with public interest. They likewise prevent an interpretation
of any law, rule, or agreement, which may violate worker's rights acquired during their employment
the Supreme Court ruled that the surviving corporation automatically assumes the employment
contracts of the absorbed corporation. The absorbed corporation's employees are not impliedly
dismissed, but become part of the manpower complement of the surviving corporation

The merger of Unocal Corporation with Blue Merger and Chevron does not result in an implied
termination of the employment of petitioner's members. Assuming respondent is a party to the
merger, its employment contracts are deemed to subsist and continue by "the combined operation
of the Corporation Code and the Labor Code under the backdrop of the labor and social justice
provisions of the Constitution."

Petitioner insists that this is contrary to its freedom to contract, considering its members did not
enter into employment contracts with the surviving corporation. However, petitioner is not
precluded from leaving the surviving corporation. Although the absorbed employees are retained
as employees of the merged corporation, the employer retains the right to terminate their

125
employment for a just or authorized cause. Likewise, the employees are not precluded from
severing their employment through resignation or retirement. The freedom to contract and the
prohibition against involuntary servitude is still, thus, preserved in this sense. This is the manner by
which the consent of the employees is considered by the law.

Assuming respondent is a party to the merger, the merger still does not operate to effect a
termination of the employment of respondent's employees. Should they be unhappy with the
surviving corporation, the employees may retire or resign from employment. Given these
considerations, we rule that the petitioner is not entitled to the separation benefits it claims from
the respondent. Separation benefits are not granted to petitioners by law in case of voluntary
resignation, or by any contract it entered into with the respondent.

Merger is not one of the circumstances where the employees may claim separation pay. The only
instances where separation pay may be awarded to petitioner are: (a) reduction in workforce as a
result of redundancy; (b) retrenchment or installation of labor-saving devices; or (c) closure and
cessation of operations.

None of these instances are present here. The terms do not provide that a merger is one of the
instances where a petitioner may claim separation benefits for its members. Neither can these
circumstances be interpreted as to contemplate a merger with another corporation. In any case, if
the parties intended that the petitioner ought to be granted separation pay in case of a merger, it
should have been explicitly provided for in the contract. Absent this express intention, petitioners
cannot claim separation pay.

In this case, there is no dismissal of the employees on account of the merger. Petitioner does not
deny that respondent actually continued its normal course of operations after the merger, and that
its members, as employees, resumed their work with their tenure, salaries, wages, and other
benefits intact. Petitioner was even able to execute with respondent, after the merger, the
Collective Bargaining Agreement from which it anchors its claims.

Given these circumstances, the petitioner is not entitled to separation pay. Although the policy of
the state is to rule in favor of labor in light of the social justice provisions under the Constitution,
the SC cannot unduly trample upon the rights of management, which are likewise entitled to
respect in the interest of fair play.

DISPOSITIVE RULING: WHEREFORE, the Decision dated July 23, 2009 and the Resolution
dated
November 9, 2009 of the Court of Appeals in CA-G.R. SP No. 102184 are AFFIRMED. The
Petition for Review is DENIED considering that no reversible error was committed by the Court of
Appeals.

126
Gilo, Crhister Vince J. L-1800085
Case 50
Sumifru Philippines Corp. v. Baya
G.R. No. 188269, 17 April 2017 Perlas-Bernabe, J.

Doctrine: Section 80 of the Corporation Code of the Philippines clearly states that one of the
effects of a merger is that the surviving company shall inherit not only the assets, but also the
liabilities of the corporation it merged with. Thus, the surviving entity in a merger must be held
answerable for the solidary liability incurred by the absorbed corporation it merged with.

FACTS: Respondent Bernabe Baya was employed by AMS Farming Corporation (AMSFC) since
1985 and, from then on, worked his way to a supervisory rank. As supervisor, Baya joined the
union of supervisors and eventually formed the AMS Kapalong Agrarian Reform Beneficiaries
Multipurpose Cooperative (AMSKARBEMCO), the agrarian reform organization of the regular
employees of AMSFC. Baya was then reassigned to a series of supervisory positions in AMSFC’s
sister company, Davao Fruits Corp. (DFC). There, Baya also joined and became a member of the
latter’s supervisory union. Later on, 220 hectares of AMSFC’s 513-hectare banana plantation were
covered by CARL. Eventually, said portion was transferred to AMSFC’s regular employees as
Agrarian Reform Beneficiaries (ARBs), including Baya. Thereafter, the ARBs explored a possible
agribusiness venture agreement with AMSFC, but went unsuccessful, prompting the PARO to
terminate negotiations and, consequently, gave AMSKARBEMCO freedom to enter into similar
agreement with other parties. ARBs then held a referendum in order to choose as to which group
between AMSKARBEMCO or SAFFPAI, an association of pro-company beneficiaries, the 280
went to AMSKARBEMCO while 85 joined SAFFPAI.

When AMSFC learned that AMSKARBEMCO entered into an export agreement with another
company, it summoned AMSKARBEMCO officers, including Baya, to lash out at them and
threatened them that the ARBs’ takeover of the lands would not push through. Thereafter, Baya
was again summoned, this time by a DFC manager, who told the former that he would be putting
himself in a “difficult situation” if he will not shift his loyalty to SAFFPAI. Nonetheless, Baya refused
to betray his cooperative. Then, Baya received a letter stating that his secondment with DFC had
ended, thus, ordering his return to AMSFC. However, upon Baya’s return to AMSFC, he was
informed that there were no supervisory positions available; thus, he was assigned to different
rank-and-file positions instead.

Due to the foregoing, Baya filed a constructive dismissal against AMSFC and DFC before the
NLRC. Labor Arbiter ruled in Baya’s favor, but NLRC found that the termination of Baya’s
employment was not caused by constructive dismissal, but by the cessation of AMSFC’s business
operation or undertaking in large portions of its banana plantation due to the implementation of the
agrarian reform program. Thus, the NLRC opined that Baya was not entitled to separation pay as
such cessation was not voluntary, but rather involuntary, on the part of AMSFC as it was an act of
the State, i.e., the agrarian reform program, that caused the same. Nonetheless, the CA reinstated
the LA ruling.

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During the pendency of the proceedings before the CA, petitioner Sumifru acquired DFC via
merger. On its appeal before the SC, petitioner argued that it should only be held liable for the
period when Baya stayed with DFC as it only merged with the latter and not with AMSFC.

ISSUE: Whether or not Sumifru is only liable for the period in which Baya stayed with DFC, the
absorbed corporation of Sumifru.

HELD: No. The Court ruled that such contention of Sumifru is untenable.

Section 80 of the Corporation Code of the Philippines clearly states that one of the effects of a
merger is that the surviving company shall inherit not only the assets, but also the liabilities of the
corporation it merged with. In this case, it is worthy to stress that both AMSFC and DFC are guilty
of acts constitutive of constructive dismissal performed against Baya. As such, they should be
deemed as solidarily liable for the monetary awards in favor of Baya. Meanwhile, Sumifru, as the
surviving entity in its merger with DFC, must be held answerable for the latter's liabilities, including
its solidary liability with AMSFC arising herein. Verily, jurisprudence states that "in the merger of
two existing corporations, one of the corporations survives and continues the business, while the
other is dissolved and all its rights, properties and liabilities are acquired by the surviving
corporation," as in this case.

The Court thus ruled that Sumifru is liable for DFC’s liability for constructively dismissing Baya, that
is, payment of separation pay in lieu of reinstatement due to strained relations.

DISPOSITIVE RULING: WHEREFORE, the petition is DENIED. The Decision dated May 14, 2008
and the Resolution dated May 20, 2009 of the Court of Appeals in CA-G.R. SP No. 85950 are
hereby AFFIRMED. Accordingly, Sumifru (Philippines) Corporation, as the surviving entity in its
merger with Davao Fruits Corporation, shall be held answerable for the latter's obligations as
indicated in this Decision.

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Hermosura, Nina Alexia C. L-170070
Case 51
Bank of Commerce vs. Heirs of Rodolfo Dela Cruz
G.R No. 211519; August 14, 2017 Bersamin, J.

Doctrine: Considering that merger involves fundamental changes in the corporation, as well as
in the rights of the stockholders and the creditors, there must be an express provision of law
authorizing the merger. The merger does not become effective upon mere agreement of the
constituent corporations, but upon the approval of the articles of merger by the Securities and
Exchange Commission issuing the certificate of merger as required by Section 79 of the
Corporation Code. Should any party in the merger be a special corporation governed by its own
charter, the Corporation Code particularly mandates that a favorable recommendation of the
appropriate government agency should first be obtained.

FACTS: Rodolfo Dela Cruz was the sole owner and proprietor of the Mamertha General
Merchandising, a business entity engaged in sugar trading. Dela Cruz opened an account in the
name of Mamertha with defendant Panasia Banking. In 1998, Rodolfo discovered that Panasia
allowed his son, Allan to withdraw money from the account without his consent. Despite instruction
and letter to Panasia not to allow his son to make any withdrawals without his consent, Panasia
continued to allow his son to withdraw from the account. Rodolfo then requested that the amount
of unauthorized withdrawals in the sum of P56,223,066.07 be restored to his bank account but this
was to no avail. Hence, a collection suit was filed. Pending collection suit, herein petitioner Bank of
Commerce demanded payment from Dela Cruz the amount of P27,150,000.00.

Dela Cruz later on found out that the loan payment demanded by the bank refers to the loan he
obtained from Panasia and that pursuant to a Purchase and Sale Agreement entered into between
Panasia and Bank of Commerce, Panasia had been acquired by Bank of Commerce transferring
to the latter the former’s assets and liabilities on bank deposits. Consequently, Dela Cruz
demanded from herein petitioner bank to pay the liability of Panasia to him.

The trial court held the petitioner and Panasia jointly and severally liable to Dela Cruz and that the
petitioner’s defense that it had not assumed the liability of Panasia was unworthy of consideration
because petitioner bank, by taking over Panasia, had absorbed all the assets and liabilities of the
latter. The Court of Appeals upheld the trial court’s decision pointing out that the failure of the
petitioner to formally offer the documents denominated as Purchase and Sale Agreement and the
Deed of Assignment was fatal to the petitioner’s defense of not having assumed Panasia’s
liabilities.

ISSUE/S: Whether or not petitioner Bank of Commerce should be solidarily liable for the acts
committed by Panasia?

HELD: No. Petitioner Bank of Commerce should not be solidarily liable for the acts of Panasia as
Dela Cruz failed to establish that the petitioner bank assumed Panasia’s liabilities.

129
Considering that merger involves fundamental changes in the corporation, as well as in the rights
of the stockholders and the creditors, there must be an express provision of law authorizing the
merger. The merger does not become effective upon mere agreement of the constituent
corporations, but upon the approval of the articles of merger by the Securities and Exchange
Commission issuing the certificate of merger as required by Section 79 of the Corporation Code.
Should any party in the merger be a special corporation governed by its own charter, the
Corporation Code particularly mandates that a favorable recommendation of the appropriate
government agency should first be obtained.

There were several specific facts whose existence must be shown before the merger of two or
more corporations can be declared as established. Among such facts are the plan of merger that
includes the terms and mode of carrying out the merger and the statement of the changes, if any,
of the present articles of the surviving corporation; the approval of the plan of merger by majority
vote of each of the boards of directors of the concerned corporations at separate meetings; the
submission of the plan of merger for the approval of the stockholders or members of each of the
corporations at separate corporate meetings duly called for the purpose; the affirmative vote of 2/3
of the outstanding capital in case of stock corporations, or 2/3 of the members in case of nonstock
corporations; the submission of the approved articles of merger executed by each of the
constituent corporations to the SEC; and the issuance of the certificate by the SEC on the approval
of the merger.

In this case, because Dela Cruz’s allegation of the merger was specifically denied by the petitioner,
the RTC had absolutely no factual and legal bases to take constructive notice of any of the
circumstances.

DISPOSITIVE RULING: WHEREFORE, the Court GRANTS the petition for review on certiorari;
AFFIRMS the decision promulgated on August 29, 2013 by the Court of Appeals subject to the
MODIFICATION that Civil Case No. C-19332 is DISMISSED insofar as petitioner Bank of
Commerce is concerned for lack of cause of action; and ORDERS the respondents to pay the
costs of suit. SO ORDERED.

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Joson, Richelle Miles B. L-170133
Case 52
Ong vs. BPI Family Savings Bank, Inc.
852 SCRA 614, January 24, 2018 J. Reyes, Jr,

Doctrine: BPI insists that it acted in good faith when it sought extrajudicial foreclosure of the
mortgage and that it was not responsible for acts committed by its predecessor, BSA. Good faith,
however, is not an excuse to exempt BPI from the effects of a merger or consolidation. Applying
the pertinent provisions of the Corporation Code, BPI did not only acquire all the rights,
privileges and assets of BSA but likewise acquired the liabilities and obligations of the latter as if
BPI itself incurred it.

FACTS:
Spouses Francisco Ong and Betty Lim Ong and Spouses Joseph Ong Chuan and Esperanza Ong
Chuan (the petitioners) are engaged in the business of printing under the name and style
"MELBROS PRINTING CENTER. In view of petitioners' business expansion plans and the
assurances made by Bank of Southeast Asia's managers, they applied for the credit facilities
offered by the latter.

Sometime in April 1997, they executed a real estate mortgage (REM) over their property situated
in Paco, Manila, covered by Transfer Certificate of Title No. 143457, in favor of BSA as security for
a P15,000,000 term loan and P5,000,000 credit line or a total of P20,000,000. With regard to the
term loan, only P10,444,271.49 was released by BSA (the amount needed by the petitioners to
pay out their loan with Ayala life assurance, the balance was credited to their account with BSA).
With regard to the P5,000,000.00 credit line, only P3,000,000.00 was released. BSA promised to
release the remaining P2,000,000 conditioned upon the payment of the P3,000,000.00 initially
released to petitioners. Petitioners acceded to the condition and paid the P3,000,000.00 in full.
However, BSA still refused to release the P2,000,000. Petitioners then refused to pay the
amortizations due on their term loan.

Later on, BPI Family Savings Bank (BPI) merged with BSA, thus, acquired all the latter's rights and
assumed its obligations. BPI filed a petition for extrajudicial foreclosure of the REM for petitioners'
default in the payment of their term loan.

In order to enjoin the foreclosure, petitioners instituted an action for damages with Temporary
Restraining Order and Preliminary Injunction against BPI. The RTC ruled in favor of the plaintiffs.
The CA reversed the decision of the lower court and ruled in favor of BPI. Petitioners filed a Motion
for Reconsideration but the same was denied by the CA. Aggrieved, petitioners filed the present
petition.

ISSUE/S:
Whether or not BPI can foreclose the mortgage on the land of herein petitioners.

HELD:

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No. Loan is a reciprocal obligation, as it arises from the same cause where one party is the
creditor and the other the debtor. The obligation of one party in a reciprocal obligation is dependent
upon the obligation of the other, and the performance should ideally be simultaneous. This means
that in a loan, the creditor should release the full loan amount and the debtor repays it when it
becomes due and demandable.

In this case, BSA did not only incur delay in releasing the pre-agreed credit line of P5,000,000 but
likewise violated the terms of its agreement with petitioners when it deliberately failed to release
the amount of P2,000,000 after petitioners complied with their terms and paid the first P3,000,000
in full. The default attributed to petitioners when they stopped paying their amortizations on the
term loan cannot be sustained by this Court because long before they sent a Letter to BSA
informing the latter of their refusal to continue paying amortizations, BSA had already reneged on
its obligation to release the amount previously agreed upon, i.e., the P5,000,000.00 covered by the
credit line.

It bears stressing that petitioners entered into a credit agreement with BSA to enable them to buy
machineries and equipment for their printing business. On its face, it can be gleaned that the
purpose of the credit agreement with BSA was indeed to assist and finance petitioner's business
by way of providing additional funds as working capital or revolving fund.

The direct consequences therefore of the acts of BSA are: the machinery and equipment that were
essential to petitioners' business and requisite for its operations had to be procured so late in time
and had crippled the printing of school supplies, hence, petitioners were constrained to cancel
purchase orders of their clients to petitioners' damage.

BPI insists that it acted in good faith when it sought extrajudicial foreclosure of the mortgage and
that it was not responsible for acts committed by its predecessor, BSA. Good faith, however, is not
an excuse to exempt BPI from the effects of a merger or consolidation, viz.:
Section 80. Effects of merger or consolidation. - The merger or consolidation shall have the
following effects:

1. The constituent corporations shall become a single corporation which, in case of merger,
shall be the surviving corporation designated in the plan of merge; and, in case of
consolidation, shall be the consolidated corporation designated in the plan of consolidation;

xxxx

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all
the right, privileges, immunities and franchises of each of the constituent corporations; and
all property, real or personal, and all receivable due on whatever account, including
subscriptions to shares and other choses in action, and all and every other interest of, or
belonging to, or due to each constituent corporation, shall be deemed transferred to and
vested in such surviving or consolidated corporation without further act or deed; and

5. The surviving or consolidated corporation shall be responsible and liable for all the
liabilities and obligations of each of the constituent corporations in the same manner as if

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 such surviving or consolidated corporation had itself incurred such liabilities or obligations;
and any pending claim, action, or proceeding brought by or against any of such constituent
corporations may be prosecuted by or against the surviving or consolidated corporation.
The rights of creditors or liens upon the property of any of such constituent corporations
shall not be impaired by such merger or consolidation.

Applying the pertinent provisions of the Corporation Code, BPI did not only acquire all the rights,
privileges and assets of BSA but likewise acquired the liabilities and obligations of the latter as if
BPI itself incurred it.

Moreover, Section 1(e) of the Articles of Merger dated November 21, 2001 provides that all
liabilities and obligations of BSA shall be transferred to and become the liabilities and obligations
of BPI in the same manner as if it had itself incurred such liabilities or obligations.

Pursuant to such merger and consolidation, BPI's right to foreclose the mortgage on petitioner's
property depends on the status of the contract and the corresponding obligations of the parties
originally involved, that is, the agreement between its predecessor BSA and petitioner.

Since BSA incurred delay in the performance of its obligations and subsequently cancelled the
omnibus line without petitioners' consent, its successor BPI cannot be permitted to foreclose the
loan for the reason that its successor BSA violated the terms of the contract even prior to
petitioners' justified refusal to continue paying the amortizations.

DISPOSITIVE RULING: WHEREFORE, in light of the foregoing, the petition is hereby GRANTED.
The Decision dated January 31, 2013 of the Court of Appeals in CA-G.R. CV No. 92348 is hereby
REVERSED and SET ASIDE. The questioned extrajudicial foreclosure of real estate mortgage is
likewise declared VOID. Respondent BPI Family Savings Bank, Inc. is hereby ORDERED to pay
petitioners Spouses Francisco Ong and Betty Lim Ong and Spouses Joseph Ong Chuan and
Esperanza Ong Chuan the amount of P2,772,000.00 as actual or compensatory damages;
P100,000.00 as exemplary damages; P300,000.00 as attorney's fees; and interest of six percent
(6%) per annum on all the amounts of damages reckoned from the finality of this decision.

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KHO, Ricardo T. L-1800006

Case 53
Securities and Exchange Commission vs. College Assurance Plan Philippines, Inc.
G.R. No. 202052, March 07, 2018 Bersamin, J.:

Doctrine: In respect of pre-need companies, the trust fund is to be treated as separate and
distinct from the paid-up capital of the company, and is established with a trustee under a trust
agreement approved by the Securities and Exchange Commission to pay the benefits as
provided in the pre-need plans. Further, Sec. 30 of R.A. No. 9829 stipulates that the trust fund is
to be used at all times for the sole benefit of the planholders, and cannot ever be applied to
satisfy the claims of the creditors of the company.

FACTS: College Assurance Plan Philippines, Inc. (CAP) engaged in the selling of pre­-need
educational plans. CAP set up a Trust Fund which is invested in assets and securities but due to
different circumstances the value of the trust fund lowered.

In 2000, Securities Regulation Code (SRC) was passed. Due to the Securities and Exchange
Commission (SEC) promulgation of the SRC, CAP was required by the SEC to submit a funding
scheme to correct the deficiency of the trust fund. CAP, among others, proposed to purchase MRT
III Bonds and assign the same to the Trust Fund. So, CAP bought MRT III Bonds from Smart and
FEMI, and assigned the same to the Trust Fund. In 2003, after having paid partial of the total
purchase price, CAP was ordered by the SEC Oversight Board to stop paying SMART/FEMI due
to its perceived inadequacy of CAP's funds.

CAP filed a Petition for Rehabilitation, which was granted. Pursuant to the Rehabilitation Plan,
CAP intended to sell the MRT Bonds. The sale of MRT III Bonds was approved. The MRT III
Bonds were sold to DBP and LandBank. DBP and LandBank credited the payment to the trust
account. However, CAP's payment to Smart and FEMI remained to be executed. The receiver
moved for the payment of the respondent's obligations to Smart and FEMI. The Regional Trial
Court (RTC) denied the motion twice.

The Court of Appeals (CA) reversed the decision of the RTC. The CA reversed the ruling on the
ground that payment to Smart and FEMI constituted "benefits" that could be validly withdrawn from
the trust fund pursuant to Rule 16.4 of the New Rules on the Registration and Sale of Pre-Need
Plans under Section 16 of the Securities and Regulation Code (New Rules) in relation to Section
30 of Republic Act No. 9829 (R.A. No. 9829). Further, because the MRT III Bonds had not been
fully paid, the unpaid portion of the purchase price thereof could not be considered as part of the
trust fund.

ISSUE/S: Whether the ruling of the CA in authorizing the payment of the outstanding balance of
the MRT III Bonds to be taken from the trust fund is valid.

HELD: No, the CA erred in authorizing the payment of the obligation of CAP to Smart and FEMI,
as the trust fund is to be used for the benefit of the planholders and cannot be applied to satisfy
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claims. The claims must be paid using the assets of CAP and not of the trust fund as Sec. 30 of
R.A. No. 9829 in relation to Sec. 16 of the New Rules expressly prohibits the use of the trust fund
to satisfy the claims of creditors.

Sec. 30 of R.A. No. 9829 stipulates that the trust fund is to be used at all times for the sole benefit
of the planholders, and cannot ever be applied to satisfy the claims of the creditors of the
company. Further, said provision prohibits the utilization of the trust fund for purposes other than
for the benefit of the planholders. The allowed withdrawals found in Section 16.4, Rule 16 of the
New Rules and Section 30 of R.A. No. 9829 such as the monetary consideration, the cost of
services rendered or property delivered, among others, refer to payments that the pre-need
company had undertaken to be made based on the pre-need plan contracts.

In respect of pre-need companies, the trust fund is set up from the planholders' payments to pay
for the cost of benefits and services, termination values payable to the planholders and other costs
necessary to ensure the delivery of benefits or services to the planholders as provided for in the
contracts. The trust fund is to be treated as separate and distinct from the paid-up capital of the
company, and is established with a trustee under a trust agreement approved by the Securities
and Exchange Commission to pay the benefits as provided in the pre-need plans.

Here, the obligation to pay Smart and FEMI did not constitute the "benefits''or "cost of services
rendered" or "property delivered". The benefits refer to the payments made to the planholders as
stipulated in their pre-need plans. Further, the Court emphasized that the trust fund is established
"to ensure the delivery of the guaranteed benefits and services provided under a pre-need plan
contract.". Hence, benefits can only mean payments or services rendered to the planholders by
virtue of the pre-need contracts.

In regard to the opinion of the CA that the unpaid amount must not be considered as part of the
trust fund, the court ruled that the CA erred as there had been no reservation or indication that only
the paid value shall accrue to the trust fund.

DISPOSITIVE RULING: the Court GRANTS the petition for review on certiorari; SETS ASIDE and
REVERSES the decision promulgated on June 14, 2011 and the resolution promulgated on May
21, 2012 of the Court of Appeals in CA-G.R. SP. No. 113576; and REINSTATES the orders dated
April 29, 2009, September 18, 2009 and January 18, 2010 issued by the Regional Trial Court,
Branch 149, in Makati City in SP. No. M-6144.

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________________________________

MODULE 4A
Subscription

________________________________
LOPEZ, Erica Therese C. L-1800319
Case 54
Lim Tay vs. Court of Appeals, Go Fay and Co. Inc., Sy Guiok, and the Estate of Alfonso Lim
G.R. No. 126891 August 5, 1998 Panganiban, J.

Doctrine: The duty of a corporate secretary to record transfers of stocks is ministerial. However,
he cannot be compelled to do so when the transferee's title to said shares has no prima facie
validity or is uncertain. More specifically, a pledgor, prior to foreclosure and sale, does not
acquire ownership rights over the pledged shares and thus cannot compel the corporate
secretary to record his alleged ownership of such shares on the basis merely of the contract of
pledge.

FACTS: On January 8, 1980, Respondent-Appellee Sy Guiok secured a loan from the petitioner in
the amount of P40,000 payable within six (6) months. To secure the payment of the aforesaid loan
and interest thereon, Respondent Guiok executed a Contract of Pledge in favor of the petitioner
whereby he pledged his three hundred (300) shares of stock in the Go Fay & Company Inc.,
(respondent corporation, for brevity's sake). On the same date, Alfonso Sy Lim secured a loan
from the petitioner in the amount of P40,000 payable in six (6) months. To secure the payment of
his loan, Sy Lim executed a "Contract of Pledge'' covering his three hundred (300) shares of stock
in Respondent Corporation.

Respondent Guiok and Sy Lim endorsed their respective shares of stock in blank and delivered
the same to the petitioner. However, Respondent Guiok and Sy Lim failed to pay their respective
loans and the accrued interests thereon to the petitioner. In October, 1990, the petitioner filed a
"Petition for Mandamus" against Respondent Corporation, with the SEC praying that an order be
issued directing the corporate secretary of Respondent Go Fay & Co., Inc. to register the stock
transfers and issue new certificates in favor of Lim Tay.

On the issue of whether mandamus can be availed of by the petitioner, the Court of Appeals held
that petitioner failed to establish a clear and legal right to the writ of mandamus prayed for by him.
The Court of Appeals debunked petitioner's claim that he had acquired ownership over the shares
by virtue of novation, holding that respondents' indorsement and delivery of the shares were
pursuant to Articles 2093 and 2095 of the Civil Code.

ISSUES:
1. Whether or not petitioner is entitled to the relief of mandamus as against the respondents.
2. Whether or not petitioner has acquired ownership of the shares "through extraordinary
prescription," pursuant to Article 1132 of the Civil Code, and through respondents'
subsequent acts, which amounted to a novation of the contracts of pledge.
3. Whether or not there was dacion en pago, in which the shares of stock were deemed sold
to petitioner, the consideration for which was the extinguishment of the loans and the
interests thereon.

HELD:
1. No. Petitioner is not entitled to the relief of mandamus as against the respondents.

137
 Petitioner prays for the issuance of a writ of mandamus, directing the corporate secretary of
respondent corporation to have the shares transferred to his name in the corporate books,
to issue new certificates of stock and to deliver the corresponding dividends to him.
In order that a writ of mandamus may issue, it is essential that the person petitioning for the
same has a clear legal right to the thing demanded and that it is the imperative duty of the
respondent to perform the act required. It neither confers powers nor imposes duties and is
never issued in doubtful cases. It is simply a command to exercise a power already
possessed and to perform a duty already imposed.

In the present case, petitioner has failed to establish a clear legal right. Petitioner's
contention that he is the owner of the said shares is completely without merit. Quite the
contrary and as already shown, he does not have any ownership rights at all. At the time
petitioner instituted his suit at the SEC, his ownership claim had no prima facie leg to stand
on. At best, his contention was disputable and uncertain Mandamus will not issue to
establish a legal right, but only to enforce one that is already clearly established.

2. No. Petitioner did not acquire the shares by extraordinary prescription or novation.
Petitioner contends that he can be deemed to have acquired ownership over the certificates
of stock through extraordinary prescription, as provided for in Article 1132 of the Civil Code.

Petitioner's argument is untenable. What is required by Article 1132 is possession in the

concept of an owner. In the present case, petitioner's possession of the stock certificates
came about because they were delivered to him pursuant to the contracts of pledge. His
possession as a pledgee cannot ripen into ownership by prescription.

Neither did petitioner acquire the shares by virtue of a novation of the contract of pledge.
Novation is defined as "the extinguishment of an obligation by a subsequent one which
terminates it, either by changing its object or principal conditions, by substituting a new
debtor in place of the old one, or by subrogating a third person to the rights of the creditor."

Respondents' indorsement and delivery of the certificates of stock were pursuant to

paragraph 2 of the contract of pledge which reads: “2. The said certificates had been
delivered by the PLEDGOR endorsed in blank to be held by the PLEDGEE under the
pledge as security for the payment of the aforementioned sum and interest thereon
accruing.”

This stipulation did not effect the transfer of ownership to petitioner. It was merely in
compliance with Article 2093 of the Civil Code, which requires that the thing pledged be
placed in the possession of the creditor or a third person of common agreement; and Article
2095, 3which states that if the thing pledged are shares of stock, then the "instrument
proving the right pledged" must be delivered to the creditor. Moreover, the fact that
respondents allowed the petitioner to receive dividends pertaining to the shares was not
meant to relinquish ownership thereof. As stated by respondent corporation, the same was
done pursuant to an agreement between the petitioner and Respondents Sy Guiok and Sy
Lim, following Article 2102 of the Civil Code.

3. No. There is no dacion en pago.

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 Neither can there be dacion en pago, in which the certificates of stock are deemed sold to
petitioner, the consideration for which is the extinguishment of the loans and the accrued
interests thereon. Dacion en pago is a form of novation in which a change takes place in the
object involved in the original contract. Absent an explicit agreement, petitioner cannot
simply presume dacion en pago.

DISPOSITIVE RULING: WHEREFORE, the petition is hereby DENIED and the assailed Decision
is AFFIRMED. Costs against petitioner.

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NARAWI, Merriam Angela C. L-170626
Case 55
Rural Bank of Lipa vs. Court of Appeals
G.R. No. 124535 Sept. 28, 2001 Ynares-Santiago, J.

Doctrine: For a valid transfer of stocks, there must be strict compliance with the mode of
transfer prescribed by law. The requirements are: (a) There must be delivery of the stock
certificate; (b) The certificate must be endorsed by the owner or his attorney-in-fact or other
persons legally authorized to make the transfer; and (c) To be valid against third parties, the
transfer must be recorded in the books of the corporation.

FACTS: Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa City, executed a Deed
of Assignment, wherein he assigned his shares, as well as those of 8 other shareholders under his
control in favor of the stockholders of the Bank represented by its directors Bautista, Custodio and
Katigbak. Sometime thereafter, Villanueva, Sr. and his wife, Avelina, executed an Agreement
wherein they acknowledged their indebtedness to the Bank, and stipulated that said debt will be
paid out of the proceeds of the sale of their real property described in the Agreement. Spouses
Villanueva assured the Board that their debt would be paid on or before December 31 of that same
year; otherwise, the Bank would be entitled to liquidate their shareholdings, including those under
their control. In such an event, should the proceeds of the sale of said shares fail to satisfy in full
the obligation, the unpaid balance shall be secured by other collateral sufficient therefore.

Spouses Villanueva failed to settle their obligation to the Bank on the due date, thus the Board
sent them a letter demanding: (1) the surrender of all the stock certificates issued to them; and (2)
the delivery of sufficient collateral to secure the balance of their debt. Spouses Villanueva ignored
the bank's demands, whereupon their shares of stock were converted into Treasury Stocks. Later,
spouses Villanuevas, through their counsel, questioned the legality of the conversion of their
shares.

The stockholders of the Bank met to elect the new directors and set of officers. Spouses
Villanuevas were not notified of said meeting. Atty. Ignacio, counsel for the spouses Villanueva,
questioned the legality of the said stockholders' meeting and the validity of all the proceedings
therein. In reply, the new set of officers of the Bank said that the Villanuevas were no longer
entitled to notice of the said meeting since they had relinquished their rights as stockholders in
favor of the Bank. Consequently, the Villanueva spouses filed with the SEC, a petition for
annulment of the stockholders' meeting and election of directors and officers, with damages and
prayer for preliminary injunction.

ISSUE: Whether or not there was a valid transfer of the shares of Villanuevas to the Bank.

HELD: No. For a valid transfer of stocks, there must be strict compliance with the mode of transfer
prescribed by law. The requirements are: (a) There must be delivery of the stock certificate; (b)
The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally
authorized to make the transfer; and (c) To be valid against third parties, the transfer must be

140
recorded in the books of the corporation. As it is, compliance with any of these requisites has not
been clearly and sufficiently shown.

It may be argued that despite non-compliance with the requisite endorsement and delivery, the
assignment was valid between the parties, meaning the Villanuevas as assignors and the bank as
assignees. While the assignment may be valid and binding on the bank, et al. and the Villanuevas,
it does not necessarily make the transfer effective. Consequently, the bank et al., as mere
assignees, cannot enjoy the status of a stockholder, cannot vote nor be voted for, and will not be
entitled to dividends, insofar as the assigned shares are concerned. Parenthetically, the
Villanuevas cannot, as yet, be deprived of their rights as stockholders, until and unless the issue of
ownership and transfer of the shares in question is resolved with finality.

DISPOSITIVE RULING: WHEREFORE, in view of all the foregoing, the instant petition for review
on certiorari is DENIED. The Decision and Resolution of the Court of Appeals in CA-G.R. SP No.
38861 are hereby AFFIRMED. The case is ordered REMANDED to the Regional Trial Court of
Batangas City, Branch 32, for proper disposition. The temporary restraining order issued by the
SEC Hearing Officer dated January 13, 1995 is ordered LIFTED.

141
OLIS, Roy A. L-1800113
Case 56
Vicente C. Ponce vs. Alsons Cement Corporation, and Francisco M. Giron, Jr.
G.R. No. 139802 December 10, 2002 Quisumbing, J.

Doctrine: Before a transferee may ask for the issuance of stock certificates, he must first cause
the registration of the transfer and thereby enjoy the status of a stockholder insofar as the
corporation is concerned. A corporate secretary may not be compelled to register transfers of
shares on the basis merely of an indorsement of stock certificates. With more reason, in our
view, a corporate secretary may not be compelled to issue stock certificates without such
registration.

FACTS: The late Fausto G. Gaid was an incorporator of Victory Cement Corporation (VCC),
having subscribed to and fully paid 239,500 shares of said corporation. On February 8, 1968,
plaintiff and Fausto Gaid executed a “Deed of Undertaking” and “Indorsement” whereby the latter
acknowledges that the former is the owner of said shares and he was therefore
assigning/endorsing the same to the plaintiff. VCC was renamed to Floro Cement Corporation
(FCC) on April 10, 1968 and was renamed again to Alson’s Cement Corporation in 1990. From
the time of incorporation of VCC up to the present, no certificates of stock corresponding to the
239,500 subscribed and fully paid shares of Gaid were issued in the name of Fausto G. Gaid
and/or the plaintiff. Despite repeated demands, the defendants refused and continued to refuse
without any justifiable reason to issue to plaintiff the certificates of stocks corresponding to the
239,500 shares of Gaid, in violation of plaintiff’s right to secure the corresponding certificate of
stock in his name. Thus, Ponce filed a complaint with the SEC for mandamus and damages
against defendants (now respondents) Alsons Cement Corporation and its corporate secretary
Francisco M. Giron, Jr.

SEC Hearing Officer dismissed Ponce’s complaint holding that there is no record of any
assignment or transfer in the books of the defendant corporation, and there is no instruction or
authority from the transferor (Gaid) for such assignment or transfer.

The SEC en banc, however, reversed the findings of the hearing officer and ruled that a transfer or
assignment of stocks need not be registered first before it can take cognizance of the case to
enforce the petitioner’s rights as a stockholder.

Aggrieved, Ponce elevated the case to the CA. In its decision, the Court of Appeals held that in the
absence of any allegation that the transfer of the shares between Fausto Gaid and Vicente C.
Ponce was registered in the stock and transfer book of ALSONS, Ponce failed to state a cause of
action. Thus, said the CA, “the complaint for mandamus should be dismissed for failure to state a
cause of action.”

ISSUE: Whether or not Ponce is legally entitled to be issued a certificate of shares of stock of
respondent corporation.

HELD: No. The Corporation Code states that:

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 SEC. 63. Certificate of stock and transfer of shares.–The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president
or vice-president, countersigned by the secretary or assistant secretary, and sealed
with the seal of the corporation shall be issued in accordance with the by-laws. Shares
of stock so issued are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact or other person
legally authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the corporation so as
to show the names of the parties to the transaction, the date of the transfer, the number
of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation.

Pursuant to the foregoing provision, a transfer of shares of stock not recorded in the stock and
transfer book of the corporation is non-existent as far as the corporation is concerned.[22] As
between the corporation on the one hand, and its shareholders and third persons on the other, the
corporation looks only to its books for the purpose of determining who its shareholders are.[23] It is
only when the transfer has been recorded in the stock and transfer book that a corporation may
rightfully regard the transferee as one of its stockholders. From this time, the consequent
obligation on the part of the corporation to recognize such rights as it is mandated by law to
recognize arises.

Hence, without such recording, the transferee may not be regarded by the corporation as one
among its stockholders and the corporation may legally refuse the issuance of stock certificates in
the name of the transferee even when there has been compliance with the requirements of Section
64 of the Corporation Code. This is the import of Section 63 which states that “No transfer,
however, shall be valid, except between the parties, until the transfer is recorded in the books of
the corporation showing the names of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares transferred.” The situation would
be different if the petitioner was himself the registered owner of the stock which he sought to
transfer to a third party, for then he would be entitled to the remedy of mandamus.

DISPOSITIVE RULING: WHEREFORE, the petition is DENIED for lack of merit. The decision of
the Court of Appeals, in CA-G.R. SP No. 46692, which set aside that of the Securities and
Exchange Commission En Banc in SEC-AC No. 545 and reinstated the order of the Hearing
Officer, is hereby AFFIRMED.

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PERALTA, Alhex Adrea M. L-1800280
Case 57
Ong Yong, et al. vs. Tiu, et al.
G.R. No. 144476 April 8, 2003 Corona, J.

Doctrine:
a. As to a Subscription Contract
A subscription contract as defined under Section 60, Title VII of the Corporation Code: Any
contract for the acquisition of unissued stock in an existing corporation or a corporation still to be
formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact
that the parties refer to it as a purchase or some other contract.
A subscription contract necessarily involves the corporation as one of the contracting parties
since the subject matter of the transaction is property owned by the corporation – its shares of
stock.

b. As to the Trust Fund Doctrine

The Trust Fund Doctrine provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their claims.
This doctrine is the underlying principle in the procedure for the distribution of capital assets,
embodied in the Corporation Code, which allows the distribution of corporate capital only in three
instances: (1) amendment of the Articles of Incorporation to reduce the authorized capital stock,
(2) purchase of redeemable shares by the corporation, regardless of the existence of
unrestricted retained earnings, and (3) dissolution and eventual liquidation of the corporation.
Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to acquire its
own shares and in Section 122 on the prohibition against the distribution of corporate assets and
property unless the stringent requirements therefor are complied with.

FACTS: The First Landlink Asia Development Corporation (FLADC), owned by the Tius,
encountered financial difficulties, which threatened the stoppage and incompletion of the
construction of the Masagana Citimall in Pasay City. FLADC was heavily indebted to the Philippine
National Bank (PNB) for P190 million.

To prevent foreclosure of the mortgage on the two lots where the mall was being built, the Tius
invited the Ongs to invest in FLADC. Under the Pre-Subscription Agreement they entered into, the
Ongs and the Tius agreed to maintain equal shareholdings in FLADC: the Ongs were to subscribe
to 1,000,000 shares at a par value of P100.00 each while the Tius were to subscribe to an
additional 549,800 shares at P100.00 each in addition to their already existing subscription of
450,200 shares. They agreed that the Tius were entitled to nominate the Vice-President and the
Treasurer plus five directors while the Ongs were entitled to nominate the President, the Secretary
and six directors (including the chairman) to the board of directors of FLADC. The Ongs were also
given the right to manage and operate the mall.

The Ongs paid P100 million in cash for their subscription to 1,000,000 shares of stock while the
Tius committed to contribute to FLADC a four-storey building and two parcels of land respectively
valued at P20 million (for 200,000 shares), P30 million (for 300,000 shares) and P49.8 million (for

144
49,800 shares) to cover their additional 549,800 stock subscription therein. The Ongs paid in
another P70 million to FLADC and P20 million to the Tius over and above their P100 million
investment, the total sum of which (P190 million) was used to settle the P190 million mortgage
indebtedness of FLADC to PNB.

However, the Tius subsequently rescinded the Pre-Subscription Agreement. The Tius accused the
Ongs of (1) refusing to credit to them the FLADC shares covering their real property contributions;
(2) preventing David S. Tiu and Cely Y. Tiu from assuming the positions of and performing their
duties as Vice-President and Treasurer, respectively, and (3) refusing to give them the office
spaces agreed upon.

The Ongs claimed that David S. Tiu and Cely Y. Tiu had in fact assumed the positions of
Vice-President and Treasurer of FLADC but that it was they who refused to comply with the
corporate duties assigned to them. It was the contention of the Ongs the Tius shied away from
helping them manage the corporation. On the issue of their alleged failure to credit the Tius with
the FLADC shares commensurate to the Tius' property contributions, the Ongs asserted that,
although the Tius executed a deed of assignment for the 1,902.30 square-meter lot in favor of
FLADC, the Tius refused to pay the capital gains tax and documentary stamp tax. Without such
payment, the SEC would not approve the valuation of the Tius' property contribution. This, in turn,
would make it impossible to secure a new Transfer Certificate of Title (TCT) over the property in
FLADC's name. On the 151 square-meter property, the Ongs discovered that FLADC had in reality
owned the property all along, even before their Pre-Subscription Agreement was executed. This
meant that the 151 square-meter property was at that time already the corporate property of
FLADC for which the Tius were not entitled to the issuance of new shares of stock.

The SEC confirmed the rescission. The SEC ordered, among others: (a) The cancellation of the
1,000,000 shares subscription of the individual defendants in FLADC; (b) FLADC to pay the
amount of P170,000,000.00 to the individual defendants representing the return of their
contribution for 1,000,000 shares of FLADC; (c) The individual defendants, individually and
collectively, their agents and representatives, to desist from exercising or performing any and all
acts pertaining to stockholder, director or officer of FLADC or in any manner intervene in the
management and affairs of FLADC. The SEC en banc affirmed the decision.

The Court of Appeals affirmed the rescission. The Supreme Court subsequently affirmed the
decision of the CA. The Ongs filed a motion for reconsideration of the Supreme Court.

ISSUES:
1. Whether or not the Tius could legally rescind the Pre-Subscription Agreement
2. Whether or not rescinding the subject agreement will violate the Trust Fund Doctrine

HELD:
1. No. FLADC was originally incorporated with an authorized capital stock of 500,000 shares
with the Tius owning 450,200 shares representing the paid-up capital. When the Tius invited
the Ongs to invest in FLADC as stockholders, an increase of the authorized capital stock
became necessary to give each group equal (50-50) shareholdings as agreed upon in the
Pre-Subscription Agreement. The authorized capital stock was thus increased from 500,000
shares to 2,000,000 shares with a par value of P100 each, with the Ongs subscribing to

145
 1,000,000 shares and the Tius to 549,800 more shares in addition to their 450,200 shares
to complete 1,000,000 shares. Thus, the subject matter of the contract was the 1,000,000
unissued shares of FLADC stock allocated to the Ongs. Since these were unissued shares,
the parties' Pre-Subscription Agreement was in fact a subscription contract as defined
under Section 60, Title VII of the Corporation Code: Any contract for the acquisition of
unissued stock in an existing corporation or a corporation still to be formed shall be deemed
a subscription within the meaning of this Title, notwithstanding the fact that the parties refer
to it as a purchase or some other contract.

A subscription contract necessarily involves the corporation as one of the contracting

parties since the subject matter of the transaction is property owned by the corporation – its
shares of stock. Thus, the subscription contract whereby the Ongs invested P100 million for
1,000,000 shares of stock was, from the viewpoint of the law, one between the Ongs and
FLADC, not between the Ongs and the Tius. Otherwise stated, the Tius did not contract in
their personal capacities with the Ongs since they were not selling any of their own shares
to them. It was FLADC that did. Assuming it had valid reasons to do so, only FLADC (and
certainly not the Tius) had the legal personality to file suit rescinding the subscription
agreement with the Ongs inasmuch as it was the real party in interest therein.

2. Yes. Granting but not conceding that the Tius possess the legal standing to sue for
rescission based on breach of contract, said action will nevertheless still not prosper since
rescission will violate the Trust Fund Doctrine and the procedures for the valid distribution of
assets and property under the Corporation Code.
The Trust Fund Doctrine provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their
claims. This doctrine is the underlying principle in the procedure for the distribution of capital
assets, embodied in the Corporation Code, which allows the distribution of corporate capital
only in three instances: (1) amendment of the Articles of Incorporation to reduce the
authorized capital stock, (2) purchase of redeemable shares by the corporation, regardless
of the existence of unrestricted retained earnings, and (3) dissolution and eventual
liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41 on the
power of a corporation to acquire its own shares and in Section 122 on the prohibition
against the distribution of corporate assets and property unless the stringent requirements
therefor are complied with.
The distribution of corporate assets and property cannot be made to depend on the whims
and caprices of the stockholders, officers or directors of the corporation, or even, for that
matter, on the earnest desire of the court a quo "to prevent further squabbles and future
litigations" unless the indispensable conditions and procedures for the protection of
corporate creditors are followed. Otherwise, the "corporate peace" laudably hoped for by
the court will remain nothing but a dream because this time, it will be the creditors' turn to
engage in "squabbles and litigations" should the court order an unlawful distribution in
blatant disregard of the Trust Fund Doctrine. In the instant case, the rescission of the
Pre-Subscription Agreement will effectively result in the unauthorized distribution of the
capital assets and property of the corporation, thereby violating the Trust Fund Doctrine and
the Corporation Code, since rescission of a subscription agreement is not one of the
instances when distribution of capital assets and property of the corporation is allowed.

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DISPOSITIVE RULING: WHEREFORE, the motion for reconsideration, dated March 15, 2002, of
petitioners Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie
Ong Alonzo and the motion for partial reconsideration, dated March 15, 2002, of petitioner Willie
Ong are hereby GRANTED. The Petition for Confirmation of the Rescission of the
Pre-Subscription Agreement docketed as SEC Case No. 02-96-5269 is hereby DISMISSED for
lack of merit. The unilateral rescission by the Tius of the subject Pre-Subscription Agreement,
dated August 15, 1994, is hereby declared as null and void. The motion for the issuance of a writ
of execution, dated March 15, 2002, of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen
See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu are hereby DENIED for being moot.
Accordingly, the Decision of this Court, dated February 1, 2002, affirming with modification the
decision of the Court of Appeals, dated October 5, 1999, and the SEC en banc, dated September
11, 1998, is hereby REVERSED. Costs against the petitioner Tius. SO ORDERED.

147
RAGOT, Joanie Mae D. L-170251
Case 58
F & S Velasco Company Inc vs. Madrid
G.R. No. 208844 November 10, 2015 Perlas-Bernabe, J.

Doctrine: Inheritance of a shares of stock does not ipso facto vest rights accorded to
shareholders. Verily, all transfers of shares of stock must be registered in the corporate books in
order to be binding on the corporation.

The mere inclusion as shareholder in the General Information Sheet is insufficient proof that they
are shareholders of the company. As between the General Information Sheet and the corporate
books, it is the latter that is controlling.

FACTS: Petitioner was a duly organized and registered corporation with five incorporators which
includes Simona, Francisco, and Angela. When they died, their daughter Angela inherited their
shares thereby giving her the control of 70.82% of FSVCI's total shares of stock.

Angela, during her tenure as the Chairman of the Board of Directors died intestate and without
issue. Madrid, as Angela's spouse, who is also an incorporator executed an Affidavit of
Self-Adjudication covering the latter's estate which includes her 70.82% ownership of FSVCI's
shares of stock. Madrid subsequently called for a Special Stockholders’ and Re-Organizational
Meeting and executed separate deeds of assignments of his respective shares. Meanwhile, an
Emergency Meeting of the FSVCI's remaining stockholders for the purpose of electing a new
president and vice-president as well as the opening of a bank account was conducted, wherein
Saturnino was recognized as FSVCI President while Scribner was elected as Vice-President.
Despite the election that was conducted, the Madrid Group proceeded with the Special
Stockholders' and Re-Organizational Meeting wherein current members were ousted except for
Madrid Group.

A petition for declaration of nullity of corporate election was filed by the Saturino Group. The RTC
declared both meetings conducted as null and void. The CA however modified the RTC ruling
declaring the meeting conducted by the Madrid Group valid.

ISSUE: Whether or not the meeting organized by Madrid is legal and valid.

HELD: No. Madrid's inheritance of Angela's shares of stock does not ipso facto afford him the
rights accorded to such majority ownership of FSVCI's shares of stock. Pursuant to Section 63 of
the Corporation Code which states that “...No transfer, however, shall be valid, except as between
the parties, until the transfer is recorded in the books of the corporation showing the names of the
parties to the transaction, the date of the transfer, the number of the certificate or certificates and
the number of shares transferred.”

The purpose of the registration is two fold: to enable the transferee to exercise all the rights of a
stockholder, including the right to vote and to be voted for, and to inform the corporation of any
change in share ownership so that it can ascertain the persons entitled to the rights and subject to
the liabilities of a stockholder.

148
In the case at bar, records reveal that at the time Madrid called for the Meeting, as well as the
actual conduct thereof, he was already the owner of 74.98% shares of stock of FSVCI as a result
of his inheritance of Angela's 70.82% ownership thereof. However, records are bereft of any
showing that the transfer of Angela's shares of stock to Madrid had been registered in FSVCI's
Stock and Transfer Book when he made such call and when the November 18, 2009 Meeting was
held.

The mere inclusion as shareholder of petitioners in the General Information Sheet of is insufficient
proof that they are shareholders of the company. As between the General Information Sheet and
the corporate books, it is the latter that is controlling.

Madrid could not have made a valid call of the November 18, 2009 Meeting as his stock ownership
of FSVCI as registered in the Stock and Transfer Book is only 4.16% in view of the non-registration
of Angela's shares of stock in the FSVCI Stock and Transfer Book in his favor.

DISPOSITIVE RULING: WHEREFORE, the petition is PARTLY GRANTED . The Decision and the
Resolution of the Court of Appeals (CA) are hereby REVERSED and SET ASIDE. The Special
Stockholders' and Re-Organizational Meeting of petitioner F & S Velasco Company, Inc. called by
respondent Rommel L. Madrid and held on is declared NULL and VOID

149
ROSALES, Mikhaila Klaudine A. L-1800031
Case 59
Anna Teng v. Securities and Exchange Commission (SEC)
G.R. No. 184332 February 17, 2016 Reyes, J.

Doctrine: It is the delivery of the certificate, coupled with the endorsement by the owner or his
duly authorized representative that is the operative act of transfer of shares from the original
owner to the transferee. The delivery contemplated in Section 63, however, pertains to the
delivery of the certificate of shares by the transferor to the transferee. To compel the delivery to
the corporation of certificates as a condition for the registration of the transfer would amount to a
restriction, which is not sanctioned by law. A corporation, either by its board, its by-laws, or the
act of its officers, cannot create restrictions in stock transfers.

FACTS: Petitioner Anna Teng is the Corporate Secretary of TCL Sales Corporation (TCL).
Respondent Ting Ping Lay (Ting Ping) was a purchaser of shares of TCL.

Ting Ping purchased shares of TCL from Peter Chiu (Chiu), TCL President Teng Ching Lay (Teng
Ching), and Ismaelita Maluto (Maluto). Ting Ping requested petitioner Teng to enter the transfer in
the Stock and Transfer Book of TCL for the proper recording of his acquisition, and for the
issuance of new certificates of stocks in his favor. Teng refused despite repeated demands, which
prompted Ting Ping to file a petition for mandamus with the SEC against TCL and Teng. The SEC
granted Ting Ping’s petition and ordered Teng to record the acquisitions in the Books of the
Corporation. On appeal, the CA affirmed the SEC's decision.

The SEC then issued a writ of execution with respect to the acquisition by Ting Ping of Chiu’s and
Maluto’s respective shares. Teng and TCL filed a motion to quash the alias writ of execution. Ting
Ping opposed, and expressed his willingness to surrender the original stock certificates of Chiu
and Maluto to facilitate and expedite the transfer of the shares in his favor. The SEC denied the
motion to quash. Teng filed a petition for certiorari and prohibition, which was denied by the CA.
Hence, this present petition.

Petitioner Teng argues that prior to registration of stocks in the corporate books, it is mandatory
that the stock certificates are first surrendered because a corporation will be liable to a bona fide
holder of the old certificate if, without demanding the said certificate, it issues a new one.

Respondent Ting Ping contends that Sec. 63 of the Corporation Code does not require the
surrender of the stock certificate before transfer can be registered, and that for as long as the
shares of stock are validly transferred, the corporate secretary has the ministerial duty to register
the transfer of such shares in the book of corporation.

ISSUE: Whether or not the surrender of the certificates of stock is a requisite before registration of
the transfer may be made in the corporate books and for the issuance of new certificates in its
stead

150
HELD: No. The surrender of the certificates of stock is not a requisite before registration of the
transfer may be made in the corporate books.

Section 63 of the Corporation Code prescribes the manner by which a share of stock may be
transferred. Under the provision, certain minimum requisites must be complied with for there to be
a valid transfer of stocks, to wit: (a) there must be delivery of the stock certificate; (b) the certificate
must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make
the transfer; and (c) to be valid against third parties, the transfer must be recorded in the books of
the corporation.

It is the delivery of the certificate, coupled with the endorsement by the owner or his duly
authorized representative that is the operative act of transfer of shares from the original owner to
the transferee. The delivery contemplated in Section 63, however, pertains to the delivery of the
certificate of shares by the transferor to the transferee, that is, from the original stockholder named
in the certificate to the person or entity the stockholder was transferring the shares to, whether by
sale or some other valid form of absolute conveyance of ownership.

It is thus clear that Teng's position – that Ting Ping must first surrender Chiu's and Maluto's
respective certificates of stock before the transfer to Ting Ping may be registered in the books of
the corporation – does not have legal basis. The delivery or surrender adverted to by Teng, i.e.,
from Ting Ping to TCL, is not a requisite before the conveyance may be recorded in its books. To
compel Ting Ping to deliver to the corporation the certificates as a condition for the registration of
the transfer would amount to a restriction on the right of Ting Ping to have the stocks transferred to
his name, which is not sanctioned by law. The only limitation imposed by Section 63 is when the
corporation holds any unpaid claim against the shares intended to be transferred.

A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in
stock transfers. In transferring stock, the secretary of a corporation acts in purely ministerial
capacity, and does not try to decide the question of ownership. If a corporation refuses to make
such transfer without good cause, it may, in fact, even be compelled to do so by mandamus.

DISPOSITIVE RULING: WHEREFORE, the petition is DENIED. The Decision dated April 29, 2008
and Resolution dated August 28, 2008 of the Court of Appeals in CA-G.R. SP No. 99836 are
AFFIRMED.

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SY, KATHERINE NICOLE C. L-1800266
Case 60
Andaya vs. Rural Bank of Cabadbaran Inc.
G.R. No. 188769 August 03, 2016 Sereno, CJ.

Doctrine: The duty of the corporation to register the transfer of shares of stock is a ministerial
one and if it refuses to make such transaction without good cause, it may be compelled to do so
by mandamus. Therefore, the remedy of the aggrieved parties to compel corporations that
wrongfully or unjustifiably refuse to record the transfer or to issue new certificates of stock is to
file an action for mandamus. This remedy is available even upon the instance of a bona fide
transferee who is able to establish a clear legal right to the registration of the transfer. This legal
right inherently flows from the transferee’s established ownership of the stocks.

FACTS: The petitioner in this case is Joseph Omar O. Andaya, while Rural Bank of Cabadbaran
Inc., is the respondent. In this case, Concepcion O. Chute was the registered owner of 2,200
shares of Stock in the Rural Bank of Cabadbaran which was bought by Andaya for P220,000.00.
The transaction was evidenced by a notarized Sale of Shares of Stocks. Consequently, Chute duly
endorsed and delivered the certificate of stock to Andaya and, subsequently, she requested the
bank to register the transfer and issue new stock certificates in favor of Andaya. Andaya also
reiterated with the bank’s corporate secretary Chute’s request for the issuance of new stock
certificates in his favor.

Bank’s corporate secretary informed Chute that she could not register the transfer because of the
existence of the right of first refusal under a previous stockholder’s resolution whereas existing
stockholders were given priority to buy the shares of others in the event that the latter offered
those shares for sale.

Eventually, the bank denied the request of Andaya on the ground that he had a conflict of interest,
as he was then president and chief executive officer of the Green Bank of Caraga, a competitor
bank. Hence, Andaya was not a purchaser in good faith. It also maintained that Chute should have
first offered her shares to other stockholders, as agreed upon during the 2001 stockholders’
meeting.

As a consequence, Andaya instituted an action for mandamus and damages against the Rural
Bank of Cabadbaran wherein Andaya sought to compel the bank to record the transfer in the
bank’s stock and transfer book and to issue new certificates of stock in his name. The Regional
Trial Court (RTC) dismissed his complaint. Citing Ponce vs. Alsons Cement Corporation, RTC
ruled that Andaya had no standing to compel the bank to register the transfer and issue stock
certificates in his name, since the transfer of the subject shares of stock had not yet been recorded
in the corporation’s stock and transfer book, and the registered owner, Chute, had not given him a
special power of attorney to make the transfer.

Therefore, Andaya filed a Rule 45 petition for review on certiorari before the Supreme Court
insisting that he has a cause of action to institute an action for mandamus against Rural Bank of
Cabadbaran.

ISSUE: Whether or not an action for mandamus may be initiated by Andaya, as a transferee of
shares of stock, to compel the Rural Bank of Cabadbaran to record the transfer of shares in its
stock and transfer book, as well as issue new stock certificates in his name.
152
HELD: Yes. Petitioner Andaya, as a transferee of shares of stock, may initiate an action for
mandamus compelling the Rural Bank of Cabadbaran to record the transfer of shares in its stock
and transfer book, as well as issue new stock certificates in his name. The Supreme Court held
that it is already settled jurisprudence that the registration of a transfer of shares of stock is a
ministerial duty on the part of the corporation. Aggrieved parties may then resort to the remedy of
mandamus to compel corporations that wrongfully or unjustifiably refuse to record the transfer or to
issue new certificates of stock. This remedy is available even upon the instance of a bona fide
transferee who is able to establish a clear legal right to the registration of the transfer. This legal
right inherently flows from the transferee’s established ownership of the stocks, a right that has
been recognized by the Supreme Court as early as in Price vs. Martin:

A person who has purchased stock, and who desires to be recognized as a

stockholder, for the purpose of voting, must secure a standing by having the transfer
recorded upon the books. If the transfer is not duly made upon requests, he has, as
his remedy, to compel it to be made.

Furthermore, the Supreme Court in Pacific Basin Securities Co., Inc., vs. Oriental Petroleum and
Minerals Corp., stressed that the registration of a transfer of shares is ministerial on the part of the
corporation. The Supreme Court held in this said case “In transferring stock, the secretary of a
corporation acts in purely ministerial capacity, and does not try to decide the question of
ownership. The duty of the corporation to transfer is a ministerial one and if it refuses to make such
transaction without good cause, it may be compelled to do so by mandamus.” Indeed, as held by
the Supreme Court in Rural Bank of Salinas, the only limitation imposed by Section 63 of the
Corporation Code (now Section 62 of the Revised Corporation Code of the Philippines) is when
the corporation holds any unpaid claim against the shares intended to be transferred.

Consequently, transferees of shares of stock are real parties in interest having a cause of action
for mandamus to compel the registration of the transfer and the corresponding issuance of stock
certificates.

In this case, the Supreme Court ruled that Andaya has been able to establish that he is a bona fide
transferee of the shares of stock of Chute. In proving this fact, he presented to the RTC the
following documents evidencing the sale: (1) notarized Sale of Shares of Stocks showing Chute’s
sale of 2,200 shares of stock to petitioner; (2) Documentary Stamp Tax Declaration/Return; (3)
Capital Gains Tax Return and (4) stock certificates covering the subject shares duly endorsed by
Chute. The existence, genuineness, and due execution of these documents have been admitted
and remain undisputed. Hence, there is no doubt that Andaya has the standing to initiate an action
for mandamus to compel the Rural Bank of Cabadbaran to record the transfer of shares in its stock
and transfer book and to issue new stock certificates in his name. As the transferee of the shares,
petitioner stands to be benefitted or injured by the judgment in the instant petition, a judgment that
will either order the bank to recognize the legitimacy of the transfer and petitioner’s status as
stockholder or to deny the legitimacy thereof.

In addition, the Supreme Court further ruled that the reliance of the RTC on Ponce in finding that
petitioner had no cause of action for mandamus against the defendant bank was misplaced.
According to the Supreme Court, requiring the petitioner to register the transaction before he could
institute a mandamus suit in supposed abidance by the ruling in Ponce was a palpable error. It led
to an absurd, circuitous situation in which Andaya was prevented from causing the registration of
the transfer, ironically because the shares had not been registered. With the logic resorted to by
the RTC, transferees of shares of stock would never be able to compel the registration of the
transfer and the issuance of new stock certificates in their favor. They would first be required to

153
show the registration of the transfer in their names – the ministerial act that is the subject of the
mandamus suit in the first place.

With regard to the requisite authorization from the transferor, the submitted documents, in the case
at bar, did not merely consist of an endorsement. Rather, petitioner Andaya presented several
undisputed documents, among which was the respondent corporate secretary’s letter to Chute
denying her request to transfer the stock standing in her name in favor of Andaya. This letter
clearly indicated that the registered owner herself had requested the registration of the transfer of
shares of stock. There was therefore no sensible reason for the RTC to perfunctorily extract the
pronouncement in Ponce and then disregard it in the face of admitted facts in addition to the duly
endorsed stock certificates.

Therefore, the Supreme Court held that petitioner Andaya has legal standing to initiate an action
for mandamus against the respondents.

DISPOSITIVE RULING:
WHEREFORE, premises considered, the instant petition is GRANTED. The Decision dated 17
April 2009 and the Order dated 15 July 2009 of the Regional Trial Court, Branch 34, Cabadbaran
City, which dismissed petitioner’s action for mandamus are SET ASIDE. The action is hereby
REINSTATED and the case REMANDED to the court of origin for further proceedings. The trial
court is further enjoined to proceed with the resolution of this case with dispatch.

154
TANGONAN, Aneliza T. L-1800115
Case 61
Tee Ling Kiat vs. Ayala Corporation
G.R. No. 192530 March 7, 2018 Caguioa, J.

Doctrine:
1. Section 63 of the Corporation Code of the Philippines (now Section 62 of the Revised
Corporation Code of the Philippines) provides that: "No transfer, x x x shall be valid,
except as between the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the date of the transfer,
the number of the certificate or certificates and the number of shares transferred.
2. Doctrine of separate juridical personality- It is a basic principle of law that money
judgments are enforceable only against property incontrovertibly belonging to the
judgment debtor. The properties belonging to a corporate entity, with personality separate
and distinct from its shareholders, cannot be made to answer upon the stockholder’s
personal liability in a money judgment.

FACTS: Ayala Corporation instituted a Complaint for Sum of Money with an application for a writ of
attachment against the Spouses Dee. RTC - Makati City ruled in favor of Ayala Corporation. Notice
of Levy on Execution was issued and addressed to the Register of Deeds of Antipolo City, to levy
upon "the rights, claims, shares, interest, title and participation" that the Spouses Dee may have in
parcels of land. The parcels of land were registered in the name of Vonnel Industrial Park, Inc.
(VIP). The titles over the subject properties are registered in the name of VIP, in which Dewey Dee
was an incorporator.

Tee Ling Kiat filed a Third-Party Claim, alleging that while Mr. Dewey Dee was indeed one of the
incorporators of VIP, he is no longer a stockholder thereof. He no longer has any rights, claims,
shares, interest, title and participation in VIP or any of its properties. As early as December 1980,
Mr. Dewey Dee had already sold to Mr. Tee Ling Kiat all his stocks in VIP, as evidenced by a
cancelled check which he issued in Mr. Tee Ling Kiat's favor.

The RTC denied VIP and Tee Ling Kiat's Omnibus Motion and disallowed the third-party claim
because the alleged sale of shares of stock from Dewey Dee to Tee Ling Kiat was not proven. The
purported Deed of Sale of Shares of Stock was not recorded in the stock and transfer books of
VIP, as required by Section 63 of the Corporation Code (now Section 62 of the Revised
Corporation Code). Thus, there was no valid transfer of shares as against third persons. CA
denied Tee Ling Kiat's petition for certiorari, on the ground that Tee Ling Kiat is not a real
party-in-interest, especially considering that the alleged sale of Dewey Dee's shares of stock to
Tee Ling Kiat has not been proven.

ISSUES:
1. Whether or not the CA committed any reversible error in ruling that Tee Ling Kiat is not a
real party-in-interest, especially considering that the alleged sale of Dewey Dee's shares of
stock to Tee Ling Kiat has not been proven
2. Whether or not the sheriff may levy upon Vonnel Industrial Park’s real properties.

155
HELD:
1. No. The CA did not commit any reversible error. Here, Tee Ling Kiat imputes error on the
CA by the simple expedient of arguing that he did not personally need to prove that the sale
of shares of stock between Dewey Dee and himself had in fact transpired, as the duty to
record the sale in the corporate books lies with VIP. Such an argument, however, fails to
recognize that the very right of Tee Ling Kiat, as a third-party claimant, to institute a terceria
is founded on his claimed title over the levied property.

Even if it could be assumed that the sale of shares of stock contained in the photocopies
had indeed transpired, such transfer is only valid as to the parties thereto, but is not binding
on the corporation if the same is not recorded in the books of the corporation. Section 63 of
the Corporation Code of the Philippines (now Section 62 of the Revised Corporation Code
of the Philippines) provides that: "No transfer, x x x shall be valid, except as between the
parties, until the transfer is recorded in the books of the corporation showing the
names of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred." Here, the records
show that the purported transaction between Tee Ling Kiat and Dewey Dee has never been
recorded in VIP's corporate books. Thus, the transfer, not having been recorded in the
corporate books in accordance with law, is not valid or binding as to the corporation or as to
third persons.

In as much as the validity of the third-party claim would only be relevant if the person
instituting the same has established that he has a real interest in the levied property, the
Court will not belabor the merits of the third-party claim in view of the conclusive
determination that Tee Ling Kiat has not adduced evidence to prove that the shares of stock
of Dewey Dee were indeed sold to him.

2. No. The Court observes that the judgment for a sum of money dated November 29, 1990
obtained by Ayala Corporation was against the Spouses Dewey and Lily Dee in their
personal capacities as sureties in the money market line transaction. Yet, in the execution of
said judgment, the properties levied upon were registered in the name of VIP, a juridical
entity with personality separate and distinct from Dewey Dee. It is a basic principle of law
that money judgments are enforceable only against property incontrovertibly belonging to
the judgment debtor, and certainly, a person other than the judgment debtor who claims
ownership over the levied properties is not precluded from challenging the levy through any
of the remedies provided for under the Rules of Court. In the pursuit of such remedies,
however, the third-party must, to reiterate, unmistakably establish ownership over the levied
property, which Tee Ling Kiat failed to do.

DISPOSITIVE RULING: WHEREFORE, premises considered, the instant petition for review is
DENIED. The Decision dated September 24, 2009 and Resolution dated May 26, 2010 of the
Court of Appeals in CA-G.R. SP No. 105081 are hereby AFFIRMED.

156
________________________________

MODULE 4B
Rights of Stockholders

________________________________
VALDEZ, Frances Loraine T. L-1800027
Case 62
Lee vs. CA
G.R. No. 93695; February 4, 1992 GUTIERREZ, JR. J.

Doctrine: By its very nature, a voting trust agreement results in the separation of the voting
rights of a stockholder from his other rights such as the right to receive dividends, the right to
inspect the books of the corporation, the right to sell certain interests in the assets of the
corporation and other rights to which a stockholder may be entitled until the liquidation of the
corporation.

FACTS: A complaint for a sum of money was filed by the International Corporate Bank, Inc.
against the private respondents who, in turn, filed a third party complaint against ALFA and the
petitioners. The petitioners filed their answer to the third-party complaint. The petitioners filed a
motion for reconsideration submitting that Rule 14, section 13 of the Revised Rules of Court is not
applicable since they were no longer officers of ALFA and that the private respondents should
have availed of another mode of service under Rule 14, Section 16 of the said Rules, i.e., through
publication to effect proper service upon ALFA.

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

The trial court upheld the validity of the service of summons on ALFA through the petitioners, thus,
denying the latter's motion for reconsideration and requiring ALFA to file its answer through the
petitioners as its corporate officers. A second motion for reconsideration was filed by the
petitioners reiterating their stand that by virtue of the voting trust agreement they ceased to be
officers and directors of ALFA, hence, they could no longer receive summons or any court
processes for or on behalf of ALFA.

ISSUE/S: Whether a director ceases to be such upon the execution of the voting trust agreement
whereby all his shares to the corporation have been transferred to the trustee

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

In order to distinguish a voting trust agreement from proxies and other voting pools and
agreements, it must pass three criteria or tests, namely:
1. that the voting rights of the stock are separated from the other attributes of ownership;

158
 2. that the voting rights granted are intended to be irrevocable for a definite period of time;
and
3. that the principal purpose of the grant of voting rights is to acquire voting control of the
corporation.

Under Section 59 of the Corporation Code, a voting trust agreement may confer upon a trustee not
only the stockholder's voting rights but also other rights pertaining to his shares as long as the
voting trust agreement is not entered "for the purpose of circumventing the law against monopolies
and illegal combinations in restraint of trade or used for purposes of fraud". The execution of a
voting trust agreement, therefore, may create a dichotomy between the equitable or beneficial
ownership of the corporate shares of a stockholder, on the one hand, and the legal title thereto on
the other hand. The transfer of shares from the stockholder of ALFA to the DBP is the essence of
the subject voting trust agreement.

DISPOSITIVE RULING: WHEREFORE, premises considered, the petition is hereby GRANTED.

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

159
VALERIO, Allan Nicolai A. L-170387
Case 63
Republic v. Sandiganbayan
G.R. Nos. 107789 & 147214; April 30, 2003 CARPIO-MORALES, J.

Doctrine: Right to Vote: Any anomaly in any entry which may deprive a person or entity of its
right to vote may generate a controversy personal to the corporation and the stockholder and
should not affect the issue as to whether it is the PCGG or the shareholder who has the right to
vote. In other words, should there be a stockholder who feels aggrieved by any alteration by
substitution in the Stock and Transfer Book, said stockholder may object thereto at the proper
time and before the stockholders meeting.

FACTS: The Presidential Commission on Good Government (PCGG) conducted an ETPI

stockholders meeting during which a PCGG controlled board of directors was elected. A special
stockholders meeting was later convened by the registered ETPI stockholders wherein another set
of board of directors was elected, as a result of which two sets of such board and officers were
elected. Africa, a stockholder of ETPI, alleging that the PCGG had since been "illegally 'exercising'
the rights of stockholders of ETPI," especially in the election of the members of the board of
directors, filed the above-said motion before the Sandiganbayan. The Sandiganbayan ordered that
an annual stockholders meeting of the Eastern Telecommunications, Philippines, Inc. (ETPI) shall
be held. Such order expressed that the Executive Clerk of Court of this Division shall issue the call
and notice of annual stockholders meeting of ETPI addressed to all the duly registered/recorded
stockholders of ETPI. The stockholders meeting shall be conducted under the supervision and
control of this Court, through Justice Sabino R. de Leon, Jr. In accordance with the Supreme Court
ruling in Cojuangco et al vs. Azcuna, et al., supra, only the registered owners, their duly authorized
representatives or their proxies may vote their corresponding shares.

ISSUE/S:
(1) Whether or not the respondent sandiganbayan acted with grave abuse of discretion in
ruling that the registered stockholders of ETPI had the right to vote despite clear
showing that ETPI’s stock and transfer book was altered.
(2) Whether or not ETPI is entitled to conduct stockholders meeting for the election of the
board of directors

HELD:
(1) No.This Court sees no grave abuse of discretion on the part of the Sandiganbayan in
ruling that the charge that there were "alterations by substitution" in the Stock and
Transfer Book is not a matter which should preclude the Stock and Transfer Book from
being the basis or guide to determine who the true owners of the shares of stock in ETPI
are. If there be any substitution or alterations, the anomaly, if at all, may be explained by
the corporate secretary who made the entries therein. At any rate, the accuracy of the
Stock and Transfer Book may be checked by comparing the entries therein with the
issued stock certificates. The fact is that any transfer of stock or issuance thereof would
necessitate an alteration of the record by substitution. Any anomaly in any entry which
may deprive a person or entity of its right to vote may generate a controversy personal

160
 to the corporation and the stockholder and should not affect the issue as to whether it is
the PCGG or the shareholder who has the right to vote. In other words, should there be
a stockholder who feels aggrieved by any alteration by substitution in the Stock and
Transfer Book, said stockholder may object thereto at the proper time and before the
stockholders meeting. Whether the ETPI Stock and Transfer Book was falsified and
whether such falsification deprives the true owners of the shares of their right to vote are
thus issues best settled in a different proceeding instituted by the real parties-in-interest.

(2) Yes.There is nothing in the Cojuangco case that would suggest that the prior measures
should be incorporated in the articles and by-laws before a stockholders meeting for the
election of the board of directors is held. The PCGG nonetheless insists that those
measures should be written in the articles and by-laws before such meeting, "otherwise,
the [Marcos] cronies will elect themselves or their representatives, control the
corporation, and for an appreciable period of time, have every opportunity to disburse
funds, destroy or alter corporate records, and dissipate assets." That could be a
possibility, but the peculiar circumstances of this case require that the election of the
board of directors first be held before the articles of incorporation are amended.

The Court is aware that the implementation of some of the above safeguards may require
agreement between the registered stockholders and the PCGG as well as action on the
part of the Securities and Exchange Commission. The Court, therefore, directs
petitioners and the PCGG to effect the implementation of this decision under the
supervision and control of the Sandiganbayan so that the right to vote the sequestered
shares and the installation and operation of the safeguards above-specified may be
exercised and effected in a substantially contemporaneous manner and with all
deliberate dispatch.

DISPOSITIVE RULING: WHEREFORE, this Court Resolved to REFER the petitions at bar to the
Sandiganbayan for reception of evidence to determine whether there is a prima facie evidence
showing that the sequestered shares in question are ill-gotten and there is an imminent danger of
dissipation to entitle the PCGG to vote them in a stockholders meeting to elect the ETPI Board of
Directors and to amend the ETPI Articles of Incorporation for the sole purpose of increasing the
authorized capital stock of ETPI.

The Sandiganbayan shall render a decision thereon within sixty (60) days from receipt of this
Resolution and in conformity herewith.

The motion to cite the PCGG and its "accomplices" and to nullify the ETPI Stockholders Meeting of
March 17, 1997 filed by Victor Africa is DENIED for lack of jurisdiction.

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VILLENA, Isabelle Gloria I. L-1800005
Case 64
Republic v. COCOFED
G.R. Nos. 147062-64; December 14, 2001 PANGANIBAN, J.

Doctrine: As a general rule, the registered owner of the shares of a corporation exercises the
right and the privilege of voting. This principle applies even to shares that are sequestered by the
government.

As an exception, the government is authorized to vote these sequestered shares registered in

the names of private persons and acquired with allegedly ill-gotten wealth, if it is able to satisfy
the two-tiered test:
1. Is there prima facie evidence showing that the said shares are ill-gotten and thus belong to the
State?
2. Is there an imminent danger of dissipation, thus necessitating their continued sequestration
and voting by the PCGG, while the main issue is pending with the Sandiganbayan?

There are also two "public character" exceptions under which the government is granted the
authority to vote the shares:
1. Where government shares are taken over by private persons or entities who/which registered
them in their own names, and
2. Where the capitalization or shares that were acquired with public funds somehow landed in
private hands.

The two-tiered test applies only when the sequestered asset in the hands of a private person is
alleged to have been acquired with ill-gotten wealth. Otherwise, the right to vote them is subject,
not to the two-tiered test, but to the public character of their acquisition which must first be
determined.

FACTS: Pursuant to EO Nos. 1, 2. and 14 issued by then President Corazon Aquino, the
Presidential Commission on Good Government (PCGG) issued and implemented numerous
sequestrations, freeze orders and provisional takeovers of allegedly ill-gotten companies, assets
and properties. Among the properties sequestered by the Commission were shares of stock in the
United Coconut Planters Bank (UCPB) registered in the names of the alleged "one million coconut
farmers," the so-called Coconut Industry Investment Fund companies (CIIF companies), and
private respondent Eduardo Cojuangco Jr. (Cojuangco).

In connection with the sequestration, the PCGG instituted an action for reconveyance, reversion,
accounting, restitution and damages in the Sandiganbayan. Upon Motion of private respondent
COCOFED, the Sandiganbayan issued a Resolution lifting the sequestration of the subject UCPB
shares. This Sandiganbayan Resolution was challenged by the PCGG in a Petition for Certiorari.

Meanwhile, upon motion of Cojuangco, the anti-graft court ordered the holding of elections for the
Board of Directors of UCPB. However, the PCGG applied for and was granted by the Supreme
Court a Restraining Order enjoining the holding of the election. Subsequently, the Court lifted the

162
Restraining Order and ordered the UCPB to proceed with the election of its board of directors.
Furthermore, it allowed the sequestered shares to be voted by their registered owners.

The victory of the registered shareholders was fleeting because the Court, acting on the solicitor
general's Motion for Clarification/Manifestation, issued a Resolution, declaring that "the right of
petitioners [herein private respondents] to vote stock in their names at the meetings of the UCPB
cannot be conceded at this time. That right still has to be established by them before the
Sandiganbayan. Until that is done, they cannot be deemed legitimate owners of UCPB stock and
cannot be accorded the right to vote them.

The Court rendered its final Decision nullifying the Sandiganbayan Resolution which lifted the
sequestration of the subject UCPB shares.

Six years later, on February 13, 2001, the Board of Directors of UCPB received from the ACCRA
Law Office a letter written on behalf of the COCOFED and the alleged nameless one million
coconut farmers, demanding the holding of a stockholders' meeting for the purpose of, among
others, electing the board of directors. In response, the board approved a Resolution calling for a
stockholders' meeting on March 6, 2001 at three o'clock in the afternoon.

On February 23, 2001, COCOFED, et al. and Ballares, et al. filed the Class Action Omnibus
Motion asking the Sandigabayan: "1. To enjoin the PCGG from voting the UCPB shares of stock
registered in the respective names of the more than one million coconut farmers; and 2. To enjoin
the PCGG from voting the SMC shares registered in the names of the CIIF holding companies
including those registered in the name of the PCGG."

The Sandiganbayan issued an Order authorizing COCOFED, et al. and Ballares, et al. as well as
Cojuangco, et al., who were acknowledged to be registered stockholders of the UCPB, to exercise
their rights to vote their shares of stock and themselves to be voted upon in the UCPBB at the
scheduled Stockholders' Meeting on March 6, 2001 or on any subsequent continuation or resetting
thereof, and to perform such acts as will normally follow in the exercise of these rights as
registered stockholders.

ISSUE/S: Who may vote the sequestered UCPB shares while the main case for their reversion to
the State is pending in the Sandiganbayan?

HELD: The government should be allowed to continue voting those shares inasmuch as they were
purchased with coconut levy funds – that are prima facie public in character or, at the very least,
are "clearly affected with public interest."

As a general rule, the registered owner of the shares of a corporation exercises the right and the
privilege of voting. This principle applies even to shares that are sequestered by the government,
over which the PCGG as a mere conservator cannot, as a general rule, exercise acts of dominion.

On the other hand, it is authorized to vote these sequestered shares registered in the names of
private persons and acquired with allegedly ill-gotten wealth, if it is able to satisfy the two-tiered
test devised by the Court in Cojuangco v. Calpo and PCGG v. Cojuangco Jr., as follows:

163
1. Is there prima facie evidence showing that the said shares are ill-gotten and thus belong to the
State?
2. Is there an imminent danger of dissipation, thus necessitating their continued sequestration and
voting by the PCGG, while the main issue is pending with the Sandiganbayan?

However, the Court in Baseco v. PCGG and Cojuangco Jr. v. Roxas has provided two clear "public
character" exceptions under which the government is granted the authority to vote the shares:
1. Where government shares are taken over by private persons or entities who/which registered
them in their own names, and
2. Where the capitalization or shares that were acquired with public funds somehow landed in
private hands.

The exceptions are based on the common-sense principle that legal fiction must yield to truth; that
public property registered in the names of non-owners is affected with trust relations; and that the
prima facie beneficial owner should be given the privilege of enjoying the rights flowing from the
prima facie fact of ownership.

In this case, it is not disputed that the money used to purchase the sequestered UCPB shares
came from the Coconut Consumer Stabilization Fund (CCSF), otherwise known as the coconut
levy funds. This fact was plainly admitted by private respondent's counsel, Atty. Teresita J.
Herbosa, during the Oral Arguments. Having conclusively shown that the sequestered UCPB
shares were purchased with coconut levies, the Court held that these funds and shares are, at the
very least, "affected with public interest." Thus, herein private respondents – even if they are the
registered shareholders – cannot be accorded the right to vote them.

To stress, the two-tiered test applies only when the sequestered asset in the hands of a private
person is alleged to have been acquired with ill-gotten wealth. Otherwise, the right to vote them is
subject, not to the two-tiered test, but to the public character of their acquisition which must first be
determined.

DISPOSITIVE RULING: WHEREFORE, the Petition is hereby GRANTED and the assailed Order
SET ASIDE. The PCGG shall continue voting the sequestered shares until Sandiganbayan Civil
Case Nos. 0033-A, 0033-B and 0033-F are finally and completely resolved. Furthermore, the
Sandiganbayan is ORDERED to decide with finality the aforesaid civil cases within a period of six
(6) months from notice. It shall report to this Court on the progress of the said cases every three
(3) months, on pain of contempt. The Petition in Intervention is DISMISSED inasmuch as the
reliefs prayed for are not covered by the main issues in this case. No costs.

164
ZIPAGAN II, Ronald Joseph C. L-170229
Case 65
Evangelista v. Santos
G.R. No. L-1721; May 19, 1950 REYES, J.

Doctrine: The injury suffered by the corporation gives the corporation the right to bring action in
its own name. The stockholders may not directly claim those damages for themselves for that
would result in the appropriation by, and the distribution among them of part of the corporate
assets before the dissolution of the corporation and the liquidation of its debts and liabilities,
something which cannot be legally done in view of section 16 of the Corporation Law.

FACTS: Plaintiffs are minority stockholders of the Vitali Lumber Company, Inc., a Philippine
corporation organized for the exploitation of a lumber concession in Zamboanga. Defendant Rafael
Santos owns 50 per cent of the stocks of said corporation and serves as its president, manager,
and treasurer. Defendant, in such triple capacity, through fault, neglect, and abandonment allowed
its lumber concession to lapse and its properties and assets (among them machineries, buildings,
warehouses, trucks, etc.,) to disappear, thus causing the complete ruin of the corporation and total
depreciation of its stocks.

Plaintiff prays for the following reliefs against defendant Santos:

(1) to render an account of his administration of the corporate affairs and assets:
(2) to pay plaintiffs the value of their respective participation in said assets on the basis of the
value of the stocks held by each of them; and
(3) to pay the costs of suit. Plaintiffs also ask for such other remedy as may be and equitable.

ISSUE/S: Whether or not the plaintiffs have the right to bring this action on their behalf and for
their benefit

HELD: NO. The complaint shows that the action is for damages resulting from mismanagement of
the affairs and assets of the corporation by its principal officer, it being alleged that defendant's
maladministration has brought about the ruin of the corporation and the consequent loss of value
of its stocks. The injury complained of is thus primarily to the corporation, so that the suit for the
damages claimed should be by the corporation rather than by the stockholders. The stockholders
may not directly claim those damages for themselves for that would result in the appropriation by,
and the distribution among them of part of the corporate assets before the dissolution of the
corporation and the liquidation of its debts and liabilities, something which cannot be legally done
in view of section 16 of the Corporation Law.

However, if the officers of the corporation, who are the ones called upon to protect their rights,
refuse to sue, or where a demand upon them to file the necessary suit would be futile because
they are the very ones to be sued or because they hold the controlling interest in the corporation,
then in that case any one of the stockholders is allowed to bring suit. But in that case it is the
corporation itself and not the plaintiff stockholder that is the real party in interest, so that such
damages as may be recovered shall pertain to the corporation.

165
In the present case, the plaintiff stockholders have brought the action not for the benefit of the
corporation but for their own benefit, since they ask that the defendant make good the losses
occasioned by his mismanagement and pay to them the value of their respective participation in
the corporate assets on the basis of their respective holding. Clearly, this cannot be done until all
corporate debts, if there be any, are paid and the existence of the corporation terminated by the
limitation of its charter or by lawful dissolution in view of the provisions of section 16 of the
Corporation Law.

Therefore, the lower court did not err in dismissing the complaint on the ground that the plaintiff did
show cause of action.

DISPOSITIVE RULING: The order appealed from is therefore affirmed. Appellant's shall pay
costs. So ordered.

166
ADAP, Roberto Anton C. L-170042
Case 66
Chua v. CA
G.R. No.150793; November 19, 2004 QUISUMBING, J:

Doctrine: The corporation is a necessary party to the derivative suit. And the relief which is
granted is a judgment against a third person in favor of the corporation. Similarly, if a corporation
has a defense to an action against it and is not asserting it, a stockholder may intervene and
defend on behalf of the corporation.

FACTS: Respondent Lydia Hao, treasurer of Siena Realty Corporation, filed a complaint-affidavit
charging Francis Chua of 4 counts of falsification of public documents under Arts. 172 in relation to
Art. 171 of RPC. Thereafter, the prosecutor filed the information in MeTC against Chua. During
trial, private prosecutors Attys. Kho and Rivera appeared and presented Hao as first witness. Chua
moved to exclude Hao’s counsels as private prosecutors. MeTC granted. On certiorari with RTC
(SCA 99, entitled Hao, in her own behalf and for the benefit of Siena Realty Corporation v. Francis
Chua, and Honorable Vega, judge, Branch 22, MeTC), RTC reversed MeTC. On certiorari with CA,
CA affirmed RTC.

Chua had argued in CA that Hao had no authority to bring a suit on behalf of the corporation since
there was no board resolution authorizing her to file the suit. CA held that the action was a
derivative suit, for it alleged that Chua falsified documents pertaining to projects of the corporation
and made it appear that Chua was a stockholder and director of the corporation. CA held that the
corporation was a necessary party. Hence this petition.

As a contention, Chua claims that CA erred when it sustained RTC in giving due course to the
petition for certiorari in SCA 99 despite the fact that the corporation was not the private
complainant in the criminal case. Also, a derivative suit is peculiar only to intra-corporate
proceedings and cannot be made part of a criminal action.

ISSUE/S: Whether Hao’s criminal complaint, including its civil aspect, is a derivative suit.

HELD: No. Under S36 of the Corporation Code, read in relation to S23, where a corporation is an
injured party, its power to sue is lodged with its board of directors or trustees. An individual
stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds
stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions,
the suing stockholder is regarded as a nominal party, with the corporation as the real party in
interest.

The corporation is a necessary party to the derivative suit. And the relief which is granted is a
judgment against a third person in favor of the corporation. Similarly, if a corporation has a defense
to an action against it and is not asserting it, a stockholder may intervene and defend on behalf of
the corporation.

167
When a criminal action is instituted, the civil action arising from the offense is deemed instituted
with the criminal action. Here, the complaint was instituted by Hao for falsifying corporate
documents concerning corporate projects of Siena Realty Corporation. Thus, Siena Realty has a
cause of action.

However, the BoD of Siena did not institute the action, but it was Hao who instituted it. Hao claims
that she filed a derivative suit on behalf of the corporation. This is inaccurate. Not every suit filed
on behalf of the corporation is a derivative suit. For a derivative suit to prosper, it is required that
the minority stockholder suing for and on behalf of the corporation must ALLEGE in his complaint
that he is suing on a derivative cause of action on behalf of the corporation and all other
stockholders similarly situated who may wish to join him in the suit. It is a condition sine qua non
that the corporation be IMPLEADED as a party because not only is the corporation an
indispensable party, but it is also the present rule that it must be served with process. The
judgment must be made binding upon the corporation in order that the corporation may get the
benefit of the suit and may not bring subsequent suit against the same defendants for the same
cause of action. In other words, the corporation must be joined as a party because it is its cause of
action that is being litigated and because judgment must be a res judicata against it.

In the criminal complaint Hao filed, nowhere is it stated that she is filing the same in behalf and for
the benefit of the corporation. Thus, the criminal complaint, including the civil aspect thereof, could
not be deemed a derivative suit.

In a string of cases, we ruled that only a party-in-interest or those aggrieved may file certiorari
cases. In Pastor v. CA, we held that if aggrieved, even a non-party may institute a petition for
certiorari. Here, although the corporation was not a complainant in the criminal action, the subject
of the falsification was the corporation’s project and the falsified documents were corporate
documents. Thus, the corporation is a proper party in the R65 petition for certiorari since the
proceedings in the criminal case adversely affected it.

DISPOSITIVE RULING: WHEREFORE, the instant petition is DENIED. The Decision, dated June
14, 2001, and the Resolution, dated November 20, 2001, of the Court of Appeals in CA-G.R. SP
No. 57070, affirming the Order, dated October 5, 1999, of the Regional Trial Court (RTC) of
Manila, Branch 19, are AFFIRMED. Accordingly, the private prosecutors are hereby allowed to
intervene in behalf of private respondent Lydia Hao in the prosecution of the civil aspect of
Criminal Case No. 285721 before Branch 22, of Metropolitan Trial Court (MeTC) of Manila. Costs
against petitioner.

168
ANDAYA, Clarice J. L-1800012
Case 67
Expertravel & Tours, Inc. v. Court of Appeals and Korean Airlines
GR Number 152392; May 26, 2005 CALLEJO, SR. J.

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

FACTS: Korean Airlines (KAL) is a corporation established and registered in the Republic of South
Korea and licensed to do business in the Philippines. On September 6, 1999, KAL, through Atty.
Aguinaldo, filed a Complaint against Expertravel and Tours, Inc. (ETI) with the Regional Trial Court
(RTC) of Manila, for the collection of the principal amount of P260,150.00, plus attorney's fees and
exemplary damages. The verification and certification against forum shopping was signed by Atty.
Aguinaldo, who indicated therein that he was the resident agent and legal counsel of KAL and had
caused the preparation of the complaint.

ETI filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo was not authorized
to execute the verification and certificate of non-forum shopping as required by Section 5, Rule 7
of the Rules of Court. KAL opposed the motion contending that Atty. Aguinaldo was its resident
agent and was registered as such with the Securities and Exchange Commission (SEC) as
required by the Corporation Code of the Philippines. It was further alleged that Atty. Aguinaldo was
also the corporate secretary of KAL. Appended to the said opposition was the identification card of
Atty. Aguinaldo, showing that he was the lawyer of KAL.

During the hearing of January 28, 2000, Atty. Aguinaldo claimed that he had been authorized to file
the complaint through a resolution of the KAL Board of Directors approved during a special
meeting held on June 25, 1999. Finally, KAL submitted on March 6, 2000 an Affidavit of even date,
executed by its general manager Suk Kyoo Kim, alleging that the board of directors conducted a
special teleconference on June 25, 1999, which he and Atty. Aguinaldo attended. It was also
averred that in that same teleconference, the board of directors approved a resolution authorizing
Atty. Aguinaldo to execute the certificate of non-forum shopping and to file the complaint. Suk
Kyoo Kim also alleged, however, that the corporation had no written copy of the aforesaid
resolution.

169
On April 12, 2000, the trial court issued an Order denying the motion to dismiss, giving credence to
the claims of Atty. Aguinaldo and Suk Kyoo Kim that the KAL Board of Directors indeed conducted
a teleconference on June 25, 1999, during which it approved a resolution as quoted in the
submitted affidavit. ETI filed a motion for the reconsideration of the Order, contending that it was
inappropriate for the court to take judicial notice of the said teleconference without any prior
hearing. The trial court denied the motion in its Order 5 dated August 8, 2000. ETI then filed a
petition for certiorari and mandamus, assailing the orders of the RTC.

On December 18, 2001, the CA rendered judgment dismissing the petition, ruling that the
verification and certificate of non-forum shopping executed by Atty. Aguinaldo had sufficient
compliance with the Rules of Court. According to the appellate court, Atty. Aguinaldo had been
duly authorized by the board resolution approved on June 25, 1999, and was the resident agent of
KAL. As such, the RTC could not be faulted for taking judicial notice of the said teleconference of
the KAL Board of Directors. ETI filed a motion for reconsideration of the said decision, which the
CA denied. Thus, ETI, now the petitioner, comes to the Court by way of petition for review on
certiorari.

ISSUE/S: Whether Atty. Aguinaldo is authorized to sign the non-forum shopping certificate?

HELD: No. Atty. Aguinaldo is not authorized to sign the non-forum shopping certificate on
behalf of the corporation.

It is settled that the requirement to file a certificate of non-forum shopping is mandatory and that
the failure to comply with this requirement cannot be excused. The certification is a peculiar and
personal responsibility of the party, an assurance given to the court or other tribunal that there are
no other pending cases involving basically the same parties, issues and causes of action. Hence,
the certification must be accomplished by the party himself because he has actual knowledge of
whether or not he has initiated similar actions or proceedings in different courts or tribunals. Even
his counsel may be unaware of such facts. Hence, the requisite certification executed by the
plaintiff's counsel will not suffice.

In a case where the plaintiff is a private corporation, the certification may be signed, for and on
behalf of the said corporation, by a specifically authorized person, including its retained counsel,
who has personal knowledge of the facts required to be established by the documents. The reason
was explained by the Court in National Steel Corporation v. Court of Appeals, as follows:

Unlike natural persons, corporations may perform physical actions only through properly
delegated individuals; namely, its officers and/or agents. The corporation, such as the
petitioner, has no powers except those expressly conferred on it by the Corporation Code
and those that are implied by or are incidental to its existence. In turn, a corporation
exercises said powers through its board of directors and/or its duly-authorized officers and
agents. Physical acts, like the signing of documents, can be performed only by natural
persons duly-authorized for the purpose by corporate by-laws or by specific act of the board
of directors. "All acts within the powers of a corporation may be performed by agents of its
selection; and except so far as limitations or restrictions which may be imposed by special
charter, by-law, or statutory provisions, the same general principles of law which govern the

170
 relation of agency for a natural person govern the officer or agent of a corporation, of
whatever status or rank, in respect to his power to act for the corporation; and agents once
appointed, or members acting in their stead, are subject to the same rules, liabilities and
incapacities as are agents of individuals and private persons."

For who else knows of the circumstances required in the Certificate but its own retained
counsel. Its regular officers, like its board chairman and president, may not even know the
details required therein.

While Atty. Aguinaldo is the resident agent of the respondent in the Philippines, this does not mean
that he is authorized to execute the requisite certification against forum shopping. Under Section
127, in relation to Section 128 of the Corporation Code, the authority of the resident agent of a
foreign corporation with license to do business in the Philippines is to receive, for and on behalf of
the foreign corporation, services and other legal processes in all actions and other legal
proceedings against such corporation.

Under the law, Atty. Aguinaldo was not specifically authorized to execute a certificate of non-forum
shopping as required by Section 5, Rule 7 of the Rules of Court. This is because while a resident
agent may be aware of actions filed against his principal (a foreign corporation doing business in
the Philippines), such resident may not be aware of actions initiated by its principal, whether in the
Philippines against a domestic corporation or private individual, or in the country where such
corporation was organized and registered, against a Philippine registered corporation or a Filipino
citizen.

The respondent knew that its counsel, Atty. Aguinaldo, as its resident agent, was not specifically
authorized to execute the said certification. It attempted to show its compliance with the rule
subsequent to the filing of its complaint by submitting, on March 6, 2000, a resolution purporting to
have been approved by its Board of Directors during a teleconference held on June 25, 1999,
allegedly with Atty. Aguinaldo and Suk Kyoo Kim in attendance. However, such an attempt of the
respondent casts veritable doubt not only on its claim that such a teleconference was held, but
also on the approval by the Board of Directors of the resolution authorizing Atty. Aguinaldo to
execute the certificate of non forum shopping.

DISPOSITIVE RULING: IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The
Decision of the Court of Appeals in CA-G.R. SP No. 61000 is REVERSED and SET ASIDE. The
Regional Trial Court of Manila is hereby ORDERED to dismiss, without prejudice, the complaint of
the respondent.

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BAGTANG, Judea Ara T. L-1800350
Case 68
Gonzales vs. Philippine National Bank
G.R. No. L-33320; May 30, 1983 VASQUEZ, J.

Doctrine: It is now expressly required as a condition for such examination that the one
requesting it must not have been guilty of using improperly any information through a prior
examination, and that the person asking for such examination must be "acting in good faith and
for a legitimate purpose in making his demand."

FACTS: Petitioner expressed and made known his intention to acquire one share of stock from
Congressman Justiniano Montano which, on the following day, was transferred in his name in the
books of the Bank. Subsequent to his aforementioned acquisition of one share of stock of the
Bank, petitioner, in his dual capacity as a taxpayer and stockholder, filed the three civil cases
involving the bank or the members of its Board of Directors.

Petitioner addressed a letter to the President of the Bank, requesting submission to look into the
records of its transactions covering the purchase of a sugar central by the Southern Negros
Development Corp. to be financed by Japanese suppliers and financiers; its financing of the
Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc. and the construction of the Passi Sugar
Mills in Iloilo. The Asst. Vice-President and Legal Counsel of the Bank answered petitioner's letter
denying his request for being not germane to his interest as a one-share stockholder and for the
cloud of doubt as to his real intention and purpose in acquiring said share. In view of the Bank's
refusal the petitioner instituted an action.

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

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

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

Petitioner maintains that the above-quoted provision does not justify the qualification made by the
lower court that the inspection of corporate records may be denied on the ground that it is intended
172
for an improper motive or purpose, the law having granted such right to a stockholder in clear and
unconditional terms.

ISSUE/S: Whether or not the request for inspection of the corporation records by a stockholder
may be denied on the ground that it is intended for an improper motive or purpose

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

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

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

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

While seemingly enlarging the right of inspection, the new Code has prescribed limitations to the
same. It is now expressly required as a condition for such examination that the one requesting it
must not have been guilty of using improperly any information through a prior examination, and
that the person asking for such examination must be "acting in good faith and for a legitimate
purpose in making his demand."

Although the petitioner has claimed that he has justifiable motives in seeking the inspection of the
books of the respondent bank, he has not set forth the reasons and the purposes for which he
desires such inspection, except to satisfy himself as to the truth of published reports regarding
certain transactions entered into by the respondent bank and to inquire into their validity. The
circumstances under which he acquired one share of stock in the respondent bank purposely to
exercise the right of inspection do not argue in favor of his good faith and proper motivation.
Admittedly he sought to be a stockholder in order to pry into transactions entered into by the
respondent bank even before he became a stockholder. His obvious purpose was to arm himself
with materials which he can use against the respondent bank for acts done by the latter when the
173
petitioner was a total stranger to the same. He could have been impelled by a laudable sense of
civic consciousness, but it could not be said that his purpose is germane to his interest as a
stockholder.

There is also merit in the contention of the respondent bank that the inspection sought to be
exercised by the petitioner would be violative of the provisions of its charter. (Republic Act No.
1300, as amended.)

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

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

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

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

DISPOSITIVE RULING: WHEREFORE, the petition is hereby DISMISSED, without costs.

174
BALLENA, Fernando Jr. M. L-170308
Case 69
Nestor Ching and Andrew Wellington v. Subic Bay Golf and Country Club, Inc.
GR Number 174353; September 10, 2014 LEONARDO-DE CASTRO, J.

Doctrine: An individual stockholder is permitted to institute a derivative suit on behalf of the

corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever
officials of the corporation refuse to sue or are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as the nominal party, with the
corporation as the party in interest. Where the gravamen of the complaint is injury to the whole
body of its stockholders, it was for the corporation to institute and maintain a remedial action.
Contrary to the arguments of petitioners, Presidential Decree No. 902-A, does not grant
minority stockholders a cause of action against waste and diversion by the Board of Directors,
but merely identifies the jurisdiction of the SEC over actions already authorized by law or
jurisprudence. The legal standing of minority stockholders to bring derivative suits is not a
statutory right, there being no provision in the Corporation Code or related statutes authorizing
the same, but is instead a product of jurisprudence based on equity. A derivative suit cannot
prosper without first complying with the legal requisites for its institution. (1) That he was a
stockholder or member at the time the acts or transactions subject of the action occurred and at
the time the action was filed; (2) He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief
he desires; (3) No appraisal rights are available for the act or acts complained of; and (4) The
suit is not a nuisance or harassment suit. This Court finds that the same should not have been
dismissed on the ground that it is a nuisance or harassment suit. Although the shareholdings of
petitioners are indeed only 2 out of the 409 alleged outstanding shares or 0.24%, the Court has
held that it is enough that a member or a minority of stockholders file a derivative suit for and on
behalf of a corporation. With regard, however, to the second requisite, we find that petitioners
failed to state with particularity in the Complaint that they had exerted all reasonable efforts to
exhaust all remedies available under the articles of incorporation, by-laws, and laws or rules
governing the corporation to obtain the relief they desire Indeed, even if petitioners thought it
was futile to exhaust intra-corporate remedies, they should have stated the same in the
Complaint and specified the reasons for such opinion. Failure to do so allows the RTC to
dismiss the Complaint, even motu proprio, in accordance with the Interim Rules.

FACTS: Petitioners Ching and Wellington filed a complaint with the RTC on behalf of the members
of Subic Bay Golf and Country Club, Inc. (SBGCCI) and later on also impleaded the latter
corporation, against the said country club and its Board of Directors and officers under the
provisions of Presidential Decree No. 902-A in relation to Section 5.2 of the Securities Regulation
Code. They claimed that defendant corporation did not disclose to them the amendment which
allegedly makes the shares non-proprietary, as it takes away the right of the shareholders to
participate in the pro-rata distribution of the assets of the corporation after its dissolution. Hence,
this is in fraud of the stockholders who only discovered the amendment when they filed a case for
injunction to restrain the corporation from suspending their rights to use all the facilities of the club
and that the Board of Directors and officers of the corporation did not call any stockholders'

175
meeting from the time of the incorporation, in violation of Section 50 of the Corporation Code and
the By-Laws of the corporation. They also enumerated several instances of fraud in the
management of the corporation allegedly committed by the Board of Directors and officers of the
corporation. Respondents claimed by way of defense that petitioners failed (a) to show that it was
authorized by SBGSI to file the Complaint on the said corporation's behalf; (b) to comply with the
requisites for filing a derivative suit and an action for receivership; and (c) to justify their prayer for
injunctive relief since the Complaint may be considered a nuisance or harassment suit under
Section 1 (b), Rule 1 of the Interim Rules of Procedure for Intra-Corporate Controversies. Thus,
they prayed for the dismissal of the Complaint.

The RTC dismissed the complaint. It held that the action is a derivative suit, it found that this case
is intended not only for the benefit of the two petitioners. This is apparent from the caption of the
case which reads Nestor Ching, Andrew Wellington and the Subic Bay Golfers and Shareholders,
Inc., for and in behalf of all its members as petitioners. Hence, petitioners failed to exhaust their
remedies within the respondent corporation itself and observed that petitioners Ching and
Wellington were not authorized by their co-petitioner Subic Bay Golfers and Shareholders, Inc. to
file the Complaint, and therefore had no personality to file the same on behalf of the said
shareholders' corporation. According to the RTC, the shareholdings of petitioners comprised of 2
shares out of the 409 alleged outstanding shares or 0.24% is an indication that the action is a
nuisance or harassment suit which may be dismissed either motu proprio or upon motion in
accordance with Section 1 (b) of the Interim Rules of Procedure for Intra-Corporate Controversies.
The CA affirmed the decision of RTC. Hence, this petition.

ISSUES:
1) Whether the petitioner's complaint is a derivative suit?

2) Whether petitioners’ contention that they filed the suit in their own right as stockholders against
the officers and Board of Directors of the corporation under Section 5 (a) of Presidential Decree
No. 902-A is correct?

HELD:
1) Yes, the petitioners’ complaint falls under derivative suit. An individual stockholder is
permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order
to protect or vindicate corporate rights, whenever officials of the corporation refuse to sue or are
the ones to be sued or hold the control of the corporation. In such actions, the suing stockholder is
regarded as the nominal party, with the corporation as the party in interest. Where the gravamen of
the complaint is injury to the whole body of its stockholders, it was for the corporation to institute
and maintain a remedial action. Here, the Complaint in question appears to have been filed only by
the two petitioners, namely Ching and Wellington, who each own one stock in the respondent
corporation SBGCCI. While the caption of the Complaint also names the "Subic Bay Golfers and
Shareholders, Inc. for and on behalf of all its members," petitioners did not attach any
authorization from said alleged corporation or its members to file the Complaint. Thus, the
Complaint is deemed filed only by petitioners and not by SBGSI. Also, the reliefs sought in the
Complaint, namely that of enjoining defendants from acting as officers and Board of Directors of
the corporation, the appointment of a receiver, and the prayer for damages in the amount of the
decrease in the value of the shares of stock, clearly show that the Complaint was filed to curb the
alleged mismanagement of SBGCCI. The causes of action pleaded by petitioners do not accrue to
a single shareholder or a class of shareholders but to the corporation itself.
176
2) No, petitioners’ contention is incorrect. As minority stockholders, petitioners do not have any
statutory right to override the business judgments of SBGCCI's officers and Board of Directors on
the ground of the latter's alleged lack of qualification to manage a golf course. Contrary to the
arguments of petitioners, Presidential Decree No. 902-A, does not grant minority stockholders a
cause of action against waste and diversion by the Board of Directors, but merely identifies the
jurisdiction of the SEC over actions already authorized by law or jurisprudence. The legal standing
of minority stockholders to bring derivative suits is not a statutory right, there being no provision in
the Corporation Code or related statutes authorizing the same, but is instead a product of
jurisprudence based on equity. While there were allegations in the Complaint of fraud in their
subscription agreements, such as the misrepresentation of the Articles of Incorporation, petitioners
do not pray for the rescission of their subscription or seek to avail of their appraisal rights. Instead,
they ask that defendants be enjoined from managing the corporation and to pay damages for their
mismanagement. Petitioners' only possible cause of action as minority stockholders against the
actions of the Board of Directors is the common law right to file a derivative suit. However, a
derivative suit cannot prosper without first complying with the legal requisites for its institution. (1)
That he was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed; (2) He exerted all reasonable efforts, and alleges the
same with particularity in the complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he
desires; (3) No appraisal rights are available for the act or acts complained of; and (4) The suit is
not a nuisance or harassment suit. This Court finds that the same should not have been dismissed
on the ground that it is a nuisance or harassment suit. Although the shareholdings of petitioners
are indeed only 2 out of the 409 alleged outstanding shares or 0.24%, the Court has held that it is
enough that a member or a minority of stockholders file a derivative suit for and on behalf of a
corporation. With regard, however, to the second requisite, we find that petitioners failed to state
with particularity in the Complaint that they had exerted all reasonable efforts to exhaust all
remedies available under the articles of incorporation, by-laws, and laws or rules governing the
corporation to obtain the relief they desire. The Complaint contained no allegation whatsoever of
any effort to avail of intra-corporate remedies. Indeed, even if petitioners thought it was futile to
exhaust intra-corporate remedies, they should have stated the same in the Complaint and
specified the reasons for such opinion. Failure to do so allows the RTC to dismiss the Complaint,
even motu proprio, in accordance with the Interim Rules. The requirement of this allegation in the
Complaint is not a useless formality which may be disregarded at will.

DISPOSITIVE RULING: WHEREFORE, the Petition for Review is hereby DENIED. The Decision
of the Court of Appeals in CA-G.R. CV No. 81441 which affirmed the Order of the Regional Trial
Court (RTC) of Olongapo City dismissing the Complaint filed thereon by herein petitioners is
AFFIRMED. SO ORDERED.

177
BEROÑA, Christienne Nathalie A. L-1800245
Case 70
Lim v. Moldex Land, Inc.
G.R. No. 206038; January 25, 2017 MENDOZA, J.

Doctrine: A corporation can act only through natural persons duly authorized for the purpose or
by a specific act of its board of directors. Thus, in order for a corporation [Moldex] to exercise its
membership rights and privileges, it necessarily has to appoint its representatives. While Moldex
may rightfully designate proxies or representatives, the latter, however, cannot be elected as
directors or trustees of Condocor. First, the Corporation Code clearly provides that a director or
trustee must be a member of record of the corporation. Further, the power of the proxy is merely
to vote. If said proxy is not a member in his own right, he cannot be elected as a director or
proxy.

FACTS: Lim is a registered unit owner of 1322 Golden Empire Tower, a condominium project of
Moldex Land, Inc. (Moldex. Condocor, a non-stock, non-profit corporation, is the registered
condominium corporation for the Golden Empire Tower. Lim, as a unit owner of Golden Empire
Tower, is a member of Condocor.

Moldex became a member of Condocor on the basis of its ownership of the 220 unsold units in the
Golden Empire Tower. The individual respondents acted as its representatives. Lim claimed that
the individual respondents are non-unit buyers, but all are members of the Board of Directors of
Condocor, having been elected during its organizational meeting in 2008. They were again elected
during the July 21, 2012 general membership meeting. During the meeting, its corporate secretary
certified, and Jaminola, as Chairman, declared the existence of a quorum even though only 29 of
the 108 unit buyers were present. The declaration of quorum was based on the presence of the
majority of the voting rights, including those pertaining to the 220 unsold units held by Moldex
through its representatives. Lim objected to the validity of the meeting but it was denied. Thus, Lim
and all the other unit owners present, except for one, walked out and left the meeting.

Despite the walkout, the individual respondents and the other unit owner proceeded and elected
the new members of the Board of Directors for 2012-2013. All four individual respondents were
voted as members of the board, together with three others whose election was conditioned on their
subsequent confirmation. Thereafter, the newly elected members of the board conducted an
organizational meeting and proceeded with the election of its officers.

Lim filed an election protest before the RTC. Said court, however, dismissed the complaint. In so
ruling, the trial court explained that the presence or absence of a quorum in the subject meeting
was determined on the basis of the voting rights of all the units owned by the members in good
standing. The total voting rights of unit owners in good standing was 73,376 and, as certified by
the corporate secretary, 83.33% of the voting rights in good standing were present in the said
meeting, inclusive of the 58,504 voting rights of Moldex.

ISSUE/S: Whether or not Moldex can be deemed a member of Condocor and consequently,
appoint a representative

178
HELD: Yes. Although the Condominium Act provides for the minimum requirement for
membership in a condominium corporation, a corporation's articles of incorporation or by-laws may
provide for other terms of membership, so long as they are not inconsistent with the provisions of
the law, the enabling or master deed, or the declaration of restrictions of the condominium project.

In this case, Lim argued that Moldex cannot be a member of Condocor. She insisted that a
condominium corporation is an association of homeowners for the purpose of managing the
condominium project, among others. Thus, it must be composed of actual unit buyers or residents
of the condominium project. Lim further averred that the ownership contemplated by law must
result from a sale transaction between the owner-developer and the purchaser. She advanced the
view that the ownership of Moldex was only in the nature of an owner-developer and only for the
sole purpose of selling the units.

A corporation can act only through natural persons duly authorized for the purpose or by a specific
act of its board of directors. Thus, in order for Moldex to exercise its membership rights and
privileges, it necessarily has to appoint its representatives.

Section 58 of the Corporation Code mandates that Stockholders and members may vote in person
or by proxy in all meetings of stockholders or members. Section 1, Article II of Condocor's
By-Laws, grants registered owners the right to designate any person or entity to represent them in
Condocor, subject to the submission of a written notification to the Secretary of such designation.
Further, the owner's representative is entitled to enjoy and avail himself of all the rights and
privileges, and perform all the duties and responsibilities of a member of the corporation. The law
and Condocor's By-Laws evidently allow proxies in members' meeting.

While Moldex may rightfully designate proxies or representatives, the latter, however, cannot be
elected as directors or trustees of Condocor. First, the Corporation Code clearly provides that a
director or trustee must be a member of record of the corporation. Further, the power of the proxy
is merely to vote. If said proxy is not a member in his own right, he cannot be elected as a director
or proxy.

DISPOSITIVE RULING: Wherefore the petition is GRANTED. The March 4, 2013 Decision of the
Regional Trial Court, Branch 24, Manila, in Civil Case No. 12-128478 is hereby REVERSED and
SET ASIDE.

179
BOHOL, Bryan D. L-170449
Case 71
Roque vs. People of the Philippines
G.R. No. 211108; June 7, 2017 TIJAM, J.

Doctrine:
● In any case, the revocation of a corporation's Certificate of Registration does not
automatically warrant the extinction of the corporation itself such that its rights and
liabilities are likewise altogether extinguished. In the case of Clemente v. Court of
Appeals, the Court explained that the termination of the life of a juridical entity does not,
by itself, cause the extinction or diminution of the rights and liabilities of such entity nor
those of its owners and creditors.
● It is logical to presume that a registration precedes the revocation thereof, as any
registration cannot be revoked without its valid existence.

FACTS: One of the members of Barangay Mulawin Tricycle Operators and Drivers Association
(BMTODA), Oscar Ongjoco, wrote a letter to the secretary of BMTODA requesting to examine
records of the associations pursuant to his right under Section 74 of the Corporation Code of the
Philippines. Ongjoco learned that the incumbent officers had been in the office beyond the terms of
office as provided in the by-laws. Ongjoco requested from Alejandro Roque for the names of all the
members of BMTODA and their respective franchise numbers including fees paid by each
member. Despite several written requests, the president and the secretary of the BMTODA, Roque
and Singson, respectively, did not deed to the demand of Ongjoco. Therefore, Ongjoco as one of
the members filed a criminal case against Roque and Singson for violating his right granted by the
Corporation Code of the Philippines. The prosecutor found probable cause to hold the case of trial.
After the prosecution rested its case, Roque and Singson filed a motion for leave of court to file
demurrer to evidence with motion to dismiss by way of demurrer to evidence. The prosecution
failed to file a comment. The Regional Trial Court granted the motion and gave due course to
Roque and Singson’s demurrer to evidence. On appeal, the Court of Appeals reversed and set
aside the order of the Regional Trial Court granting the demurrer to evidence and remanded the
case to the trial court for defense’s presentation of evidence. Roque filed a petition for review on
certiorari before the Supreme Court arguing that Roque was not liable because there was no duly
incorporated BMTODA for the Corporation Code to be applied in this case. Assuming that there
was a valid corporation, there was no BMTODA at that time because there was an order revoking
certificate of incorporation of the said BMTODA. Roque argued that if there was no corporation,
the corporation code of the Philippines cannot be invoked by the prosecution.

ISSUE/S: Whether or not Roque is liable when he refused to grant the written request of Oscar
Ongjoco in the exercise of the latter’s right granted by the Corporation Code of the Philippines.

HELD: The Supreme Court ruled that Roque was liable in refusing to grant the exercise of Oscar
Ongjoco’s right as a member of BMTODA.

According to the Supreme Court, Section 74 of the Corporation Code provides for the liability for
damages of any officer or agent of the corporation for refusing to allow any director, trustee,
stockholder or member of the corporation to examine and copy excerpts from its records or
180
minutes. Section 144 of the same Code further provides for other applicable penalties in case of
violation of any provision of the Corporation Code. It was clear that Roque and Singson had
violated Ongjoco’s right. Therefore, the former were liable under the Corporation Code.

The Supreme Court ruled that in case of revocation of a corporation’s certificate of registration, it
does not automatically warrant the extinction of the corporation itself such that its rights and
liabilities are likewise altogether extinguished. The termination of the life of a juridical entity does
not, by itself, cause the extinction or diminution of the rights and liabilities of such entity, not those
of its owners and creditors. Thus, the revocation of BMTODA’s registration did not diminish the
right of Ongjoco to examine the documents of the association. In fact, the written request of
Ongjoco was received by Roque after the lifter order of the revocation of BMTODA’s registration.

Since Roque admitted that BMTODA’s revocation of registration, Roque cannot come forward and
disclaim BMTODA’s registration with the SEC as a corporation. It is logical to presume that a
registration precedes the revocation thereof, as any registration cannot be revoked without its valid
existence. Therefore, BMTODA was a valid and subsisting corporation under the SEC for the
application of the Corporation Code of the Philippines.

DISPOSITIVE RULING: WHEREFORE, the instant petition is DENIED. The Decision dated
August 31, 2012 and Resolution dated January 22, 2014 of the Court of Appeals are AFFIRMED in
toto.

181
DISTURA, Quennie Minalete B. L-170503
Case 72
Belo Medical Group, Inc. vs. Santos
GR Number 185894; August 30, 2017 LEONEN, J.

Doctrines:
● The trial court may make a declaration first on who owns the shares of stock and suspend
its ruling on whether Santos should be allowed to inspect corporate records. Or, it may
rule on whether Santos has the right to inspect corporate books in the meantime while
there has yet to be a resolution on the ownership of shares.
● A conflict between two (2) stockholders of a corporation does not automatically render
their dispute as intra-corporate. The nature of the controversy must also be examined.

FACTS: The present case arose from when herein petitioner Belo Medical Group received a
request from Santos for the inspection of corporate records. Santos claimed that he was a
registered shareholder and a co-owner of Belo's shares, as these were acquired while they
cohabited as husband and wife. Santos’ concern were the following:
● He sought advice on his probable removal as director of the corporation considering that he
was not notified of meetings where he could have been removed.
● He also inquired on the election of Alfredo Henares as Corporate Secretary in 2007 when
Santos had not been notified of a meeting for Henares' possible election. Finally, he sought
explanation on the corporation's failure to inform him of the 2007 annual meeting and the
holding of an annual meeting in 2008.

Santos' concern over the corporate operations arose from the alleged death of a patient in one (1)
of its clinics. Santos - in his three attempts - was unsuccessful in inspecting the corporate books as
Henares, the officer-in-charge of corporate records, was travelling. Belo Medical Group asked for
time in order for Henares to accommodate Santos' request.

Belo wrote the Belo Medical Group to repudiate Santos' co-ownership of her shares and his
interest in the corporation. She claimed that Santos held the 25 shares in his name merely in trust
for her, as she was the one who paid for these shares.

Thus, Belo Medical Group filed a:

● Complaint for Interpleader. The Complaint was filed "to protect its interest and compel [Belo
and Santos] to interplead and litigate their conflicting claims of ownership of, as well as the
corresponding right of inspection arising from the 25 shares between themselves.
● Supplemental Complaint for declaratory relief to deny Santos' request for inspection. It
prayed that Santos be perpetually barred from inspecting its books due to his business
interest in a competitor.

RTC: It declared the case as an intra-corporate controversy but dismissed the Complaints. The
RTC characterized the dispute as "intrinsically connected with the regulation of the corporation as
it involves the right of inspection of corporate records..

182
CA: Dismissed Belo's Petition for Review and ruled that the pending case before this Court was
the more appropriate vehicle to determine the issues.

ISSUE/S: Whether or not the present controversy is intra-corporate.

HELD: Yes. To determine whether an intra-corporate dispute exists and whether this case requires
the application of these rules of procedure, this Court evaluated the relationship of the parties. The
types of intra-corporate relationships were reviewed in Union Glass & Container Corporation v.
Securities and Exchange Commission:
[a] between the corporation, partnership or association and the public;
[b] between the corporation, partnership or association and its stockholders, partners,
members, or officers;
[c] between the corporation, partnership or association and the state in so far as its
franchise, permit or license to operate is concerned; and
[d] among the stockholders, partners or associates themselves.

For as long as any of these intra-corporate relationships exist between the parties, the controversy
would be characterized as intra-corporate. This is known as the "relationship test."

DMRC Enterprises v. Este del Sol Mountain Reserve, Inc. employed what would later be called as
the "nature of controversy test." It became another means to determine if the dispute should be
considered as intra­-corporate.

Applying the relationship test, this Court notes that both Belo and Santos are named shareholders
in Belo Medical Group's Articles of Incorporation and General Information Sheet for 2007. The
conflict is clearly intra-corporate as it involves two (2) shareholders although the ownership of
stocks of one stockholder is questioned.

Applying the nature of the controversy test, this is still an intra-­corporate dispute. The Complaint
for interpleader seeks a determination of the true owner of the shares of stock registered in
Santos' name. Ultimately, however, the goal is to stop Santos from inspecting corporate books.
This goal is so apparent that, even if Santos is declared the true owner of the shares of stock upon
completion of the interpleader case, Belo Medical Group still seeks his disqualification from
inspecting the corporate books based on bad faith. Therefore, the controversy shifts from a mere
question of ownership over movable property to the exercise of a registered stockholder's
proprietary right to inspect corporate books.

As an intra-corporate dispute, Santos should not have been allowed to file a Motion to Dismiss.
The trial court should have continued on with the case as an intra-corporate dispute considering
that it called for the judgments on the relationship between a corporation and its two warring
stockholders and the relationship of these two stockholders with each other.

AS TO THE RIGHT OF INSPECTION OF SANTOS

The trial court may make a declaration first on who owns the shares of stock and suspend its ruling
on whether Santos should be allowed to inspect corporate records. Or, it may rule on whether
Santos has the right to inspect corporate books in the meantime while there has yet to be a
resolution on the ownership of shares. Remedies are available to Belo Medical Group and Belo at

183
any stage of the proceeding, should they carry on in prohibiting Santos from inspecting the
corporate books.

DISPOSITIVE RULING: WHEREFORE, the Petition for Review of Belo Medical Group, Inc. is
PARTIALLY GRANTED. The December 8, 2008 Joint Resolution of Branch 149, Regional Trial
Court, Makati City in Civil Case No. 08-397 is REVERSED regarding its dismissal of the
intra-corporate case. Let this case be REMANDED to the commercial court of origin for further
proceedings.

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DOCTOR, Clarisse Maita M. L-160075
Case 73
Villongco vs. Yabut
G.R. No. 225022; February 05, 2018 TIJAM, J.

Doctrine: The right to vote is inherent in and incidental to the ownership of corporate stocks. It is
settled that unissued stocks may not be voted or considered in determining whether a quorum is
present in a stockholders' meeting. Only stocks actually issued and outstanding may be voted.
Thus, for stock corporations, the quorum is based on the number of outstanding voting stocks.
The distinction of undisputed or disputed shares of stocks is not provided for in the law or the
jurisprudence. Ubi lex non distinguit nec nos distinguere debemus — when the law does not
distinguish we should not distinguish.

FACTS: Phil-Ville Development and Housing Corporation (Phil-Ville) is a family corporation

founded by Geronima Que (Geronima) that is engaged in the real estate business. The corporation
has an authorized capital stock of Twenty Million Pesos (P20,000,000) divided into Two Hundred
Thousand (200,000) shares with a par value of One Hundred Pesos (P100.00) per share. During
her lifetime, Geronima owned 3,140 shares of stock while the remaining 196,860 shares were
equally distributed among Geronima's six children, namely: Carolina Que Villongco, Ana Maria
Que Tan, Angelica Que Gonzales, Cecilia Que Yabut, Ma. Corazon Que Garcia, and Maria Luisa
Que Camara.

Geronima died and subsequently Cecilia as attorney-in-fact of Geronima executed a Sale of

Shares of Stock and effected an inequitable distribution of the 3,140 shares that belonged to
Geronima to Geronima’s children and grandchildren.

Cecilia, Eumir Carlo Que Camara and Ma. Corazon [Cecilia Que, et. al.] wrote a letter to Ana
Maria, Corporate Secretary of Phil-Ville, to send out notices for the holding of the annual
stockholders' meeting. However, before Ana Maria could reply thereto, several notices were sent
to Phil-Ville’s stockholders regarding the annual stockholders’ meeting. Thereafter, majority of the
Board of Directors of Phil-Ville held an emergency meeting and decided to postpone the annual
stockholders’ meeting until the issue of the distribution of the 3,140 shares of stocks in the name of
certain stockholders is settled and all the stockholders were notified of such postponement.

Despite postponement, Cecilia Que, et al. proceeded with the scheduled annual stockholder's
meeting participated only by a few stockholders. In the said meeting, they elected the new
members of the Board of Directors and officers of Phil-Ville. Prior to the stockholders’ meeting,
Carolina, Ana Maria, and Angelica, together with several others, had already filed a Complaint for
Annulment of Sale/Distribution or Settlement of Shares of Stock/Injunction against [Cecilia Que, et.
al.].

Consequently, Carolina, Ana Maria, Angelica, Elaine and Edison Williams [Carolina, et al.] filed the
instant election case against [Cecilia Que, et al.] before the RTC and prayed that election of
Cecilia, Ma. Corazon and Eumir Carlo - as directors - be declared void considering the invalidity of
the holding of the meeting, lack of quorum therein, the questionable manner by which it was
conducted, including the invalid inclusion in the voting of the shares of the late Geronima.

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Carolina et. al., claimed that the basis for determining quorum should have been the total number
of undisputed shares of stocks of Phil-Ville due to the exceptional nature of the case since the
3,140 shares of the late Geronima and the fractional .67, .67, and .66 shares of Eumir Que
Camara, Paolo Que Camara and Abimar Que Camara are the subject of another dispute filed
before the RTC. Thus, excluding the 3,142 shares from the 200,000 outstanding capital stock, the
proper basis of determining the presence of quorum should be 196,858 shares of stocks.

ISSUE/S: Whether or not the total undisputed shares of stocks in Phil-Ville should be the basis in
determining the presence of a quorum?

HELD: No. Section 52 of the Corporation Code states that:

Section 52. Quorum in meetings. - Unless otherwise provided for in this Code or in the by-laws, a
quorum shall consist of the stockholders representing a majority of the outstanding capital stock or
a majority of the members in the case of non-stock corporations.

While Section 137 of the same Code defines "outstanding capital stock", thus:

Section 137. Outstanding capital stock defined. - The term "outstanding capital stock", as used in
this Code, means the total shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid, except treasury shares.

The right to vote is inherent in and incidental to the ownership of corporate stocks. It is settled that
unissued stocks may not be voted or considered in determining whether a quorum is present in a
stockholders' meeting. Only stocks actually issued and outstanding may be voted. Thus, for stock
corporations, the quorum is based on the number of outstanding voting stocks. The distinction of
undisputed or disputed shares of stocks is not provided for in the law or the jurisprudence. Ubi lex
non distinguit nec nos distinguere debemus — when the law does not distinguish we should not
distinguish. Thus, the 200,000 outstanding capital stocks of Phil-Ville should be the basis for
determining the presence of a quorum, without any distinction. Therefore, to constitute a quorum,
the presence of 100,001 shares of stocks in Phil-Ville is necessary.

We agree with the CA when it held that only 98,430 shares of stocks. were present during the
January 25, 2014 stockholders meeting at Max's Restaurant, therefore, no quorum had been
established.

DISPOSITIVE RULING: Wherefore, premises considered, the instant petitions for Review on
Certiorari are denied.

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________________________________

MODULE 5
Non-Stock Corporations

________________________________
ESPENIDA, Mheltina Deniece B. L-1800137
Case 74
Alfredo Long v. Lydia Basa
G.R. No. 134963-64, 27 September 2001 Sandoval-Gutierrez, J.

Doctrine: Section 91 of the Corporation Code has been made explicitly applicable to religious
corporations pursuant to the second paragraph of Section 109 of the same Code. Accordingly,
membership shall be terminated in the manner and for the causes provided in the articles of
incorporation or the by-laws. Likewise, termination of membership shall have the effect of
extinguishing all rights of a member in the corporation or in its property, unless otherwise
provided in the articles of incorporation or the by-laws.

FACTS: The Church in Quezon City, Inc. (CHURCH) was organized as an entity of the
brotherhood in Christ and was registered with SEC as a non-stock, non-profit religious corporation
for the administration of its properties. The CHURCH embraced the principles of faith that every
member or officer shall, without mental reservation, adhere strictly to the doctrine, teaching and
faith being observed by the CHURCH in proclaiming the Gospel of Christ. Since the CHURCH
follows strictly such principles, the Board of Directors were given the absolute power to admit and
expel a member of the CHURCH. The procedure for the expulsion of a member was indicated in
the CHURCH’s by-laws which states that “if it is brought to the notice of the Board of Directors that
any member has failed to observe any regulations and by-laws of the institution or the conduct of
any member has been dishonorable or improper or otherwise injurious to the character and
interest of the institution, the Board of Directors may by resolution without assigning any reason
therefor expel such member.” The Board of Directors noticed that some of the members
particularly the petitioners exhibited prohibited conduct by introducing doctrines and teachings
which were not based on the Bible. The petitioners were then asked to correct their ways but
petitioners ignored these reminders. This prompted the Board of Directors to update the
membership list of the CHURCH and remove the names of the petitioners. The petitioners
questioned their expulsion since it was made without prior notice and hearing.

ISSUE:
Whether or not the expulsion of the members of CHURCH made in accordance with the by-laws
was valid.

HELD: Yes, the expulsion was valid. The by-laws of the CHURCH does not require the Board of
Directors to give prior notice to the erring or dissident members in cases of expulsion. the only
requirements before a member can be expelled or removed from the membership of the CHURCH
are: (a) the Board of Directors has been notified that a member has failed to observe any
regulations and By-laws of the CHURCH, or the conduct of any member has been dishonorable or
improper or otherwise injurious to the character and interest of the CHURCH, and (b) a resolution
is passed by the Board expelling the member concerned, without assigning any reason therefor.

It is thus clear that a member who commits any of the causes for expulsion enumerated in
paragraph 4 of Article VII may be expelled by the Board of Directors, through a resolution, without
giving that erring member any notice prior to his expulsion. The resolution need not even state the
reason for such action.
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The CHURCH By-law provision on expulsion, as phrased, may sound unusual and objectionable
to petitioners as there is no requirement of prior notice to be given to an erring member before he
can be expelled. But that is how peculiar the nature of a religious corporation is vis-à-vis an
ordinary corporation organized for profit. It must be stressed that the basis of the relationship
between a religious corporation and its members is the latter’s absolute adherence to a common
religious or spiritual belief. Once this basis ceases, membership in the religious corporation must
also cease. Thus, generally, there is no room for dissension in a religious corporation. And where,
as here, any member of a religious corporation is expelled from the membership for espousing
doctrines and teachings contrary to that of his church, the established doctrine in this jurisdiction is
that such action from the church authorities is conclusive upon the civil courts.

Obviously recognizing the peculiarity of a religious corporation, the Corporation Code leaves the
matter of ecclesiastical discipline to the religious group concerned.

Section 91 of the Corporation Code, which has been made explicitly applicable to religious
corporations by the second paragraph of Section 109 of the same Code, states: "SEC. 91.
Termination of membership.- Membership shall be terminated in the manner and for the causes
provided in the articles of incorporation or the by-laws. Termination of membership shall have the
effect of extinguishing all rights of a member in the corporation or in its property, unless otherwise
provided in the articles of incorporation or the by-laws."

DISPOSITIVE RULING: WHEREFORE, the present consolidated petitions are denied.

189
EUSTAQUIO, Patricia Erika A. L-1800087
Case 75
Sta. Clara Homeowners’ Association vs. Spouses Gaston
G.R. No. 141961, 23 January 2002 Panganiban, J.

Doctrine: A party cannot be compelled to become members of an association by the simple

expedient of including them in its Articles of Incorporation and By-laws without their express or
implied consent. It may be to the mutual advantage of lot owners in a subdivision to band
themselves together to promote their common welfare, but that is possible only if the owners
voluntarily agree, directly or indirectly, to become members of the association.

FACTS: Respondent spouses filed a complaint for damages with preliminary

injunction/preliminary mandatory injunction and temporary restraining order before RTC Bacolod
City against petitioner Santa Clara Homeowners' Association (SCHA) through its Board of
Directors. Among others, the complaint alleged that the respondents are residents of San Jose
Avenue, Sta. Clara Subdivision, Mandalagan, Bacolod City. Respondents have remained
non-members of the homeowners association from the time they purchased their lots sometime in
1974.

In March 1998, respondents, including their son who resided with his parents, were prevented from
entering the subdivision and proceeding to their residential abode unless they showed their driver's
license for identification. These acts of petitioners allegedly had caused respondents to suffer
moral damages as it was done in the presence of other subdivision owners.

Petitioners moved to dismiss the complaint on the ground of lack of jurisdiction and lack of cause
of action. Among others, petitioners alleged that the case arose from intra-corporate relations
between the SCHA and its members, thus, the Home Insurance and Guaranty Corporation (HIGC)
has jurisdiction over the dispute. To support their claim of intra-corporate controversy, petitioners
stated that the Articles of Incorporation of SCHA, which was duly approved by the Securities and
Exchange Commission (SEC) on 4 October 1973, provides 'that the association shall be a
non-stock corporation with all homeowners of Sta. Clara constituting its membership.' Moreover,
petitioners alleged that private respondents enjoyed the privileges and benefits of membership in
and abided by the rules of the association, and even attended the general special meeting of the
association members on 24 March 1998.The lower court denied petitioner's motion to dismiss. It
held that it is the RTC that has jurisdiction over the dispute. The Court of Appeals upheld the
decision of the trial court.

ISSUE/S:
(1) Whether or not respondent spouses were considered members of the SCHA
(2) Whether or not the RTC had jurisdiction over the complaint

HELD:
(1) No, respondent spouses were not members of the SCHA. The constitutionally guaranteed
freedom of association includes the freedom not to associate. The right to choose with whom one
will associate oneself is the very foundation and essence of that partnership. It should be noted

190
that the provision guarantees the right to form an association. It does not include the right to
compel others to form or join one.

Private respondents cannot be compelled to become members of the SCHA by the simple
expedient of including them in its Articles of Incorporation and By laws without their express or
implied consent. It may be to the mutual advantage of lot owners in a subdivision to band
themselves together to promote their common welfare. But that is possible only if the owners
voluntarily agree, directly or indirectly, to become members of the association. memberships in
homeowners' associations may be acquired in various ways — often through deeds of sale,
Torrens certificates or other forms of evidence of property ownership. In the present case,
however, other than the said Articles of Incorporation and By-laws, there is no showing that private
respondents have agreed to be SCHA members.

No privity of contract exists between petitioners and private respondents. When private
respondents purchased their property in 1974 and obtained TCT Nos. T-126542 and T-127462 for
Lots 11 and 12 of Block 37 along San Jose Avenue in Sta. Clara Subdivision, there was no
annotation showing their automatic membership in the SCHA. Thus, no privity of contract arising
from the title certificate exists between petitioners and private respondents. The records are bereft
of any evidence that would indicate that private respondents intended to become members of the
SCHA. Prior to the implementation of the aforesaid Resolution, they and the other homeowners
who were not members of the association were issued non-member gate pass stickers for their
vehicles. This fact has not been disputed by petitioners. Thus, the SCHA recognized that there
were subdivision landowners who were not members thereof, notwithstanding the provisions of its
Articles of Incorporation and By-laws.

(2) Yes, the RTC had jurisdiction over the complaint. The RTC did not void the SCHA Resolution; it
merely resolved the Motion to Dismiss filed by petitioners by holding that it was the RTC, not the
HIGC, that had jurisdiction over the dispute. HIGC was created pursuant to RA 580. Originally,
administrative supervision over homeowners' associations was vested by law in the SEC.

Pursuant to EO No. 535, however, the HIGC assumed the regulatory and adjudicative functions of
the SEC over homeowners' associations. Among others, the Revised Rules of Procedure of the
HIGC provides that the HIGC has jurisdiction over controversies arising out of intra-corporate
relations between and among members of the association, between any or all of them and the
association of which they are members; and between such association and the state/general
public or other entity in so far as it concerns its right to exist as a corporate entity. powers and
responsibilities, which had been vested in the HIGC with respect to homeowners' associations,
were later transferred to the Housing and Land Use Regulatory Board (HLURB) pursuant to RA
8763.

The Complaint did not allege that private respondents are members of the SCHA. In point of fact,
they deny such membership. Thus, the HIGC has no jurisdiction over the dispute.

Petitioners likewise contend that even if private respondents are not members of the SCHA, an
intra-corporate controversy under the third type of dispute provided in Section 1(b) of Rule II of the
HIGC Rules exists. Petitioners posit that private respondents fall within the meaning of "general
public." The SC was not convinced.

191
First, the third type of dispute refers only to cases wherein an association's right to exist as a
corporate entity is at issue. In the present case, the Complaint filed by private respondents refers
to the SCHA's acts allegedly amounting to an impairment of their free access to their place of
residence inside the Sta. Clara Subdivision. The existence of SCHA as a corporate entity is clearly
not at issue in the instant case.

In United BF Homeowners' Association v. BF Homes, Inc., the SC held that Section 1(b), Rule II of
HIGC's "Revised Rules of Procedure in the Hearing of Homeowners' Disputes" was void. As
provided by the law, it is only the State, not the "general public or other entity", that can question
an association's franchise or corporate existence. Thus, the HIGC exercises limited jurisdiction
over homeowners' disputes. The law confines its authority to controversies that arise from any of
the following intracorporate relations: (1) between and among members of the association; (2)
between any and/or all of them and the association of which they are members; and (3) between
the association and the state insofar as the controversy concerns its right to exist as a corporate
entity.

DISPOSITIVE RULING: WHEREFORE, the Petition is hereby DENIED and the assailed Decision
AFFIRMED. Costs against petitioners.

192
GILO, Crhister Vince J. L-1800085
Case 76
Padcom Condominium Corp. v. Ortigas Center Assoc., Inc.
G.R. No. 146807, 9 May 2002 Davide Jr., C.J.

Doctrine: No application for membership of an association is necessary requiring the

acceptance of its board if there exists an “automatic membership clause” annotated in the title of
the property bought. This “automatic membership clause” is not violative to freedom of
association because the parties are given wide latitude of discretion in buying the land.

FACTS: Padcom Condominium Corp. owns and manages the Padilla Office Condominium
Buildings (Padcom Building) located in Ortigas, Pasig City. The land on which the building is
erected was originally acquired from Ortigas & Company (OCLP) by Tierra Development Company
(TDC) under a deed of sale, with a requirement that the transferee and its successor-in-interest
must become members of an association for realty owners and long-term lessees in the area, later
on established as Ortigas Center. Thereafter, the lot with improvements was conveyed by TDC in
favor of Padcom in a deed of transfer.

In 1982, Ortigas Center Association, Inc. was organized to advance the interests of the real estate
owners and long-term lessees of lots in the Ortigas Center. It sought the collection of membership
dues of P2,724.40 per month from Padcom, and eventually, Padcom owed the Association
P639,961, representing membership dues, interests, and penalty from April 1983 to June 1993. In
view of Padcom’s failure and refusal to pay, the Association filed a complaint for collection of sum
of money in RTC. Padcom contended that for it to become a member of the Association, it should
first apply for and be accepted for membership by the Association’s Board of Directors, and that no
automatic membership is contemplated in the Association’s bylaws. Padcom claims it cannot be
compelled to be a member without violating its right to freedom of association. RTC dismissed the
complaint, but the CA, on appeal, reversed.

ISSUE:
Whether or not Padcom is a member of the Association.

HELD: Yes, Padcom is a member of the Association. Section 44 of PD 1529 provides that every
registered owner receiving a certificate of title in pursuance of a decree of registration, and every
subsequent purchaser of registered land taking a certificate of title for value and in good faith, shall
hold the same free from all encumbrances except those noted on said certificate. When the land
was bought by Padcom’s predecessor in interest, TDC, from OCLP, the sale bound TDC to comply
with the covenants, conditions, and restrictions of the deed of sale, including the automatic
membership clause.

Further, such stipulation was annotated at the back of TCT No. 457308 issued to TDC, and when
TDC sold the lot to Padcom, the Deed of Transfer stated that the property is free from all liens and
encumbrances, except those already annotated at the back of said TCT No. 457308. This is so
because any lien annotated on previous certificates of title should be incorporated in or carried
over to the new transfer certificates of title. Such lien is inseparable from the property as it is a right

193
in rem, a burden on the property whoever its owner may be. It subsists notwithstanding a change
in ownership; in short, the personality of the owner is disregarded.

Furthermore, no application for membership is necessary. If at all, acceptance by the Board of

Directors is a ministerial function considering that Padcom is deemed to be a regular member
upon the acquisition of the lot pursuant to the automatic membership clause annotated in the
Certificate of Title of the property and the Deed of Transfer. The clause is likewise not a violation of
its freedom of association. Padcom was never forced to join the association. It could have avoided
such membership by not buying the land from TDC. Nobody forced it to buy the land when it
bought the building with the annotation of the condition or lien on the Certificate of Title thereof and
accepted the Deed. Padcom voluntarily agreed to be bound by and respect the condition, and thus
to join the Association.

DISPOSITIVE RULING: WHEREFORE, the petition is hereby DENIED for lack of merit.

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HERMOSURA, Nina Alexia C. L-170070
Case 77
Tan v. Sycip
G.R No. 153468, 17 August 2006 Panganiban, J.

Doctrines:
When the principle for determining the quorum for stock corporations is applied by analogy to
nonstock corporations, only those who are actual members with voting rights should be counted.

Membership in and all rights arising from a nonstock corporation are personal and non-
transferable, unless the articles of incorporation or the bylaws of the corporation provide
otherwise.

The determination of whether or not “dead members” are entitled to exercise their voting rights
(through their executor or administrator), depends on those articles of incorporation or bylaws.

FACTS: Petitioner Grace Christian High School (GCHS), is a non-stock, non-profit educational
corporation with 15 regular members, who also constitute their board of trustees. During GCHS’s
annual members’ meeting that was conducted on April 6, 1998, there were only 11 living
member-trustees left because the four had already died, and out of the 11 living member-trustees,
only a number of 7 member-trustees attended the meeting through their respective proxies. The
said meeting was convened and chaired by Atty. Padilla. However, Atty. Pacis objected, and
argued that there was no quorum.

In the meeting, petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to
replace the four deceased member-trustees. Afterwards, the issue was then elevated to the SEC.
Petitioners maintained that the deceased member-trustees should not be counted in the
computation of the quorum, because upon their death, members automatically lost all their rights,
including their right to vote and interests in the corporation.

Despite Atty. Pacis’s objection, the SEC hearing officer declared the meeting null and void for lack
of quorum. It held that the basis for determining the quorum in a meeting of members should be
their number as specified in the articles of incorporation and not simply the number of living
members. She explained that the qualifying phrase “entitled to vote” in Section 24 of the
corporation code, which provided the basis for determining a quorum for the election of directors or
trustees, should be read together with Section 89.

The hearing officer also opined that Article III (2) of the By-Laws of GCHS, insofar as it prescribed
the mode of filling vacancies in the board of trustees, must be interpreted in conjunction with
Section 29 of the Corporation Code which provides:

“Section 29. Vacancies in the office of director or trustee - Any vacancy occurring
in the board of directors or trustees other than by removal by the stockholders or
members or by expiration of term, may be filled by the vote of at least a majority of
the remaining directors or trustees, if still constituting a quorum; otherwise, said

195
 vacancies must be filled by the stockholders in a regular or special meeting called
for that purpose.”

The SEC en banc denied the appeal of petitioners. On appeal to the CA, it dismissed the appeal of
petitioners because the Verification and Certification of Non-Forum Shopping had been signed
only by Atty. Sabino Padilla Jr. and no Special Power of Attorney had been attached to show his
authority to sign for the rest of the petitioners. Hence the present petition.

ISSUE:
Whether or not in non-stock corporations, dead members should still be counted in determination
of quorum for purposes of conducting the Annual Members’ Meeting?

HELD: No. In this case, dead members who are dropped from the membership roster in the
manner and for the causes provided for in the By-Laws of GHCS are not to be counted in
determining the quorum.

In non stock corporations, the voting rights attach to membership. Members vote as persons, in
accordance with the law and the bylaws of the corporation. Each member shall be entitled to one
vote unless so limited, broadened, or denied in the articles of incorporation or bylaws. The
Supreme Court held that when the principle for determining the quorum for stock corporations is
applied by analogy to non-stock corporations, only those who are actual members with voting
rights should be counted.

Under Section 52 of the Corporation Code, the majority of the members representing the actual
number of voting rights, not the number or numerical constant that may originally be specified in
the articles of incorporation, constitutes the quorum.

“Section 52. Quorum in meetings.—Unless otherwise provided for in this Code or

in the by-laws, a quorum shall consist of the stockholders representing a majority
of the outstanding capital stock or a majority of the members in the case of
non-stock corporations.”

After having determined that the quorum in a members’ meeting is to be reckoned as the actual
number of members of the corporation, the next question to be resolved is what happens in the
event of the death of one of them.

In stock corporations, shareholders may generally transfer their shares. Thus, on the death of a
shareholder, the executor or administrator duly appointed by the Court is vested with the legal title
to the stock and entitled to vote it. Until a settlement and division of the estate is made in effect,
the stocks of the decedent are held by the administrator or executor. On the other hand,
membership in and all rights arising from a nonstock corporation are personal and non-
transferable, unless the articles of incorporation or the bylaws of the corporation provide otherwise.
In other words, the determination of whether or not “dead members” are entitled to exercise their
voting rights (through their executor or administrator), depends on those articles of incorporation or
bylaws.

Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated
by the death of the member. Section 91 of the Corporation Code further provides that termination

196
extinguishes all the rights of a member of the corporation, unless otherwise provided in the articles
of incorporation or the bylaws. Applying Section 91 to the present case, the Court held that dead
members who are dropped from the membership roster in the manner and for the cause provided
for in the By-Laws of GCHS are not to be counted in determining the requisite vote in corporate
matters or the requisite quorum for the annual members’ meeting. With 11 remaining members,
the quorum in the present case should be 6. Therefore, there being a quorum, the annual
members’ meeting, conducted with six members present, was valid.

DISPOSITIVE RULING: WHEREFORE, the Petition is partly GRANTED. The assailed Resolutions
of the Court of Appeals are hereby REVERSED AND SET ASIDE. The remaining members of the
board of trustees of Grace Christian High School (GCHS) may convene and fill up the vacancies in
the board, in accordance with this Decision. No pronouncement as to costs in this instance.

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________________________________

MODULE 6
Close Corporation & Special Corporations

________________________________
ZIPAGAN, Ronald Joseph II C. L-170229

Case #78
Dulay Enterprises vs. CA
GR #91889 Date August 27, 1993 Ponente Nocon, J

Doctrine: Corporate action taken at a board meeting without proper call or notice in a close
corporation is deemed ratified by the absent director unless the latter promptly files his written
objection with the secretary of the corporation after having knowledge of the meeting.

FACTS: Manuel R. Dulay Enterprises, Inc, a domestic corporation, obtained various loans for the
construction of its hotel project, Dulay Continental Hotel (now Frederick Hotel). Manuel Dulay by
virtue of Board Resolution No 18 sold the subject property to spouses Maria Theresa and
Castrense Veloso. Maria Veloso (buyer), without the knowledge of Manuel Dulay, mortgaged the
subject property to private respondent Manuel A. Torres. Upon the failure of Maria Veloso to pay
Torres, the property was sold to Torres in an extrajudicial foreclosure sale.

Torres filed an action against the corporation, Virgilio Dulay and against the tenants of the
apartment. RTC ordered the corporation and the tenants to vacate the building, which decision
was affirmed by the Court of Appeals.

Petitioners contend that the respondent court had acted with grave abuse of discretion when it
applied the doctrine of piercing the veil of corporate entity in the instant case considering that the
sale of the subject property between private respondents spouses Veloso and Manuel Dulay has
no binding effect on petitioner corporation as Board Resolution No. 18 which authorized the sale of
the subject property was resolved without the approval of all the members of the board of directors
and said Board Resolution was prepared by a person not designated by the corporation to be its
secretary.

ISSUE: Whether or not the sale to Veloso is valid notwithstanding that it was resolved without the
approval of all the members of the board of directors

HELD: Yes, the sale is valid. Section 101 of the Corporation Code of the Philippines provides:

Sec. 101. When board meeting is unnecessary or improperly held. Unless the by-laws
provide otherwise, any action by the directors of a close corporation without a meeting shall
nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by all the directors,
or
2. All the stockholders have actual or implied knowledge of the action and make no prompt
objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or implied
acquiesce of all the stockholders, or

199
 4. All the directors have express or implied knowledge of the action in question and none of
them makes prompt objection thereto in writing.

If a directors' meeting is held without call or notice, an action taken therein within the corporate
powers is deemed ratified by a director who failed to attend, unless he promptly files his written
objection with the secretary of the corporation after having knowledge thereof.

In the instant case, petitioner corporation is classified as a close corporation and consequently a
board resolution authorizing the sale or mortgage of the subject property is not necessary to bind
the corporation for the action of its president. At any rate, corporate action taken at a board
meeting without proper call or notice in a close corporation is deemed ratified by the absent
director unless the latter promptly files his written objection with the secretary of the corporation
after having knowledge of the meeting which, in his case, petitioner Virgilio Dulay failed to do.

Petitioners' claim that the sale of the subject property by its president, Manuel Dulay, to private
respondents spouses Veloso is null and void as the alleged Board Resolution No. 18 was passed
without the knowledge and consent of the other members of the board of directors cannot be
sustained. As correctly pointed out by the respondent Court of Appeals:

“Virgilio Duluy is very much privy to the transactions involved. To begin with, he is an
incorporator and one of the board of directors designated at the time of the
organization of Manuel R. Dulay Enterprise, Inc. In ordinary parlance, the said entity is
loosely referred to as a "family corporation". The nomenclature, if imprecise, however,
fairly reflects the cohesiveness of a group and the parochial instincts of the individual
members of such an aggrupation of which Manuel R. Dulay Enterprises, Inc. is
typical: four-fifths of its incorporators being close relatives namely, three (3) children
and their father whose name identifies their corporation.”

Besides, the fact that petitioner Virgilio Dulay on June 24, 1975 executed an affidavit that he was
a signatory witness to the execution of the post-dated Deed of Absolute Sale of the subject
property in favor of private respondent Torres indicates that he was aware of the transaction
executed between his father and private respondents.

Consequently, petitioner corporation is liable for the act of Manuel Dulay and the sale of the
subject property to private respondents by Manuel Dulay is valid and binding.

DISPOSITIVE RULING: WHEREFORE, the petition is DENIED and the decision appealed from is
hereby AFFIRMED.

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ADAP, Roberto Anton C. L-170042

Case #79
San Juan Structural Steel Fabricators v. CA
G.R. No. 129459 September 29, 1998 PANGANIBAN, J.

Doctrine: Piercing of Corporate Veil

Thus, the Court has consistently ruled that [w]hen the fiction is used as a means of perpetrating
a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention
of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery
or crime, the veil with which the law covers and isolates the corporation from the members or
stockholders who compose it will be lifted to allow for its consideration merely as an aggregation
of individuals.

FACTS: Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.s amended complaint
alleged that on 14 February 1989, plaintiff-appellant entered into an agreement with
defendant-appellee Motorich Sales Corporation for the transfer to it of a parcel of land identified as
Lot 30, Block 1 of the Acropolis Greens Subdivision located in the District of Murphy, Quezon City,
Metro Manila, containing an area of Four Hundred Fourteen (414) square meters, covered by TCT
No. (362909) 2876; that as stipulated in the Agreement of 14 February 1989, plaintiff-appellant
paid the down payment in the sum of One Hundred Thousand (P100,000.00) Pesos, the balance
to be paid on or before March 2, 1989; that on March 1, 1989, Mr. Andres T. Co, president of
plaintiff-appellant corporation, wrote a letter to defendant-appellee Motorich Sales Corporation
requesting for a computation of the balance to be paid; that said letter was coursed through
defendant-appellees broker, Linda Aduca, who wrote the computation of the balance; that on
March 2, 1989, plaintiff-appellant was ready with the amount corresponding to the balance,
covered by Metrobank Cashiers Check No. 004223, payable to defendant-appellee Motorich Sales
Corporation.

Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96 of the
Corporation Code defines a close corporation as follows:

SEC. 96. Definition and Applicability of Title. -- A close corporation, within the meaning of this
Code, is one whose articles of incorporation provide that: (1) All of the corporations issued stock of
all classes, exclusive of treasury shares, shall be held of record by not more than a specified
number of persons, not exceeding twenty (20); (2) All of the issued stock of all classes shall be
subject to one or more specified restrictions on transfer permitted by this Title; and (3) The
corporation shall not list in any stock exchange or make any public offering of any of its stock of
any class. Notwithstanding the foregoing, a corporation shall be deemed not a close corporation
when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation within the meaning of this Code. xxx.

Petitioner also argues that the veil of corporate fiction of Motorich should be pierced, because the
latter is a close corporation. Since Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg
owned all or almost all or 99.866% to be accurate, of the subscribed capital stock of Motorich,
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petitioner argues that Gruenberg needed no authorization from the board to enter into the subject
contract. It adds that, being solely owned by the Spouses Gruenberg, the company can be treated
as a close corporation which can be bound by the acts of its principal stockholder who needs no
specific authority. The Court is not persuaded.

ISSUE: Whether or not the doctrine of piercing the veil of corporate fiction is applicable in the
instant case

HELD: First, petitioner itself concedes having raised the issue belatedly, not having done so during
the trial, but only when it filed its sur-rejoinder before the Court of Appeals. Thus, this Court cannot
entertain said issue at this late stage of the proceedings. It is well-settled that points of law,
theories and arguments not brought to the attention of the trial court need not be, and ordinarily will
not be, considered by a reviewing court, as they cannot be raised for the first time on appeal.
Allowing petitioner to change horses in midstream, as it were, is to run roughshod over the basic
principles of fair play, justice and due process.

Second, even if the above-mentioned argument were to be addressed at this time, the Court still
finds no reason to uphold it. True, one of the advantages of a corporate form of business
organization is the limitation of an investors liability to the amount of the investment. This feature
flows from the legal theory that a corporate entity is separate and distinct from its stockholders.
However, the statutorily granted privilege of a corporate veil may be used only for legitimate
purposes. On equitable considerations, the veil can be disregarded when it is utilized as a shield to
commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve
as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of
another corporation.

The articles of incorporation of Motorich Sales Corporation does not contain any provision stating
that (1) the number of stockholders shall not exceed 20, or (2) a preemption of shares is restricted
in favor of any stockholder or of the corporation, or (3) listing its stocks in any stock exchange or
making a public offering of such stocks is prohibited. From its articles, it is clear that Respondent
Motorich is not a close corporation. Motorich does not become one either, just because Spouses
Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed capital stock. The mere
ownership by a single stockholder or by another corporation of all or nearly all of the capital stock
of a corporation is not of itself sufficient ground for disregarding the separate corporate
personalities. So too, a narrow distribution of ownership does not, by itself, make a close
corporation.

DISPOSITIVE RULING:: WHEREFORE, the petition is hereby DENIED and the assailed Decision
is AFFIRMED.

SO ORDERED.

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BAGTANG, Judea Ara T. L-1800350

Case #80
BUSTOS v. MILLIAN’S SHOES, INC.
G.R. No. 185024 April 24, 2017 Sereno, C.J.

Doctrine: Several requisites must be present for its (Sec. 100, of the Corporation Code)
applicability. None of these were alleged in the case of Spouses Cruz. Neither did the RTC or
the CA explain the factual circumstances for this Court to discuss the personal liability of
respondents to their creditors because of "corporate torts."

The general doctrine of separate juridical personality, thus, should be applied, which provides
that a corporation has a legal personality separate and distinct from that of people comprising it.
By virtue of that doctrine, stockholders of a corporation enjoy the principle of limited liability: the
corporate debt is not the debt of the stockholder. Thus, being an officer or a stockholder of a
corporation does not make one's property the property also of the corporation.

FACTS: Spouses Fernando and Amelia Cruz owned a 464-square-meter lot covered by TCT No.
N-126668. On 6 January 2004, the City Government of Marikina levied the property for
nonpayment of real estate taxes. On 14 October 2004, the City Treasurer of Marikina auctioned off
the property, with petitioner Joselito Hernand M. Bustos emerging as the winning bidder.

Petitioner then applied for the cancellation of TCT No. N-126668. On 13 July 2006, the RTC
ordered the cancellation of the previous title and the issuance of a new one under the name of
petitioner.

Meanwhile, notices of lis pendens were annotated on TCT No. N-126668 on 9 February 2005,
indicating that SEC Corp. Case No. 036-04, which was filed before the RTC and involved the
rehabilitation proceedings for MSI, covered the subject property and included it in the Stay Order
issued by the RTC dated 25 October 2004.

On 26 September 2006, petitioner moved for the exclusion of the subject property from the Stay
Order. He claimed that the lot belonged to Spouses Cruz who were mere stockholders and officers
of MSI. He further argued that since he had won the bidding of the property on 14 October 2004,
or before the annotation of the title on 9 February 2005, the auctioned property could no longer be
part of the Stay Order.

The RTC denied the entreaty of petitioner. It ruled that because the period of redemption up to 15
October 2005 had not yet lapsed at the time of the issuance of the Stay Order on 25 October
2004, the ownership thereof had not yet been transferred to petitioner.

The CA ruled as follows:chanRoblesvirtualLawlibrary

In the case at bar, the delinquent tax payers were the Cruz Spouses who were the
registered owners of the said parcel of land at the time of the delinquency sale. The
sale was held on October 14, 2004 and the Cruz Spouses had until October 15, 2005
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 within which to redeem the parcel of land. The stay order was issued on October 25,
2004 and inscribed at the back of the title on February 9, 2005, which is within the
redemption period. The Cruz Spouses were still the owners of the land at the time of
the issuance of the stay order. The said parcel of land which secured several mortgage
liens for the account of MSI remains to be an asset of the Cruz Spouses, who are the
stockholders and/or officers of MSI, a close corporation. Incidentally, as an exception to
the general rule, in a close corporation, the stockholders and/or officers usually
manage the business of the corporation and are subject to all liabilities of directors, i.e.
personally liable for corporate debts and obligations. Thus, the Cruz Spouses being
stockholders of MSI are personally liable for the latter's debt and obligations.

Petitioner unsuccessfully moved for reconsideration. The CA maintained its ruling and even held
that his prayer to exclude the property was time-barred by the 10-day reglementary period to
oppose rehabilitation petitions under Rule 4, Section 6 of the Interim Rules of Procedure on
Corporate Rehabilitation.

Before this Court, petitioner maintains three points: (1) the Spouses Cruz are not liable for the
debts of MSI; xxx and (3) the time bar rule does not apply to him, because he is not a creditor of
MSI.

In their Comment, respondents do not contest that Spouses Cruz own the subject property. Rather,
respondents assert that as stockholders and officers of a close corporation, they are personally
liable for its debts and obligations. Furthermore, they argue that since the Rehabilitation Plan of
MSI has been approved, petitioner can no longer assail the same.

ISSUES:
1. Whether or not MSI is a closed corporation
2. Whether or not the Sps. Cruz, as stockholders and officers of a close corporation, are personally
liable for its debts and obligations.

HELD:
1. No. In finding the subject property answerable for the obligations of MSI, the CA characterized
respondent spouses as stockholders of a close corporation who, as such, are liable for its debts.
This conclusion is baseless.

To be considered a close corporation, an entity must abide by the requirements laid out in Section
96 of the Corporation Code, which reads:

Sec. 96. Definition and applicability of Title. - A close corporation, within the meaning of
this Code, is one whose articles of incorporation provide that: (1) All the corporation's
issued stock of all classes, exclusive of treasury shares, shall be held of record by not
more than a specified number of persons, not exceeding twenty (20); (2) all the issued
stock of all classes shall be subject to one or more specified restrictions on transfer
permitted by this Title; and (3) The corporation shall not list in any stock exchange or
make any public offering of any of its stock of any class. Notwithstanding the foregoing,
a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of
its voting stock or voting rights is owned or controlled by another corporation which is

204
 not a close corporation within the meaning of this Code. x x x.

In San Juan Structural and Steel Fabricators. Inc. v. Court of Appeals, the Court held that a narrow
distribution of ownership does not, by itself, make a close corporation. Courts must look into the
articles of incorporation to find provisions expressly stating that (1) the number of stockholders
shall not exceed 20; or (2) a preemption of shares is restricted in favor of any stockholder or of the
corporation; or (3) the listing of the corporate stocks in any stock exchange or making a public
offering of those stocks is prohibited.

Here, neither the CA nor the RTC showed its basis for finding that MSI is a close corporation. The
CA and the RTC deemed MSI a close corporation based on the allegation of Spouses Cruz that it
was so. However, mere allegation is not evidence and is not equivalent to proof. For this reason
alone, the CA rulings should be set aside.

2. No. The CA seriously erred in portraying the import of Section 97 of the Corporation Code.
Citing that provision, the CA concluded that "in a close corporation, the stockholders and/or
officers usually manage the business of the corporation and are subject to all liabilities of directors,
i.e. personally liable for corporate debts and obligations."

However, Section 97 of the Corporation Code only specifies that "the stockholders of the
corporation shall be subject to all liabilities of directors." Nowhere in that provision do we find any
inference that stockholders of a close corporation are automatically liable for corporate debts and
obligations.

Parenthetically, only Section 100, paragraph 5, of the Corporation Code explicitly provides for
personal liability of stockholders of close corporation, viz:chanRoblesvirtualLawlibrary

Sec. 100. Agreements by stockholders. -

xxxx

5. To the extent that the stockholders are actively engaged in the management or
operation of the business and affairs of a close corporation, the stockholders shall be
held to strict fiduciary duties to each other and among themselves. Said stockholders
shall be personally liable for corporate torts unless the corporation has obtained
reasonably adequate liability insurance.

Several requisites must be present for its (Sec. 100, of the Corporation Code) applicability. None of
these were alleged in the case of Spouses Cruz. Neither did the RTC or the CA explain the factual
circumstances for this Court to discuss the personal liability of respondents to their creditors
because of "corporate torts."

The general doctrine of separate juridical personality, thus, should be applied, which provides that
a corporation has a legal personality separate and distinct from that of people comprising it. By
virtue of that doctrine, stockholders of a corporation enjoy the principle of limited liability: the
corporate debt is not the debt of the stockholder. Thus, being an officer or a stockholder of a
corporation does not make one's property the property also of the corporation.

205
In rehabilitation proceedings, claims of creditors are limited to demands of whatever nature or
character against a debtor or its property, whether for money or otherwise. In several cases, the
Court has already held that stay orders should only cover those claims directed against
corporations or their properties, against their guarantors, or their sureties who are not solidarily
liable with them, to the exclusion of accommodation mortgagors. To repeat, properties merely
owned by stockholders cannot be included in the inventory of assets of a corporation under
rehabilitation.

Given that the true owner the subject property is not the corporation, petitioner cannot be
considered a creditor of MSI but a holder of a claim against respondent spouses.

Rule 4, Section 6 of the Interim Rules of Procedure on Corporate Rehabilitation, directs creditors
of the debtor to file an opposition to petitions for rehabilitation within 10 days before the initial
hearing of rehabilitation proceedings. Since petitioner does not hold any claim over the properties
owned by MSI, the time-bar rule does not apply to him.

DISPOSITIVE RULING: WHEREFORE, the Petition for review on certiorari filed by petitioner
Joselito Hernand M. Bustos is GRANTED. The Decision dated 12 June 2008 and Resolution dated
27 October 2008 of the Court of Appeals in C.A.-G.R. SP. No. 100298 are REVERSED and SET
ASIDE.

SO ORDERED.

206
BALLENA, Fernando Jr, M. L-170308

Case #81
Iglesia Evangelica Metodista En Las Islas Filipinas (Iemelif) (Corporation Sole), Inc., Et Al., vs. Bishop
Nathanael Lazaro, Et Al.
G.R. No. 184088 July 6, 2010 ABAD, J.

Doctrine: The one member in a corporation sole, here the General Superintendent, is but a
trustee, according to Section 110 of the Corporation Code, of its membership. There is no point
in dissolving the corporation sole of one member to enable the corporation aggregate to emerge
from it. Whether it is a non-stock corporation or a corporation sole, the corporate being remains
distinct from its members, whatever be their number. Hence, the one member, with the
concurrence of two-thirds of the membership of the organization for whom he acts as trustee,
can self-will the amendment. He can, with membership concurrence, increase the technical
number of the members of the corporation from "sole" or one to the greater number authorized
by its amended articles.

FACTS: Bishop Nicolas Zamora established the petitioner Iglesia Evangelica Metodista En Las
Islas Filipinas, Inc. (IEMELIF) as a corporation sole with Bishop Zamora acting as its General
Superintendent. After 39 years, the IEMELIF enacted and registered a by-laws that established a
Supreme Consistory of Elders (the Consistory), made up of church ministers, who were to serve
for four years and for all intents and purposes, the Consistory served as the IEMELIF's board of
directors. The IEMELIF remained a corporation sole on paper but it had always acted like a
corporation aggregate. The Consistory exercised IEMELIF's decision-making powers without ever
being challenged. During its 1973 General Conference, the general membership voted to put
things right by changing IEMELIF's organizational structure from a corporation sole to a
corporation aggregate. The SEC approved the vote. However, the corporate papers of the
IEMELIF remained unaltered as a corporation sole. The issue arose after 28 years. In an answer
to a query from the IEMELIF, the SEC replied that the conversion was not properly carried out and
documented, although it did not object to the conversion of the IEMELIF into a corporation
aggregate, it instructed the IEMELIF to amend its articles of incorporation for that purpose.Hence,
the Consistory resolved to convert the IEMELIF to a corporation aggregate. Subsequently, the
general membership approved the conversion, prompting the IEMELIF to file amended articles of
incorporation with the SEC. Bishop Lazaro filed an affidavit-certification in support of the
conversion.

Petitioners Reverend Nestor Pineda, et al., which belonged to a faction that did not support the
conversion, filed a civil case, in IEMELIF's name, against respondent members of its Consistory
before the RTC. Petitioners claim that a complete shift from IEMELIF's status as a corporation
sole to a corporation aggregate required, not just an amendment of the IEMELIF's articles of
incorporation, but a complete dissolution of the existing corporation sole followed by a
re-incorporation.

RTC: Dismissed the petition. It held that, while the Corporation Code on Religious Corporations
has no provision governing the amendment of the articles of incorporation of a corporation sole,
207
its Section 109 provides that religious corporations shall be governed additionally "by the
provisions on non-stock corporations insofar as they may be applicable." The RTC thus held that
Section 16 of the Code that governed amendments of the articles of incorporation of non-stock
corporations applied to corporations sole as well. What IEMELIF needed to authorize the
amendment was merely the vote or written assent of at least two-thirds of the IEMELIF
membership.

CA: Affirmed the decision of RTC. Hence, the present petition for review before this Court.

ISSUE: Whether the CA erred in affirming the ruling of RTC that a corporation sole may be
converted into a corporation aggregate by mere amendment of its articles of incorporation?

HELD: No, the CA did not err in affirming the RTC’s decision. While it is true that the Corporation
Code provides no specific mechanism for amending the articles of incorporation of a corporation
sole. But, as the RTC correctly held, Section 109 of the Corporation Code allows the application
to religious corporations of the general provisions governing non-stock corporations. For
non-stock corporations, the power to amend its articles of incorporation lies in its members. The
code requires two-thirds of their votes for the approval of such an amendment. So how will this
requirement apply to a corporation sole that has technically but one member (the head of the
religious organization) who holds in his hands its broad corporate powers over the properties,
rights, and interests of his religious organization? Although a non-stock corporation has a
personality that is distinct from those of its members who established it, its articles of
incorporation cannot be amended solely through the action of its board of trustees. The
amendment needs the concurrence of at least two-thirds of its membership. If such approval
mechanism is made to operate in a corporation sole, its one member in whom all the powers of
the corporation technically belongs, needs to get the concurrence of two-thirds of its
membership. The one member, here the General Superintendent, is but a trustee, according to
Section 110 of the Corporation Code, of its membership.There is no point in dissolving the
corporation sole of one member to enable the corporation aggregate to emerge from it. Whether
it is a non-stock corporation or a corporation sole, the corporate being remains distinct from its
members, whatever be their number. The increase in the number of its corporate membership
does not change the complexion of its corporate responsibility to third parties. The one member,
with the concurrence of two-thirds of the membership of the organization for whom he acts as
trustee, can self-will the amendment. He can, with membership concurrence, increase the
technical number of the members of the corporation from "sole" or one to the greater number
authorized by its amended articles.

Here, the evidence shows that the IEMELIF's General Superintendent, respondent Bishop
Lazaro, who embodied the corporation sole, had obtained, not only the approval of the
Consistory that drew up corporate policies, but also that of the required two-thirds vote of its
membership. The amendment of the articles of incorporation, as correctly put by the CA, requires
merely that a) the amendment is not contrary to any provision or requirement under the
Corporation Code, and that b) it is for a legitimate purpose. Section 17 of the Corporation Code
provides that amendment shall be disapproved if, among others, the prescribed form of the
articles of incorporation or amendment to it is not observed, or if the purpose or purposes of the
corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and
regulations, or if the required percentage of ownership is not complied with. These impediments

208
do not appear in the case of IEMELIF. Besides, as the CA noted, the IEMELIF worked out the
amendment of its articles of incorporation upon the initiative and advice of the SEC. The latter's
interpretation and application of the Corporation Code is entitled to respect and recognition,
barring any divergence from applicable laws. Considering its experience and specialized
capabilities in the area of corporation law, the SEC's prior action on the IEMELIF issue should be
accorded great weight.

DISPOSITIVE RULING: WHEREFORE, the Court DENIES the petition and AFFIRMSthe
October 31, 2007 decision and August 1, 2008 resolution of the Court of Appeals in CA-G.R. SP
92640.

209
________________________________

MODULE 7A
Corporate Dissolution/Liquidation

________________________________
BEROÑA, Christienne Nathalie L-1800245

Case #82
Gelano v. Court of Appeals
GR # L-39050 February 24, 1981 DE CASTRO, J.

Doctrine: A corporation that has a pending action and which cannot be terminated within the
three-year period after its dissolution is authorized under Section 78 to convey all its property to
trustees to enable it to prosecute and defend suits by or against the corporation beyond the
three-year period.

FACTS: Insular Sawmill, Inc. is a corporation organized with a corporate life up to September 17,
1995 with the primary purpose of carrying on a general lumber and sawmill business. Private
respondent leased the paraphernal property of petitioner-wife Guillermina M. Gelano at the corner
of Canonigo and Otis, Paco, Manila for P1,200 a month. Carlos Gelano obtained cash advances
that private respondent could deduct the same from the monthly rentals of the leased premises
until said cash advances are fully paid. Carlos Gelano was able to pay only P5,950 leaving an
unpaid balance of P20,000 which he refused to pay despite repeated demands by private
respondent. Guillermina M. Gelano refused to pay on the ground that said amount was for the
personal account of her husband asked for by, and given to him, without her knowledge and
consent and did not benefit the family. Petitioners also made credit purchases of lumber materials
from private respondent. The amount due private respondent on account of credit purchases of
lumber materials is P946.46 which petitioners failed to pay.

Private respondent, through Joseph Tan Yoc Su, executed a joint and several promissory note with
Carlos Gelano in favor of China Banking Corporation in the amount of P8,000 payable in 60 days.
For failure of Carlos Gelano to pay the promissory note upon maturity, the bank collected from the
respondent corporation the amount of P9,106 including interests. Carlos Gelano was able to pay
private respondent the amount of P5,000 but the balance of P4,106 remained unsettled.

On May 29, 1959, the corporation filed a complaint for collection against herein petitioners. In the
meantime, private respondent amended its Articles of Incorporation to shorten its term of existence
up to December 31, 1960 only. The amended Articles of Incorporation was filed with, and
approved by the SEC, but the trial court was not notified of the amendment shortening the
corporate existence and no substitution of party was ever made. Almost 4 years after the
dissolution of the corporation, the trial court rendered a decision in favor of private respondent. The
Court of Appeals rendered a decision modifying the judgment of the trial court by holding petitioner
spouses jointly and severally liable on private respondents claim and increasing the award of
P4,106. After petitioners received a copy of the decision on August 24, 1973, they came to know
that the Insular Sawmill Inc. was dissolved way back on December 31, 1960.

211
ISSUE: Whether or not a corporation, whose corporate life had ceased by the expiration of its
terms of existence, could still continue prosecuting and defending suits after its dissolution and
beyond the period of 3 years provided for under the Corporation Law, to wind up its affairs, without
having undertaken any step to transfer its assets to a trustee or assignee.

HELD: Yes. Section 77 of the Corporation Law provides that the corporation shall "be continued as
a body corporate for three (3) years after the time when it would have been dissolved, for the
purpose of prosecuting and defending suits by or against it," so that, thereafter, it shall no longer
enjoy corporate existence for such purpose. For this reason, Section 78 of the same law
authorizes the corporation, "at any time during said three years to convey all of its property to
trustees for the benefit of members, stockholders, creditors and other interested," evidently for the
purpose, among others, of enabling said trustees to prosecute and defend suits by or against the
corporation begun before the expiration of said period.

When Insular Sawmill, Inc. was dissolved on December 31, 1960, under Section 77 of the
Corporation Law, it still has the right until December 31, 1963 to prosecute in its name the present
case. After the expiration of said period, the corporation ceased to exist for all purposes and it can
no longer sue or be sued.

However, a corporation that has a pending action and which cannot be terminated within the
three-year period after its dissolution is authorized under Section 78 to convey all its property to
trustees to enable it to prosecute and defend suits by or against the corporation beyond the
three-year period. Although private respondent did not appoint any trustee, yet the counsel who
prosecuted and defended the interest of the corporation in the instant case and who in fact
appeared on behalf of the corporation may be considered a trustee of the corporation at least with
respect to the matter in litigation only. Said counsel had been handling the case when the same
was pending before the trial court until it was appealed before the Court of Appeals and finally to
this Court. We therefore hold that there was a substantial compliance with Section 78 of the
Corporation Law and as such, private respondent Insular Sawmill, Inc. could still continue
prosecuting the present case even beyond the period of three (3) years from the time of its
dissolution.

DISPOSITIVE RULING: WHEREFORE, with the modification that only the conjugal partnership is
liable, the appealed decision is hereby affirmed in all other respects. Without pronouncement as to
costs.

212
BOHOL, Bryan L-170449

Case 83
Clarion Printing House, Inc. and Eulogio Yutingco vs. NLRC and Miclat
GR No. 148372 Date June 27, 2005 Carpio-Morales, J.

Doctrine: Under Sections 5 and 6 of the Presidential Decree No. 902-A, The Securities
Exchange Commission has original and exclusive jurisdiction to hear and decide cases involving
petition of corporations, partnership or associations declared in the state of suspension of
payments in cases where the corporation, partnership, or association possesses sufficient
property to cover all debts but foresees the impossibility of the meeting them when they
respectively fall due or in cases where the corporation, partnership, association has no sufficient
assets to cover its liabilities, but is under the management of a Rehabilitation Receiver of
Management Committee created pursuant to this Decree.

Section 6 of the same Decree provides that in order to effectively exercise, the Commission shall
possess the power to appoint one or more receivers of the property, real and personal, which is
the subject of the action pending before the Commission in accordance with the provisions of the
Rules of Court in such other cases whenever necessary in order to preserve the rights of the
parties-litigants and/or protect the interest of the investing public and creditors: Provided,
however, That the Commission may in appropriate cases, appoint a rehabilitation receiver
of corporations, partnerships or other associations not supervised or regulated by other
government agencies who shall have, in addition to powers of the regular receiver under
the provisions of the Rules of Court, such functions and powers as are provided for in the
succeeding paragraph (d) hereof:

(d) To create and appoint a management committee, board or body upon petition or motu propio
to undertake the management of corporations, partnership or other associations not supervised
or regulated by other government agencies in appropriate cases when there is imminent
danger of dissipation, loss, wastage or destruction of assets or other properties or
paralization of business operations of such corporations or entities which may be
prejudicial to the interest of minority stockholders, parties-litigants of the general public

In this case, the Supreme Court ruled that the SEC, mandated by law to have regulatory
functions over corporations, partnerships or associations, appointed an interim receiver for the
EYCO Group of Companies on its petition in light of, as quoted above, the therein enumerated
"factors beyond the control and anticipation of the management" rendering it unable to meet its
obligation as they fall due, and thus resulting to "complications and problems . . . to arise that
would impair and affect its operations . . ." shows that CLARION, together with the other
member-companies of the EYCO Group of Companies, was suffering business reverses
justifying, among other things, the retrenchment of its employees.

FACTS: The EYCO Group of Companies which the Clarion Printing House, Inc. belonged to, filed
a petition for the declaration of suspension of payment, formation and appointment of
Rehabilitation Receiver/Committee, Approval of Rehabilitation Plan with Alternative Prayer for
Liquidation and Dissolution of the Corporation. EYCO alleged that there were factors beyond the
213
control and anticipation of the management came into play which caught the petitioners flat-footed
such as the real estate market had resulted in a severe slow down in the sales of the properties,
there was inflation and the erratic change in the peso-dollar exchange rate, labor problems that
had precipitated adverse company effect on the media and in the financial circuit, and other related
adverse matters. Therefore, the inability of EYCO Group of Companies to meet the obligations as
they fall due on the schedule agreed with the bank has now become a stark reality. Since the
obligations would not be met within the scheduled due date, complications and problems would
definitely arise that would impair and affect the operations of the entire conglomerate comprising
the EYCO Group of Companies.

For these reasons, the Group of Companies need to partially suspend its operations and cut some
costs thereby resulting in the retrenchment of some employees including private respondent
Miclat. Michelle Miclat was employed by Clarion Printing House, Inc. as a probationary employee
on April 21, 1997 without informing about the standards of probationary work in the company.
Michelle Miclat’s employment was terminated on October 22, 1997, exactly six months after her
hiring. Clarion Printing House, Inc. argued that because of the substantial losses which were
imminent and urgent as evidenced by the petition filed by EYCO Group of Companies, it was
forced to terminate Miclat’s employment.

Michelle Miclat filed a labor case against Clarion Printing House, Inc. for reinstatement and
payment of backwages and benefits. Miclat argued that she was fired and separated from the
company without just and authorized causes and Clarion Printing House, Inc. failed to comply with
the requirement of two notices to the employee and the DOLE for at least 1 month prior the
scheduled termination of employment. Thus, it violated her security of tenure and his right to due
process. The Labor Arbiter ruled in favor of Miclat because Clarion Printing House, Inc. was not
able to factually prove the reasons for Miclat’s retrenchment and it failed to comply with the
mandatory notices. The NLRC affirmed the decision as well the Court of Appeals. Hence, Clarion
Printing House, Inc. filed this petition before the Supreme Court.

ISSUE: Whether or not the Court of Appeals erred when it failed to recognize the petition being
filed by EYCO Group of Companies to which Clarion Printing House, Inc. belonged as a sufficient,
clear, and convincing proof that Clarion Printing House, Inc. had authorized and just causes to
legally dismiss private respondent Miclat.

HELD: Yes. The Court of Appeals failed to appreciate the pieces of factual evidence presented by
Clarion Printing House, Inc.

The SEC has exclusive and original jurisdiction on petitions of corporations, partnership, or
associations declared in the state of suspension of payments in cases where the corporation
possesses sufficient assets to cover all debts but foresees the impossibility of meeting them when
they respectively fall due. In this case, EYCO filed as petition before the SEC was correct also the
appointment of an interim receiver for the EYCO Group of Companies on its petition in light of
factors beyond the control and anticipation of the management rendering its obligation as they fall
due, and thus resulting to complications and problems showed that Clarion Printing House, Inc.,
together with the other member-companies of the EYCO Group of Companies, was suffering
business reverses justifying, among other things, the retrenchment of its employees.

214
In fact, the said petition was disapproved and orders of liquidation and dissolution of EYCO Group
of Companies including Clarion Printing House, Inc. The Supreme Court stated that these facts
were sufficient as authorized and just causes for the dismissal of Miclat to be legal.

Therefore, Miclat was legally dismissed but the Supreme Court ordered Clarion Printing House,
Inc. to pay back wages and benefits of Miclat because the former failed to comply with the notices
of at least 1 month prior to the scheduled termination to the employee and the DOLE.

DISPOSITIVE RULING: WHEREFORE, the Court of Appeals November 24, 2000 Decision,
together with its May 23, 2001 Resolution, is SET ASIDE and another rendered declaring the
legality of the dismissal of respondent, Michelle Miclat. Petitioners are ORDERED, however, to
PAY her the following in accordance with the foregoing discussions:

1. P6,500.00 as nominal damages for non-compliance with statutory due process;

2. P6,500.00 as separation pay; and
3. P3,250.00 as 13th month pay.

Let a copy of this Decision be furnished the SEC Hearing Panel charged with the liquidation and
dissolution of petitioner corporation for inclusion, in the list of claims of its creditors, respondent
Michelle Miclat's claims, to be satisfied in accordance with Article 110 of the Labor Code in relation
to the Civil Code provisions on Concurrence and Preference of Credits.

Costs against petitioners

215
Distura, Quennie Minalete B. L-170503

Case 84
Aguirre II v. FQB+7, Inc
G.R. No. 170770 January 9, 2013 DEL CASTILLO, J.

DOCTRINE: Section 122 of the Corporation Code prohibits a dissolved corporation from
continuing its business, but allows it to continue with a limited personality in order to settle and
close its affairs, including its complete liquidation.

FACTS: Petitioner Vitaliano Aguirre discovered substantive discrepancies in the General

Information Sheet of FQB+7 Inc, a dissolved corporation which include the designation of
Nathaniel Bocobo and Pricila Bocobo as directors and subscribers in place of their deceased
father Francisco Bocobo. The petitioner, who was one of the original subscribers of FQB was also
no longer listed as such. This prompted Vitaliano to ask the "real" Board to rectify what he
perceived as erroneous entries in the GIS, and to allow him to inspect the corporate books and
records. The "real" Board allegedly ignored Vitaliano's request. Hence, he filed a Complaint with
Branch 24 of the RTC of Manila, which was a designated special commercial court.

ISSUE: Whether or not the corporation's dissolution affected the trial court's jurisdiction to hear the
intra-corporate dispute.

HELD: NO. Section 122 of the Corporation Code prohibits a dissolved corporation from continuing
its business, but allows it to continue with a limited personality in order to settle and close its
affairs, including its complete liquidation. The Court fails to find in the prayers any intention to
continue the corporate business of FQB+7. The Complaint does not seek to enter into contracts,
issue new stocks, acquire properties, execute business transactions, etc. Its aim is not to continue
the corporate business, but to determine and vindicate an alleged stockholder's right to the return
of his stockholdings and to participate in the election of directors, and a corporation's right to
remove usurpers and strangers from its affairs. The Court fails to see how the resolution of these
issues can be said to continue the business of FQB+7. To be considered as an intra-corporate
dispute, the case: (a) must arise out of intra-corporate or partnership relations, and (b) the nature
of the question subject of the controversy must be such that it is intrinsically connected with the
regulation of the corporation or the enforcement of the parties' rights and obligations under the
Corporation Code and the internal regulatory rules of the corporation. So long as these two criteria
are satisfied, the dispute is intra-corporate and the RTC, acting as a special commercial court, has
jurisdiction over it.

DISPOSITIVE RULING: WHEREFORE, premises considered, the Petition for Review on Certiorari
is PARTIALLY GRANTED. The assailed June 29, 2005 Decision of the Court of Appeals in
CA-G.R. SP No. 87293, as well as its December 16, 2005 Resolution, are ANNULLED with
respect to their dismissal of SEC Case No. 04-111077 on the ground of lack of jurisdiction. The
said case is ordered REINSTATED before Branch 24 of the Regional Trial Court of Manila. The
rest of the assailed issuances are AFFIRMED.

216
 DOCTOR, Clarisse Maita L-160075

Case 85
Dela Torre vs. Primetown Property Group, Inc.
GR # 221932 Date: February 14, 2018 Ponente: Peralta, J.

Doctrine: Rule 2, Section 1 of the Interim Rules defines a claim as referring to all claims or
demands of whatever nature or character against a debtor or its property, whether for money or
otherwise. The definition is all-encompassing as it refers to all actions whether for money or
otherwise. There are no distinctions or exemptions.

The justification for the suspension of actions or claims, without distinction, pending rehabilitation
proceedings is to enable the management committee or rehabilitation receiver to effectively
exercise its/his powers free from any judicial or extrajudicial interference that might unduly
hinder or prevent the "rescue" of the debtor company. To allow such other actions to continue
would only add to the burden of the management committee or rehabilitation receiver, whose
time, effort and resources would be wasted in defending claims against the corporation instead
of being directed toward its restructuring and rehabilitation.

FACTS: Respondent is primarily engaged in holding, owning and developing real estate in Metro
Manila and later on expanded to Cebu. However, the success of the respondent was arrested and
its shares were brought down by the Asian Financial crisis. As a consequence, the respondent
filed a petition for corporate rehabilitation with prayer for suspension of payments and actions with
the RTC of Makati. On August 15, 2003, the rehabilitation issued a Stay Order.

On October 15, 2004, petitioner Patricia Dela Torre filed a Motion for Leave to Intervene seeking
judicial order for specific performance, i.e., for respondent to execute in her favor a deed of sale
covering a unit in one of respondent’s projects. The RTC ruled in favor of the petitioner and is
therefore entitled to the grant of relief. A motion for reconsideration was filed by respondent
alleging that petitioner is still liable to pay the interest and penalty charges to respondent. The CA
ruled that when the Stay Order was issued, the rehabilitation court is empowered to suspend all
claims against respondent whether monetary or otherwise which includes petitioner's action or
claim to execute a certificate of title in her favor. Moreso, when respondent countered that
petitioner was not entitled to her prayer as she had not yet fully paid the contract price. Petitioner
alleges that her claim against respondent was not suspended with the issuance of the Stay Order.
That claims refer to debts or demands of pecuniary nature or the assertion that money be paid by
the company under rehabilitation to its creditors, but her prayer for the execution of a deed of
absolute sale is not a claim of this character as to be covered and suspended under the Stay
Order.

ISSUE: Whether or not petitioner’s claim against respondent is suspended with the issuance of
Stay Order.

HELD: Yes. The law on rehabilitation and suspension of actions for claims against corporations is
Presidential Decree (PD) 902-A, as amended. Corporate rehabilitation contemplates a
continuance of corporate life and activities in an effort to restore and reinstate the corporation to its
217
former position of successful operation and solvency, the purpose being to enable the company to
gain a new lease on life and allow its creditors to be paid their claims out of its earnings. An
essential function of corporate rehabilitation is the Stay Order which is a mechanism of suspension
of all actions and claims against the distressed corporation upon the due appointment of a
management committee or rehabilitation receiver.

Clearly, while the respondent is undergoing rehabilitation, the enforcement of all claims against it is
stayed. Rule 2, Section 1 of the Interim Rules defines a claim as referring to all claims or demands
of whatever nature or character against a debtor or its property, whether for money or otherwise.
The definition is all-encompassing as it refers to all actions whether for money or otherwise. There
are no distinctions or exemptions.

Petitioner's prayer in intervention for respondent to execute the deed of sale in her favor for the
condominium unit is a claim as defined under the Interim Rules which has already stayed as early
as August 15, 2003. The RTC's Order granting petitioner's intervention and directing respondent to
execute a deed of sale in her favor and to deliver the copy of the owner's duplicate copy of the
condominium certificate, with all the pertinent documents needed to effect registration of the deed
of sale and issuance of a new title in petitioner's name, is a violation of the law.

DISPOSITIVE RULING: WHEREFORE, the petition is DENIED. The Decision dated April 28, 2015
and the Resolution dated November 25, 2015 of the Court of Appeals in CA-G.R. SP No. 125314
are hereby AFFIRMED.

218
ESPENIDA, Mheltina L-1800137

Case 86
Dr. Gil Rich v. Guillermo Paloma III

GR # 210538 March 07, 2018 Reyes, Jr., J.

Doctrine: Once a corporation is dissolved, be it voluntarily or involuntarily, liquidation, which is

the process of settling the affairs of the corporation, will ensue. This consists of (1) collection of
all that is due the corporation, (2) the settlement and adjustment of claims against it, and (3) the
payment of its debts. Section 122 of the Corporation Code, which empowers every corporation
whose corporate existence has been legally terminated to continue as a body corporate for three
years after the time when it would have been dissolved. This continued existence would only be
for the purposes of “prosecuting and defending suits by or against it and enabling it to settle and
close its affairs, to dispose of and convey its property and to distribute its assets.

FACTS: In 1997, Dr. Rich lent one million pesos to his brother, Estanislao. Their agreement was
secured by a real estate mortgage over a parcel of land. When his brother failed to pay, Dr. Rich
foreclosed on the property via a public auction sale conducted in March 2005 by Sheriff Paloma III.
The petitioner was declared the highest bidder and was issued a certificate of sale. However, prior
to foreclosure, January 2005 to be exact, Estanislao entered into a loan agreement with Maasin
Traders Lending Corporation (MTLC) secured by a real estate mortgage over the same property.

Servacio, president of MTLC, exercised equitable redemption after the foreclosure proceedings. In
March 2006, the sheriff issued a Deed of Redemption in favor of MTLC. The deed became the
subject of the complaint for Annulment of Deed of Redemption filed by Dr. Rich against Servacio.
According to petitioner, MTLC no longer has juridical personality to effect the equitable redemption
as it has been already dissolved as early as September 2003.

The RTC rendered a decision in favor of the petitioner. However, the CA ruled otherwise.

ISSUE: Whether or not the redemption of the subject property without its juridical personality by
MTLC makes the legal action void.

HELD: Yes. Once a corporation is dissolved, be it voluntarily or involuntarily, liquidation, which is

the process of settling the affairs of the corporation, will ensue. This consists of (1) collection of all
that is due the corporation, (2) the settlement and adjustment of claims against it, and (3) the
payment of its debts. Section 122 of the Corporation Code, which empowers every corporation
whose corporate existence has been legally terminated to continue as a body corporate for three
years after the time when it would have been dissolved. This continued existence would only be for
the purposes of “prosecuting and defending suits by or against it and enabling it to settle and close
its affairs, to dispose of and convey its property and to distribute its assets. In addition, and as
expressly mentioned by the Corporation Code, this extended authority necessarily excludes the
purpose of continuing the business for which it was established. The reason for this is simple: the
dissolution of the corporation carries with it the termination of the corporation's juridical personality.
Any new business in which the dissolved corporation would engage in, other than those for the
219
purpose of liquidation, "will be a void transaction because of the non-existence of the corporate
party." Two things must be said of the foregoing in relation to the facts of this case. First, if MTLC
entered into the real estate mortgage agreement with Estanislao after its dissolution, then
resultantly, such real estate mortgage agreement would be void ab initio because of the
non-existence of MTLC's juridical personality.

Second, if, however, MTLC entered into the real estate mortgage agreement prior to its
dissolution, then MTLC's redemption of the subject property, even if already after its dissolution (as
long as it would not exceed three years thereafter), would still be valid because of the
liquidation/winding up powers accorded by Section 122 of the Corporation Code to MTLC.

The Court scoured the records, and after a perusal of all the submissions herein and the rulings of
the lower and appellate courts, the Court finds that: (1) MTLC has already been dissolved by the
Securities and Exchange Commission as early as September 2003; (2) Estanislao and MTLC
entered into the real estate mortgage agreement only on January 24, 2005; and (3) MTLC, through
respondent Servacio, redeemed the property on December 15, 2005, for which a Deed of
Redemption was issued by respondent Paloma III on March 15, 2006.

From the foregoing, it is clear that, by the time MTLC executed the real estate mortgage
agreement, its juridical personality had already ceased to exist. The agreement is void as MTLC
could not have been a corporate party to the same.

DISPOSITIVE RULING: WHEREFORE, premises considered, the Decision and Resolution of the
Court of Appeals in CA-G.R. CV No. 02948 dated February 28, 2013 and November 19, 2013,
respectively, are hereby REVERSED and SET ASIDE, and a new one is entered DECLARING the
Real Estate Mortgage executed by Estanislao Rich and MTLC as NULL and VOID, and
ORDERING the City Assessor of Maasin, Southern Leyte to cancel the Deed of Redemption in
favor of MTLC appearing on the Tax Declaration covering the property. SO ORDERED.

220
 HERMOSURA, Nina Alexia C. L-170070

Case # 87

Icon Development Corporation vs. National Life Insurance

GR #: 220686 Date: March 9, 2020 Ponente: Inting, J.

Doctrine: The Insurance Code does not provide that the power of the conservator to preserve
the assets of a distressed company includes the total replacement or substitution of the existing
board of directors and corporate officers to the extent of making them ineffective during
rehabilitation. Conservatorship, being in the nature of a rehabilitation proceeding, signifies a
continuance of corporate life and activities in an effort to restore and reinstate the corporation to
its former position of successful operation and solvency.

A conservator of a distressed corporation does not supplant the board or directors of

management and that during a conservatorship, the board and corporate officers continue to
exercise their powers as such including the collection of debts through foreclosure of the
mortgaged properties.

FACTS: Petitioner Icon Development Corp. acquired loans from Respondent National Life
Insurance Company and as security for the loans, petitioner’s properties were subject to mortgage.
Despite repeated demands, petitioner defaulted in payment of its obligations amounting to P274,
297,565.60 prompting the respondent to file an Extrajudicial Foreclosure of the mortgaged
properties and subjecting it to an auction sale.

In filing a complaint for TRO, petitioner insisted among others that, the respondent is collecting an
exorbitant and unconscionable interest, that the officers who secured the loans had no authority
from the petitioner, and that the respondent National Life Insurance is under conservatorship, thus
the directors who initiated the foreclosure had no authority to do so. The Regional Trial Court
granted the issuance of the TRO. It ruled that the filing of the foreclosure petition by respondent’s
director was invalid as it is under conservatorship.

The Court of Appeals reversed the trial court’s decision and ruled that a conservator of a
distressed corporation does not supplant the board or directors of management and that during a
conservatorship, the board and corporate officers continue to exercise their powers as such
including the collection of debts through foreclosure of the mortgaged properties. Consequently,
the respondent’s board of directors could validly authorize the filing of the foreclosure proceeding.

Petitioner Icon Development Corp. contends that the task of filing an extra judicial foreclosure
during conservatorship belongs to the conservator and not to the board of directors of the
company. Petitioner’s motion for reconsideration filed with the appellate court was denied, hence
the case.
221
ISSUE: Whether or not the directors of a corporation under conservatorship may initiate a petition
for extra judicial foreclosure of mortgaged properties of the company’s debtor even without the
authority of the conservator?

HELD: Yes. The case of Garcia v. NLRC defines Conservatorship as proceedings against a
financially distressed insurance company are resorted to only when such a company is in a state
of continuing inability to maintain a condition of solvency or liquidity deemed adequate to protect
the interest of policyholders and creditors. An insurance company placed under conservatorship is
facing financial difficulties which require the appointment of a conservator to take charge of its
assets, liabilities, and management aimed at preserving its resources and restoring its viability as a
going business enterprise.

As the Insurance Code provides, conservatorship is in a form of a rehabilitation proceeding which

signifies a continuance of corporate life and activities in an effort to restore and reinstate the
corporation to its former position of successful operation and solvency. A conservator may only act
with approval of the Insurance Commissioner with respect to the major aspects of rehabilitation,
but as regards to ordinary details of administration, the conservator has implied authorities by
virtue of its appointment. While it is true that the Code clothes the conservator with vast powers, it
must be related to the preservation of assets of the company. The Insurance Code does not
provide that the power of the conservator to preserve the assets of a distressed company includes
the total replacement or substitution of the existing board of directors and corporate officers to the
extent of making them ineffective during rehabilitation.

DISPOSITIVE RULING: WHEREFORE, the petition is DENIED. The Decisions are dated May 26,
2015 and the Resolution dated August 20, 2015 of the Court of Appeals in CA-G.R SP No. 128708
are AFFIRMED.

222
________________________________

MODULE 7B
Foreign Corporation

________________________________
 JOSON, Richelle Miles B. L-170133

Case # 88
FACILITIES MANAGEMENT VS DELA OSA
GR # L-38649 March 26, 1979 MAKASIAR, J

Doctrine: If a foreign corporation, not engaged in business in the Philippines, is not banned from
seeking redress from courts in the Philippines, a fortiori, that same corporation cannot claim
exemption from being sued in Philippine courts for acts done against a person or persons in the
Philippines.

FACTS: Leonardo dela Osa filed a petition which sought his reinstatement with full backwages,
as well as the recovery of his overtime compensation, swing shift and graveyard shift differentials
before the Court of Industrial Relations. He alleged that he was recruited by Facilities Management
Corporation through its agent in the Philippines, J.V. Catuira and that he was employed by
respondents for various jobs: as a painter, a houseboy and a cashier. Respondents in their letter-
answer interposed as their special defenses that respondents Facilities Management Corporation
and J. S. Dreyer are domiciled in Wake Island which is beyond the territorial jurisdiction of the
Philippine Government and that respondent J. V. Catuira, though an employee of the respondent
corporation presently stationed in Manila, is without power and authority of legal representation.
On the basis of the findings of the Hearing Examiner, the Court of Industrial Relations rendered
judgment in favor of Dela Osa. In its petition for review, petitioner claims that the CIR cannot affirm
a judgment against persons domiciled outside and not doing business in the Philippines.

ISSUE: Whether or not the CIR can affirm a judgment against persons domiciled outside and not
doing business in the Philippines.

HELD: Yes. In the case of Aetna Casualty & Surety Company vs. Pacific Star Lines, The Bradman
Co., Inc., Manila Port Service and/or Manila Railroad Company, Inc., where the main issue
involved in the appeal is whether or not the plaintiff appellant has been doing business in the
Philippines, considering the fact that it has no license to transact business in the Philippines as a
foreign corporation, the Court ruled that:

The object of Sections 68 and 69 of the Corporation Law was not to prevent the foreign
corporation from performing single acts, but to prevent it from acquiring a domicile for the
purpose of business without taking the steps necessary to render it amenable to suit in the
local courts. It was never the purpose of the Legislature to exclude a foreign corporation
which happens to obtain an isolated order for business from the Philippines, from securing
redress in the Philippine courts.

In Mentholatum Co., Inc., et al., vs. Mangaliman, et al., the Court ruled that no general rule
or governing principle can be laid down as to what constitutes 'doing' or 'engaging in' or
'transacting' business. Indeed, each case must be judged in the light of its peculiar
224
 environmental circumstances. The true test, however, seems to be whether the foreign
corporation is continuing the body or substance of the business or enterprise for which it
was organized or whether it has substantially retired from it and turned it over to another.
The term implies a continuity of commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of, the purpose and object of its
organization.

Consequently, since the appellant Aetna Casualty & Surety Company is not engaged in the
business of insurance in the Philippines but is merely collecting a claim assigned to it by the
consignee, it is not barred from filing the instant case although it has not secured a license
to transact insurance business in the Philippines.

Indeed, if a foreign corporation, not engaged in business in the Philippines, is not banned from
seeking redress from courts in the Philippines, a fortiori, that same corporation cannot claim
exemption from being sued in Philippine courts for acts done against a person or persons in the
Philippines.

DISPOSITIVE RULING: WHEREFORE, THE PETITION IS HEREBY DENIED WITH COSTS

AGAINST THE PETITIONERS.

SO ORDERED.

225
LOCQUIAO, Maureen Nicole N. L - 1800303
CASE # 89
THE HOME INSURANCE COMPANY vs. EASTERN SHIPPING LINES
GR # L-34382 July 20, 1983 GUTIERREZ, JR., J

Doctrine: Even when the petitioner had not yet secured the necessary licenses and authority it
has when the insurance contracts which formed the basis of these cases were executed, the
lower court declared that pursuant to the basic public policy reflected in the Corporation Law,
insurance contracts executed before a license was secured must be held null and void.
However, this was cured by the subsequent registration strengthened by the procedural aspects
of these cases.

The objective of the law was to subject the foreign corporation to the jurisdiction of our courts.
The Corporation Law must be given a reasonable, not an unduly harsh, interpretation which
does not hamper the development of trade relations and which fosters friendly commercial
intercourse among countries.

Our jurisprudence leans towards the view that the primary purpose of our statute is to compel a
foreign corporation desiring to do business within the state to submit itself to the jurisdiction of
the courts of this state. It was not intended to exclude foreign corporations from the state and
does not, in terms, render invalid contracts made in this state by non-complying corporations.

FACTS: For the first case, Kajita & Co, on behalf of Atlas Consolidated Mining & Development
Corporation, shipped on board the SS “Eastern Jupiter” from Osaka coils of Black Hot Rolled
Copper Wire Rods. The vessel is owned and operated by defendant Eastern Shipping Lines. The
shipment was insured with the plaintiff against all risks. When discharged from the vessel, 53 of
the coils were in bad order and when the consignee, Phelps Dodge Copper received it, 73 coils
were loose and partly cut, while 28 were entangled. This was automatically considered as scrap.

The plaintiff paid the consignee under its insurance policy for the loss/damage suffered by the
cargo, plaintiff then became subrogated to the rights and actions of the consignee and made
demands for payment against the carrier and the transportation company for reimbursement.

For the second case, Hansa Transport Kontor shipped 30 packages of Service parts of Farm
equipments and implements on board the vessel SS “Neder Rijn” represented in the Philippines by
the defendant Columbian Philippines, Inc. as the carrier and its local agent. This was also insured
with the plaintiff company.

When the packages were discharged from the vessel, seven packages were found to be bad
orders, and 8 packages were then received by the consignee in bad order. The plaintiff paid the
consignee under its insurance policy after which plaintiff became subrogated to the rights and
actions of the consignee.

In both cases, petitioner-appellant averred their capacity to sue contending that they were duly
authorized to do business in the Philippines through their agent, Victor Bello.

226
Respondent-appellee denied plaintiff’s capacity to sue for lack of knowledge or information
sufficient to form a belief as to the truth thereof.

CFI dismissed the complaints in the two cases on the ground that the plaintiff failed to prove its
capacity to sue. Stating that they are of the opinion that Sec. 68 of the Corporation law reflects a
policy designated to protect public interest. Hence, although defendants have not raised the
question of plaintiff’s compliance with that provision of law, the Court resolved to take the matter
into account.
A suing foreign corporation has to plead affirmative and provide either that the transaction upon
which it bases its complaint is an isolated one, or that it is licensed to transact business in the
country, failing to do so, will be deemed that they have no valid cause of action.

ISSUE : Whether or not Home Insurance Company has the legal existence or capacity to sue

HELD: YES.
There is no question that the private respondents should pay the obligations found by the trial
court as owing the petitioner. The petitioner had already secured the necessary license to conduct
its insurance business in the Philippines and could already file suits. They were in fact duly
authorized to do business here in the country through its agent, Mr. Belo.

Even when the petitioner had not yet secured the necessary licenses and authority it has when the
insurance contracts which formed the basis of these cases were executed, the lower court
declared that pursuant to the basic public policy reflected in the Corporation Law, insurance
contracts executed before a license was secured must be held null and void. However, this was
cured by the subsequent registration strengthened by the procedural aspects of these cases.

The objective of the law was to subject the foreign corporation to the jurisdiction of our courts. The
Corporation Law must be given a reasonable, not an unduly harsh, interpretation which does not
hamper the development of trade relations and which fosters friendly commercial intercourse
among countries.

Our jurisprudence leans towards the view that the primary purpose of our statute is to compel a
foreign corporation desiring to do business within the state to submit itself to the jurisdiction of the
courts of this state. It was not intended to exclude foreign corporations from the state and does
not, in terms, render invalid contracts made in this state by non-complying corporations.

There is no question that the contracts are enforceable. The old Section 68 was reworded in Sec.
133 in terms of non-access to courts and administrative agencies in order to maintain or intervene
in any action or proceeding. The prohibition against doing business without first securing a license
is now given penal sanctions which is also applicable to other violations of the Corporation Code. It
is therefore not necessary to declare the contract null and void even as against the erring foreign
corporation.

The penal sanction for violation and denial of access to our courts and administrative bodies are
sufficient from the viewpoint of legislative policy.

227
DISPOSITIVE RULING : Wherefore, the petitions are hereby granted and the decisions of the
respondent court are reversed and set aside. Eastern Shipping LInes and N.V. Nedlloyd Lijen or its
agent Columbian Phil. Inc. were ordered to pay the petitioner. SO ORDERED.

228
LOPEZ, Erica Therese C. L-1800319

Case # 90
THE MENTHOLATUM CO., INC., ET AL. vs. ANACLETO MANGALIMAN, ET AL.
GR # L-47701 June 27, 1941 LAUREL, J

Doctrine: To determine whether the corporation engages in business in the Philippines, it was
held in Traction Cos v. Collectors of Internal Revenue that “the true test, however, seems to be
whether the foreign corporation is continuing the body or substance of the business or enterprise
for which it was organized or whether it has substantially retired from it and turned it over to
another.”

FACTS: Petitioner, Mentholatum Co., Inc, instituted an action with the CFI of Manila for
infringement of trademark and unfair competition against Anacleto and Florencio Mangaliman, and
the Director of the Bureau of Commerce. Petitioner averred that it was a Kansas corporation and
that it manufactures “Mentholatum," a medicament and salve adapted for the treatment of colds,
nasal irritations, chapped skin, insect bites, rectal irritation and other external ailments of the
body”. This was distributed in the Philippines by the Philippine-American Drug Co., Inc. which was
also tasked to protect Mentholatum Co.’s interests.

As its trademark product, petitioner registered with the Bureau of Commerce the word
“mentholatum”. Thereafter, the respondents Mangaliman sold a product called “mentholiman”
which was a salve packaged in a container similar to Mentholatum’s. Because of this, petitioner
suffered damages from the “diminution of their sales and the loss of goodwill and reputation of
their product in the market.”

The CFI, rendered a decision, which among others, prohibited respondents Mangaliman from
selling their product in the form similar to Mentholatum’s.

The CA reversed the CFI’s decision. It averred that Mentholatum Co., Inc. may not maintain the
present suit under Sec. 69 of the Corporation Law.

ISSUE: Whether or not Mentholatum Co, Inc. may maintain the case at bar

HELD: No. Section 69 of Act No. 1459 reads:

SEC. 69. No foreign corporation or corporation formed, organized, or existing under any
laws other than those of the Philippine Islands shall be permitted to transact business in the
Philippine Islands or maintain by itself or assignee any suit for the recovery of any debt,
claim, or demand whatever, unless it shall have the license prescribed in the section
immediately preceding. Any officer, or agent of the corporation or any person transacting
business for any foreign corporation not having the license prescribed shall be punished by
imprisonment for not less than six months nor more than two years or by a fine of not less
than two hundred pesos nor more than one thousand pesos, or by both such imprisonment
and fine, in the discretion of the court.

229
Petitioner is a foreign corporation not licensed to do business in the Philippines. To determine
whether the corporation engages in business in the Philippines, it was held in Traction Cos v.
Collectors of Internal Revenue that “the true test, however, seems to be whether the foreign
corporation is continuing the body or substance of the business or enterprise for which it was
organized or whether it has substantially retired from it and turned it over to another.”

Since Philippine-American Drug Co., Inc., is the exclusive distributing agent in Mentholatum Co.,
Inc., in the sale and distribution of its product known as the Mentholatum." in the Philippines,
whatever transactions that the former did would be considered as if the latter, Mentholatum Co.,
did itself.

However, Mentholatum Co. Inc does not have the license required under Sec. 68 of the
Corporation Law, to do business in the Philippines. As such, it is not allowed to prosecute the
action for violation of trade mark and unfair competition,

DISPOSITIVE RULING: The right of the petitioner conditioned upon compliance with the
requirements of section 69 of the Corporation Law to protect its rights, is hereby reserved.

The writ prayed for should be, as it hereby is, denied, with costs against the petitioners.

So ordered.

230
NARAWI, Merriam Angela C. L-170626

Case 91
ERIKS v. COURT OF APPEALS
GR #11843 February 6, 1997 Panganiban, J.

Doctrine: A foreign corporation without a license is not ipso facto incapacitated from bringing an
action. A license is necessary only if it is "transacting or doing business in the country.”

What is determinative of "doing business" is not really the number or the quantity of the
transactions, but more importantly, the intention of an entity to continue the body of its business in
the country. The number and quantity are merely evidence of such intention.

FACTS: Eriks Pte. Ltd. is a corporation duly organized and existing under the laws of the Republic
of Singapore. It is engaged in the manufacture and sale of elements used in sealing pumps, valves
and pipes for industrial purposes, valves and control equipment used for industrial fluid control and
PVC pipes and fittings for industrial uses.

Delfin Enriquez, Jr., doing business under the name and style of Delrene EB Controls Center
and/or EB Karmine Commercial, ordered and received from Eriks various elements used in sealing
pumps, valves, pipes and control equipment, PVC pipes and fittings. The ordered materials were
delivered via airfreight. The transfers of goods were perfected in Singapore, for Enriquez's
account, F.O.B. Singapore, with a 90-day credit term.

Subsequently, demands were made by Eriks upon Enriquez to settle his account, but the latter
failed/refused to do so. Thus, Eriks filed with the Regional Trial Court of Makati a civil case for the
recovery of the sum of money. Enriquez filed a Motion to Dismiss on the ground that Eriks, a
foreign corporation doing business in the Philippines without a license, has no legal capacity to
sue. The trial court dismissed the action. The appellate court affirmed the order. Eriks now insists
that the series of sales made to Enriquez constitute isolated transactions despite the number of
invoices covering several separate and distinct items sold and shipped over a span of four to five
months.

ISSUE: Whether or not a foreign corporation which sold its products sixteen times over a
five-month period to the same Filipino buyer without first obtaining a license to do business in the
Philippines is prohibited from maintaining an action to collect payment therefor in Philippine courts

HELD: Yes. Section 133 of The Corporation Code provides that no foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be permitted to
maintain or intervene in any action, suit or proceeding in any court or administrative agency of the
Philippines; but such corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine laws. This
provision prohibits, not merely absence of the prescribed license, but it also bars a foreign
corporation "doing business" in the Philippines without such license access to our courts. A foreign
corporation without such license is not ipso facto incapacitated from bringing an action. A license is
necessary only if it is "transacting or doing business in the country.”
231
More than the sheer number of transactions entered into, a clear and unmistakable intention on
the part of Eriks to continue the body of its business in the Philippines is more than apparent. As
alleged in its complaint, it is engaged in the manufacture and sale of elements used in sealing
pumps, valves, and pipes for industrial purposes, valves and control equipment used for industrial
fluid control and PVC pipes and fittings for industrial use. Thus, the sale by Eriks of the items
covered by the receipts, which are part and parcel of its main product line, was actually carried out
in the progressive prosecution of commercial gain and the pursuit of the purpose and object of its
business, pure and simple. Further, its grant and extension of 90-day credit terms to Enriquez for
every purchase made, unarguably shows an intention to continue transacting with Enriquez, since
in the usual course of commercial transactions, credit is extended only to customers in good
standing or to those on whom there is an intention to maintain long-term relationship.

The series of transactions in question could not have been isolated or casual transactions. What is
determinative of "doing business" is not really the number or the quantity of the transactions, but
more importantly, the intention of an entity to continue the body of its business in the country. The
number and quantity are merely evidence of such intention. The phrase "isolated transaction" has
a definite and fixed meaning, i.e. a transaction or series of transactions set apart from the common
business of a foreign enterprise in the sense that there is no intention to engage in a progressive
pursuit of the purpose and object of the business organization. Whether a foreign corporation is
"doing business" does not necessarily depend upon the frequency of its transactions, but more
upon the nature and character of the transactions.

It was never the intent of the legislature to bar court access to a foreign corporation or entity which
happens to obtain an isolated order for business in the Philippines. Neither did it intend to shield
debtors from their legitimate liabilities or obligations. But it cannot allow foreign corporations or
entities which conduct regular business any access to courts without the fulfillment by such
corporations of the necessary requisites to be subjected to our government's regulation and
authority. By securing a license, the foreign entity would be giving assurance that it will abide by
the decisions of our courts, even if adverse to it.

The requirement of a license is not meant to put foreign corporations at a disadvantage. Rather,
the doctrine of lack of capacity to sue is based on considerations of sound public policy. While the
Court agrees with petitioner that the county needs to develop trade relations and foster friendly
commercial relations with other states, we also need to enforce our laws that regulate the conduct
of foreigners who desire to do business here. Such strangers must follow our laws and must
subject themselves to reasonable regulation by our government.

DISPOSITIVE RULING: WHEREFORE, premises considered, the instant petition is hereby

DENIED and the assailed Decision is AFFIRMED. SO ORDERED.

232
OLIS, Roy A.. L-1800113

Case #92
Merrill Lynch Futures, Inc v. CA and Sps. Pedro and Elisa Lara
GR #97816 July 24, 1992 Narvasa,C. J.

Doctrine: The rule is that a party is estopped to challenge the personality of a corporation after
having acknowledged the same by entering into a contract with it; and the doctrine of estoppel to
deny corporate existence applies to foreign as well as to domestic corporations; one who has
dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate
existence and capacity.

FACTS: Merrill Lynch Futures, Inc. (MLFI) is a non-resident foreign corporation, not doing
business in the Philippines, duly organized and existing under and by virtue of the laws of the state
of Delaware, U.S.A, licensed to act as futures commission merchant in the futures markets and
exchanges of the US essentially functioning as a broker to buy and sell futures contract.

In 1983, private respondents spouses Pedro and Elisa Lara entered into a futures contract
agreement with MLFI where MLFI purchased and sold futures contracts in the US on behalf of
spouses Lara. In line with this contract, spouses Lara actively traded in futures contracts from
1983-1987. In three transactions, the spouses Lara suffered a loss amounting to US$160,749.69.
MLFI set off the loss with the amount of US$75,913.42 then owed by MLFI to the Lara Spouses.
After the set off, said spouses became indebted to MLFI for the ensuing balance of US$84,836.27,
which the latter asked them to pay.

Spouses Lara now moves to dismiss the complaint initiated by MLFI claiming that the latter has no
personality to sue because it is a foreign corporation not licensed to do business in the Philippines.

ISSUE: Whether or not Merrill Lynch Futures, Inc. is without personality to sue in Philippines
courts.

HELD: No. Although Section 133 of The Corporation Code provides that no foreign corporation
transacting business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or administrative
agency of the Philippines; but such corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any valid cause of action recognized under
Philippine laws, spouses Lara acknowledged the existence and capacity of MLFI as a corporate
entity when they entered a contract with it. The rule is that a party is estopped to challenge the
personality of a corporation after having acknowledged the same by entering into a contract with it.
And the "doctrine of estoppel to deny corporate existence applies to foreign as well as to domestic
corporations;" "one who has dealt with a corporation of foreign origin as a corporate entity is
estopped to deny its corporate existence and capacity." The principle "will be applied to prevent a
person contracting with a foreign corporation from later taking advantage of its noncompliance with
the statutes, chiefly in cases where such person has received the benefits of the contract, where
such person has acted as agent for the corporation and has violated his fiduciary obligations as

233
such, and where the statute does not provide that the contract shall be void, but merely fixes a
special penalty for violation of the statute.
There would seem to be no question that the Laras received benefits generated by their business
relations with MLFI. Those business relations, according to the Laras themselves, spanned a
period of seven (7) years; and they evidently found those relations to be of such profitability as
warranted their maintaining them for that not insignificant period of time; otherwise, it is reasonably
certain that they would have terminated their dealings with MLFI much, much earlier. In fact, even
as regards their last transaction, in which the Laras allegedly suffered a loss in the sum of
US$160,749.69, the Laras nonetheless still received some monetary advantage, for MLFI credited
them with the amount of US$75,913.42 then due to them, thus reducing their debt to
US$84,836.27. Given these facts, and assuming that the Lara Spouses were aware from the
outset that MLFI had no license to do business in this country, it would appear quite inequitable for
the Laras to evade payment of an otherwise legitimate indebtedness due and owing to MLFI upon
the plea that it should not have done business in this country in the first place, or that its agent in
this country, Merrill Lynch Philippines, Inc., had no license either to operate as a "commodity
and/or financial futures broker."

Considerations of equity dictate that, at the very least, the issue of whether the Laras are in truth
liable to MLFI and if so in what amount, and whether they were so far aware of the absence of the
requisite licenses on the part of MLFI and its Philippine correspondent, MLPI, as to be estopped
from alleging that fact as defense to such liability, should be ventilated and adjudicated on the
merits by the proper trial court.

DISPOSITIVE RULING: WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No.
16478 dated November 27, 1990 and its Resolution of March 7, 1991 are REVERSED and SET
ASIDE, and the Regional Trial Court at Quezon City, Branch 84, is ORDERED to reinstate Civil
Case No. Q-52360 and forthwith conduct a hearing to adjudicate the issues set out in the
preceding paragraph on the merits.

234
PERALTA, ALHEX ADREA M. L-1800280

Case #93
AGILENT TECHNOLOGIES SINGAPORE (PTE) LTD., v. INTEGRATED SILICON TECHNOLOGY PHILIPPINES
CORPORATION, ET AL
GR #154618 April 14, 2004 Ynares-Santiago, J.

Doctrines:

1. As to capacity of foreign corporations to bring suit in Philippine courts:

The principles regarding the right of a foreign corporation to bring suit in Philippine courts may
be condensed in four statements: (1) if a foreign corporation does business in the Philippines
without a license, it cannot sue before the Philippine courts; (2) if a foreign corporation is not
doing business in the Philippines, it needs no license to sue before Philippine courts on an
isolated transaction or on a cause of action entirely independent of any business transaction; (3)
if a foreign corporation does business in the Philippines without a license, a Philippine citizen or
entity which has contracted with said corporation may be estopped from challenging the foreign
corporation’s corporate personality in a suit brought before Philippine courts; and (4) if a foreign
corporation does business in the Philippines with the required license, it can sue before
Philippine courts on any transaction.

2. As to the tests to determine whether or not a foreign corporation can be considered as

"doing business" in the Philippines:

There are two general tests to determine whether or not a foreign corporation can be considered
as "doing business" in the Philippines. The first is the substance test, to wit: The true test for
doing business, however, seems to be whether the foreign corporation is continuing the body of
the business or enterprise for which it was organized or whether it has substantially retired from
it and turned it over to another. The second test is the continuity test, which provides: The term
doing business implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of some of the
functions normally incident to, and in the progressive prosecution of, the purpose and object of
its organization.

FACTS:

Petitioner Agilent Technologies is a foreign corporation not licensed to do business in the

Philippines while respondent Integrated Silicon is a private domestic corporation, 100% foreign
owned, which is engaged in the business of manufacturing and assembling electronics
components. Teoh Kiang Hong, Teoh Kiang Seng and Anthony Choo, Malaysian nationals, are the
current members of Integrated Silicon’s board of directors. Joanne Kate M. dela Cruz, Jean Kay M.
dela Cruz, and Rolando T. Nacilla are its former members.

235
In 1996, a 5-year Value Added Assembly Services Agreement (VAASA) was entered into between
Integrated Silicon and HP-Singapore. VAASA provided that Integrated Silicon was to locally
manufacture and assemble fiber optics for export to HP-Singapore while HP-Singapore was to
consign raw materials, transport machinery and pay to Integrated Silicon the purchase price of the
finished products. In 1999, with the consent of Integrated Silicon, HP-Singapore assigned all its
rights and obligations in the VAASA to Agilent.

Integrated Silicon filed a complaint for specific performance and damages against Agilent and its
officers, alleging that Agilent breached the parties’ oral agreement to extend the VAASA.
Integrated Silicon prayed that the defendant be ordered to execute a written extension of the
VAASA for a period of five years, and to pay actual, moral, exemplary damages and attorney’s
fees. Agilent filed a separate complaint against some of the former members of Integrated Silicon.

The respondents filed a motion to dismiss. One of the grounds relied upon was the lack of
Agilent’s legal capacity to sue it being an unlicensed foreign corporation doing business in the
Philippines. The assailed acts of petitioner Agilent, purportedly in the nature of "doing business" in
the Philippines, are the following: (1) mere entering into the VAASA; (2) appointment of a full-time
representative 3) the appointment of full-time staff members stationed at Integrated Silicon’s
facilities to inspect the finished goods for Agilent; and (4) Agilent’s participation in the
management, supervision and control of Integrated Silicon.

The trial court denied the motion and rendered judgment in favor of Agilent. Respondents filed a
petition for certiorari with the Court of Appeals. Eventually, the Court of Appeals granted
respondents’ certiorari and ordered the dismissal of the case.

ISSUE:

A. Whether or not Agilent can be considered to be “doing business in the Philippines”

B. Whether or not Agilent has the capacity to sue before Philippine courts

HELD:

A. No. The Supreme Court ruled that Agilent cannot be considered to be doing business in the
Philippines.

There is no definitive rule on what constitutes "doing", "engaging in", or "transacting" business in
the Philippines. However, that the term "implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the exercise
of some of the functions normally incident to or in progressive prosecution of the purpose and
subject of its organization."
There are two general tests to determine whether or not a foreign corporation can be considered
as "doing business" in the Philippines.

The first is the substance test, to wit: The true test for doing business, however, seems to be
whether the foreign corporation is continuing the body of the business or enterprise for which it
was organized or whether it has substantially retired from it and turned it over to another.

236
The second test is the continuity test, which provides: The term doing business implies a continuity
of commercial dealings and arrangements, and contemplates, to that extent, the performance of
acts or works or the exercise of some of the functions normally incident to, and in the progressive
prosecution of, the purpose and object of its organization.

The case law definition has evolved into a statutory definition, having been adopted with some
qualifications in various pieces of legislation. The Foreign Investments Act of 1991 (the "FIA";
Republic Act No. 7042, as amended), defines "doing business" as follows: Sec. 3, par. (d). The
phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether
called "liaison" offices or branches; appointing representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the country for a period or periods totaling one
hundred eighty (180) days or more; participating in the management, supervision or control of any
domestic business, firm, entity, or corporation in the Philippines; and any other act or acts that
imply a continuity of commercial dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions normally incident to, and in
the progressive prosecution of, commercial gain or of the purpose and object of the business
organization.

An analysis of the relevant case law, in conjunction with Section 1 of the Implementing Rules and
Regulations of the FIA (as amended by Republic Act No. 8179), would demonstrate that the acts
enumerated in the VAASA do not constitute "doing business" in the Philippines.

Section 1 of the Implementing Rules and Regulations of the FIA (as amended by Republic Act No.
8179) provides that the following shall not be deemed "doing business": (1) Mere investment as a
shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; (2) Having a nominee director or officer to represent its interest
in such corporation; (3) Appointing a representative or distributor domiciled in the Philippines which
transacts business in the representative’s or distributor’s own name and account; (4) The
publication of a general advertisement through any print or broadcast media; (5) Maintaining a
stock of goods in the Philippines solely for the purpose of having the same processed by another
entity in the Philippines; (6) Consignment by a foreign entity of equipment with a local company to
be used in the processing of products for export; (7) Collecting information in the Philippines; and
(8) Performing services auxiliary to an existing isolated contract of sale which are not on a
continuing basis, such as installing in the Philippines machinery it has manufactured or exported to
the Philippines, servicing the same, training domestic workers to operate it, and similar incidental
services.

By and large, to constitute "doing business", the activity to be undertaken in the Philippines is one
that is for profit-making.

By the clear terms of the VAASA, Agilent’s activities in the Philippines were confined to (1)
maintaining a stock of goods in the Philippines solely for the purpose of having the same
processed by Integrated Silicon; and (2) consignment of equipment with Integrated Silicon to be
used in the processing of products for export. Based on the evidence presented, Agilent cannot be
deemed to be "doing business" in the Philippines. Respondents’ contention that Agilent lacks the
legal capacity to file suit is therefore devoid of merit. As a foreign corporation not doing business in
the Philippines, it needed no license before it could sue before our courts.

237
B. Yes. The Supreme court ruled that Agilent has the capacity to sue in Philippine Courts.

A foreign corporation without a license is not ipso facto incapacitated from bringing an action in
Philippine courts. A license is necessary only if a foreign corporation is "transacting" or "doing
business" in the country.

The Corporation Code provides:

Sec. 133. Doing business without a license. — No foreign corporation transacting business
in the Philippines without a license, or its successors or assigns, shall be permitted to
maintain or intervene in any action, suit or proceeding in any court or administrative agency
of the Philippines; but such corporation may be sued or proceeded against before Philippine
courts or administrative tribunals on any valid cause of action recognized under Philippine
laws.

The aforementioned provision prevents an unlicensed foreign corporation "doing business" in the
Philippines from accessing our courts.

Premised on the doctrine of estoppel, an unlicensed foreign corporation doing business in the
Philippines may bring suit in Philippine courts against a Philippine citizen or entity who had
contracted with and benefited from said corporation. A party is estopped from challenging the
personality of a corporation after having acknowledged the same by entering into a contract with it.
The application of this principle prevents a person contracting with a foreign corporation from later
taking advantage of its noncompliance with the statutes chiefly in cases where such person has
received the benefits of the contract.

The principles regarding the right of a foreign corporation to bring suit in Philippine courts may be
condensed in four statements: (1) if a foreign corporation does business in the Philippines without
a license, it cannot sue before the Philippine courts; (2) if a foreign corporation is not doing
business in the Philippines, it needs no license to sue before Philippine courts on an isolated
transaction or on a cause of action entirely independent of any business transaction; (3) if a foreign
corporation does business in the Philippines without a license, a Philippine citizen or entity which
has contracted with said corporation may be estopped from challenging the foreign corporation’s
corporate personality in a suit brought before Philippine courts; and (4) if a foreign corporation
does business in the Philippines with the required license, it can sue before Philippine courts on
any transaction.

DISPOSITIVE RULING: WHEREFORE, PREMISES CONSIDERED, the petition is GRANTED.

The Decision of the Court of Appeals in CA-G.R. SP No. 66574 dated August 12, 2002, which
dismissed Civil Case No. 3123-2001-C, is REVERSED and SET ASIDE. The Order dated
September 4, 2001 issued by the Regional Trial Court of Calamba, Laguna, Branch 92, in Civil
Case No. 3123-2001-C, is REINSTATED. Agilent’s application for a Writ of Replevin is GRANTED.
No pronouncement as to costs.
SO ORDERED.

238
RAGOT, Joanie Mae D. L-170251

Case # 94
Expertravel & Tours Inc. Vs. Court of Appeals and Korean Airlines
GR # 152392 May 26, 2005 Callejo, Sr. J.

Doctrines:

1. Under Section 127, in relation to Section 128 of the Corporation Code, a resident agent
was not specifically authorized to execute a certificate of non-forum shopping. This is
because while a resident agent may be aware of actions filed against his principal (a
foreign corporation doing business in the Philippines), such resident may not be aware of
actions initiated by its principal, whether in the Philippines against a domestic corporation
or private individual, or in the country where such corporation was organized and
registered, against a Philippine registered corporation or a Filipino citizen.

2. Teleconferencing is an interactive group communication (three or more people in two or

more locations) through an electronic medium. It has three basic types: (1) video
conferencing - television-like communication augmented with sound; (2) computer
conferencing - printed communication through keyboard terminals, and (3)
audio-conferencing-verbal communication via the telephone with optional capacity for
telewriting or telecopying.

FACTS:

Korean Airlines (KAL) is a corporation established and registered in the Republic of South Korea
and licensed to do business in the Philippines.  KAL, through Atty. Aguinaldo, filed a Complaint
against ETI with the Regional Trial Court (RTC) of Manila, for the collection of money. The
verification and certification against forum shopping was signed by Atty. Aguinaldo, who indicated
therein that he was the resident agent and legal counsel of KAL and had caused the preparation of
the complaint.

ETI filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo was not authorized
to execute the verification and certificate of non-forum shopping as required by Section 5, Rule 7
of the Rules of Court. KAL opposed the motion, contending that Atty. Aguinaldo was its resident
agent and was registered as such with the Securities and Exchange Commission (SEC) as
required by the Corporation Code of the Philippines. It was further alleged that Atty. Aguinaldo was
also the corporate secretary of KAL. 

During the hearing, Atty. Aguinaldo claimed that he is authorized to file the complaint and execute
the certificate of non-forum shopping through a resolution of the KAL Board of Directors approved
during a special meeting. It was alleged that the special meeting was conducted through
teleconference.

239
The RTC ruled that there was indeed a teleconference conducted in which the resolution was
approved. The CA rendered a judgement ruling that the verification and certificate of non-forum
shopping was sufficient compliance with the Rules of Court.

ISSUES:
1. Whether or not Atty. Aguinaldo is authorized to execute the requisite verification and
certificate of non-forum shopping as the resident agent and counsel of KAL.
2. Whether or not there was a resolution approved by KAL's board through a special
teleconference authorizing Atty. Aguinaldo to file the complaint and execute the certificate of
non-forum shopping.

HELD:
1. No.

It is settled that the requirement to file a certificate of non-forum shopping is mandatory and that
the failure to comply with this requirement cannot be excused.

In a case where the plaintiff is a private corporation, the certification may be signed, for and on
behalf of the said corporation, by a specifically authorized person, including its retained counsel,
who has personal knowledge of the facts required to be established by the documents. 

While a resident agent may be aware of actions filed against his principal (a foreign corporation
doing business in the Philippines), such resident may not be aware of actions initiated by its
principal, whether in the Philippines against a domestic corporation or private individual, or in the
country where such corporation was organized and registered, against a Philippine registered
corporation or a Filipino citizen.

In this case, while Atty. Aguinaldo is the resident agent of the respondent in the Philippines, this
does not mean that he is authorized to execute the requisite certification against forum shopping.
Under Section 127, in relation to Section 128 of the Corporation Code, the authority of the resident
agent of a foreign corporation with license to do business in the Philippines is to receive, for and
on behalf of the foreign corporation, services and other legal processes in all actions and other
legal proceedings against such corporation. Thus, under the law, Atty. Aguinaldo was not
specifically authorized to execute a certificate of non-forum shopping as required by Section 5,
Rule 7 of the Rules of Court. Furthermore, the verification and certificate of non-forum shopping
which was incorporated in the complaint and signed by Atty. Aguinaldo failed to alleged that he is
authorized to execute the certificate of non-forum shopping  by the respondent’s Board of
Directors; moreover, no such board resolution was appended thereto or incorporated therein.

2. No.

In this age of modern technology, the courts may take judicial notice that business transactions
may be made by individuals through teleconferencing. Teleconferencing is an interactive group
communication (three or more people in two or more locations) through an electronic medium. In
general terms, teleconferencing can bring people together under one roof even though they are
separated by hundreds of miles. This type of group communication may be used in a number of
ways, and have three basic types: (1) video conferencing - television-like communication
240
augmented with sound; (2) computer conferencing - printed communication through keyboard
terminals, and (3) audio-conferencing-verbal communication via the telephone with optional
capacity for telewriting or telecopying.

In the Philippines, teleconferencing and videoconferencing of members of board of directors of

private corporations is a reality, in light of Republic Act No. 8792. Thus, the Court agrees with the
RTC that persons in the Philippines may have a teleconference with a group of persons in South
Korea relating to business transactions or corporate governance.

In this case, the respondent, through Atty. Aguinaldo, announced the holding of the teleconference
only during the hearing; Atty. Aguinaldo then prayed for several extensions to submit the board
resolution. However, no such resolution was appended in the certification. Furthermore, the
respondent’s allegation that its board of directors conducted a teleconference and approved the
said resolution (with Atty. Aguinaldo in attendance) is incredible, given the additional fact that no
such allegation was made in the complaint. If the resolution had indeed been approved, long
before the complaint was filed, the respondent should have incorporated it in its complaint, or at
least appended a copy thereof.

DISPOSITIVE RULING: IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The
Decision of the Court of Appeals is REVERSED and SET ASIDE. The Regional Trial Court of
Manila is hereby ORDERED to dismiss, without prejudice, the complaint of the respondent.

241
ROSALES, Mikhaila Klaudine A. L-1800031

Case #95
Cargill, Inc. v. Intra Strata Assurance Corporation
G.R. #168266 March 15, 2010 Carpio, J.

Doctrine: The phrase "doing business" shall include act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate to that extent the performance of acts or
works, or the exercise of some of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object of the business organization.
Activities within Philippine jurisdiction that do not create earnings or profits to the foreign
corporation do not constitute doing business in the Philippines. To constitute "doing business,"
the activity undertaken in the Philippines should involve profit-making.

FACTS: Petitioner Cargill, Inc. is a corporation organized and existing under the laws of Delaware,
USA. Cargill entered into a contract with Northern Mindanao Corporation (NMC), whereby NMC
agreed to sell to petitioner tons of molasses. The contract was amended to require NMC to put up
a performance bond, among others. The performance bond was issued by respondent Intra Strata
Assurance Corporation.

NMC failed to comply with its obligations under the contract. The parties entered into a
compromise agreement, but NMC still failed to deliver. A complaint for a sum of money was filed
by petitioner Cargill against NMC and respondent Intra Strata. The RTC ruled in favor of Cargill,
ordering Intra Strata to solidarily pay Cargill the amount claimed. On appeal, the CA reversed the
decision, ruling that petitioner has no capacity to sue, being a foreign corporation doing business in
the Philippines without the requisite license. Hence, this petition.

ISSUE: Whether or not petitioner, an unlicensed foreign corporation, is considered as a

corporation “doing business in the Philippines,” and therefore has no legal capacity to sue before
Philippine courts

HELD: NO, petitioner Cargill, Inc. is not considered as a corporation doing business in the
Philippines. Under Article 123 of the Corporation Code, a foreign corporation must first obtain a
license and a certificate from the appropriate government agency before it can transact business in
the Philippines. Where a foreign corporation does business in the Philippines without the proper
license, it cannot maintain any action or proceeding before Philippine courts as provided under
Section 133 of the Corporation Code.

The phrase "doing business" shall include act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the performance of acts or works, or the
exercise of some of the functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business organization.

In this case, there is no showing that the transactions between petitioner and NMC signify the
intent of petitioner to establish a continuous business or extend its operations in the Philippines.
Activities within Philippine jurisdiction that do not create earnings or profits to the foreign
242
corporation do not constitute doing business in the Philippines. The contract between petitioner
and NMC involved the purchase of molasses by petitioner from NMC. It was NMC, the domestic
corporation, which derived income from the transaction and not the petitioner. To constitute "doing
business," the activity undertaken in the Philippines should involve profit-making.

Petitioner is a foreign company merely importing molasses from a Philippine exporter. A foreign
company that merely imports goods from a Philippine exporter, without opening an office or
appointing an agent in the Philippines, is not doing business in the Philippines.

DISPOSITIVE RULING: WHEREFORE, we GRANT the petition. We REVERSE the Decision

dated 26 May 2005 of the Court of Appeals in CA-G.R. CV No. 48447. We REINSTATE the
Decision dated 23 November 1994 of the trial court.

243
SY, Katherine Nicole C. L-1800266

Case # 96
Global Business Holdings, Inc. vs. Surecomp Software
GR #173463 October 13, 2010 Nachura, J.

Doctrine: As a general rule, unlicensed foreign non-resident corporations doing business in the
Philippines cannot file suits in the Philippines (Section 133 of the Corporation Code, now Section
150 the the Revised Corporation Code of the Philippines). Nevertheless, the doctrine of estoppel
operates as an exception to this rule. For this reason, a foreign corporation doing business in the
Philippines without license may sue in Philippine courts a Filipino citizen or a Philippine entity that
had contracted with and benefited from it. A party is estopped from challenging the personality of
a corporation after having acknowledged the same by entering into a contract with it.

FACTS: This case stemmed from a software license agreement entered into between respondent
Surecomp Software, B.V. (Surecomp), a foreign corporation duly organized and existing under the
laws of the Netherlands and Asian Bank Corporation (ABC), a domestic corporation, for the use of
respondent’s IMEX Software System (System) in the ABC’s computer system for a period of
twenty (20) years.

Later on, ABC and petitioner Global Business Holdings Inc. (Global) have entered into a merger
with the latter as the surviving corporation. In the light of this, Global informed Surecomp that it
decided to terminate the earlier agreement entered into between Surecomp and ABC and to stop
further payments thereon as it found that the System unworkable for its operations. Consequently,
Surecomp filed a complaint for breach of contract with damages before the Regional Trial Court
(RTC) of Makati stating that notwithstanding the delivery of the product and services provided,
Global failed to comply with its obligations under the agreement despite demands.

Furthermore, Surecomp, in order to support its complaint, alleged that it is a foreign corporation
not doing business in the Philippines and is suing only on an isolated transaction. On the contrary,
Global assailed, through a motion to dismiss, that Surecomp had no capacity to sue because it
was doing business in the Philippines without a license and that the contract entered into was for a
period of 20 years; therefore, it was not an isolated transaction. Furthermore, Global stressed that
it could not be held accountable for any breach as it was not a party in the subject agreement
entered into between Surecomp and ABC since it merely took over the operations of ABC as a
result of merger.

RTC ruled that Global cannot now be made to raise the issue of capacity to sue since there is a
prima facie showing that there is indeed a contract entered into, willingly, between Surecomp and
Global, the latter as successor-in-interest of ABC as a result of the merger. The Court of Appeals
affirmed the decision of RTC. Hence, this petition for review on certiorari under Rule 45 of the
Rules of Court was filed by petitioner Global before the Supreme Court.

ISSUE: Whether or not petitioner Global is barred from questioning Surecomp’s capacity to sue
pursuant to the doctrine of estoppel.

HELD: Yes. The Supreme Court held that Global is estopped from challenging Surecomp’s
capacity to sue. As a general rule, unlicensed foreign non-resident corporations doing business in
244
the Philippines cannot file suits in the Philippines. Section 133 of the Corporation Code (now
Section 150 the the Revised Corporation Code of the Philippines), provides:

Sec. 133. Doing business without a license. - No foreign corporation transacting

business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines, but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.

A corporation has a legal status only within the state or territory in which it was organized. For this
reason, a corporation organized in another country has no personality to file suits in the
Philippines. In order to subject a foreign corporation doing business in the country to the
jurisdiction of our courts, it must acquire a license from the Securities and Exchange Commission
and appoint an agent for service of process. Without such license, it cannot institute a suit in the
Philippines.

Be that as it may, the doctrine of estoppel, as an exception to the general rule, applies in the case
at bar. A foreign corporation doing business in the Philippines without license may sue in Philippine
courts a Filipino citizen or a Philippine entity that had contracted with and benefited from it. A party
is estopped from challenging the personality of a corporation after having acknowledged the same
by entering into a contract with it. The principle is applied to prevent a person contracting with a
foreign corporation from later taking advantage of its noncompliance with the statutes, chiefly in
cases where such person has received the benefits of the contract.

All things considered, the Supreme Court further held that due to Global’s merger with ABC and
because it is the surviving corporation, it is as if it was the one which entered into contract with
Surecomp. In the merger of two existing corporations, one of the corporations survives and
continues the business, while the other is dissolved, and all its rights, properties, and liabilities are
acquired by the surviving corporation. This is particularly true in this case. Based on the findings of
fact of the RTC, as affirmed by the CA, under the terms of the merger or consolidation, Global
assumed all the liabilities and obligations of ABC as if it had incurred such liabilities or obligations
itself. In the same way, Global also has the right to exercise all defenses, rights, privileges, and
counter-claims of every kind and nature which ABC may have or invoke under the law. These
findings of fact were never contested by Global in any of its pleadings filed before this Court.

DISPOSITIVE RULING: WHEREFORE, in view of the foregoing, the Decision dated May 5, 2006
and the Resolution dated July 10, 2006 of the Court of Appeals in CA-G.R. SP No. 75524 are
hereby AFFIRMED. Costs against petitioner.

SO ORDERED.

245
TANGONAN, Aneliza T. L-1800115

Case # 97
Steelcase, Inc. v. Design International Selections, Inc

GR # 171995 April 18, 2012 MENDOZA, J

Doctrine: Sec. 133 of the Corporation Code (now Section 150 of the Revised Corporation
Code). Doing business without a license. - No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be permitted to maintain or
intervene in any action, suit or proceeding in any court or administrative agency of the
Philippines; but such corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine laws.

FACTS: This is a petition for review under Rule 45 of Rules of Court.

Petitioner Steelcase Inc., is a foreign corporation engaged in office furniture manufacture, who
distributes the same worldwide. To distribute in the Philippines, it entered into a dealership
agreement with Respondent Design International Selections, Inc. (DISI) where it had the right to
market, sell, distribute, install, and service its products to end-user customers within the
Philippines. The relationship later on terminated, with DISI having an unpaid account to Steelcase.
To recover the amount, Steelcase sued DISI in the Philippine Courts for a collection of sum of
money with damages. As defense, DISI argues that Steelcase has no capacity to sue in the
Philippines due to lack of license to engage in business in the Philippines, during the time it
engaged business with DISI. Hence, this petition.

ISSUE: Whether or not Steelcase was doing business in the Philippines without a license

HELD: The Court ruled in the negative. Steelcase is an unlicensed foreign corporation not doing
business in the Philippines.

The governing law in this case is Section 133 of the Corporation Code (now Section 150 of the
Revised Corporation Code) which states:

“No foreign corporation transacting business in the Philippines without a license, or its
successors or assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such corporation
may be sued or proceeded against before Philippine courts or administrative tribunals on
any valid cause of action recognized under Philippine laws.”

Also, the phrase "doing business" is clearly defined in Section 3(d) of R.A. No. 7042 (Foreign
Investments Act of 1991), to wit:

(d) The phrase "doing business" shall include soliciting orders, service contracts, opening
offices, whether called "liaison" offices or branches; appointing representatives or distributors

246
domiciled in the Philippines or who in any calendar year stay in the country for a period or periods
totalling one hundred eighty (180) days or more; participating in the management, supervision or
control of any domestic business, firm, entity or corporation in the Philippines; and any other act or
acts that imply a continuity of commercial dealings or arrangements, and contemplate to that
extent the performance of acts or works, or the exercise of some of the functions normally incident
to, and in progressive prosecution of, commercial gain or of the purpose and object of the business
organization: Provided, however, That the phrase "doing business" shall not be deemed to include
mere investment as a shareholder by a foreign entity in domestic corporations duly registered to
do business, and/or the exercise of rights as such investor; nor having a nominee director or officer
to represent its interests in such corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for its own account;
(Emphases supplied)

Additionally, this definition is supplemented by its Implementing Rules and Regulations, Rule
I, Section 1(f) which elaborates on the meaning of the same phrase:

f. "Doing business" shall include soliciting orders, service contracts, opening offices, whether
liaison offices or branches; appointing representatives or distributors, operating under full control of
the foreign corporation, domiciled in the Philippines or who in any calendar year stay in the country
for a period totalling one hundred eighty [180] days or more; participating in the management,
supervision or control of any domestic business, firm, entity or corporation in the Philippines; and
any other act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of some of the
functions normally incident to and in progressive prosecution of commercial gain or of the purpose
and object of the business organization.

On the other hand, Supreme Court held that the following acts shall not be deemed "doing
business" in the Philippines: (a) mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or the exercise of rights as such
investor; (b) having a nominee director or officer to represent its interest in such corporation; (c)
appointing a representative or distributor domiciled in the Philippines which transacts
business in the representative's or distributor's own name and account; (d) the publication of
a general advertisement through any print or broadcast media; (e) maintaining a stock of goods in
the Philippines solely for the purpose of having the same processed by another entity in the
Philippines; (f) consignment by a foreign entity of equipment with a local company to be used in
the processing of products for export; (g) collecting information in the Philippines; and (h)
performing services auxiliary to an existing isolated contract of sale which are not on a continuing
basis, such as installing in the Philippines machinery it has manufactured or exported to the
Philippines, servicing the same, training domestic workers to operate it, and similar incidental
services.
In view of the foregoing, Steelcase is an unlicensed foreign corporation not doing business in
the Philippines.
Based on this list, the Supreme Court said that the appointment of a distributor in the
Philippines is not sufficient to constitute "doing business" unless it is under the full control
of the foreign corporation. If the distributor is an independent entity which buys and distributes
products, other than those of the foreign corporation, for its own name and its own account, the
latter cannot be considered to be doing business in the Philippines.

247
Applying these rules, the Supreme Court said that DISI was founded in 1979 and is independently
owned and managed. In addition to Steelcase products, DISI also distributed products of other
companies including carpet tiles, relocatable walls and theater settings. The dealership agreement
between Steelcase and DISI had been described by the owner himself as a buy and sell
arrangement. This clearly belies DISI’s assertion that it was a mere conduit through which
Steelcase conducted its business in the country. From the preceding facts, the only reasonable
conclusion that can be reached is that DISI was an independent contractor, distributing
various products of Steelcase and of other companies, acting in its own name and for its
own account. As a result, Steelcase cannot be considered to be doing business in the Philippines
by its act of appointing a distributor as it falls under one of the exceptions under R.A. No. 7042.
However, DISI is estopped from challenging Steelcase's capacity to sue.
On this point, the Supreme Court declared that “if indeed Steelcase had been doing business in
the Philippines without a license, DISI would nonetheless be estopped from challenging the
former’s legal capacity to sue xxx A foreign corporation doing business in the Philippines may sue
in Philippine Courts although not authorized to do business here against a Philippine citizen or
entity who had contracted with and benefited by said corporation. To put it in another way, a party
is estopped to challenge the personality of a corporation after having acknowledged the same by
entering into a contract with it. And the doctrine of estoppel to deny corporate existence applies to
a foreign as well as to domestic corporations. One who has dealt with a corporation of foreign
origin as a corporate entity is estopped to deny its corporate existence and capacity.”
Further, although the foreign corporation in this case was declared to be not doing business in the
Philippines, this case, nonetheless, explicitly declares another exception to the rule provided in
Section 133 of the Corporation Code of the Philippines that “[n]o foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be permitted to
maintain or intervene in any action, suit or proceeding in any court or administrative agency of the
Philippines…” Following the ruling in this case, a foreign corporation doing business in the
Philippines without a license may maintain suit in the Philippines against a domestic corporation or
person who is party to a contract as the domestic corporation or person is deemed estopped from
challenging the personality of the foreign corporation.

DISPOSITIVE RULING: WHEREFORE, the March 31, 2005 Decision of the Court of Appeals and
its March 23, 2006 Resolution are hereby REVERSED and SET ASIDE. The dismissal order of the
Regional Trial Court dated November 15, 1999 is hereby set aside. Steelcase’s Amended
Complaint is hereby ordered REINSTATED and the case is REMANDED to the RTC for
appropriate action.

248
Valdez, Frances Loraine T. L-1800027

Case # 98
Air Canada V. Commissioner of Internal Revenue

GR # 169507 January 11, 2016 Leonen, J

Doctrine: An offline international air carrier selling passage tickets in the Philippines, through a
general sales agent, is a resident foreign corporation doing business in the Philippines. As such,
it is taxable under Section 28 (A) (1), and not Section 28 (A) (3) of the 1997 National Internal
Revenue Code, subject to any applicable tax treaty to which the Philippines is a signatory.
Pursuant to Article 8 of the Republic of the Philippines- Canada Tax Treaty, Air Canada may only
be imposed a maximum tax of 1 1/2 % of its gross revenues earned from the sale of its tickets in
the Philippines.

FACTS:
Air Canada engaged the services of Aerotel as its general sales agent in the Philippines. Aerotel
"sells Air Canada's passage documents in the Philippines." For the period ranging from the third
quarter of 2000 to the second quarter of 2002, Air Canada, through Aerotel, filed quarterly and
annual income tax returns and paid the income tax on Gross Philippine Billings. Air Canada filed a
written claim for refund of alleged erroneously paid income taxes before the BIR. It found basis
from the revised definition of Gross Philippine Billings under Section 28 (A) (3) (a) of the 1997
National Internal Revenue Code. To prevent the running of the prescriptive period, Air Canada filed
a Petition for Review before the Court of Tax Appeals.

The Court of Tax Appeals First Division rendered its Decision denying the Petition for Review and,
hence, the claim for refund. It found that Air Canada was engaged in business in the Philippines
through a local agent that sells airline tickets on its behalf. As such, it should be taxed as a
resident foreign corporation at the regular rate of 32%. Further, Air Canada was deemed to have
established a "permanent establishment" in the Philippines under Article V (2) (i) of the Republic of
the Philippines-Canada Tax Treaty by the appointment of the local sales agent, "in which [the]
petitioner uses its premises as an outlet where sales of [airline] tickets are made[.]"

The First Division held that while Air Canada was not liable for tax on its Gross Philippine Billings
under Section 28 (A) (3), it was nevertheless liable to pay the 32% corporate income tax on
income derived from the sale of airline tickets within the Philippines pursuant to Section 28 (A) (1).

ISSUE: Whether or not Air Canada, as an offline international carrier selling passage documents
through a general sales agent in the Philippines, is a resident foreign corporation within the
meaning of Section 28 (A) (1) of the 1997 National Internal Revenue Code

RULING: Yes. Petitioner falls within the definition of resident foreign corporation under Section 28
(A) (1) of the 1997 National Internal Revenue Code, thus, it may be subject to 32% 53 tax on its
taxable income.

249
Commonwealth Act No. 466, known as the National Internal Revenue Code and approved on June
15, 1939, defined "resident foreign corporation" as applying to "a foreign corporation engaged in
trade or business within the Philippines or having an office or place of business therein.

While Section 3 (d) Republic Act No. 7042 or the Foreign Investments Act of 1991states that
"appointing a representative or distributor domiciled in the Philippines which transacts business in
its own name and for its own account" is not considered as "doing business," the Implementing
Rules and Regulations of Republic Act No. 7042 clarifies that "doing business" includes
"appointing representatives or distributors, operating under full control of the foreign corporation,
domiciled in the Philippines or who in any calendar year stay in the country for a period or periods
totaling one hundred eighty (180) days or more[.]"

An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics] Board, but who
maintains office or who has designated or appointed agents or employees in the Philippines, who
sells or offers for sale any air transportation in behalf of said foreign air carrier and/or others, or
negotiate for, or holds itself out by solicitation, advertisement, or otherwise sells, provides,
furnishes, contracts, or arranges for such transportation."

"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil
Aeronautics] Board for such authority." Each offline carrier must file with the Civil Aeronautics
Board a monthly report containing information on the tickets sold, such as the origin and
destination of the passengers, carriers involved, and commissions received.

Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the Philippines.

Aerotel performs acts or works or exercises functions that are incidental and beneficial to the
purpose of the petitioner's business. The activities of Aerotel bring direct receipts or profits to the
petitioner. There is nothing on record to show that Aerotel solicited orders alone and for its own
account and without interference from, let alone direction of, petitioner. On the contrary, Aerotel
cannot "enter into any contract on behalf of [petitioner Air Canada] without the express written
consent of [the latter,]" and it must perform its functions according to the standards required by
petitioner. Through Aerotel, petitioner is able to engage in economic activity in the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an offline
carrier in the Philippines for a period of five years.

Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from
sources within the Philippines. Petitioner's income from sale of airline tickets, through Aerotel, is
income realized from the pursuit of its business activities in the Philippines.

DISPOSITIVE RULING: WHEREFORE, the Petition is DENIED. The Decision dated August 26,
2005 and Resolution dated April 8, 2005 of the Court of Tax Appeals En Banc are AFFIRMED. SO
ORDERED.

250
________________________________

MODULE 9
Securities

________________________________
VALERIO, Allan Nicolai A. L-170387

Case 99
Philippine Stock Exchange vs. Court of Appeals
G.R. No. 125469 October 27, 1997 Torres, Jr., J.

Doctrine: The SEC's power to look into the subject ruling of the PSE, therefore, may be implied
from or be considered as necessary or incidental to the carrying out of the SEC's express power
to insure fair dealing in securities traded upon a stock exchange or to ensure the fair
administration of such exchange. It is, likewise, observed that the principal function of the SEC is
the supervision and control over corporations, partnerships and associations with the end in view
that investment in these entities may be encouraged and protected, and their activities for the
promotion of economic development.

FACTS: The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer
its shares to the public in order to raise funds allegedly to develop its properties and pay its loans
with several banking institutions. PALI was issued a Permit to Sell its shares to the public by the
Securities and Exchange Commission (SEC). To facilitate the trading of its shares among
investors, PALI sought to course the trading of its shares through the Philippine Stock Exchange,
Inc. (PSE), for which purpose it filed with the said stock exchange an application to list its shares,
with supporting documents attached. Before PSE could act upon PALI's application, the Board of
Governors of the PSE received a letter from the heirs of Ferdinand E. Marcos, claiming that the
late President Marcos was the legal and beneficial owner of certain properties forming part of the
Puerto Azul Beach Hotel and Resort Complex which PALI claims to be among its assets and that
the Ternate Development Corporation. In its regular meeting, the Board of Governors of the PSE
reached its decision to reject PALI's application, citing the existence of serious claims, issues and
circumstances surrounding PALI's ownership over its assets that adversely affect the suitability of
listing PALI's shares in the stock exchange.

ISSUE: Whether or not SEC had authority to order the PSE to list the shares of PALI in the stock
exchange

HELD: Yes. The SEC had authority to order the PSE to list the shares of PALI in the stock
exchange.

It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is clothed
with the markings of a corporate entity, it functions as the primary channel through which the
vessels of capital trade ply. The PSE's relevance to the continued operation and filtration of the
securities transactions in the country gives it a distinct color of importance such that government
intervention in its affairs becomes justified, if not necessarily. Indeed, as the only operational stock
exchange in the country today, the PSE enjoys a monopoly of securities transactions, and as such,
it yields an immense influence upon the country's economy. Due to this special nature of stock
exchanges, the country's lawmakers has seen it wise to give special treatment to the

252
administration and regulation of stock exchanges. These provisions, read together with the general
grant of jurisdiction, and right of supervision and control over all corporations under Sec. 3 of P.D.
902-A, give the SEC the special mandate to be vigilant in the supervision of the affairs of stock
exchanges so that the interests of the investing public may be fully safeguard.

The SEC's power to look into the subject ruling of the PSE, therefore, may be implied from or be
considered as necessary or incidental to the carrying out of the SEC's express power to insure fair
dealing in securities traded upon a stock exchange or to ensure the fair administration of such
exchange. It is, likewise, observed that the principal function of the SEC is the supervision and
control over corporations, partnerships and associations with the end in view that investment in
these entities may be encouraged and protected, and their activities for the promotion of economic
development.

The court affirm that the SEC is the entity with the primary say as to whether or not securities,
including shares of stock of a corporation, may be traded or not in the stock exchange. This is in
line with the SEC's mission to ensure proper compliance with the laws, such as the Revised
Securities Act and to regulate the sale and disposition of securities in the country.

This is not to say, however, that the PSE's management prerogatives are under the absolute
control of the SEC. The PSE is, after all, a corporation authorized by its corporate franchise to
engage in its proposed and duly approved business. One of the PSE's main concerns, as such, is
still the generation of profit for its stockholders. Moreover, the PSE has all the rights pertaining to
corporations, including the right to sue and be sued, to hold property in its own name, to enter (or
not to enter) into contracts with third persons, and to perform all other legal acts within its allocated
express or implied powers. Thus, notwithstanding the regulatory power of the SEC over the PSE,
and the resultant authority to reverse the PSE's decision in matters of application for listing in the
market, the SEC may exercise such power only if the PSE's judgment is attended by bad faith.

DISPOSITIVE RULING: ACCORDINGLY, in view of the foregoing considerations, the Court

hereby GRANTS the Petition for Review on Certiorari. The Decisions of the Court of Appeals and
the Securities and Exchange Commission dated July 27, 1996 and April 24, 1996 respectively, are
hereby REVERSED and SET ASIDE, and a new Judgment is hereby ENTERED, affirming the
decision of the Philippine Stock Exchange to deny the application for listing of the private
respondent Puerto Azul Land, Inc.

253
ANDAYA, Clarice J. L-1800012
Case 100
Power Homes Unlimited Corporation vs. SEC
G.R. No. 164182 February 26, 2008 Puno, C.J.

Doctrine: The records reveal that public respondent SEC properly examined petitioner's
business operations when it (1) called into conference three of petitioner's incorporators, (2)
requested information from the incorporators regarding the nature of petitioner's business
operations, (3) asked them to submit documents pertinent thereto, and (4) visited petitioner's
business premises and gathered information thereat.An investment contract is defined in the
Amended Implementing Rules and Regulations of R.A. No. 8799 as a "contract, transaction or
scheme (collectively 'contract') whereby a person invests his money in a common enterprise and
is led to expect profits primarily from the efforts of others."

Our R.A. No. 8799 appears to follow this flexible concept for it defines an investment contract as
a contract, transaction or scheme (collectively "contract") whereby a person invests his money in
a common enterprise and is led to expect profits not solely but primarily from the efforts of others.
Thus, to be a security subject to regulation by the SEC, an investment contract in our jurisdiction
must be proved to be: (1) an investment of money, (2) in a common enterprise, (3) with
expectation of profis, (4) primarily from the efforts of others.

FACTS: Petitioner is a domestic corporation duly registered with public respondent SEC. Its
primary purpose is to engage in the transaction of promoting, acquiring, managing, leasing,
obtaining options on, development, and improvement of real estate properties for subdivision and
allied purposes, and in the purchase, sale and/or exchange of said subdivision and properties
through network marketing.

On October 27, 2000, respondent Noel Manero requested public respondent to investigate
petitioner's business. He claimed that he attended a seminar conducted by petitioner where the
latter claimed to sell properties that were inexistent and without any broker's license. On
November 21, 2000, one Romulo E. Munsayac, Jr. inquired from public respondent SEC whether
petitioner's business involves "legitimate network marketing." On the bases of the letters of
respondent Manero and Munsayac, public respondent SEC held a conference on December 13,
2000 that was attended by petitioner's incorporators John Lim, Paul Nicolas and Leonito Nicolas.

The following day or on December 14, 2000, petitioner submitted to public respondent SEC copies
of its marketing course module and letters of accreditation/authority or confirmation from Crown
Asia, Fil-Estate Network and Pioneer 29 Realty Corporation. On January 26, 2001, public
respondent SEC visited the business premises of petitioner wherein it gathered documents such
as certificates of accreditation to several real estate companies, list of members with web sites,
sample of member mail box, webpages of two (2) members, and lists of Business Center Owners
who are qualified to acquire real estate properties and materials on computer tutorials. On the
same day, after finding petitioner to be engaged in the sale or offer for sale or distribution of
investment contracts, which are considered securities under Sec. 3.1 (b) of Republic Act (R.A.) No.
254
8799 (The Securities Regulation Code), but failed to register them in violation of Sec. 8.1 of the
same Act, public respondent SEC issued a Cease and Desist Order (CDO).

On February 5, 2001, petitioner moved for the lifting of the CDO, which public respondent SEC
denied for lack of merit on February 22, 2001. Aggrieved, petitioner went to the Court of Appeals
imputing grave abuse of discretion amounting to lack or excess of jurisdiction on public respondent
SEC for issuing the order. It also applied for a temporary restraining order, which the appellate
court granted. On July 13, 2001, the appellate court granted petitioner's motion. On August 8,
2001, public respondent SEC moved for reconsideration, which was not resolved by the Court of
Appeals. On July 31, 2003, the Court of Appeals issued its Consolidated Decision denying it for
lack of merit. On June 18, 2004, the Court of Appeals denied petitioner's motion for
reconsideration; hence, this petition for review.

ISSUES:
1. Whether or not public respondent SEC followed due process in the issuance of the assailed
CDO
2. Whether or not petitioner's business constitutes an investment contract which should be
registered with public respondent SEC before its sale or offer for sale or distribution to the
public

HELD:
1. Yes. The Court held that petitioner was not denied due process. The records reveal that
public respondent SEC properly examined petitioner's business operations when it (1)
called into conference three of petitioner's incorporators, (2) requested information from the
incorporators regarding the nature of petitioner's business operations, (3) asked them to
submit documents pertinent thereto, and (4) visited petitioner's business premises and
gathered information thereat. All these were done before the CDO was issued by the public
respondent SEC. Trite to state, a formal trial or hearing is not necessary to comply with the
requirements of due process. Its essence is simply the opportunity to explain one's position.
Public respondent SEC abundantly allowed petitioner to prove its side.

2. Yes. An investment contract is defined in the Amended Implementing Rules and

Regulations of R.A. No. 8799 as a "contract, transaction or scheme (collectively 'contract')
whereby a person invests his money in a common enterprise and is led to expect profits
primarily from the efforts of others." It behooves us to trace the history of the concept of an
investment contract under R.A. No. 8799. Our definition of an investment contract traces its
roots from the 1946 United States (US) case of SEC v. W.J. Howey Co.

Thus, it ruled that the use of the catch-all term "investment contract" indicated a
congressional intent to cover a wide range of investment transactions. It established
a test to determine whether a transaction falls within the scope of an "investment
contract." Known as the Howey Test, it requires a transaction, contract, or scheme
whereby a person (1) makes an investment of money, (2) in a common enterprise,
(3) with the expectation of profits, (4) to be derived solely from the efforts of others.
Although the proponents must establish all four elements, the US Supreme Court
stressed that the Howey Test "embodies a flexible rather than a static principle, one

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 that is capable of adaptation to meet the countless and variable schemes devised by
those who seek the use of the money of others on the promise of profits." Needless
to state, any investment contract covered by the Howey Test must be registered
under the Securities Act, regardless of whether its issuer was engaged in fraudulent
practices.

After Howey came the 1973 US case of SEC v. Glenn W. Turner Enterprises, Inc. et al. In
this case, the 9th Circuit of the US Court of Appeals ruled that the element that profits must
come "solely" from the efforts of others should not be given a strict interpretation. It held that
a literal reading of the requirement "solely" would lead to unrealistic results. It reasoned out
that its flexible reading is in accord with the statutory policy of affording broad protection to
the public. Our R.A. No. 8799 appears to follow this flexible concept for it defines an
investment contract as a contract, transaction or scheme (collectively "contract") whereby a
person invests his money in a common enterprise and is led to expect profits not solely but
primarily from the efforts of others. Thus, to be a security subject to regulation by the SEC,
an investment contract in our jurisdiction must be proved to be: (1) an investment of money,
(2) in a common enterprise, (3) with expectation of profits, (4) primarily from the efforts of
others.

Prescinding from these premises, we affirm the ruling of the public respondent SEC and the
Court of Appeals that the petitioner was engaged in the sale or distribution of an investment
contract. We therefore rule that the business operation or the scheme of petitioner
constitutes an investment contract that is a security under R.A. No. 8799. Thus, it must be
registered with the public respondent SEC before its sale or offer for sale or distribution to
the public. As petitioner failed to register the same, its offering to the public was rightfully
enjoined by public respondent SEC. The CDO was proper even without a finding of fraud.
As an investment contract that is security under R.A. No. 8799, it must be registered with
the public respondent SEC, otherwise the SEC cannot protect the investing public from
fraudulent securities. The strict regulation of securities is founded on the premise that the
capital markets depend on the investing public's level of confidence in the system.

DISPOSITIVE RULING: IN VIEW WHEREOF, the petition is DENIED. The July 31, 2003 Decision
of the Court of Appeals, affirming the January 26, 2001 Cease and Desist Order issued by public
respondent Securities and Exchange Commission against petitioner Power Homes Unlimited
Corporation, and its June 18, 2004 Resolution denying petitioner's Motion for Reconsideration are
AFFIRMED. No costs.

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EUSTAQUIO, Patricia Erika A. L-1800087

Case 101
SEC vs. Santos
G.R. No. 195542 March 19, 2014 Perez, J.

Doctrine: The elements for violation of Section 28 of the Securities Regulation Code: (a)
engaging in the business of buying or selling securities in the Philippines as a broker or dealer; or
(b) acting as a salesman; or (c) acting as an associated person of any broker or dealer, unless
registered as such with the SEC.

FACTS: In 2007, an investment scam was exposed with the disappearance of its primary
perpetrator, Michael H.K. Liew (Liew), a self-styled financial guru and Chairman of the Board of
Directors of Performance Investment Products Corporation (PIPC-BVI), a foreign corporation
registered in the British Virgin Islands. PIPC-BVI incorporated herein as Philippine International
Planning Center Corporation (PIPC Corporation).

Because the head of PIPC Corporation had gone missing and with it the monies and investment of
a significant number of investors, the SEC was flooded with complaints from thirty-one (31)
individuals against PIPC Corporation, its directors, officers, employees, agents and brokers for
alleged violation of certain provisions of the Securities Regulation Code, including Section 28
thereof. Santos was charged in the complaints in her capacity as investment consultant of PIPC
Corporation.

The SEC, through its Compliance and Endorsement Division, filed a complaint-affidavit for
violation of Sections 8, 26, and 28 of the Securities Regulation Code before the Department of
Justice.

Lorenzo and Sy charge Santos in her capacity as investment consultant of PIPC Corporation who
actively engaged in the solicitation and recruitment of investors. Private complainants maintain that
Santos, apart from being PIPC Corporation's employee, acted as PIPC Corporation's agent and
made representations regarding its investment products and that of the supposed global
corporation PIPC-BVI. Facilitating Lorenzo's and Sy's investment with PIPC Corporation, Santos
represented to the two that investing with PIPC Corporation, an affiliate of PIPC-BVI, would be
safe and full-proof.

Santos' defense consisted in: (1) denying participation in the conspiracy and fraud perpetrated
against the investor-complainants of PIPC Corporation, specifically Sy and Lorenzo; (2) claiming
that she was initially and merely an employee of, and subsequently an independent information
provider for, PIPC Corporation; (3) PIPC Corporation being a separate entity from PIPC-BVI of
which Santos has never been a part of in any capacity; (4) her not having received any money
from Sy and Lorenzo, the two having, in actuality, directly invested their money in PIPC-BVI; (5)
Santos having dealt only with Sy and the latter, in fact, deposited money directly into PIPC-BVI's

257
account; and (6) on the whole, PIPC-BVI as the other party in the investment contracts signed by
Sy and Lorenzo, thus the only corporation liable to Sy and Lorenzo and the other complainants.

On 18 April 2008, the DOJ, in I.S. No. 2007-1054, issued a Resolution signed by a panel of three
(3) prosecutors, with recommendation for approval of the Assistant Chief State Prosecutor, and
ultimately approved by Chief State Prosecutor Jovencito R. Zuño, indicting: (a) Liew and
Gonzalez-Tuason for violation of Sections 8 and 26 of the Securities Regulation Code; and (b)
herein respondent Santos, along with Cristina Gonzalez-Tuason and 12 others for violation of
Section 28 of the Securities Regulation Code.

Sec. 8. Requirement of Registration of Securities. — 8.1. Securities shall not be sold or offered for
sale or distribution within the Philippines, without a registration statement duly filed with and
approved by the Commission. Prior to such sale, information on the securities, in such form and
with such substance as the Commission may prescribe, shall be made available to each
prospective purchaser.

Section 8.5 thereof provides that "The Commission may audit the financial statements, assets and
other information of a firm applying for registration of its securities whenever it deems the same
necessary to insure full disclosure or to protect the interest of the investors and the public in
general." It is only the PIPC Corp. and respondents Michael H. Liew and Cristina
Gonzalez-Tuason being the President and the General Manager respectively, of PIPC Corp. who
violated Section 8 of the SRC.

Aside from being officer employees or investors, clearly acted as agents of PIPC Corp. who made
representations regarding PIPC Corp. and PIPC-BVI investment products. They assured their
clients that investing with PIPC-BVI will be 100% guaranteed. In addition, they also facilitated their
clients' investments with PIPC-BVI and some, if not all, even received money investors as
evidenced by the acknowledgement receipts they signed and on behalf of PIPC-BVI.

As to their contention that they are not officers or employees of PIPC Corp., the Supreme Court
ruled that one may be an agent of a domestic corporation although he or she is not an officer
thereto.

Further, they cannot raise the defense of good faith for the simple reason that the SRC is a special
law where criminal intent is not an essential element., mere violation of which is punishable.

The DOJ panel based its finding of probable cause on the collective acts of the majority of the
respondents therein, including herein respondent Santos, which consisted in their acting as
employees-agent and/or investor-agents of PIPC Corporation and/or PIPC-BVI. Specifically
alluding to Santos as Investment Consultant of PIPC Corporation, the DOJ found probable cause
to indict her for violation of Section 28 of the Securities Regulation Code for engaging in the
business of selling or offering for sale securities, on behalf of PIPC Corporation and/or PIPC-BVI
(which were found to be an issuer of securities without the necessary registration from the SEC)
without Santos being registered as a broker, dealer, salesman or an associated person.

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Respondent Santos filed a petition for review before the Office of the Secretary of the DOJ
assailing the Resolutions dated 18 April 2008 and 2 September 2008 and claiming that she was a
mere clerical employee/information provider who never solicited nor recruited investors, in
particular complainants Sy and Lorenzo, for PIPC Corporation or PIPC-BVI. Santos also claimed
dearth of evidence indicating she was a salesman/agent or an associated person of a broker or
dealer, as defined under the Securities Regulation Code.

The Office of the Secretary of the DOJ, through its then Undersecretary Ricardo R. Blancaflor,
issued a Resolution dated 1 October 2009 which excluded respondent Santos from prosecution for
violation of Section 28 of the Securities Regulation Code.

Section 28 of the Securities Regulation Code (SRC) reads:

SEC. [28]. Registration of Brokers, Dealers, Salesmen and Associated Persons.

28.1. No person shall engage in the business of buying or selling securities in the Philippines
as a broker or dealer unless registered as such with the Commission.
28.2. No registered broker or dealer shall employ any salesman or any associated person,
and no issuer shall employ any salesman, who is not registered as such with the
Commission.

The Secretary of the DOJ denied the SEC’s motion for reconsideration. The SEC filed a petition for
certiorari with the CA to annul the 1 October 2009 resolution of the Secretary of the DOJ which
was consequently dismissed as well. Hence, the appeal of the SEC by certiorari to the SC.

ISSUE: Whether or not the Santos' exclusion from the Information for violation of Section 28 of the
Securities Regulation Code was valid

HELD: No. In excluding Santos from the prosecution of the supposed violation of Section 28 of the
Securities Regulation Code, the Secretary of the DOJ, as affirmed by the appellate court,
debunked the DOJ panel's finding that Santos was prima facie liable for either: (1) selling
securities in the Philippines as a broker or dealer, or (2) acting as a salesman, or an associated
person of any broker or dealer on behalf of PIPC Corporation and/or PIPC-BVI without being
registered as such with the SEC.

The Secretary of the DOJ and the appellate court ruled that no evidence was adduced showing
Santos' actual participation in the final sale by PIPC Corporation and/or PIPC-BVI of unregistered
securities since the very affidavits of complainants Lorenzo and Sy proved that Santos had never
signed, neither was she mentioned in, any of the investment documents between Lorenzo and Sy,
on one hand, and PIPC Corporation and/or PIPC-BVI, on the other hand.

As defined in Sec. 3 of the SEC Code:

3.3. "Broker" is a person engaged in the business of buying and selling securities for the account
of others.

3.4. "Dealer" means [any] person who buys [and] sells securities for his/her own account in the
ordinary course of business.

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3.5. "Associated person of a broker or dealer" is an employee thereof whom, directly exercises
control of supervisory authority, but does not include a salesman, or an agent or a person whose
functions are solely clerical or ministerial.

3.13. "Salesman" is a natural person, employed as such [or] as an agent, by a dealer, issuer or
broker to buy and sell securities.

The elements for violation of Section 28 of the Securities Regulation Code: (a) engaging in the
business of buying or selling securities in the Philippines as a broker or dealer; or (b) acting as a
salesman; or (c) acting as an associated person of any broker or dealer, unless registered as such
with the SEC.

There is no quarrel that Santos was in the employ of PIPC Corporation and/or PIPC-BVI, a
corporation which sold or offered for sale unregistered securities in the Philippines. Santos, by the
very nature of her function as what she unaffectedly called an information provider, brought about
the sale of securities made by PIPC Corporation and/or PIPC-BVI to certain individuals,
specifically private complainants Sy and Lorenzo by providing information on the investment
products of PIPC Corporation and/or PIPC-BVI with the end in view of PIPC Corporation closing a
sale.

While Santos was not a signatory to the contracts on Sy's or Lorenzo's investments, Santos
procured the sale of these unregistered securities to the two (2) complainants by providing
information on the investment products being offered for sale by PIPC Corporation and/or
PIPC-BVI and convincing them to invest therein.

It is apparent that Santos connected the probable investors, Sy and Lorenzo, to PIPC Corporation
and/or PIPC-BVI, acting as an ostensible agent of the latter on the viability of PIPC Corporation as
an investment company. At each point of Sy's and Lorenzo's investment, Santos' participation
thereon, even if not shown strictly on paper, was prima facie established.

Santos did not present in evidence her salaries as a supposed "mere clerical employee or
information provider" of PIPC-BVI. Such presentation would have foreclosed all questions on her
status within PIPC Corporation and/or PIPC-BVI at the lowest rung of the ladder who only provided
information and who did not use her discretion in any capacity.

The SC cannot overemphasize that the very information provided by Santos locked the deal on
unregistered securities with Sy and Lorenzo.

From the facts, Sy and Lorenzo did not go directly to Liew or any of PIPC Corporation's and/or
PIPC-BVI's principal office before making their investment or renewing their prior investment.
However, undeniably, Santos actively recruited and referred possible investors to PIPC
Corporation and/or PIPC-BVI and acted as the go-between on behalf of PIPC Corporation and/or
PIPC-BVI.

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The transaction initiated by Santos with Sy and Lorenzo, respectively, is an investment contract or
participation in a profit sharing agreement that falls within the definition of the law. When the
investor is relatively uninformed and turns over his money to others, essentially depending upon
their representations and their honesty and skill in managing it, the transaction generally is
considered to be an investment contract. The touchstone is the presence of an investment in a
common venture premised on a reasonable expectation of profits to be derived from the
entrepreneurial or managerial
efforts of others.

The exculpation of Santos cannot be preliminarily established simply by asserting that she did not
sign the investment contracts, as the facts alleged in this case constitute fraud perpetrated on the
public. Specially so because the absence of Santos' signature in the contract is, likewise,
indicative of a scheme to circumvent and evade liability should the pyramid fall apart.

DISPOSITIVE RULING: WHEREFORE, the petition is GRANTED. The Decision of the Court of
Appeals in CA-G.R. No. SP No. 112781 and the Resolutions of the Department of Justice dated 1
October 2009 and 23 November 2009 are ANNULLED and SET ASIDE. The Resolution of the
Department of Justice dated 18 April 2008 and 2 September 2008 are REINSTATED. The
Department of Justice is directed to include respondent Oudine Santos in the Information for
violation of Section 28 of the Securities and Regulation Code.

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GILO, Crhister Vince J. L-1800085

Case 102
SEC vs. CJH Development Corp.
G.R. No. 210316 28 November 2016 Peralta, J.

Doctrine: Section 8.1 of the SRC states that securities shall not be sold or offered for sale or
distribution within the Philippines without a registration statement duly filed with and approved by
the SEC and that prior to such sale, information on the securities, in such form and with such
substance as the SEC may prescribe, shall be made available to each prospective buyer. The
purpose of this provision is to afford the public protection from investing in worthless securities.

FACTS: Respondent CJHDC is a domestic corporation engaged in the acquisition, development,

sale, lease and management of real estate. CJHDC, together with the Bases Conversion and
Development Authority (BCDA), entered into a Lease Agreement wherein the former will develop
and manage a public tourism complex in a property in John Hay Special Economic Zone in Baguio
City.

Pursuant to its development plan, CJHDC constructed two condotels named “The Manor” and
“The Suites”. The residential units in these condotels were then offered for sale to the general
public by means of two schemes: 1) straight purchase and sale contract, and 2) the sale of the unit
with an added option to avail of a “leaseback” or a “money-back” arrangement. Under the second
option, the buyer pays for the unit and, subsequently, surrenders its possession to the
management of CJHDC or CJHSC which will create a pool of units and offer them for billeting. In
turn, the buyers who chose for the “leaseback” scheme will receive either a proportionate share in
70% of the annual income of the pooled rooms or a guaranteed 8% return on their investment.
Meanwhile, the buyers who opted for the "money-back" arrangement are entitled to a return of the
purchase price they paid for the units by expiration of the Lease Agreement in 2046.

Sometime in May 2010, BCDA and the CJHDC entered into an agreement for the restructuring of
the latter's rental payments which led to the transfer of ownership of, among others, 16 units from
"The Manor'' and 10 units from "The Suites" to the BCDA via dacion en pago. With this, BCDA
learned the "leaseback" or "money-back" schemes in selling the units. Thus, the BCDA requested
the SEC to conduct an investigation into the operations of CJHDC and CJHSC on the belief that
the “leaseback” or “money-back” schemes are investment contracts which are considered as
securities under RA 8799, or the Securities Regulation Code (SRC).

Acting on such request, the Enforcement and Prosecution Department (EPD) of the SEC
conducted its own investigation. The Corporation Finance Department (CFD) of the SEC then
issued a Memorandum indicating its opinion that the “leaseback” arrangements offered by
respondents to the public are investment contracts. This prompted the EPD in filing a Motion for
Issuance of Cease and Desist Order with the SEC En Banc, which was granted. Aggrieved,
respondents filed directly a Petition for Review before the CA assailing the issuance of the Cease
and Desist Order (CDO).
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ISSUE: Whether or not the Petition for Review filed before the Court of Appeals is proper

HELD: No. It is improper for the following reasons:

First, the challenged CDO is an interlocutory order, which refers to something intervening between
the commencement and the end of the suit which decides some point or matter but is not a final
decision of the whole controversy. It is a settled rule in this jurisdiction that an appeal may only be
taken from a judgment or final order that completely disposes of the case and that an interlocutory
order is not appealable.

Here, it is clear from the dispositive portion of the CDO that its issuance is based on the findings of
the SEC that there exists prima facie evidence that respondents are engaged in the business of
selling securities without the proper registration issued by the Commission. It means that the
findings of the SEC can still be refuted and disproved by contrary evidence. This only means that
the CDO is not final, is just provisional, and that the prohibition thereunder is merely temporary. It
is, therefore, clear that the subject CDO, being interlocutory, may not be the subject of an appeal.

Second reason is the respondents' failure to exhaust all administrative remedies available to them.
Under the doctrine of exhaustion of administrative remedies, before a party is allowed to seek the
intervention of the court, he or she should have availed himself or herself of all the means of
administrative processes afforded him or her.

In ruling in favor of the respondents, the CA ruled that the direct recourse of the respondents
before the CA is justified because their case falls within the exception of the doctrine of exhaustion
of administrative remedies in cases when there is a violation of due process, or when the issue
involved is purely a legal question. However, the Supreme Court disagrees and ruled that the issue
as to whether or not the sale of "The Manor" or "The Suites" units to the general public under the
"leaseback" or "money-back" scheme is a form of investment contract or sale of securities, is not a
pure question of law. Further, the Court pointed out that the law is clear that a cease and desist
order may be issued by the SEC motu proprio, it being unnecessary that it results from a verified
complaint from an aggrieved party, and a prior hearing is not required whenever the SEC finds it
appropriate to issue a cease and desist order that aims to curtail fraud or grave or irreparable
injury to investors.

Lastly, the Court emphasized that Section 8.1 of the SRC clearly states that securities shall not be
sold or offered for sale or distribution within the Philippines without a registration statement duly
filed with and approved by the SEC and that prior to such sale, information on the securities, in
such form and with such substance as the SEC may prescribe, shall be made available to each
prospective buyer. The Court agrees with the SEC that the purpose of this provision is to afford the
public protection from investing in worthless securities.

DISPOSITIVE RULING: WHEREFORE, the petition is GRANTED. The Decision of the Court of
Appeals, dated June 7, 2013, and its Resolution dated November 28, 2013, in CA-G.R. SP No.
125482 are REVERSED and SET ASIDE. The Writ of Preliminary Injunction, per CA Resolution
dated November 8, 2012, which was made permanent by its June 7, 2013 Decision, is hereby

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LIFTED. SEC-CDO Case No. 05-12-006 and the June 7, 2012 Cease and Desist Order of the
Securities and Exchange Commission are REINSTATED.

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KHO, Ricardo T. L-1800006

Case 103
SEC vs. Interport Services
G.R. No. 135808 October 6, 2008 Chico-Nazario, J.

Doctrine: In regard to the absence of the IRR:

The mere absence of implementing rules cannot effectively invalidate provisions of law, where a
reasonable construction that will support the law may be given.

In regard to insider trading:

The term "insiders" now includes persons whose relationship or former relationship to the issuer
gives or gave them access to a fact of special significance about the issuer or the security that is
not generally available, and one who learns such a fact from an insider knowing that the person
from whom he learns the fact is such an insider.

FACTS: The Board of Directors of Interport Resources Corporation (IRC) approved a

Memorandum of Agreement with Ganda Holdings Berhad (GHB).

IRC alleged that oit sent a press release announcing the approval of the agreement through
facsimile transmission but the facsimile machine of the SEC could not receive it. Upon the advice
of the SEC, the IRC sent the press release on the next day.

The SEC received reports of IRC’s failure to make timely public disclosures of its negotiations with
GHB and that some of its directors heavily traded IRC shares utilizing this material insider
information. The SEC Chairman required IRC to submit to the SEC a copy of its agreement with
GHB and to appear to explain IRC's failure to immediately disclose the information as required by
the Rules on Disclosure of Material Facts. IRC complied with the SEC Chairman’s directive.

The SEC Chairman found that IRC violated the Rules on Disclosure of Material Facts when it
failed to make timely disclosure of its negotiations with GHB. In addition, the SEC pronounced that
some of the officers and directors of IRC entered into transactions involving IRC shares in violation
of Section 30, in relation to Section 36, of the Revised Securities Act.

IRC filed an Omnibus Motion. SEC issued an order creating a special investigating panel to hear
and decide the instant case in accordance with the Rules of Practice and Procedure Before the
Prosecution and Enforcement Department (PED), among others.

IRC filed a petition before the Court of Appeals (CA) questioning the Omnibus Orders, specifically
the creation of the investigation panel, with a Supplemental Motion for the issuance of a writ of
preliminary injunction enjoining the SEC from conducting its investigation. The CA granted the
motion. SEC filed a Motion for Leave to Quash SEC Omnibus Orders but the CA stated that there

265
were no implementing rules and regulations (IRR) regarding disclosure, insider trading, or any of
the provisions the RSA which the IRC allegedly violated, among others. Hence, the present case.

ISSUE: Whether or not Sections 8, 30 and 36 of the RSA are not binding and legal for the fact that
no IRR was issued in regard to these provisions

HELD: No. Sections 8, 30 and 36 of the SRA are binding and legal even if there are no IRRs for it.

The Supreme Court stated that in the absence of any constitutional or statutory infirmity, which
may concern Sections 30 and 36 of the Revised Securities Act, the Court upheld the provisions as
legal and binding. It is well settled that every law has in its favor the presumption of validity. Unless
and until a specific provision of the law is declared invalid and unconstitutional, the same is valid
and binding for all intents and purposes. The mere absence of implementing rules cannot
effectively invalidate provisions of law, where a reasonable construction that will support the law
may be given.

Sec. 30 of the RSA provides that:

Sec. 30. Insider's duty to disclose when trading. - (a) It shall be unlawful for an insider to sell
or buy a security of the issuer, if he knows a fact of special significance with respect to the
issuer or the security that is not generally available, unless (1) the insider proves that the
fact is generally available or (2) if the other party to the transaction (or his agent) is
identified, (a) the insider proves that the other party knows it, or (b) that other party in fact
knows it from the insider or otherwise.

(b) "Insider" means (1) the issuer, (2) a director or officer of, or a person controlling,
controlled by, or under common control with, the issuer, (3) a person whose relationship or
former relationship to the issuer gives or gave him access to a fact of special significance
about the issuer or the security that is not generally available, or (4) a person who learns
such a fact from any of the foregoing insiders as defined in this subsection, with knowledge
that the person from whom he learns the fact is such an insider.

(c) A fact is "of special significance" if (a) in addition to being material it would be likely, on
being made generally available, to affect the market price of a security to a significant
extent, or (b) a reasonable person would consider it especially important under the
circumstances in determining his course of action in the light of such factors as the degree
of its specificity, the extent of its difference from information generally available previously,
and its nature and reliability.

(d) This section shall apply to an insider as defined in subsection (b) (3) hereof only to the
extent that he knows of a fact of special significance by virtue of his being an insider.

The court ruled that the term "insiders" now includes persons whose relationship or former
relationship to the issuer gives or gave them access to a fact of special significance about the
issuer or the security that is not generally available, and one who learns such a fact from an insider
knowing that the person from whom he learns the fact is such an insider. Insiders have the duty to

266
disclose material facts which are known to them by virtue of their position but which are not known
to persons with whom they deal and which, if known, would affect their investment judgment. In
some cases, however, there may be valid corporate reasons for the nondisclosure of material
information. Where such reasons exist, an issuer's decision not to make any public disclosures is
not ordinarily considered as a violation of insider trading. At the same time, the undisclosed
information should not be improperly used for non-corporate purposes, particularly to disadvantage
other persons with whom an insider might transact, and therefore the insider must abstain from
entering into transactions involving such securities.

Here, the IRC further argued that some of the terms of Sec. 30 must be defined. The summary of
the discussion of the Court on these terms are as follows:

"material fact,"- a fact is material if it induces or tends to induce or otherwise affect the sale or
purchase of its securities.

"reasonable person," - it is the same standard used on most of the legal doctrines. Such as those
“reasonable man” in regard to torts, warrant of arrest and buyer in a sale.

"nature and reliability" - the "nature and reliability" of a significant fact in determining the course of
action a reasonable person takes regarding securities must be clearly viewed in connection with
the particular circumstances of a case.

"generally available." - Sec. 30 of RSA provides a defense for insiders which is that the insider has
possession of information that is "generally available" to the public. Whether information is
generally available to the public is a matter which may be adjudged given the particular
circumstances of the case.

NOTE: The Court did not rule upon whether there was insider trading on the part of IRC because
the investigation of the SEC, which was enjoined by the orders of the CA, has not yet concluded.

DISPOSITIVE RULING: IN VIEW OF THE FOREGOING, the instant Petition is GRANTED. This
Court hereby REVERSES the assailed Decision of the Court of Appeals promulgated on 20
August 1998 in CA-G.R. SP No. 37036 and LIFTS the permanent injunction issued pursuant
thereto. This Court further DECLARES that the investigation of the respondents for violations of
Sections 8, 30 and 36 of the Revised Securities Act may be undertaken by the proper authorities in
accordance with the Securities Regulations Code. No costs.

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VILLENA, Isabelle Gloria I. L-1800005

Case 104
Cemco Holdings vs. National Life
G.R. No. 171815 August 7, 2007 Chico-Nazario, J.

Doctrine: A tender offer is an offer by the acquiring person to stockholders of a public company
for them to tender their shares therein on the terms specified in the offer. A public company is
defined as a corporation which is listed on an exchange, or a corporation with assets exceeding
P50,000,000.00 and with 200 or more stockholders, at least 200 of them holding not less than
100 shares of such company.

The purpose of the tender offer rule is to protect minority shareholders against any scheme that
dilutes the share value of their investments. It gives the minority shareholders the chance to exit
the company under reasonable terms, giving them the opportunity to sell their shares at the same
price as those of the majority shareholders.

The mandatory tender offer rule covers not only direct acquisition but also indirect acquisition or
"any type of acquisition".

FACTS: Majority of UCC’s (a publicly-listed company) stocks were owned by UCHC (a non-listed
company) with 60.51%, and petitioner Cemco Holdings, Inc. (Cemco) with 17.03%. Meanwhile,
majority of UCHC's stocks were owned by BCI with 21.31% and ACC with 29.69%. Cemco owned
9% of UCHC stocks.

BCI informed the Philippine Stock Exchange (PSE) that BCI and ACC passed resolutions to sell
their stocks in UCHC to Cemco. In a PSE Circular for Brokers, PSE stated that as a result of the
acquisition, Cemco’s total beneficial ownership, direct and indirect, in UCC has increased by 36%
and amounted to at least 53% of the shares of UCC.

In a letter to the SEC, the PSE inquired as to whether the tender offer rule under Rule 19 of the
Implementing Rules of the Securities Regulation Code is applicable to the purchase. In a letter,
Director Callangan of the SEC’s Corporate Finance Department responded to the query that while
it was the stance of the department that the tender offer rule was not applicable, the matter must
still have to be confirmed by the SEC en banc. In another letter from Director Callangan, she
confirmed that the SEC en banc had resolved that the Cemco transaction was not covered by the
tender offer rule.

The Share Purchase Agreement was executed.

Respondent National Life Insurance Company of the Philippines, Inc. (National Life) filed a
complaint with the SEC to declare the purchase agreement void and that the mandatory tender
offer rule be applied to its shares in UCC. In their comments, Cemco, UCC, UCHC, BCI and ACC
argued that the tender offer rule applied only to a direct acquisition of the shares of the listed

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company and did not extend to an indirect acquisition arising from the purchase of the shares of a
holding company of the listed firm.
The SEC ruled in favor of National Life and directed Cemco to make a tender offer for UCC shares
to respondent and other holders of UCC shares similar to the class held by UCHC in accordance
with Section 9 (E), Rule 19 of the Securities Regulation Code.

Cemco filed a petition with the CA. The CA affirmed the SEC ruling.

ISSUES:
1. Whether or not the SEC has jurisdiction over National Life’s complaint and to require
Cemco to make a tender offer for National Life's shares in UCC
2. Whether or not the rule on mandatory tender offer applies to the indirect acquisition of
shares in a listed company: in this case, the indirect acquisition by Cemco of 36% of UCC, a
publicly-listed company, through its purchase of the shares in UCHC, a non-listed company
3. Whether or not the questioned ruling of the SEC can be applied retroactively to Cemco's
transaction which was consummated under the authority of the SEC's prior resolution

HELD:
1. Yes. The SEC has jurisdiction over respondent's complaint and to require Cemco to make a
tender offer for respondent's UCC shares.

The SEC was acting pursuant to Rule 19 (13) of the Amended IRR of the Securities
Regulation Code which states that “If there shall be violation of this Rule … the
Commission, upon complaint, may nullify the said acquisition and direct the holding of a
tender offer.” This rule emanates from the SEC's power and authority to regulate,
investigate or supervise the activities of persons to ensure compliance with the Securities
Regulation Code.

Moreover, Cemco is barred from questioning the jurisdiction of the SEC. Cemco had
participated in all the proceedings before the SEC and had prayed for affirmative relief.
Cemco did not question the jurisdiction of the SEC when it rendered an opinion favorable to
it, such as the 27 July 2004 Resolution, where the SEC opined that the Cemco transaction
was not covered by the mandatory tender offer rule.

2. Yes. The rule on mandatory tender offer applies to the indirect acquisition of shares in a
listed company: in this case, the indirect acquisition by Cemco of 36% of UCC, a
publicly-listed company, through its purchase of the shares in UCHC, a non-listed company

A tender offer is an offer by the acquiring person to stockholders of a public company for
them to tender their shares therein on the terms specified in the offer. A public company is
defined as a corporation which is listed on an exchange, or a corporation with assets
exceeding P50,000,000.00 and with 200 or more stockholders, at least 200 of them holding
not less than 100 shares of such company.

The purpose of tender offer is to protect minority shareholders against any scheme that
dilutes the share value of their investments. It gives the minority shareholders the chance to

269
 exit the company under reasonable terms, giving them the opportunity to sell their shares at
the same price as those of the majority shareholders.

The mandatory tender offer rule covers not only direct acquisition but also indirect
acquisition or "any type of acquisition". This is clear from the discussions of the Bicameral
Conference Committee on the Securities Act of 2000, on 17 July 2000. The legislative intent
of Section 19 of the Code is to regulate activities relating to acquisition of control of the
listed company and for the purpose of protecting the minority stockholders of a listed
corporation. Whatever may be the method by which control of a public company is obtained,
either through the direct purchase of its stocks or through an indirect means, mandatory
tender offer applies.

3. The action of the SEC on the PSE request for opinion on the Cemco transaction cannot be
construed as passing merits or giving approval to the questioned transaction.

The letter dated of the SEC was nothing but an approval of the draft letter prepared by
Director Callanga. There was no public hearing where interested parties could have been
heard. Hence, it was not issued upon a definite and concrete controversy affecting the legal
relations of parties thereby making it a judgment conclusive on all the parties. Said letter
was merely advisory. Jurisprudence has it that an advisory opinion of an agency may be
stricken down if it deviates from the provision of the statute.

DISPOSITIVE RULING: WHEREFORE, the Decision and Resolution of the Court of Appeals
dated 24 October 2005 and 6 March 2006, respectively, affirming the Decision dated 14 February
2005 of the Securities and Exchange Commission En Banc, are hereby AFFIRMED. Costs against
petitioner.

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TANGONAN, Aneliza T. L-1800115

Case 105
Abacus Securities vs. Ampil
G.R. No. 160016 February 27, 2006 Panganiban, C.J.

Doctrine: Mandatory Close-out Rule (Obligation of Brokers)

The law places the burden of compliance with margin requirements primarily upon the brokers
and dealers. Sections 23 and 25 and Rule 25-1, otherwise known as the "mandatory close-out
rule," clearly vest upon Abacus the obligation, not just the right, to cancel or otherwise liquidate a
customer's order, if payment is not received within three days from the date of purchase.

The word "shall" as opposed to the word "may," is imperative and operates to impose a duty,
which may be legally enforced. For transactions subsequent to an unpaid order, the broker
should require its customer to deposit funds into the account sufficient to cover each purchase
transaction prior to its execution. These duties are imposed upon the broker to ensure faithful
compliance with the margin requirements of the law, which forbids a broker from extending undue
credit to a customer.

The nature of the stock brokerage business enables brokers, not the clients, to verify, at any time,
the status of the client's account. Brokers, therefore, are in the superior position to prevent the
unlawful extension of credit. Because of this awareness, the law imposes upon them the primary
obligation to enforce the margin requirements.

FACTS: This is a petition for review under Rule 45 of Rules of Court.

Petitioner Abacus Security Corporation is engaged as a broker and dealer of securities of listed
companies at the Philippine Stock Exchange Center. Meanwhile, on April 8, 1997, Ruben Ampil,
the respondent opened a cash or regular account with petitioner Abacus for th purpose of buying
and selling securities. The consequence of Ampil’s trading activities, he accumulated an
outstanding obligation in favor of Abacus in the principal sum of Php 6,617,035.22 as of April 30,
1997.

Subsequently, respondent Ampil consistently failed to settle his obligations with Abacus from April
10 to 30, 1997, and the latter is forced to sell Ampil’s securities to be applied to his unpaid
account. Later on, a balance of Php 3, 364,313.56 remained unpaid. As a result, petitioner Abacus
referred to its legal counsel for collection.

Respondent Ampil averred that he was induced to trade by petitioner Abacus because the latter
allowed offset settlements wherein he is not obliged to pay the purchase price. Rather, it waits for
the customer to sell. And if there is loss, petitioner Abacus only requires the payment of the
deficiency (i.e., the difference between the higher buying price and the lower selling price). On the

271
other side if the customer sells and there is a profit, Abacus deducts the purchase price and
delivers only the surplus upon charging its commission.

The RTC Makati ruled that Abacus violated Section 2/3 and 25 of the Revised Securities Act
(RSA) and Rule 25-1 of the RSA Rules. Petitioner Abacus allowed respondent Ampil to continue
trading securities despite the failure of the latter to pay his outstanding obligations. Further, the trial
court also found that respondent Ampil to be equally at fault by incurring excessive credits and
waiting to see how his investments turned out before deciding to invoke the RSA. As a
consequence, the RTC concluded that the parties were in pari delicto and therefore without
recourse against each other.

However, petitioner Abacus contended that the trial court is wanting of jurisdiction to determine the
violations of the RSA. The CA affirmed the jurisdiction of the RTC and its application of the rule of
pari delicto.

ISSUE: Whether or not the petitioner and respondent are in pari delicto which allegedly bars any
recovery

HELD: The Court ruled that petitioner and respondent are in pari delicto, however, petitioner
Abacus is not barred from recovering the unsettled obligations of respondent Ampil.

The provisions governing the above transactions are Section 23 and 25 of the RSA16 and the
Rule 25-1 of the RSA Rules, which state as follows.

"SEC. 23. Margin Requirements. –

xxxxxxxxx

(b) It shall be unlawful for any member of an exchange or any broker or dealer, directly or
indirectly, to extend or maintain credit or arrange for the extension or maintenance of credit to or
for any customer –

(1) On any security other than an exempted security, in contravention of the rules and regulations
which the Commission shall prescribe under subsection (a) of this Section;

(2) Without collateral or on any collateral other than securities, except (i) to maintain a credit
initially extended in conformity with the rules and regulations of the Commission and (ii) in cases
where the extension or maintenance of credit is not for the purpose of purchasing or carrying
securities or of evading or circumventing the provisions of subparagraph (1) of this subsection.

x x x x x x x x x"

"SEC. 25. Enforcement of margin requirements and restrictions on borrowings. – To prevent

indirect violations of the margin requirements under Section 23 hereof, the broker or dealer shall
require the customer in non-margin transactions to pay the price of the security purchased for his
account within such period as the Commission may prescribe, which shall in no case exceed three
trading days; otherwise, the broker shall sell the security purchased starting on the next trading
day but not beyond ten trading days following the last day for the customer to pay such purchase

272
price, unless such sale cannot be effected within said period for justifiable reasons. The sale shall
be without prejudice to the right of the broker or dealer to recover any deficiency from the
customer. x x x."

"RSA RULE 25-1

"Purchases and Sales in Cash Account

"(a) Purchases by a customer in a cash account shall be paid in full within three (3) business days
after the trade date.

"(b) If full payment is not received within the required time period, the broker or dealer shall cancel
or otherwise liquidate the transaction, or the unsettled portion thereof, starting on the next
business day but not beyond ten (10) business days following the last day for the customer to pay,
unless such sale cannot be effected within said period for justifiable reasons.

"(c) If a transaction is cancelled or otherwise liquidated as a result of non-payment by the

customer, prior to any subsequent purchase during the next ninety (90) days, the customer shall
be required to deposit sufficient funds in the account to cover each purchase transaction prior to
execution.

xxxxxxxxx

"(f) Written application for an extension of the period of time required for payment under paragraph
(a) be made by the broker or dealer to the Philippine Stock Exchange, in the case of a member of
the Exchange, or to the Commission, in the case of a non-member of the Exchange. Applications
for the extension must be based upon exceptional circumstances and must be filed and acted
upon before the expiration of the original payment period or the expiration of any subsequent
extension."

In this case, Section 23(b) is the alleged violation of petitioner. it is unlawful for a broker to extend
or maintain credit on any securities other than in conformity with the rules and regulations issued
by Securities and Exchange Commission (SEC). Also, Section 25 lays down the rules to prevent
indirect violations of Section 23 by brokers or dealers and RSA Rule 25-1 prescribes in detail the
regulations governing cash accounts.

Moreover, the main purpose of the above statute on margin requirements is to regulate the
volume of credit flow,by way of speculative transactions, into the securities market and redirect
resources into more productive uses. Further, other purposes are: (1) to give a [g]government
credit agency an effective method of reducing the aggregate amount of the nation’s credit
resources which can be directed by speculation into the stock market and out of other more
desirable uses of commerce and industry x x x; (2) A related purpose of the governmental
regulation of margins is the stabilization of the economy; (3) Restrictions on margin percentages
are imposed "in order to achieve the objectives of the government with due regard for the
promotion of the economy and prevention of the use of excessive credit. Otherwise stated, the
margin requirements set out in the RSA are primarily intended to achieve a macroeconomic
purpose- the protection of the overall economy from excessive speculation in securities.
Also, their recognized secondary purpose is to protect small investors.

273
The law places the burden of compliance with margin requirements primarily upon the
brokers and dealers. Sections 23 and 25 and Rule 25-1, otherwise known as the "mandatory
close-out rule," clearly vest upon Abacus the obligation, not just the right, to cancel or
otherwise liquidate a customer's order, if payment is not received within three days from
the date of purchase. The word "shall" as opposed to the word "may," is imperative and operates
to impose a duty, which may be legally enforced. For transactions subsequent to an unpaid order,
the broker should require its customer to deposit funds into the account sufficient to cover each
purchase transaction prior to its execution. These duties are imposed upon the broker to ensure
faithful compliance with the margin requirements of the law, which forbids a broker from extending
undue credit to a customer.

It will be noted that trading on credit (or "margin trading") allows investors to buy more
securities than their cash position would normally allow. Investors pay only a portion of the
purchase price of the securities; their broker advances for them the balance of the purchase price
and keeps the securities as collateral for the advance or loan. Brokers take these securities/stocks
to their bank and borrow the "balance" on it, since they have to pay in full for the traded stock.
Hence, increasing margins is the most direct and effective method of discouraging an abnormal
attraction of funds into the stock market and achieving a more balanced use of such resources.

The nature of the stock brokerage business enables brokers, not the clients, to verify, at
any time, the status of the client's account. Brokers, therefore, are in the superior position
to prevent the unlawful extension of credit. Because of this awareness, the law imposes
upon them the primary obligation to enforce the margin requirements.

Right is one thing; obligation is quite another. A right may not be exercised; it may even be waived.
An obligation, however, must be performed; those who do not discharge it prudently must
necessarily face the consequence of their dereliction or omission.

Nonetheless, these margin requirements are applicable only to transactions entered into by the
present parties subsequent to the initial trades of April 10 and 11, 1997. Thus, we hold that
petitioner can still collect from respondent to the extent of the difference between the latter's
outstanding obligation as of April 11, 1997 less the proceeds from the mandatory sell out of the
shares pursuant to the RSA Rules. Petitioner's right to collect is justified under the general law on
obligations and contracts (Art. 1236) Since a brokerage relationship is essentially a contract for the
employment of an agent, principles of contract law also govern the broker-principal relationship.
The right to collect cannot be denied to petitioner as the initial transactions were entered pursuant
to the instructions of respondent. The obligation of respondent for stock transactions made and
entered into on April 10 and 11, 1997 remains outstanding. These transactions were valid and the
obligations incurred by respondent concerning his stock purchases on these dates subsist. At that
time, there was no violation of the RSA yet. Petitioner's fault arose only when it failed to: (1)
liquidate the transactions on the fourth day following the stock purchases, or on April 14 and 15,
1997; and (2) complete its liquidation no later than ten days thereafter, applying the proceeds
thereof as payment for respondent's outstanding obligation.

Elucidating further, since the buyer was not able to pay for the transactions that took place on April
10 and 11, that is at T+4, the broker was duty-bound to advance the payment to the settlement
banks without prejudice to the right of the broker to collect later from the client. In securities
trading, the brokers are essentially the counterparties to the stock transactions at the Exchange.
274
Since the principals of the broker are generally undisclosed, the broker is personally liable for the
contracts thus made. Hence, petitioner had to advance the payments for respondent's trades.
Brokers have a right to be reimbursed for sums advanced by them with the express or implied
authorization of the principal, in this case, respondent.

It should be clear that Congress imposed the margin requirements to protect the general
economy, not to give the customer a free ride at the expense of the broker. Not to require
respondent to pay for his April 10 and 11 trades would put a premium on his circumvention
of the laws and would enable him to enrich himself unjustly at the expense of petitioner.

In the present case, petitioner obviously failed to enforce the terms and conditions of its
Agreement with respondent, specifically paragraph 8 thereof, purportedly acting on the plea of
respondent to give him time to raise funds therefor. These stipulations, in relation to paragraph 4,
constituted faithful compliance with the RSA. By failing to ensure respondent's payment of his first
purchase transaction within the period prescribed by law, thereby allowing him to make
subsequent purchases, petitioner effectively converted respondent's cash account into a credit
account. However, extension or maintenance of credits on non-margin transactions, are
specifically prohibited under Section 23(b). Thus, petitioner was remiss in its duty and cannot be
said to have come to court with "clean hands" insofar as it intended to collect on transactions
subsequent to the initial trades of April 10 and 11, 1997.

On the other hand, we find respondent equally guilty in entering into the transactions in
violation of the RSA and RSA Rules. Clearly, he is not an unsophisticated, small investor merely
prodded by petitioner to speculate on the market with the possibility of large profits with low — or
no — capital outlay, as he pictures himself to be. Rather, he is an experienced and knowledgeable
trader who is well versed in the securities market and who made his own investment decisions.

We note that it was respondent who repeatedly asked for some time to pay his obligations for his
stock transactions. Petitioner acceded to his requests. It is only when sued upon his indebtedness
that respondent raised as a defense the invalidity of the transactions due to alleged violations of
the RSA. It was respondent's privilege to gamble or speculate, as he apparently did so by asking
for extensions of time and refraining from giving orders to his broker to sell, in the hope that the
prices would rise. Sustaining his argument now would amount to relieving him of the risk and
consequences of his own speculation and saddling them on the petitioner after the result was
known to be unfavorable. Such contention finds no legal or even moral justification and must
necessarily be overruled. Respondent's conduct is precisely the behavior of an investor deplored
by the law.

In the final analysis, both parties acted in violation of the law and did not come to court with
clean hands with regard to transactions subsequent to the initial trades made on April 10
and 11, 1997. Thus, the peculiar facts of the present case bar the application of the pari delicto
rule — expressed in the maxims "Ex dolo malo non oritur action" and "In pari delicto potior est
conditio defendentis" — to all the transactions entered into by the parties. The pari delicto rule
refuses legal remedy to either party to an illegal agreement and leaves them where they were. In
this case, the pari delicto rule applies only to transactions entered into after the initial trades made
on April 10 and 11, 1997.

275
Since the initial trades are valid and subsisting obligations, respondent is liable for them.
Justice and good conscience require all persons to satisfy their debts. Ours are courts of
both law and equity; they compel fair dealing; they do not abet clever attempts to escape just
obligations. Ineludibly, this Court would not hesitate to grant relief in accordance with good faith
and conscience.

Pursuant to RSA Rule 25-1, petitioner should have liquidated the transaction (sold the stocks) on
the fourth day following the transaction (T+4) and completed its liquidation not later than ten days
following the last day for the customer to pay (effectively T+14). Respondent's outstanding
obligation is therefore to be determined by using the closing prices of the stocks purchased at
T+14 as basis.

DISPOSITIVE RULING: WHEREFORE, the assailed Decision and Resolution of the Court of
Appeals are hereby MODIFIED. Respondent is ordered to pay petitioner the difference between
the former's outstanding obligation as of April 11, 1997 less the proceeds from the mandatory sell
out of shares pursuant to the RSA Rules, with interest thereon at the legal rate until fully paid.

276
NARAWI, Merriam Angela C. L-170626

Case 106
SEC vs. Subic Bay Golf and Country Club
G.R. No. 179047 March 11, 2015 Leonen, J.

Doctrine: Intra-corporate controversies, previously under the SEC's jurisdiction, are now under
the jurisdiction of Regional Trial Courts designated as commercial courts. However, the transfer
of jurisdiction to the trial courts does not oust the SEC of its jurisdiction to determine if
administrative rules and regulations were violated.

The SEC’s regulatory power does not include the authority to order the refund of the purchase
price of Villareal's and Filart's shares in the golf club. The issue of refund is intra-corporate or civil
in nature. Similar to issues such as the existence or inexistence of appraisal rights, pre-emptive
rights, and the right to inspect books and corporate records, the issue of refund is an
intra-corporate dispute that requires the court to determine and adjudicate the parties' rights
based on law or contract. Injuries, rights, and obligations involved in intra-corporate disputes are
specific to the parties involved. They do not affect the SEC or the public directly.

FACTS: SBGCCI and UIGDC entered into a Development Agreement. UIGDC agreed to finance,
construct and develop a golf course, for and in consideration of the payment by SBGCCI of its
1,530 (SBGCCI) shares of stock. Upon SBGCCI's application, the SEC issued an Order for the
Registration of 3,000 no par value shares of SBGCCI. SBGCCI was issued a Certificate of Permit
to Offer Securities for Sale to the Public of its 1,530 no par value proprietary shares. The shares
were sold. SBGCCI would use the proceeds of the sale of securities to pay UIGDC for the
development of the golf course.

Complainants Filart and Villareal informed the SEC that they had been asking UIGDC for the
refund of their payment for their SBGCCI shares, but UIGDC did not act on their requests. They
alleged that they purchased the shares based on the promise of SBGCCI and UIGDC to deliver an
18-hole golf course that would meet the highest USGA and PGA standards, a 9-hole executive
course which would be completely illuminated to allow members to play after dark, etc. However,
their promises were not delivered. They also claimed that despite SBGCCI's and UIGDC's failure
to deliver the promised amenities, complainants were charged with monthly dues. They also never
received any billing statement until they were sent a demand notice to pay the alleged back dues.

SBGCCI and UIGDC averred that they had already substantially complied with their commitment
to provide the members a world-class golf and country club. The construction of the golf course
substantially met international standards. Other proposed project developments such as the
construction of villas and residential condominium-hotels were not included in the rights purchased
with member shares.

The SEC’s Corporation Finance Department conducted an ocular inspection of the project. Based
on the Memorandum Report, SBGCCI and UIGDC failed to comply substantially with their

277
commitment to complete the project. The Corporation Finance Department ordered the return of
the purchase price of shares pursuant to Rule 14 of the Implementing Rules and Regulations of
the Securities Regulation Code. It explained that the non-completion of the golf course constituted
a material amendment in the prospectus. The prospectus had become misleading, tending to work
a fraud. This gave the purchasers the right to a refund of their contributions.

SBGCCI and UIGDC assailed the Corporation Finance Department's and the Securities and
Exchange Commission's authority to order a refund of investments. They also assailed its
jurisdiction over the case, which according to SBGCCI and UIGDC involved an intra-corporate
dispute.

ISSUES:
1. Whether or not SEC has the authority to order a refund of investments in a case involving
intra-corporate disputes
2. Whether or not a complaint with allegations that are intra-corporate in nature ousts the SEC
of its regulatory and administrative jurisdiction to determine and act if there were
administrative violations committed

HELD:

1. No. Under Presidential Decree No. 902-A, the SEC has jurisdiction over acts amounting to
fraud and misrepresentation by a corporation's board of directors, business associates, and
officers. It also provides that it has jurisdiction over intra-corporate disputes. However,
jurisdiction over intra-corporate disputes and all other cases enumerated in Section 5 of
Presidential Decree No. 902-A had already been transferred to designated Regional Trial
Courts. Hence, actions pertaining to intra-corporate disputes should be filed directly before
designated Regional Trial Courts. Intra-corporate disputes brought before other courts or
tribunals are dismissible for lack of jurisdiction.

Villareal and Filart's right to a refund of the value of their shares was based on SBGCCI and
UIGDC's alleged failure to abide by their representations in their prospectus. Specifically,
Villareal and Filart alleged in their letter-complaint that the world-class golf course that was
promised to them when they purchased shares did not materialize. This is an
intra-corporate matter that is under the designated Regional Trial Court's jurisdiction. It
involves the determination of a shareholder's rights under the Corporation Code or other
intra-corporate rules when the corporation or association fails to fulfill its obligations.

2. No. Even though the Complaint filed before the SEC contains allegations that are
intra-corporate in nature, it does not necessarily oust the SEC of its regulatory and
administrative jurisdiction to determine and act if there were administrative violations
committed.

When Villareal and Filart alleged in their letter-complaint that SBGCCI and UIGDC
committed misrepresentations in the sale of their shares, nothing prevented the Securities
and Exchange Commission from taking cognizance of it to determine if SBGCCI and
UIGDC committed administrative violations and were liable under the Securities Regulation
Code. The SEC may investigate activities of corporations under its jurisdiction to ensure
compliance with the law. However, the SEC’s regulatory power does not include the
278
 authority to order the refund of the purchase price of Villareal's and Filart's shares in the golf
club. The issue of refund is intra-corporate or civil in nature. Similar to issues such as the
existence or inexistence of appraisal rights, pre-emptive rights, and the right to inspect
books and corporate records, the issue of refund is an intra-corporate dispute that requires
the court to determine and adjudicate the parties' rights based on law or contract. Injuries,
rights, and obligations involved in intra-corporate disputes are specific to the parties
involved. They do not affect the SEC or the public directly.

DISPOSITIVE RULING: WHEREFORE, the Court of Appeals Decision dated July 31, 2007 is
AFFIRMED. SO ORDERED.

279
ROSALES, Mikhaila Klaudine A. L-1800031

Case 107
Palanca vs. RSI
G.R. No. 241905 March 11, 2020 Reyes, A., Jr., J.

Doctrine: Requests for Assistance to the PSE for the furnishing of copies of certain documents
cannot be considered complaints under Article II of the CMIC Rules but as mere requests for
production of records under the last paragraph of Article IX, Section 1 of the same Rules. The
CMIC Rules did not intend to make such requests subject to prescription, as they are simple
administrative requests.

The SEC has the power to order RSI to produce the requested records.

FACTS: Respondent RCBC Securities, Inc. (RSI) is a Philippine corporation engaged in the
business of securities brokerage and trading. Among its clients are petitioners Palanca and
Cognatio Holdings, Inc. RSI discovered that one of its sales agents was involved in questionable
securities trading transactions. As a consequence, the Market Regulation Department of the
Philippine Stock Exchange (PSE-MRD) imposed a penalty on RSI for violation of securities laws
and rules relative to the transactions involving its sales agent. Among those clients defrauded by
Valbuena were petitioners, whose claim was rejected as baseless by RSI.

Petitioners filed cases for separate performance against RSI with the RTC. Meanwhile, petitioners
sent Requests for Assistance to the PSE, seeking the latter’s assistance to direct RSI to furnish
them with copies of certain documents. These requests were referred to CMIC. RSI opposed the
requests on the ground of prescription, arguing that they were actually written complaints which
should have been filed within the 6-month reglementary period. RSI further argued that the
requests constitute deliberate forum shopping in lieu of the specific performance cases before the
RTC.

The CMIC ruled in favor of RSI and denied petitioners’ requests for assistance. The SEC reversed
the CMIC and directed RSI to produce the documents sought, holding that requests are plain
requests meant to access records and are not covered by the prescriptive period. On appeal, the
CA ruled in favor of RSI. Hence, this petition.

ISSUES:
1. Whether or not the Requests are in the nature of written complaints, and are therefore filed
beyond the applicable prescriptive period
2. Whether or not the filing of the requests was barred by res judicata
3. Whether or not petitioners committed deliberate forum-shopping

280
HELD:
1. No. The Requests are not in the nature of written complaints and are not subject to
prescription.

The Requests filed by petitioners are exactly that: mere requests for the production of
documents. They are simply requests for PSE to exercise its powers as an SRO to compel
RSI to furnish petitioners with copies of documents related to their trading account. The
PSE and the CMIC are not being requested to conduct any further action on the matter
other than the relief sought. As such, the Requests cannot be considered complaints under
Article II of the CMIC Rules but as mere requests for production of records under the last
paragraph of Article IX, Section 1 of the same Rules. the CMIC Rules did not intend to
make such requests subject to prescription, as they are simple administrative requests. As
a client of a stock brokerage firm with a legally recognized contractual relationship, it is
undeniable that petitioners are "legally entitled or authorized" to access their trading records
with RSI.

Furthermore, even assuming arguendo that there is no independent proceeding for

requesting records under the CMIC Rules, it is undeniable that the SEC has the power to
order RSI to produce the requested records. Thus, the SEC did not exceed its jurisdiction
when it ordered RSI to release the records requested by petitioners, as it was well within its
powers under the SRC to do so.

2. No. The filing of the Requests was not barred by res judicata.

Here, the ultimate act which gave rise to both the PSE-MRD case and the Requests is the
series of questionable transactions committed by Valbuena, the sales agent. On one hand,
the PSE-MRD decision concerns RSI's administrative liability for violation of securities rules
in general, without reference to any particular stock brokerage contract. On the other hand,
the subject matter of the Requests filed by petitioners is the trading record pertinent to the
particular stock brokerage contracts existing between petitioners and RSI. The Requests do
not seek a declaration of liability or an imposition of any penalty whatsoever on RSI. Rather,
they are mere requests for the production of documents which RSI is obliged to produce
under the CMIC Rules and the law governing its relationship with petitioners. It is therefore
clear that the RTC cases do not constitute res judicata as against the Requests.

3. No. The petitioners did not commit forum-shopping.

The PSE-MRD decision and the Requests filed by petitioners have different subject matters
and pertain to different liabilities of RSI. While it is indeed true that the PSE-MRD ruling and
the Requests originate from the same incident involving the questionable trades made by
Valbuena, the two cases pertain to different liabilities created thereby. The PSE-MRD
decision pertains solely to RSI's administrative liability as a member of a self-regulatory
organization, while the Requests pertain to RSI's duty to release trading records to its
clients.

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DISPOSITIVE RULING: WHEREFORE, premises considered, the petition is hereby GRANTED.
The Decision dated October 27, 2017 and the Resolution dated September 5, 2018 of the Court of
Appeals in CA-G.R. SP No. 148920 are hereby REVERSED and SET ASIDE. The Decision dated
December 6, 2016 of the Securities and Exchange Commission in SEC En Banc Case No.
07-15-379 is hereby REINSTATED.

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