Commercial Law Cases (Catindig's Outline

8/15/2019 Commercial Law Cases (Catindig's Outline

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T H E C O R P O R A T I O N C O D E

LOZANO VS ANDAG.R. No. 125221 June 19, 1997

T HE JURISDICTION OF THE S ECURITIES AND E XCHANGE

COMMISSION (SEC) IS SET FORTH IN S ECTION 5 OF P RESIDENTIAL

DECREE N O. 902-A. S ECTION 5 READS AS FOLLOWS :• Sec. 5. . . . [T]he Securities and Exchange Commission

[has] ori ginal an d exclusive jurisdiction to hear a nd decidecases involving:

o (a) Devices or s chemes employed by or any acts ofthe board of directors, bu siness associates, itsofficers or partners, amounting to fraud and

misrepresentation which m ay be detrimental to theinterest of t he public and/or of t he stockholders,

partners, members of associations or organizationsregistered w ith the Commission .

o (b) Controversies arising out of i ntra-corporate orpartnership relations, between and amongstockholders, members or associ ates; between anyor all of them and the corporation, partnership orassociation of which they are stockholders,

members, or associ ates, respectively; and betweensuch corporation, partnership or association andthe state insofar as it concerns their individualfranchise o r ri ght t o exist as such entity.

o (c) Controversies in the election or appointmentof directors, trustees, officers or m anagers of suchcorporations, partnerships or a ssociations.

o (d) Petitions of corporations, partnerships or

associations to be declared in the state of

suspension of payments in cases where thecorporation, partnership or associationpossesses sufficient property to cover all itsdebts but foresees the impossibility of meeting

them when they respectively fall due or incases where the corporation, partnership orassociation has no sufficient assets to over itsliabilities, but is under the management of aRehabilitation Receiver or Management Committeecreated pursuant to this Decree.

THIS JURISDICTION IS DETERMINED BY ACONCURRENCE OF TWO ELEMENTS:(1) The status o r relationship of t he p arties; and(2) The nature of the question that is the subject of t heircontroversy.

• The rst element requires that the controversy mustarise 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 associ ation of which they are st ockholders,

members or associ ates, respectively; and• Between such corporation, partnership or association and

the State in so far as it concerns their individualfranchises.

• The second element requires that the dispute among the

parties be intrinsically connected with the regulation

of the corporation, partnership or a ssociation or d eal w iththe internal affairs of the corporation, partnership orassociation.

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• The principal function of the SEC is the supervision andcontrol of corporations, partnership and associations withthe end in view that investments in these entities may beencouraged and protected.

T HERE IS NO INTRA -CORPORATE NOR PARTNERSHIP RELATION

BETWEEN PETITIONER AND PRIVATE RESPONDENT :• The controversy between them arose out of their plan to

consolidate t heir respective jeepney drivers' and operators'associations into a single common association.

• This unied association was, however, still a proposal.• It had not been approved by the SEC, neither had its

officers and members submitted their articles ofconsolidation is accorda nce with Sections 78 and 79 of theCorporation Code.

CONSOLIDATION BECOMES EFFECTIVE NOT UPON MERE AGREEMENT

OF THE MEMBERS BUT ONLY UPON ISSUANCE OF THE CERTIFICATE

OF CONSOLIDATION BY THE SEC: When the SEC, upon processing and examining the

articles of con solidation, i s satised that th e consolidationof the corporations is n ot inconsistent with the provisionsof the Corporation Code and existing laws, it issues acerticate of consolidation which makes the reorganization

official. The new consolidated corporation comes into existence

and the constituent corporations dissolve and cease toexist.

Corporation by estoppel is founded on principles of equityand is designed to prevent injustice and unfairness:

• It applies when persons assu me to form a corporation andexercise corporate functions and enter into businessrelations w ith third p erson.

• Where there is no third person involved and the conictarises only among those assuming the form of acorporation, who therefore know that it has not beenregistered, there i s n o corporation by estoppel.

LIBAN VS GORDONG. R. No. 175352, January 18, 2011

THE OFFICE OF THE C HAIRMAN OF THE P HILIPPINE N ATIONALRED C ROSS IS NOT A GOVERNMENT OFFICE OR AN OFFICE IN AGOVERNMENT -OWNED OR CONTROLLED CORPORATION FOR

PURPOSES OF THE PROHIBITION IN S ECTION 13, A RTICLE VI OF THE 1987 C ONSTITUTION .

• Respondent did not forfeit his seat i n the Senate when heaccepted the chairmanship of the PNRC Board ofGovernors, as "the office of the PNRC Chairman is not agovernment office or an office in a government-owned orcontrolled corporation for purposes of the prohibition inSection 13, Article VI of the 1987 Constitution." 5

• The PNRC Charter IS VOID "insofar as it creates the PNRCas a private corp oration" and consequently ru led that "the

PNRC should incorporate under the Corporation Code andregister with the Securities an d Exchange Commission if it

wants to be a private corporation."

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GAMBOA VS TEVESG.R. No. 176579, October 9, 2012

THE GRANDFATHER RULE MUST BE APPLIED TO ACCURATELY DETERMINE THE ACTUAL PARTICIPATION,

BOTH DIRECT AND INDIRECT, OF FOREIGNERS IN ACORPORATION ENGAGED IN A NATIONALIZED ACTIVITYOR BUSINESS :• Compliance with the constitutional limitation(s) on

engaging in nationalized activities m ust be d etermined byascertaining if 60% of the investing corporation’soutstanding capital st ock is owned by "Filipino citizens",or a s i nterpreted, by n atural or i ndividual Fi lipino citizens.

• If such investing corporation is in turn owned to someextent by another investing corporation, the sa me processmust be observed.

• One must not stop until the citizenships of t he individualor natural st ockholders of layer after layer of investingcorporations have been established, the very essence ofthe Grandfather Rule.

It was the intent of the framers of the 1987 Constitutionto adopt the Grandfather Rule:• Base of the equity requirement: on the subscribed capital

stock, because u nless d eclared d elinquent, unpaid capitalstock shall be e ntitled to vote.

T HE 60-40 OWNERSHIP REQUIREMENT IN FAVOR OF F ILIPINOCITIZENS IN THE C ONSTITUTION TO ENGAGE IN CERTAIN ECONOMIC

ACTIVITIES APPLIES NOT ONLY TO VOTING CONTROL OF THECORPORATION , BUT ALSO TO THE BENEFICIAL OWNERSHIP OF THECORPORATION .

MERE LEGAL TITLE IS INSUFFICIENT TO MEET THE 60 PERCENTFILIPINO -OWNED " CAPITAL " REQUIRED IN THE C ONSTITUTION . F ULLBENEFICIAL OWNERSHIP OF 60 PERCENT OF THE OUTSTANDINGCAPITAL STOCK , COUPLED WITH 60 PERCENT OF THE VOTINGRIGHTS , IS REQUIRED :• The legal and benecial ownership of 60 percent of the

outstanding capital stock must rest in the hands ofFilipinos

• Otherwise, the corporation is "considered as non-Philippine nationals.

BOTH THE V OTING C ONTROL T EST AND THE B ENEFICIALO WNERSHIP T EST MUST BE APPLIED TO DETERMINE WHETHER ACORPORATION IS A "P HILIPPINE NATIONAL ."

T HE 1987 C ONSTITUTION RESERVES THE OWNERSHIP ANDOPERATION OF PUBLIC UTILITIES EXCLUSIVELY TO (1) F ILIPINOCITIZENS , OR (2) CORPORATIONS OR ASSOCIATIONS AT LEAST 60PERCENT OF WHOSE " CAPITAL " IS OWNED BY F ILIPINO CITIZENS :• In the c ase of individuals, on ly Filipino citizens c an validly

own and operate a public u tility.• In the case of corporat ions or associations, at l east 6 0

percent of their "capital" must be owned by Filipinocitizens.

o Under Section 11, Article XII of the 1987Constitution, t o own and operate a public u tility acorporation’s capital m ust a t least be 60 percentowned by Philippine n ationals .

REPUBLIC ACT NO. 7042 OR THE FOREIGNINVESTMENTS ACT OF 1991 (FIA), AS AMENDED, WHICHDEFINED A "PHILIPPINE NATIONAL" AS FOLLOWS:• The term " Philippine n ational" shall mean a citizen of the

Philippines;

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• Or a domestic partnership or association wholly owned by citizens of the Philippines; or

• A corporation organized under the laws of thePhilippines of which at least sixty percent (60%) of thecapital stock outstanding and entitled to vote is ownedand held by citizens of the Philippines ;

• Or a corporat ion organized abroad and registered as d oing business in the Philippines under the Corporation Code of which one hundred percent (100%) of the capital stock

outstanding and entitled to vote is wholly owned byFilipinos or

• A trustee of funds for pension or other employeeretirement or sepa ration benets, where the trustee is aPhilippine national an d at l east si xty percent (60%) of thefund will accrue to t he b enet of Philippine n ationals:

WHERE A CORPORATION AND ITS NON-FILIPINOSTOCKHOLDERS OWN STOCKS IN A SECURITIES ANDEXCHANGE COMMISSION (SEC) REGISTEREDENTERPRISE:• At least sixty percent (60%) of the capital stock

outstanding and entitled to vote of each of bothcorporations must be owned and held by citizens of thePhilippines and

• At least sixty percent (60%) of the members of the Board ofDirectors of each of both corporations m ust be ci tizens ofthe Philippines, in order that the corporation, sh all beconsidered a "Philippine national."

A "P HILIPPINE NATIONAL " AS A P HILIPPINE CITIZEN , OR ADOMESTIC CORPORATION AT LEAST "60% OF THE CAPITAL STOCK OUTSTANDING AND ENTITLED TO VOTE " IS OWNED BY P HILIPPINECITIZENS .

EXECUTIVE O RDER N O. 226 OR THE O MNIBUS I NVESTMENTSCODE OF 1987:• "Philippine national" shall mean a citizen of the

Philippines or a diplomatic partnership or association wholly-owned by citizens of the Philippines;

• Or a corporation organized under the laws of thePhilippines of which at least sixty per cent (60%) ofthe capital stock outstanding and entitled to vote isowned and held by citizens of the Philippines ;

• Or a trustee of funds for pension or other employeeretirement or sepa ration benets, where the trustee is aPhilippine n ational an d at l east si xty p er cen t (60%) of thefund will accrue to t he b enet of Philippine n ationals:

• Where a corporation and its non-Filipino stockholders ownstock in a registered enterprise, at l east si xty per cen t(60%) of the capital stock outstanding and entitled to voteof both corporations must be owned and held by thecitizens o f the Philippines a nd at l east si xty p er cen t (60%)of the members of the Board of Directors of bothcorporations must be citizens of the Philippines in orderthat the corporation shall be considered a Philippinenational;

• Under Article 48(3) of the Omnibus Investments Code of1987, "no corporation x x x which is not a ‘Philippinenational’ x x x sh all do business x x x in the Philippines x

x x without rst securing from the Board of Investments a

written certicate to the effect that such business oreconomic activity x x x would not conict with theConstitution or laws of the Philippines."

• Only a "Philippine national" can own and operate a publicutility.

T HE FIA, LIKE ALL ITS PREDECESSOR STATUTES , CLEARLYDEFINES A "P HILIPPINE NATIONAL " AS A F ILIPINO CITIZEN , OR ADOMESTIC CORPORATION " AT LEAST SIXTY PERCENT (60%) OF THE

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CAPITAL STOCK OUTSTANDING AND ENTITLED TO VOTE " IS OWNEDBY F ILIPINO CITIZENS .• A domestic corporation is a "Philippine national" on ly if

at least 60% of its voting stock is owned by Filipinocitizens.

• FIA reiterates and claries Section 11, Article XII of the1987 Constitution, which limits the ownership andoperation of public utilities to Filipino citizens or tocorporations or associations at least 60% Filipino-owned.

FOR MORE THAN FOUR DECADES , THE STATUTORY DEFINITION OF THE TERM "P HILIPPINE NATIONAL " HAS BEEN UNIFORM AND

CONSISTENT :• Means a Filipino citizen, or a d omestic corp oration at l east

60% of the voting stock is owned by Filipinos.• Only "Philippine nationals" could own and operate public

utilities in the Philippines.

RIGHT TO ELECT DIRECTORS, COUPLED WITHBENEFICIAL OWNERSHIP, TRANSLATES TO EFFECTIVECONTROL:

THE 60 PERCENT F ILIPINO OWNERSHIP REQUIRED BY THECONSTITUTION TO ENGAGE IN CERTAIN ECONOMIC ACTIVITIES

APPLIES NOT ONLY TO VOTING CONTROL OF THE CORPORATION ,

BUT ALSO TO THE BENEFICIAL OWNERSHIP OF THE CORPORATION :• Mere legal title is insufficient to meet the 60 percentFilipino-owned "capital" required i n the Constitution.

• Full benecial ownership of 60 percent of theoutstanding capital stock, coupled with 60 percent ofthe voting rights, is required .

T HE LEGAL AND BENEFICIAL OWNERSHIP OF 60 PERCENT OF THEOUTSTANDING CAPITAL STOCK MUST REST IN THE HANDS OFFILIPINO NATIONALS IN ACCORDANCE WITH THE CONSTITUTIONALMANDATE :

• Otherwise, the corporation is "considered as non-Philippine nationals."

• Section 1(b) of the Implementing Rules of the FIA providesthat "for stocks to be deemed owned and held byPhilippine citizens or Philippine nationals, mere legaltitle is not enough to meet the req uired F ilipino equity.

FULL BENEFICIAL OWNERSHIP OF THE STOCKS , COUPLED WITH APPROPRIATE VOTING RIGHTS , IS ESSENTIAL ."

THE CONSTITUTIONAL REQUIREMENT OF AT LEAST 60 PERCENTFILIPINO OWNERSHIP APPLIES NOT ONLY TO VOTING CONTROL OF

THE CORPORATION BUT ALSO TO THE BENEFICIAL OWNERSHIP OF THE CORPORATION :

• The requirement applies uniformly to all classes ofshares , regardless of nomenclature and category,comprising th e ca pital of a corporation.

• Capital stock consists of all classes of shares issued tostockholders, that is, common shares as w ell as p referredshares, which may have different rights, privileges orrestri ctions.

SINCE A SPECIFIC CLASS OF SHARES MAY HAVE RIGHTS AND PRIVILEGES OR RESTRICTIONS DIFFERENT FROM THE REST OF THE SHARES IN A CORPORATION, THE 60-

40 OWNERSHIP REQUIREMENT IN FAVOR OF FILIPINOCITIZENS IN SECTION 11, ARTICLE XII OF THECONSTITUTION MUST APPLY NOT ONLY TO SHARES

WITH VOTING RIGHTS BUT ALSO TO SHARES WITHOUT VOTING RIGHTS:

• Preferred shares, denied the ri ght t o vote in the election ofdirectors, are a nyway still enti tled to vote on the eightspecic corp orate m atters;

• Thus, if a corporation, engaged in a partiallynationalized industry, issues a mixture of common and

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preferred non-voting shares, at least 60 percent of thecommon shares and at least 60 percent of the

preferred non-voting shares must be owned byFilipinos.

IF A CORPORATION ISSUES ONLY A SINGLE CLASS OF SHARES , ATLEAST 60 PERCENT OF SUCH SHARES MUST NECESSARILY BEOWNED BY F ILIPINOS :• 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 oth er class o f shares.• This uniform application of the 60-40 ownership

requirement in favor of Filipino citizens clearly breatheslife to the constitutional command tha t the ownership andoperation of pu blic u tilities s hall be rese rved exclusively tocorporations at least 60 percent of whose capital isFilipino-owned.

• Applying uniformly the 60-40 ownership requirement infavor of Filipino citizens to each class of shares ,regardless of differences in voting rights, pri vileges andrestrictions, gu arantees effective Filipino control of pu blicutilities, as m andated b y the Constitution.

SUCH UNIFORM APPLICATION TO EACH CLASS OF SHARES INSURES THAT THE " CONTROLLING INTEREST " IN PUBLIC UTILITIES ALWAYS

LIES IN THE HANDS OF F ILIPINO CITIZENS :• This addresses worry that foreigners, owning most of the

non-voting shares, will exercise greater control overfundamental corporate matters requiring two-thirds ormajority vote of all shareholders.

INTENT OF THE FRAMERS OF THE CONSTITUTION; THE TERM "CAPITAL" REFERS TO CONTROLLING

INTEREST OF A CORPORATION:

• 60 percent of the "cap ital" assumes , or sh ould result in, a"controlling interest " in the co rporation.

TO CONSTRUE BROADLY THE TERM " CAPITAL " AS THE TOTAL

OUTSTANDING CAPITAL STOCK , TREATED AS A SINGLE CLASS

REGARDLESS OF THE ACTUAL CLASSIFICATION OF SHARES , GROSSLY

CONTRAVENES THE INTENT AND LETTER OF THE C ONSTITUTION THAT THE "S TATE SHALL DEVELOP A SELF -RELIANT AND INDEPENDENT

NATIONAL ECONOMY EFFECTIVELY CONTROLLED BY F ILIPINOS :• Illustration of the glaring anomaly which would result in

dening the term "capital" as the total outstanding capitalstock of a corporation, treated as a single class of sha resregardless o f the a ctual classication of sh ares, t o wit:

• Assume that a corporation has 100 common shares ownedby foreigners and 1,000,000 non-voting preferred sharesowned by Filipinos, with both classes of sha re h aving a par

value of one peso ( P 1.00) per sha re.• Under the broad denition of the term "capital," such

corporation would be considered compliant with the 40 percent constitutional limit on foreign equity of public

utilities since the overwhelming majority, or more than99.999 percent, of t he total out standing capital st ock isFilipino owned.

• This is obviously absurd.• In the example given, on ly the foreigners holding the

common shares have voting rights in the election of

directors, even if they hold only 1 00 shares.• The foreigners, with a minuscule equity of less than 0.001

percent, exercise control over the public utility.• On the ot her ha nd, the F ilipinos, holding m ore t han 99.999

percent of the equity, cannot vote in the election of directorsand hence, have no co ntrol over t he p ublic u tility.

• This starkly circumvents the intent of the framers of theConstitution, as well as the clear language of theConstitution, t o place the control of pu blic utilities in thehands o f Filipinos.

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• Humphrey’s Executor v. US :o Allowing foreign shareholders to elect a controlling

majority of t he board, even if al l the directors a reFilipinos, grossly circumvents the letter a nd intent ofthe Constitution and defeats t he very p urpose of ournationalization laws.

T HE LAST SENTENCE OF S ECTION 11, A RTICLE XII OF THE 1987CONSTITUTION READS : THE PARTICIPATION OF FOREIGN INVESTORS IN

THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE

LIMITED TO THEIR PROPORTIONATE SHARE IN ITS CAPITAL , AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATION OR

ASSOCIATION MUST BE CITIZENS OF THE P HILIPPINES .• The last sentence of Section 11, Article XII of the

Constitution mandates tha t (1) the participation of foreigninvestors in the governing body of the corporation or

association shall be limited to th eir proportionate sharein the capital of such entity; and (2) all officers of thecorporation or a ssociation must be Filipino citizens.

The undisputed facts : There is no dispute, and respondents do not claim the

contrary, that (1) foreigners own 64.27% of the commonshares of PLDT, which class of shares exercisesthe sole right to vote in the election of di rectors, and thusforeigners con trol PLDT;(2) Filipinos own only 35.73% of PLDT’s common shares,constituting a minority of the voting stock, and thusFilipinos d o not con trol PLDT;(3) Preferred shares, 99.44% owned by Filipinos, have no

voting rights;(4) Preferred shares earn only 1/70 of the dividends thatcommon shares earn;(5) Preferred shares have twice the par value of com monshares; and

(6) Preferred shares con stitute 77.85% of the authorizedcapital stock of PLDT and common shares only 22.15%.

THE SEC IS THE ADMINISTRATIVE AGENCY TASKED TO ENFORCE THE 60-40 OWNERSHIP REQUIREMENT IN FAVOR OF F ILIPINO

CITIZENS IN S ECTION 11, A RTICLE XII OF THE C ONSTITUTION :

THE C ONSTITUTION EXPLICITLY RESERVES THE OWNERSHIP ANDOPERATION OF PUBLIC UTILITIES TO P HILIPPINE NATIONALS , WHO

ARE DEFINED IN THE F OREIGN I NVESTMENTS A CT OF 1991 ASFILIPINO CITIZENS , OR CORPORATIONS OR ASSOCIATIONS AT LEAST 60 PERCENT OF WHOSE CAPITAL WITH VOTING RIGHTS BELONGS TO FILIPINOS :

The FIA’s implementing rules explain that "for stocks to bedeemed owned and held by Philippine citizens orPhilippine nationals , mere legal title is not enough tomeet the required Filipino equity.

• Full benecial ownership of the stocks, coupled withappropriate voting rights is essential ."

"CAPITAL " IN S ECTION 11, A RTICLE XII OF THE 1987CONSTITUTION REFERS TO SHARES WITH VOTING RIGHTS , AS WELL

AS WITH FULL BENEFICIAL OWNERSHIP :• The right to v ote in the election of directors , coupled

with full benecial ownership of stocks , t ranslates to

effective con trol of a corporation.

A NY OTHER CONSTRUCTION OF THE TERM " CAPITAL " IN S ECTION11, A RTICLE XII OF THE C ONSTITUTION CONTRAVENES THELETTER AND INTENT OF THE C ONSTITUTION :• Any other meaning of the term "capital" openly invites

alien domination of economic activities reservedexclusively to Philippine nationals.

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NARRA NICKEL MINING AND DEVELOPMENTCORPORATION VS REDMONT CONSOLIDATED MINESCORP.,G.R. No. 195580, January 28, 2015

WEB OF CORPORATE LAYERING INTENDED TO GO AROUND THEFILIPINO OWNERSHIP REQUIREMENT IN THE C ONSTITUTION ANDPERTINENT LAWS , REQUIRE THE ESTABLISHMENT OF A DEFINITEPRINCIPLE THAT WILL ENSURE THAT THE C ONSTITUTIONAL PROVISIONRESERVING TO F ILIPINO CITIZENS OR “ CORPORATIONS AT LEAST SIXTYPER CENTUM OF WHOSE CAPITAL IS OWNED BY SUCH CITIZENS ” BEEFFECTIVELY ENFORCED AND COMPLIED WITH .

T HE APPLICATION OF THE G RANDFATHER R ULE IS JUSTIFIED BY THE CIRCUMSTANCES OF THE CASE TO DETERMINE THE

NATIONALITY OF PETITIONERS .

ON T HE C ONSTITUTION , THE F OREIGN I NVESTMENTS A CT OF 1991(FIA), THE P HILIPPINE M INING A CT OF 1995,3 AND THE R ULESISSUED BY THE S ECURITIES AND E XCHANGE C OMMISSION (SEC):

• These laws and rules supposedly espouse the applicationof the Control Test i n verifying th e Philippine n ationality ofcorporate en tities for p urposes of determining compliance

with Sec. 2, Art. XII of the Constitution that only

“corporations or a ssociations at l east si xty per centum of whose capital is owned by such [Filipino] citizens” may

enjoy certain rights and privileges, l ike the explorationand development of natural resources.

T HE APPLICATION OF THE G RANDFATHER R ULE IN THE PRESENTCASE DOES NOT ESCHEW ( AVOID ) THE C ONTROL T EST :• The Court used the Grandfather Rule as a “supplement”

to the Control Test so that the intent underlying theaverted Sec. 2, Art. XII of the Constitution be given effect .

THE “ CONTROL TEST ” IS STILL THE PREVAILING MODE OFDETERMINING WHETHER OR NOT A CORPORATION IS A F ILIPINOCORPORATION , WITHIN THE AMBIT OF S EC . 2 , A RT . XII OF THE 1987CONSTITUTION , ENTITLED TO UNDERTAKE THE EXPLORATION ,DEVELOPMENT AND UTILIZATION OF THE NATURAL RESOURCES OF

THE P HILIPPINES : 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 corp oration,then it may apply the “grandfather rule.”

With that, the use of the Grandfather Rule as a“supplement” to the Control Test is not proscr ibed by theConstitution or the Philippine Mining Act of 1995.

T HE G RANDFATHER R ULE IMPLEMENTS THE INTENT OF THE

FILIPINIZATION PROVISIONS OF THE C ONSTITUTION :• To reiterate, Sec. 2, Art. XII of the Constitution reserves

the exploration, development, an d utilization of naturalresources to Filipino citizens and “corporations orassociations a t least si xty per centum of whose capital isowned by such citizens.”

• Similarly, Section 3(aq) of t he Philippine Mining Act of1995 considers a “corporation x x x registered inaccordance with law at l east si xty per cen t of the ca pital of

which is owned by citizens of the Philippines” as a personqualied to undertake a m ining operation.

• Consistent with this objective, the Grandfather R ule wasoriginally conceived to look into the citizenship of theindividuals who ultimately own and control the shares ofstock of a corporation for purposes of determiningcompliance with the con stitutional requirement of Filipinoownership.

• It cannot, therefore, be denied that the framers of theConstitution have not foreclosed the Grandfather Rule asa tool in verifying the nationality of corporations for

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purposes of ascertaining their right to participate innationalized or p artly n ationalized activities.

GRANDFATHER R ULE IS “ THE METHOD BY WHICH THE PERCENTAGEOF F ILIPINO EQUITY IN A CORPORATION ENGAGED IN NATIONALIZED

AND / OR PARTLY NATIONALIZED AREAS OF ACTIVITIES , PROVIDED FORUNDER THE C ONSTITUTION AND OTHER NATIONALIZATION LAWS , ISCOMPUTED , IN CASES WHERE CORPORATE SHAREHOLDERS AREPRESENT , BY ATTRIBUTING THE NATIONALITY OF THE SECOND OREVEN SUBSEQUENT TIER OF OWNERSHIP TO DETERMINE THENATIONALITY OF THE CORPORATE SHAREHOLDER :• Thus, to arrive at the actual Filipino ownership and

control in a corporation, both the direct and indirectshareholdings in the corporation are det ermined.

• This concept of stock attribution inherent in theGrandfather Rule to determine the u ltimate ownership ina corporation is observed by the Bureau of InternalRevenue (BIR) in applying Section 127 (B)5 of the NationalInternal Revenue Code on taxes imposed on closely heldcorporations, in relation to Section 96 of the CorporationCode on close corp orations.

• Thus, in BIR Ruling No. 148-10, Commissioner KimHenares held: In the case of a m ulti-tiered corporation,the stock attribution rule must be allowed to runcontinuously along the chain of ownership until it

nally reaches the individual stockholders. This is inconsonance with the “grandfather rule” adopted in thePhilippines under Section 96 of the Corporation Code(Batas Pambansa Blg. 68) which provides thatnotwithstanding the fact that all the issued stock of acorporation are held by not more than twenty persons,among others, a corporation is nonetheless not to bedeemed a close corporation when at least t wo thirds of its

voting stock or voting rights is owned or controlled byanother corporat ion which is n ot a cl ose co rporation.

• In SEC-OGC Opinion No. 10-31 dated December 9, 2010(SEC Opinion 10-31), the SEC applied the GrandfatherRule even if the corporation engaged in mining operation

passes the 60-40 requirement of the Control Test , vi z: Yo uallege that the structure of MML’s ownership in PHILSAGAis as follows: (1) MML owns 40% equity in MEDC, while

the 60% is ostensibly owned by Philippine individualcitizens who are actually MML’s controlled nominees; (2)MEDC, in turn, owns 60% equity in MOHC, while MMLowns the remaining 40%; (3) Lastly, MOHC owns 60% ofPHILSAGA, while MML owns the remaining 40%. Youprovide th e following gure t o illustrate t his stru cture: x x

x x We note that the Constitution and the statute use theconcept “Ph ilippine citizens.” Article III, S ection 1 of th eConstitution provides who are Philippine citizens: x x x

This enumeration is exhaustive. In other words, there can be no other Philippine citizens other than those falling within the enumeration provided by the Constitution.

Obviously, only natural persons are susceptible ofcitizenship. Thus, for purposes of the Constitutional andstatutory restrictions on foreign participation in theexploitation of mineral r esources, a corporation investingin a mining joint venture can never be considered as aPhilippine c itizen.

T HE S UPREME C OURT E N B ANC ; P EDRO R. P ALTING , VS . S AN J OSE P ETROLEUM I NC .:

The Court held that a corporation investing in anothercorporation engaged in a nationalized activity cannot beconsidered as a citizen for purposes of the Constitutionalprovision restricting foreign exploitation of naturalresources: Accordingly, we opine that we must look intothe citizenship of the individual st ockholders, i.e. naturalpersons, of that i nvestor-corporation in order to d etermineif the Constitutional and statutory restrictions arecomplied with. If the shares of stock of the immediateinvestor corporation is in turn held and controlled by

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another corporation, then we must look into thecitizenship of the individual stockholders of the lattercorporation. In other words, if there are layers ofintervening corporations investing in a mining joint

venture, we must delve into the citizenship of theindividual stockholders of each corporation.

The framers of the Constitution intended for the“grandfather rule” to apply in case a 60%-40%Filipino-Foreign equity corporation invests in anothercorporation engaging in an activity where theConstitution restricts forei gn participation :

Redmont Consolidated Mines Corporation v. McArthurMining Inc., et al:• The SEC en banc applied the Grandfather R ule despite the

fact t hat t he su bject corpo rations o stensibly h ave s atisedthe 60-40 Filipino equity requ irement.

• The SEC en banc held that to attain the Constitutionalobjective of reserving to Filipinos the utilization ofnatural resources, one should not stop where the

percentage of the capital stock is 60%. Thus: Doubt, we believe, exists in the instant case because the

foreign investor, MBMI, provided practically all thefunds of the remaining appellee-corporations .

T HE AVOWED PURPOSE OF THE C ONSTITUTION IS TO PLACE IN THEHANDS OF F ILIPINOS THE EXPLOITATION OF OUR NATURALRESOURCES . N ECESSARILY , THEREFORE , THE R ULE INTERPRETING

THE CONSTITUTIONAL PROVISION SHOULD NOT DIMINISH THATRIGHT THROUGH THE LEGAL FICTION OF CORPORATE OWNERSHIP

AND CONTROL :• Hence, the Grandfather Rule must be applied to

accurately determine th e actual parti cipation, both directand indirect, of foreigners in a corporation engaged in anationalized activity or bu siness.

• The method employed in the Grandfather Rule ofattributing the shareholdings of a given corporateshareholder to the second or even the subsequent tier ofownership hews with the rule that the “ benecialownership ” of corporations engaged in nationalizedactivities m ust r eside in the h ands o f Filipino citizens.

• Thus, even if the 6 0-40 Filipino e quity requirement appearsto have bee n s atised , the Department of Justice (DOJ), inits Opinion No. 144, S. of 1977, stated that an agreementthat may distort the actual economic or benecialownership of a mining corporation may be struckdown as violative of the constitutional requirement .

T HE “G RANDFATHER R ULE ” IS APPLIED SPECIFICALLY IN CASES WHERE THE CORPORATION HAS CORPORATE STOCKHOLDERS WITH ALIEN STOCKHOLDINGS , OTHERWISE , IF THE RULE IS NOT APPLIED , THE PRESENCE OF SUCH CORPORATE STOCKHOLDERS COULD

DIMINISH THE EFFECTIVE CONTROL OF F ILIPINOS :

T HE PAIRING OF THE CONCEPTS “ BENEFICIAL OWNERSHIP ” AND THE “ SITUS OF

CONTROL ” IN DETERMINING WHAT CONSTITUTES “ CAPITAL ” HASBEEN ADOPTED BY THE S UPREME C OURT IN H EIRS OF G AMBOA V .

T EVES , O CTOBER 9, 2012:• This is consistent with Section 3 of the FIA which provides

that where 100% of the capital stock is held by “a trusteeof funds for pension or other employee retirement orseparation benets,” the trustee is a Philippine national i f“at l east si xty p ercent (60%) of the fund will accrue to the

benet of Philippine nationals.”• Likewise, Section 1(b) of the Implementing Rules of the FIA

provides that “for stocks to be deemed owned and held byPhilippine citizens or Philippine nationals, m ere legal t itleis not enough to meet the required Filipino equity. Full

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benecial ownership of the stocks, coupled withappropriate voting rights, is essential .”

IN EMPHASIZING THE TWIN REQUIREMENTS OF “ BENEFICIALOWNERSHIP ” AND “ CONTROL ” IN DETERMINING COMPLIANCE WITH THE

REQUIRED F ILIPINO EQUITY IN G AMBOA , THE EN BANC COURTEXPLICITLY CITED WITH APPROVAL THE SEC EN BANC ’S APPLICATION

IN REDMONT C ONSOLIDATED M INES , C ORP . V. M C A RTHUR M INING ,INC ., ET AL . OF THE G RANDFATHER R ULE , TO WIT :• Signicantly, the SEC en banc , which is th e collegial body

statutorily empowered to issue rules and opinions on behalf of SEC, has adopted the Grandfather Rule in

determining compliance with the 60- 40 ownershiprequirement in favor of F ilipino citizens mandated by theConstitution for ce rtain economic a ctivities.

• This prevailing SEC ruling, which the SEC correctlyadopted to thwart any circumvention of the requiredFilipino “ownership and control ,” is laid down in the 25March 2010 SEC en banc ruling in Redmont ConsolidatedMines, Corp. v. McArthur Mining, Inc., et al.

• Applying Gamboa , the Court, in Express Investments IIIPrivate Ltd. v. Bayantel Communications, I nc. , denied theforeign creditors’ proposal t o convert p art o f Bayantel’sdebts to common shares of the company at a rate of77.7%.

•

Supposedly , the conversion of the debts to commonshares by the foreign creditors would be done, bothdirectly and indirectly, in order to meet the controltest principle under the FIA .

• Under the proposed structure, the foreign creditors wouldown 40% of the outstanding capital stock of thetelecommunications company on a direct basis, while theremaining 40% of shares would be registered to a holdingcompany that sh all retain, on a direct basis, the other60% equity reserve d for F ilipino citizens.

• Nonetheless, the Court found the proposal non-compliant with the Constitutional requirement ofFilipino ownership as the proposed structure would givemore than 60% of the ownership of the common shares ofBayantel to th e foreign corporations, viz:

o In its Rehabilitation Plan, among the material

nancial commitments made by respondentBayantel is that i ts shareholders sh all relinquishthe agreed-upon amount of common stocks aspayment to Unsecured Creditors as per the TermSheet. Evidently, the parties intend to convertthe unsustainable portion of respondent’s debtinto common stocks, which have voting rights.If we indulge petitioners on their proposal, theOmnibus Creditors which are foreigncorporations, shall have control over 77.7% ofBayantel, a public utility company. This isprecisely the scenario proscribed by theFilipinization provision of the Constitution.

Therefore, the Court of Appeals acted correctly insustaining the 40% debt-to-equity ceiling onconversion.

o The Grandfather Rule not only nds basis, butmore importantly, it implements the Filipino equityrequirement, in the Constitution.

A PPLICATION OF THE G RANDFATHER R ULE WITH THE C ONTROL T EST :

• The Control Test can be, as it has been, applied jointlywith the Grandfather Rule to determine the observance offoreign ownership restriction in nationalized economicactivities.

• The Control Test and the Grandfather Rule are n ot, asit were, incompatible ownership-determinant m ethods thatcan only be a pplied alternative to each other.

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T HUS , I N THE M ATTER OF THE P ETITION FOR R EVOCATION OF THE C ERTIFICATE OF R EGISTRATION OF L INEAR W ORKS R EALTY

DEVELOPMENT C ORPORATION : The SEC held that when foreigners contribute more

capital to an enterprise, doubt exists as to th e actualcontrol and ownership of the subject corporation evenif the 60% Filipino equity threshold is met .

The foreign equity participation in Linearworks RealtyDevelopment Corporation amounts to 26.41% of thecorporation’s capital stock since the amount of sh aressubscribed by foreign nationals is 1,795 only out of the6,795 shares.

Thus, the subject corporation is compliant with the40% limit on foreign equity participation .

O Not taking into account the par value of sha res indetermining compliance with the constitutionaland statutory restrictions on foreign equity.

However, some unscrupulous individuals employschemes to circumvent the constitutional andstatutory restrictions on foreign equity .In the present case, the fact that the shares of the

Japanese nationals have a greater par value but onlyhave similar rights to those held by Philippine citizenshaving much lower par value, is highly suspicious.

This is because a reasonable investor would expect to

have greater control and economic rights than otherinvestors who invested less capital than him. Thus , it is reasonable to suspect that there may be

secret arrangements between the corporation and thestockholders wherein the Japanese nationals whosubscribed to the shares with greater par valueactually have greater control and economic rightscontrary t o the equality of shares b ased on the articles ofincorporation.

IN THE CASE AT BAR : Even if at rst glance the petitioners comply with the 60-

40 Filipino to foreign equity ratio, doubt exists in thepresent case that gives rise to a reasonable suspicionthat the Filipino shareholders do not actually have therequisite number of contr ol and benecial ownership in

petitioners Narra, Tesoro, and McArthur.Hence, a further investigation and dissection of the exten tof the ownership of the corporate shareholders throughthe Grandfather R ule is justied.

SUFFICE IT TO SAY IN THIS REGARD THAT , WHILE THEGRANDFATHER R ULE WAS ORIGINALLY INTENDED TO TRACE THESHAREHOLDINGS TO THE POINT WHERE NATURAL PERSONS HOLD

THE SHARES , THE SEC HAD ALREADY SET UP A LIMIT AS TO THENUMBER OF CORPORATE LAYERS THE ATTRIBUTION OF THE

NATIONALITY OF THE CORPORATE SHAREHOLDERS MAY BE APPLIED :

• In a 1977 internal memorandum, the SEC suggestedapplying the Grandfather Rule on two (2) levels ofcorporate rel ations for p ublicly-held corporations o r w herethe shares are t raded in the stock exchanges, and to three(3) levels for closely held corporations or th e shares of

which are not traded in the stock exchanges.• RULE CANNOT GO BEYOND THE LEVEL OF WHAT IS

REASONABLE:

A REASONABLE INVESTOR WOULD EXPECT TO HAVE GREATERCONTROL AND ECONOMIC RIGHTS THAN OTHER INVESTORS WHOINVESTED LESS CAPITAL THAN HIM .

SECTION 6 OF THE C ORPORATION C ODE OF THE P HILIPPINESEXPLICITLY PROVIDES THAT “ NO SHARE MAY BE DEPRIVED OF

VOTING RIGHTS EXCEPT THOSE CLASSIFIED AS ‘ PREFERRED ’ OR‘REDEEMABLE ’ SHARES :”

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SEC Memorandum Circular No. 8, Series of 2013, (SEC MemoNo. 8)23 Section 2 of which states:• Section 2. All covered corporations shall, at all times,

observe the constitutional or stat utory requirement. Forpurposes of determining compliance therewith, therequired p ercentage of Filipino ownership shall be applied

to BOTH (a) the total ou tstanding shares of st ock entitledto vote in the election of directors; AND (b) the totalnumber of outstanding shares of s tock, whether or notentitled to vote i n the electi on of dir ectors.

June 28, 2011 -Gamboa vs. Teves,GR No 176579,En banc, DECISION,(http://sc.judiciary.gov.ph/jurisprudence/2011/june2011/17

6579.html )

Carpio, J.:

The crux of the controversy is the denition ofthe term "capital." Does the term "capital" inSection 11, Article XII of the Constitution referto common shares or t o the total outstandingcapital stock (combined total of common andnon-voting preferred shares)?

xxxConsidering that common shares have votingrights which translate t o control, as o pposed topreferred shares which usually have no votingrights, t he term "capital" in Section 11, Article

XII of the Constitution refers only to commonshares. However, if the preferred shares alsohave the right to vote in the election ofdirectors, t hen the term "capital" sh all includesuch preferred shares because the right toparticipate 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 ofthe Constitution refers only to shares ofstock that can vote in the election ofdirectors.

xxxMere legal title is insufficient to meet the 60percent F ilipino-owned capital requ ired in theConstitution. Full benecial ownership of 60percent of the outstanding capital stock,coupled with 60 percent of the voting rights, isrequired. The legal and benecial ownership of60 percent of t he outstanding capital stockmust r est in the hands of Filipino nationals inaccordance with the constitutional mandate.

Otherwise, the corporation is considered asnon-Philippine national[s].

xxx WHEREFORE , we PARTLY GRANT th e p etition

and rule that t he term capital in Section 11, Article XII of the 1987 Constitution refers only

to shares o f stock entitled to vote i n the el ectionof directors, and thus in the present case onlyto common shares, and not to the totaloutstanding capital stock (common and non-

voting preferred shares). xxx xxx xxx

October 9, 2012 -Heirs of Gamboa vs. Teves,id ,En banc, RESOLUTION,(http://www.lawphil.net/judjuris/juri2012/oct2012/gr_176579_2012.html )

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Carpio, J.:

Signicantly, the SEC en banc , which is thecollegial body statutorily empowered to issuerules and opinions on behalf of the SEC, hasadopted even the Grandfather Rule in

determining compliance with the 60-40ownership requirement in favor of Filipinocitizens mandated by the Constitution forcertain economic activities. This prevailing SECruling, which the SEC correctly adopted tothwart any circumvention of the requiredFilipino " ownership and control ," is l aid downin the 25 March 2010 SEC en banc rulingin Redmont Consolidated Mines, Corp. v.McArthur M ining, Inc., et al.

xxx

Compliance w ith the co nstitutional l imitation(s)on engaging in nationalized activities m ust bedetermined by ascertaining if 60% of theinvesting corporation’s outstanding capitalstock is owned by "Filipino citizens", or a sinterpreted, by natural or individual Filipino

citizens. I f such investing corporation is i n turnowned to some extent by another investingcorporation, the same process must beobserved. One must not stop until thecitizenships of the individual or naturalstockholders of layer after layer of investingcorporations have been established, the veryessence of the Grandfather Rule.

Lastly, it was the intent of the framers ofthe 1987 Constitution to adopt theGrandfather Rule.

xxx

The 28 June 2011 Decision declares that the60 percent Filipino ownership required by theConstitution to engage in certain economicactivities applies not on ly to voting control ofthe corporation, but also to the benecialownership of the corporation .

xxx

The FIA’s implementing rules explain that "[f]orstocks to be deemed owned and held byPhilippine citizens or Ph ilippine n ationals, merelegal title is not enough to meet the requiredFilipino equity. Full benecial ownership ofthe stocks, coupled with appropriate votingrights i s essential ." In effect, the FIA claries,reiterates and conrms th e interpretation thatthe term "capital" in Section 11, Article XII ofthe 1987 Constitution refers to shares withvoting rights, as well as with full benecialownership . xxx xxx xxx

[For Prof. Ortha, the Control Test and the Grandfather Ruleshould be one and the same. The latter is just a method tofurther the former. He pointed out that there are only twotypes of tests in determining a corporation’s citizenship, i.e.the incorporation test an d the control or n ationality test .]

December 5, 2012 -

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Express Investments III Private Ltd. and Export DevelopmentCanada vs. Dayan Telecommunications, Inc. (aka In reBayantel case),GR Nos 174457-59,First Division, DECISION,(http://www.lawphil.net/judjuris/juri2012/dec2012/gr_1744

57_2012.html )

Villarama, Jr., J.:

xxx However, if the preferred shares also havethe right to vote in the election of directors,then the term "capital" shall include suchpreferred shares because the right toparticipate in the control or management of thecorporation is exercised through the right to

vote in the election of directors. In short, theterm "capital" in Section 11, Article XII ofthe Constitution refers only to shares ofstock that can vote in the election ofdirectors. xxx xxx xxx

May 22, 2013 –SEC Memorandum No. 8(http://www.sec.gov.ph/laws/memorandumcircular/CY%202013/sec%20memo%20no.%208,%20s2013.pdf)

WHEREAS, the Supreme Court in Heirs ofGamboa v. Teveset al,1 ruled that the term'capital' in Section 11, Article XII of the 1987Constitution refers only to shares of stockentitled to vote i n the e lection of di rectors;

xxx

Section 1. This Circular shall apply to allcorporations ("covered corporations") engagedin identied areas of activities or enterprisesspecically reserved, wholly or partly, toPhilippine Nationals by the Constitution, theFIA and other existing laws, amendments

thereto and IRRs of sai d laws, except as m ayotherwise b e provided therein.

Section 2. All covered corporations sh all, at al ltimes, obse rve the constitutional or st atutoryownership requirement. For purposes ofdetermining compliance therew ith, the requ iredpercentage of Filipino ownership shall beapplied to BOTH (a) the total number ofoutstanding shares o f stock entitled to vote inthe election of directors; AND (b) the totalnumber of outstanding shares of stock,

whether or not entitled to vote in the election ofdirectors.

Corporations covered by special laws2 whichprovide specic citizenship requirements shallcomply with the provisions of sai d law. xxx xxx

xxx

[According to Prof. Joseph, during our class in Transpo,

Section 2 of the aforesaid memorandum may be questionedsince the requirement that “…the required percentage ofFilipino ownership shall be applied to BOTH (a) the totalnumber of outstanding shares of stock entitled to vote in theelection of directors; AND (b) the total number of outstandingshares of st ock, whether or n ot en titled to vote in the electionof directors” was not mentioned in the Heirs of Gamboa case.However, he opined that the same is valid since it did notrelax the requirements of the SC but, on the contrary, madethe same stricter. Thus, the interpretations of the

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Constitution and statutes involved regarding Filipinoownership requ irements are st ill complied with.]

April 21, 2014 –Narra Nickel Mining and Development Corp. vs. RedmontConsolidated Mines Corp.(aka Narra Nickel case),GR No 195580,

Third Division, DECISION,(http://www.lawphil.net/judjuris/juri2014/apr2014/gr_195580_2014.html )

Velasco, Jr., J.:

Basically, there are two acknowledged tests indetermining the nationality of a corporation:

the con trol test and th e gran dfather r ule.

xxx

"Corporate layering" is admittedly allowed bythe FIA; but if it is used to circumvent theConstitution and pertinent laws, then it

becomes illegal. Further, the pronouncement ofpetitioners that the grandfather rule hasalready been abandoned must be discredited

for l ack of ba sis.

xxx

In other words, based on the said SEC Ruleand DOJ Opinion, the Grandfather Rule or thesecond part of the SEC Rule applies only whenthe 60-40 Filipino-foreign equity ownership isin doubt (i.e., in cases where t he joint ven turecorporation with Filipino and foreign

stockholders with less than 60% Filipinostockholdings [or 59%] invests in other joint

venture corporation which is either 60-40%Filipino-alien or th e 59% less Filipino). Stateddifferently, where the 60-40 Filipino- foreignequity ownership is not in doubt, the

Grandfather Rule will not apply.

xxx

The assertion of petitioners that "doubt" onlyexists when the stockholdings are less than60% fails to convince this Court. DOJ OpinionNo. 20, which petitioners quoted in theirpetition, only made an example of an instance

where "doubt" as to the ownership of thecorporation exists. It would be ludicrous tolimit the application of the said word only tothe instances where the stockholdings of non -Filipino stockholders are m ore than 40% of thetotal stockholdings in a corporation.

xxx

In ending, the "control test" is still theprevailing mode of determining whether or nota corporation is a Filipino corporation, within

the ambit of Sec. 2, Art. II of the 1987Constitution, entitled to undertake theexploration, development an d utilization of thenatural resources of t he Philippines. When inthe mind of the Court there is doubt, based onthe attendant facts and circumstances of t hecase, i n the 60-40 Filipino-equity ownership inthe corporation, then it may apply the"grandfather r ule." xxx xxx xxx

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January 28, 2015 –Narra Nickel Mining and Development Corp. vs. RedmontConsolidated Mines Corp.id ,Special Third Division, DECISION,

(http://www.chanrobles.com/cralaw/2015januarydecisions.php?id=81 )

Velasco, Jr., J.:

The Grandfather Rule, standing alone, shouldnot be used to determine the Filipinoownership and control in a corporation, as i tcould result in an otherwise foreign corporationrendered qualied to perform nationalized orpartly nationalized activities. H ence, it is o nly

when the Control Test is rst complied withthat the Grandfather Rule may be applied .Put in another manner, if the subjectcorporation’s Filipino equity falls below thethreshold 60%, the corporation is immediatelyconsidered foreign-owned, in which case, theneed to resort to the Grandfather Ruledisappears.

xxx

On the other hand, a corporation thatcomplies with the 60-40 Filipino to foreignequity requirement can be considered aFilipino corporation if there is no doubt asto who has the “benecial ownership” and“control” of the corporation. In thatinstance, there is no need for a dissection orfurther inquiry on the ownership of the

corporate shareholders in both the investingand investee corporation or the application ofthe Grandfather Rule. 12 As a corollary rule,even if the 60-40 Filipino to foreign equity ratiois apparently met by the subject or i nvesteecorporation, a resort to the Grandfather Rule

is necessary if doubt exists as to the locusof the “benecial ownership” and“control.” In this case, a further i nvestigationas to the nationality of the personalities withthe benecial ownership and control of thecorporate shareholders in both the investingand investee corp orations is necessary.

xxx

“(D)oubt” refers to various indicia that the“benecial ownership” and “control” of thecorporation do not in fact reside in Filipinoshareholders but in foreignstakeholders. xxx xxx xxx

F OR M ATION AN D O RG AN IZATIO N O FC OR PORATIONS

LYCEUM OF THE PHILIPPINES VS. COURT OF APPEALS

REGISTRATION OF PROPOSED NAME WHICH IS IDENTICALOR CONFUSINGLY SIMILAR TO THAT OF ANY EXISTINGCORPORATION, PROHIBITED; CONFUSION AND DECEPTIONEFFECTIVELY PRECLUDED BY THE APPENDING OFGEOGRAPHIC NAMES TO THE WORD "LYCEUM":

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• The Articles of Incorporation of a corporation must, amongother t hings, set out the name of the corp oration.

• Section 18 of the Corporation Code establishes arestrictive ru le insofar as c orporate na mes are co ncerned:

• "Section 18. Corporate name. — No corporate name may be allowed by the Securities and Exchange Commission if

the proposed name is identical or deceptively orconfusingly similar t o th at of any existing corporation or t oany other n ame already protected by law or is patentlydeceptive, confusing or co ntrary to exi sting laws.

• When a change in the corporate name is approved, theCommission shall issue an amended certicate ofincorporation under the amended name."

• The policy underlying the prohibition in Section 18 againstthe registration of a corporate n ame which is "identical ordeceptively or confusingly similar" t o that o f an y existingcorporation or which is "patently deceptive" or " patentlyconfusing" or " contrary to ex isting laws," is th e avoidanceof fraud upon the public which would have occasion todeal with the entity concerned, the evasion of legalobligations and duties, and the reduction ofdifficulties of administration and supervision overcorporations.

• True enough, the corporate names of private respondententities all carry the word "Lyceum" but confusion anddeception are effectively precluded by the appending ofgeographic names to the word "Lyceum."

• Thus, we do not believe that the "Lyceum of Aparri" can bemistaken by the general public for the Lyceum of thePhilippines, or that the "Lyceum of Camalaniugan" would

be confused with the Lyceum of the Philippines.

DOCTRINE OF SECONDARY MEANING; USE OF WORD"LYCEUM," NOT ATTENDED WITH EXCLUSIVITY:

• It is claimed, however, by petitioner that the word"Lyceum" has acqu ired a secondary meaning in relation topetitioner w ith the result t hat w ord, al though originally ageneric, has become appropriable by petitioner to theexclusion of other institutions like private resp ondentsherein.

• The doctrine of secondary meaning originated in the eldof trademark law.

• Its application has, however, been extended to corporatenames since the right to use a corporate name to theexclusion of others is based upon the same principle

which underlies the right to use a particular trademark or

tradename.

In Philippine Nut Industry, Inc. v. Standard Brands, I nc.,the doctrine of secondary meaning was elaborated in thefollowing terms: " . . . a word or phrase originallyincapable of exclusive appropriation with reference toan article on the market, because geographically orotherwise descriptive, might nevertheless have been

19



used so long and so exclusively by one producer withreference to his article that, in that tr ade and to that

branch of the purchasing public, the word or phrasehas come to m ean that the article was his product."

•

The question which arises, therefore, is whether or not theuse by petitioner of "Lyceum" in its corporate name has

been for such length of time and with such exclusivity asto have become associated or identied with the petitionerinstitution in the mind of the general public (or at leastthat portion of the general public which has to do withschools).

The Court of Appeals recognized this issue and answered

it in the negative: " Under the doctrine of secondarymeaning, a word or phrase originally incapable ofexclusive appropriation with reference to an article in themarket, because geographical or otherwise descriptivemight nevertheless have been used so long and soexclusively by one producer with reference to this a rticlethat, in that trade and to that group of the purchasingpublic, the word or phrase has come to mean that thearticle was his p roduce (Ana Ang vs. Toribio Teodoro, 74

Phil. 56 ).

• This circumstance has been referred to as thedistinctiveness into which the name or ph rase ha s evolvedthrough the substantial and exclusive use of the same fora considerable p eriod of t ime. . . .

• No evidence was ever presented in the hearing before theCommission which sufficiently proved that the word

'Lyceum' has indeed acquired secondary meaning in favorof t he a ppellant.

• If there was any of this kind, the sam e tend to prove onlythat the appellant had been using the d isputed word for along p eriod of t ime. . . .

In other words, while the appellant may have provedthat it had been using the word 'Lyceum' for a longperiod of time, this fact alone did not amount to meanthat the said word had acquired secondary meaning inits favor because the appellant failed to prove that ithad been using the same word all by itself to theexclusion of others.

• More so, t here was no evidence presented to prove thatconfusion will surely arise if the same word were to beused by other ed ucational institutions.

• Consequently, the allegations of the appellant in its rsttwo assigned errors m ust ne cessarily fail."

• We agree with the Court of Appeals. The number alone of

the private respondents in the case at bar suggestsstrongly tha t pet itioner's u se of t he word "Lyceum" has not been attended with the exclusivity essential for

applicability of the doctrine of secon dary m eaning.

• Petitioner's use of the word "Lyceum" was not exclusive but was in truth shared with the Western Pangasinan

Lyceum and a little later with other private respondent

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institutions which registered with the SEC using "Lyceum"as part of their corporation names.

• There may well be other schools using Lyceum or Liceo intheir nam es, but not registered with the SEC because theyhave not adopted the corporate form of organization.

MUST BE EVALUATED IN THEIR ENTIRETY TO DETERMINE WHETHER THEY ARE CONFUSINGLY OR DECEPTIVELY

SIMILAR TO ANOTHER CORPORATE ENTITY'S NAME:

• Petitioner i nstitution is n ot en titled to a legally enforceableexclusive right to use the word "Lyceum" in its corporate

name and that other institutions may use "Lyceum" aspart of their corporate names.

• To determine whether a given corporate name is "identical"or "con fusingly or d eceptively s imilar" w ith another en tity'scorporate name, it is n ot enough to ascertain the presenceof "Lyceum" or "Liceo" in both names.

• One must evaluate corporate names in their entirety and

when the name of petitioner is juxtaposed with the namesof private respon dents, they are not reasonably regardedas "identical" or "con fusingly or deceptively similar" w itheach other.

REFRACTORIES CORPORATION VS. COURT OF APPEALS AND SEC

G.R. No. 122174, October 3, 2002

SECTION 18 OF THE C ORPORATION C ODE EXPRESSLY PROHIBITS THE USE OF A CORPORATE NAME WHICH IS " IDENTICAL OR

DECEPTIVELY OR CONFUSINGLY SIMILAR TO THAT OF ANY EXISTINGCORPORATION OR TO ANY OTHER NAME ALREADY PROTECTED BYLAW OR IS PATENTLY DECEPTIVE , CONFUSING OR CONTRARY TOEXISTING LAWS :"• The policy behind the foregoing prohibition is to avoid

fraud upon the public tha t will have occasion to deal withthe en tity concerned, the evasion of legal obligations andduties, an d the reduction of difficulties of administrationand supervision over corporat ion.

PURSUANT THERETO , THE R EVISED G UIDELINES IN THE A PPROVALOF C ORPORATE AND P ARTNERSHIP N AMES SPECIFICALLY REQUIRES

THAT : (1) A corporate name shall not b e identical, misleading orconfusingly similar to one already registered by anothercorporation with the C ommission; and(2) If the proposed name is similar to the n ame of a registeredrm, the proposed name must contain at least one distinctive

word different from the name of the company alreadyregistered .

PHILIPS E XPORT B.V. VS . C OURT OF A PPEALS : TO FALL WITHIN THE PROHIBITION OF THE LAW , TWO REQUISITES MUST BE PROVEN , TO WIT :

(1)That the complainant corporation acquired a priorright over the use of such corporate name; and

(2)The proposed n ame is either:a. Identical, or

b. Deceptively or confusingly similar to that of anyexisting corporation or to any other namealready protected by law; or

c. Patently deceptive, confusing or contrary toexisting law.

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A S REGARDS THE FIRST REQUISITE , IT HAS BEEN HELD THAT THERIGHT TO THE EXCLUSIVE USE OF A CORPORATE NAME WITHFREEDOM FROM INFRINGEMENT BY SIMILARITY IS DETERMINEDBY PRIORITY OF ADOPTION :• In this case, respondent RCP was incorporated on October

13, 1976 and since then has been using the corporatename "Refractories C orp. of the Philippines".

• Meanwhile, petitioner was incorporated on August 23,1979 originally under the name " SynclaireManufacturing Corporation ".

• It only started using the name "Industrial RefractoriesCorp. of the Philippines" when it amended its Articles ofIncorporation on August 23, 1985, or nine (9) years afterrespondent RCP started using its name.

• Thus, being the prior registrant, respondent RCP has

acquired the right to use the w ord "Refractories" as p art ofits corporat e name.

A NENT THE SECOND REQUISITE , IN DETERMINING THE EXISTENCEOF CONFUSING SIMILARITY IN CORPORATE NAMES , THE TEST IS

WHETHER THE SIMILARITY IS SUCH AS TO MISLEAD A PERSONUSING ORDINARY CARE AND DISCRIMINATION AND THE C OURT MUSTLOOK TO THE RECORD AS WELL AS THE NAMES THEMSELVES .• Petitioner’s corporate name is "Industrial Refractories

Corp. of t he Phils.", while respondent’s is "Refractories

Corp. of t he Phils."• Obviously, both names contain the identical words

"Refractori es", "Corporation" an d "Philippines".• The only word that distinguishes petitioner from

respondent RCP is the word " Industrial " which merelyidenties a corporation’s general eld of activities oroperations.

• We need not linger on these two corporate names toconclude that they are patently similar that even withreasonable care an d observation, confusion might arise.

• It m ust be n oted that bo th cater t o th e sa me clientele, i.e.̧the steel industry.

• In fact, the SEC found that there were instances whendifferent steel companies were actually confused betweenthe two, especially since they also have similar productpackaging.

•

Such ndings are accor ded not only great respect but evennality, and are binding upon this Court, unless it isshown that it had arbitrarily disregarded ormisapprehended evidence before it to such an extent as tocompel a contrary conclusion had such evidence beenproperly appreciated.

• And even without such proof of actual confusion betweenthe two corporate names, it suffices that confusion isprobable or likely to occ ur.

Refractory materials are d escribed as follows:"Refractories are structural materials used at hightemperatures to [sic] industrial furnaces. Th ey are suppliedmainly in the form of brick of standard sizes and of specialshapes. Refractories also include refractory cem ents, bondingmortars, plastic rebrick, cast ables, ramming mixtures, andother bulk materials such as dead-burned grain magneside,chrome or groun d ganister an d special clay." 35

While the word "refractories" is a generic term, its usageis not widespread and is limited merely to theindustry/trade in which it is used, and its continuous use

by respondent RCP for a considerable period has made theterm so closely identied with it. 36

REPUBLIC PLANTERS BANK VS AGANA, SR.

G.R. NO. 51765 MARCH 3, 1997

22



A PREFERRED SHARE OF STOCK IS ONE WHICH ENTITLES THE

HOLDER THEREOF TO CERTAIN PREFERENCES OVER THE HOLDERS

OF COMMON STOCK :

• The preferences are designed to induce persons tosubscribe for sh ares of a corporation.

PREFERRED SHARES TAKE A MULTIPLICITY OF FORMS : T HE MOST

COMMON FORMS MAY BE CLASSIFIED INTO TWO :

1. Preferred shares as to assets;

o A share which gives the holder thereof preferencein the distribution of the assets o f the corporationin case of l iquidation.

2. Preferred shares as to di vidends.

o A share the holder of which is entitled to receivedividends on said share to the extent agreed upon

before any dividends at all are paid to the holdersof common stock

NO CORPORATION SHALL MAKE OR DECLARE ANY DIVIDEND EXCEPT

FROM THE SURPLUS PROFITS ARISING FROM ITS BUSINESS , OR

DISTRIBUTE ITS CAPITAL STOCK OR PROPERTY OTHER THAN

ACTUAL PROFITS AMONG ITS MEMBERS OR STOCKHOLDERS UNTIL

AFTER THE PAYMENT OF ITS DEBTS AND THE TERMINATION OF ITS

EXISTENCE BY LIMITATION OR LAWFUL DISSOLUTION :

• The board of directors of a stock corporation may declare

dividends o nly out of unrestricted retained earnings.

• The Code, in Section 43, adopting the change made inaccounting terminology, substituted the phrase"unrestricted retained earnings," which may be a moreprecise term, in place of "surplus prots arising fromits business " in the former l aw.

THE DECLARATION OF DIVIDENDS IS DEPENDENT UPON THE

AVAILABILITY OF SURPLUS PROFIT OR UNRESTRICTED RETAINED

EARNINGS , AS THE CASE MAY BE .

• Preferences granted to preferred stockholders do not givethem a lien upon the property of the corporation;

• Nor make them creditors of t he corporation, the right of

the former bei ng always su bordinate t o the latter.

DIVIDENDS ARE THUS PAYABLE ONLY WHEN THERE ARE PROFITS

EARNED BY THE CORPORATION AND AS A GENERAL RULE :

23



• Even if there are ex isting prots, the board of directorshas the discretion to determine whether or n ot dividendsare t o be d eclared.

• Shareholders, both common and preferred, are consideredrisk takers w ho invest capital in the business an d who canlook only to what is left after corporate debts andliabilities are fu lly paid.

REDEEMABLE SHARES ARE SHARES USUALLY PREFERRED , WHICH

BY THEIR TERMS ARE REDEEMABLE AT A FIXED DATE , OR AT THE

OPTION OF EITHER ISSUING CORPORATION , OR THE STOCKHOLDER ,OR BOTH AT A CERTAIN REDEMPTION PRICE :

• A redemption by the corporation of its stock is, in a sense,a rep urchase of it for ca ncellation;

• The present Code allows redemption of shares even if thereare n o unrestricted retained earnings on the books of thecorporation.

• This is a new provision which in effect qualies thegeneral rule that the corporation cannot purchase its ownshares excep t out of current retained earnings.

WHILE REDEEMABLE SHARES MAY BE REDEEMED REGARDLESS OF

THE EXISTENCE OF UNRESTRICTED RETAINED EARNINGS , THIS IS

SUBJECT TO THE CONDITION THAT THE CORPORATION HAS , AFTER

SUCH REDEMPTION , ASSETS IN ITS BOOKS TO COVER DEBTS AND

LIABILITIES INCLUSIVE OF CAPITAL STOCK :

• Redemption, therefore, may not be made where thecorporation is insolvent or i f such redemption will causeinsolvency or i nability of the corporation to meet i ts debtsas they mature.

WHILE THE STOCK CERTIFICATE DOES ALLOW REDEMPTION , THE

OPTION TO DO SO WAS CLEARLY VESTED IN THE PETITIONER BANK :

• The redemption therefore is clearly the type known as

"optional ".

Thus, except as otherwise provided in the stock certicate ,the redemption rests entirely with the corporation andthe stockholder is without right to either compel orrefuse the red emption of its stock.

• Furthermore, the terms and conditions set forth thereinuse the word "may".

• The word "may" denotes discretion, and cannot beconstrued as having a m andatory effect.

SEC . 43 OF THE C ORPORATION C ODE PROHIBITS THE ISSUANCE OF

ANY STOCK DIVIDEND WITHOUT THE APPROVAL OF STOCKHOLDERS ,REPRESENTING NOT LESS THAN TWO - THIRDS (2/3) OF THE

24



OUTSTANDING CAPITAL STOCK AT A REGULAR OR SPECIAL MEETING

DULY CALLED FOR THE PURPOSE :

• Payment of dividends to a stockholder is not a m atter ofright but a m atter of consensus.

• Furthermore, "interest bearing stocks", on which thecorporation agrees absolutely to pay interest beforedividends are pa id to common stockholders, is legal only

when construed as requiring payment of interest a sdividends from net earnings or surpl us on ly.

CASTILLO VS. BALINGHASAYG.R. NO. 150976, OCTOBER 18, 2004

UNDER S ECTION 6 OF B.P. B LG . 68, THE REQUIREMENTS ANDRESTRICTIONS ON VOTING RIGHTS WERE EXPLICITLY PROVIDEDFOR :• "No share may be deprived of voting rights except those

classied and issued as " preferred " or " redeemable "shares, unless otherwise provided in this Code" and

• That "there shall always be a class or series of shares which have complete voting rights."

• Section 6 of the Corporation Code being deemed writteninto Article VII of the Articles of Incorporation of MCPI, itnecessarily follows that u nless Class "B" shares of M CPIstocks are clearly categorized to be "preferred" or"redeemable" shares, the holders of sai d Class "B" sharesmay n ot be d eprived of their vot ing rights.

• Note that there i s n othing in the Articles of Incorporationnor an iota of evidence on record to show that Class "B"

shares were categorized as either "preferred" or"redeemable" sh ares.

• The only possible conclusion is that Class "B" shares fallunder neither category and thus, under the law, areallowed to exercise vo ting ri ghts.

ONE OF THE RIGHTS OF A STOCKHOLDER IS THE RIGHT TOPARTICIPATE IN THE CONTROL AND MANAGEMENT OF THECORPORATION THAT IS EXERCISED THROUGH HIS VOTE :• The right to vote is a right inherent in and incidental to

the ownership of corporate stock, and as such is aproperty right.

• The stockholder cannot be deprived of the right to vote hisstock nor m ay the right be essentially impaired, ei ther bythe legislature or by th e corp oration, without his con sent,through amending the charter, or the by-laws.

Section 148 of the Corporation Code expressly providesthat it shall apply to corporations in existence at the timeof the effectivity of the Code . Hence, the non-impairmentclause i s inapplicable in this instance. When Article VII of the

Articles of Incorporation of MCPI were amended in 1992, the board of directors and stockholders must have been aware of

Section 6 of the Corporation Code and intended that Article VII be construed in harmony with the Code, which was then

already in force an d effect.

Since Section 6 of the Corporation Code expresslyprohibits the deprivation of voting rights, except as to"preferred" and "redeemable" shares, then Article VII ofthe Articles of Incorporation cannot be construed asgranting exclusive voting rights to Class "A" shareholders,to the prejudice of Class "B" shareholders, withoutrunning afoul of t he letter and spirit of the CorporationCode.

25



M AY THE FAILURE OF A CORPORATION TO FILE ITS BY-LAWS

WITHIN ONE MONTH FROM THE DATE OF ITS INCORPORATION , AS

MANDATED BY S ECTION 46 OF THE C ORPORATION C ODE , DOES

NOT RESULT IN ITS AUTOMATIC DISSOLUTION :• Automatic corporate dissolution for failure to le the by-

laws on t ime was never the intention of t he legi slatu re.• Section 46 of corporation code reveal s the l egislative intentto attach a directory , and not mandatory, meaning for the

word "must" in the rst sentence thereof.• Note should be taken of the second paragraph of the law

which allows the ling of the by-laws even prior toincorporation.

o This provision in the same section of the Coderules out mandatory compliance with therequirement of l ing the by-laws "within one (1)month after r eceipt of official notice of the issuanceof its certicate of incorporation by th e Securitiesand Exchange Commission."

• It n ecessarily follows that f ailure to le the by-laws withinthat peri od does n ot imply the "demise" of the corp oration.

• By-laws may be necessary for the "government" of thecorporation but these are subordinate to the articles ofincorporation as well as t o the Corporation Code andrelated statutes.

• The Corporation Code requires the ling of by-laws; it doesnot expressly provide for the consequences of t he non-ling of the sa me within the period provided for in Section46.

• However, such omission has been rectied by PresidentialDecree No. 902-A, where non-compliance may be groundfor suspension or revocation, bu t not au tomatic becausenotice an d hearing is a p art.

SAWADJAAN VS. COURT OF APPEALS

G.R. NO. 141735, JUNE 8, 2005

A CORPORATION WHICH HAS FAILED TO FILE ITS BY-LAWS WITHIN THE PRESCRIBED PERIOD DOES NOT IPSO FACTO LOSES ITS

POWERS AS SUCH :• The SEC Rules on Suspension/Revocation of the

Certicate of Registration of Corporations, d etails the

procedures and remedies that may be availed of before anorder of revocation can be issued.• There is no showing that such a procedure has been

initiated in this case.• De facto corporation: At t he very least, by its failure to

submit its by-laws on time, the AIIBP may be considered ade facto corporation whose right to exercise corporatepowers m ay not be i nquired into collaterally in any privatesuit to which su ch corporations may be a pa rty.

T H E C ORPORATE E NTITY

DE LEON VS. NLRC

G.R. NO. 112661, MAY 30, 2001

27



PIERCING CORPORATE VEIL APPLIED:

Labor Arbiter correctly applied the doctrine of piercingthe corporate veil to hold all respondents liable for unfairlabor practice and illegal termination of petitioners'employment :

• It is a fundamental principle in corporation law that acorporation is an entity separate and distinct from itsstockholders and from other corporations to which it isconnected.

• However, when the concept of separate legal entity is usedto defeat public convenience, justify wrong, protectfraud or defend crime, the law will regard thecorporation as a n association of persons, or in case o f twocorporations, merge them into one.

• The separate juridical personality of a corporation mayalso be disregarded when such corporation is a mere alterego or bu siness con duit of another person.

LIPAT VS. PACIFIC BANKING

G.R. NO. 142435, APRIL 30, 2003

W HEN THE CORPORATION IS THE MERE ALTER EGO OR BUSINESS

CONDUIT OF A PERSON , THE SEPARATE PERSONALITY OF THE

CORPORATION MAY BE DISREGARDED :

• This is commonly referred as the " instrumentality rule "

or th e a lter ego doctrine.

• Where one corporation is so organized and controlled andits affairs are conducted so that it is, in fact, a mereinstrumentality or ad junct of the oth er, the ction of thecorporate entity of the 'instrumentality' may bedisregarded.

• The control necessary is not majority or even complete

stock control but such domination of nances, policiesand practices that t he controlled corporation has, so t ospeak, no separate mind, will or existence of i ts own, andis b ut a c onduit for i ts p rincipal.

PAMPLONA PLANTATION COMPANY, INC VS TINGHILG.R. NO. 159121, FEBRUARY 3, 2005

T O PROTECT THE RIGHTS OF LABOR , TWO CORPORATIONS WITHIDENTICAL DIRECTORS , MANAGEMENT , OFFICE AND PAYROLLSHOULD BE TREATED AS ONE ENTITY ONLY :• A suit by the employees against one corporation should be

deemed as a suit against the other.• Also, the rights and claims of workers should not be

prejudiced by the acts of the employer that t end to confusethem about i ts co rporate identity.

• The corporate ction must yield to truth and justice.

28



MOBILIA PRODUCTS, INC., VS. UMEZAWA

G.R. NO. 149357, MARCH 04, 2005

IT IS THE RTC WHICH HAS JURISDICTION AND NOT SEC.

The bare fact that the resp. was the president andgeneral manager of pet. corporation when the crimescharged were allegedly committed and was then astockholder thereof does not in itself deprive RTC.

T HE PROPERTY OF THE CORPORATION IS NOT THE PROPERTY OF

THE STOCKHOLDERS OR MEMBERS OR OFFICERS WHO ARE

STOCKHOLDERS :

• Properties registered in the name of the corporation areowned by it as an entity separate and distinct from itsmembers.

• While shares of stock constitute personal property, they donot represent property of the corporation.

• The corporation has property of its own which consistschiey of real estate.

A SHARE OF STOCK ONLY TYPIFIES AN ALIQUOT PART OF THE

CORPORATION ’S PROPERTY , OR THE RIGHT TO SHARE IN ITS

PROCEEDS TO THAT EXTENT WHEN DISTRIBUTED ACCORDING TO

LAW AND EQUITY BUT ITS HOLDER IS NOT THE OWNER OF ANY PARTOF THE CAPITAL OF THE CORPORATION :

• Nor is h e en titled to th e possession of any denite portionof its pro perty or a ssets.

• The stockholder is not a co-owner or tenant in common ofthe co rporate p roperty.

• The ownership of that property is in the corporation, andnot in the holders of sh ares of its stock .

• The interest of each stockholder consists in the right to aproportionate part of the prots whenever dividends aredeclared by the co rporation, during its ex istence, under i tscharter, and to a like proportion of the property rem aining,upon the termination or dissolution of the corporation,after pa yment of its debts.

• A fraudulent act may give rise to liability for violation ofthe rules of the SEC cognizable by the S EC, as well ascriminal liability for violation of RPC cognizable by theregular co urts, both charges to be led and proceededindependently, and may be simultaneously with theother .

29



T HE PROPERTY OF THE CORPORATION IS NOT THE PROPERTY OF

THE STOCKHOLDERS OR MEMBERS OR OF ITS OFFICERS WHO ARE

STOCKHOLDERS :

• Properties registered in the name of the corporation areowned by it as an entity separate and distinct from itsmembers.

• While shares of stock constitute personal property, they donot represent property of the corporation.

• The corporation has property of its own which consistschiey of real est ate

• A share of stock only typies an aliquot part of thecorporation’s p roperty, or the ri ght to sh are i n its p roceedsto that extent when distributed according to law andequity, but its h older is n ot the owner of any part of thecapital of the corporation.

• Nor is h e en titled to th e possession of any denite portionof its p roperty or a ssets

• The stockholder is not a co-owner or tenant in common of

the corp orate property.

TITLE OF A CORPORATION , AND THE INTEREST OF ITS MEMBERS OR

STOCKHOLDERS IN THE PROPERTY OF THE CORPORATION :

• The ownership of that property is in the corporation, andnot in the h olders of shares o f its stock .

• The interest of each stockholder consists in the right to aproportionate part of the prots whenever dividends aredeclared by the co rporation, during its ex istence, under i tscharter, and to a like proportion of the property rem aining,upon the termination or dissolution of the corporation,after pay ment of its debts.

F ABIA V . C OURT OF A PPEALS : S ECTION 5 OF P.D. N O. 902-ASHOULD BE TAKEN IN CONJUNCTION WITH S ECTION 6 OF THE LAW :

• Sec. 5 of PD 902-A mandates that cases involvingfraudulent a ctions and devices which are detrimental tothe interest of stockholders, members or associates anddirectors of the corporation are within the original an dexclusive jurisdiction of the SEC.

• Taken in conjunction with Sec. 6 of the same law, it will begathered that the fraudulent acts/schemes which the S ECshall exclusively investigate a nd prosecute are those " in

violation of any law or rules and regulationsadministered and enforced by the Commission" alone .

• This investigative and prosecutorial powers of the SEC arefurther "without prej udice to any liability for violation ofany provision of The Revised Penal Code."

o Filing of the civil/intra-corp orate case before theSEC does not preclude the simultaneous andconcomitant ling of a cri minal act ion before theregular cou rts;

30

http://www.lawphil.net/judjuris/2002/sep2002/132684.htm














o Such that, a fraudulent act may give rise toliability for v iolation of t he ru les and regulations ofthe SEC cognizable by the SEC itself, as well ascriminal l iability f or violation of th e Revised PenalCode cognizable by the regular courts, bothcharges to be led and proceeded independently,and may be si multaneously with the ot her.

A DISPUTE INVOLVING THE CORPORATION AND ITS STOCKHOLDERS

IS NOT NECESSARILY AN INTRA -CORPORATE DISPUTE COGNIZABLE

ONLY BY THE S ECURITIES AND E XCHANGE C OMMISSION :

• Nor does it ipso facto negate the jurisdiction of theRegional Trial Court over t he su bject cases.

• Not every conict between a corporation and itsstockholders involves corp orate matters t hat on ly the SECcan resolve in the exercise of its adjudicatory or quasi-

judicial powers.

• A contrary interpretation would distort the meaning and

intent of P. D. 90 2-A, t he law re-organizing the Securities

and Exchange Commission.

• The better po licy in determining which body has j urisdiction

over a ca se w ould be to con sider not only the rel ationship ofthe p arties but also the nature of t he qu estions rai sed in the

subject of the co ntroversy.

o Even a SEC ruling v oiding the resol ution authorizing

the ling of criminal charges versus the accused

Hajime Umezawa can have no bearing on thevalidity of the informations led in these three

criminal cases as pointed out by privatecomplainant, the public offenses of qua lied theft

and estafa can [be] prosecuted de offi cio."

JARDINE DAVIES INC. VS. JRB REALTY, INC.

G.R. NO. 151438 JULY 15, 2005

A CORPORATION IS AN ARTIFICIAL BEING INVESTED BY LAW WITH A

PERSONALITY SEPARATE AND DISTINCT FROM ITS STOCKHOLDERS

AND FROM OTHER CORPORATIONS TO WHICH IT MAY BE

CONNECTED :

• While a corporation is allowed to exist solely for a lawfulpurpose, the law will regard i t as an association of personsor in case of two corporations, merge them into one,

when this corporate legal entity is used as a cloak forfraud or i llegality.

31



• This is the doctrine of piercing the veil of corporate ction which applies only when such corporate ction is used to

defeat p ublic convenience, justify wrong, prot ect fraud ordefend crime.

• The rationale behind piercing a corporation’s identity is toremove the barrier between the corporation from thepersons comprising it to thwart t he fraudulent an d illegalschemes of those who use the corporate personality as ashield for u ndertaking certain proscribed activities.

A SUBSIDIARY HAS AN INDEPENDENT AND SEPARATE JURIDICAL

PERSONALITY , DISTINCT FROM THAT OF ITS PARENT COMPANY ;HENCE , ANY CLAIM OR SUIT AGAINST THE LATTER DOES NOT BIND

THE FORMER , AND VICE VERSA . I N APPLYING THE DOCTRINE , THE

FOLLOWING REQUISITES MUST BE ESTABLISHED :

(1) Control , not m erely majority or com plete st ock control;

(2)Such control must have been used by the defendant tocommit fraud or wrong, to perpetuate the violation of astatutory or other positive legal duty, or dishonestacts in contravention of pl aintiff’s l egal rights; an d

(3)The aforesaid control and breach of duty mustproximately cause the injury or un just loss complainedof.

T HE EXISTENCE OF INTERLOCKING DIRECTORS , CORPORATE

OFFICERS AND SHAREHOLDERS IS NOT ENOUGH JUSTIFICATION TOPIERCE THE VEIL OF CORPORATE FICTION IN THE ABSENCE OF

FRAUD OR OTHER PUBLIC POLICY CONSIDERATIONS :

•

But even when there is dominance over the affairs of thesubsidiary, t he doctrine of piercing the veil of corporatection applies only when such ction is used to defeatpublic convenience, justify wrong, protect fraud or defendcrime.

• To warrant resort to this extraordinary remedy, there must be proof that the corporation is being used as a cloak or

cover for fraud or illegality, or to work injustice.

• Any piercing of the corporate veil has to be done withcaution.

• The wrongdoing must be clearly and convincinglyestablished.

• It cannot just be presumed.

MENDOZA VS. BANCO REAL

G.R. NO. 140923. SEPTEMBER 16, 2005

T HE GENERAL RULE IS THAT OBLIGATIONS INCURRED BY ACORPORATION , ACTING THROUGH ITS DIRECTORS , OFFICERS OREMPLOYEES , ARE ITS SOLE LIABILITIES :

32



PROPRIETORSHIP IS NOT VESTED WITH JURIDICAL PERSONALITY TO FILE OR DEFEND AN ACTION :

• The law merely recognizes the existence of a soleproprietorship as a form of business organizationconducted for p rot by a single individual and requires i tsproprietor or owner to secure licenses and permits,

register its business name, and pay taxes t o the nationalgovernment.• The law does not vest a separate legal personality on the

sole proprietorship or empower it to le or defend anaction in court.

WHERE AN INDIVIDUAL OR SOLE TRADER ORGANIZES ACORPORATION TO TAKE OVER HIS BUSINESS AND ALL HIS ASSETS ,

AND IT BECOMES IN EFFECT MERELY AN ALTER EGO OF THEINCORPORATOR , THE CORPORATION , EITHER ON THE GROUNDS OF

IMPLIED ASSUMPTION OF THE DEBTS OR ON THE GROUNDS THAT THE BUSINESS IS THE SAME AND IS MERELY BEING CONDUCTED

UNDER A NEW GUISE , IS LIABLE FOR THE INCORPORATOR 'SPREEXISTING DEBTS AND LIABILITIES :• Where the corporation assumes or accepts the debt of its

predecessor in business it is liable and if the transfer ofassets i s i n fraud of credi tors it w ill be liable to th e extentof t he a ssets tr ansferred.

• The corporation is not liable on an implied assumption ofdebts from the receipt of asset s where the incorporator

retains sufficient assets to pay the indebtedness, or wherenone of his assets are tr ansferred to the corporation, or where, although all the assets of the incorporator have been transferred, there is a change in the persons

carrying on the business and the corporation is notmerely an alter ego of t he person to whose business itsucceeded.

o In order f or a c orporation to be able to le su it andclaim the receivables of its predecessor in

business, in this case a sole proprietorship, it

must show proof that the corporation hadacquired the assets and liabilities of the soleproprietorship.

PANTRANCO EMPLOYEES ASSOCIATION VS NLRC

G.R. NO. 170689, MARCH 17, 2009

W HERE ONE CORPORATION SELLS OR OTHERWISE TRANSFERS ALL

ITS ASSETS TO ANOTHER CORPORATION FOR VALUE , THE LATTER ISNOT , BY THAT FACT ALONE , LIABLE FOR THE DEBTS AND

LIABILITIES OF THE TRANSFEROR :

• The persons made liable after the company’s cessation ofoperations were the officers and agents of the corporat ion.

• In the instant case, w hat is being made liable is another

corporation (PNB) which acquired the debtor corpor ation(PNEI).

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 .

34



• The doctrine applies only when such corporate ction is

used to defeat public convenience, justify wrong,protect fraud, or defend crime , or when it is made as ashield to confuse the legitimate issues , or where a

corporation is the mere alter ego or business conduit of

a person , or where the corporation is so organized andcontrolled and its affairs are so conducted as to makeit merely an instrumentality, agency, conduit oradjunct of ano ther corporation .

• To disregard the separate juridical personality of acorporation, the wrongdoing must be established clearlyand convincingly. It cannot be presumed.

JIAO VS NLRCG.R. NO. 182331, APRIL 18, 2012

A CORPORATION THAT PURCHASES THE ASSETS OF ANOTHER WILLNOT BE LIABLE FOR THE DEBTS OF THE SELLING CORPORATION ,PROVIDED THE FORMER ACTED IN GOOD FAITH AND PAID ADEQUATECONSIDERATION FOR SUCH ASSETS , EXCEPT WHEN ANY OF THEFOLLOWING 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 corp orations;3. Where the purchasing corporation is merely a

continuation of the sel ling corporation; and4. Where the selling corporation fraudulently enters into the

transaction to escape l iability for th ose d ebts.

This ction of corporate entity can only be disregarded incases when it is used to defeat public convenience, justify

wrong, protect fraud, or defend crime:• Moreover, t o justify the disregard of t he separate j uridical

personality of a corporation, the wrongdoing must beclearly and convincingly established .

RAMIREZ, ET AL. VS. MAR FISHING CO., INC., ET ALG.R. NO. 168208, JUNE 13, 2012

LEGASPI TOWERS 300 VS. MUERG.R. NO. 170783, JUNE 18, 2012

A DERIVATIVE SUIT MUST BE DIFFERENTIATED FROM INDIVIDUAL AND REPRESENTATIVE OR CLASS SUITS :

SUITS BY STOCKHOLDERS OR MEMBERS OF A CORPORATION BASEDON WRONGFUL OR FRAUDULENT ACTS OF DIRECTORS OR OTHERPERSONS MAY BE CLASSIFIED INTO INDIVIDUAL SUITS , CLASS SUITS ,

AND DERIVATIVE SUITS :1. Where a stockholder or member is denied the right of

inspection, his suit would be individual because the wrong is done to him personally and not to the other

stockholders or t he corporation.2. Where the wrong is done to a group of stockholders, as

where preferred stockholders' rights are violated, a classor representative suit will be p roper for th e p rotection ofall stockholders belonging to the sa me group.

3. But where the acts complained of constitute a wrong tothe corporation itself, the cause of act ion belongs to thecorporation and not to the individual stockholder ormember.

IN MOST EVERY CASE OF WRONG TO THE CORPORATION , EACHSTOCKHOLDER IS NECESSARILY AFFECTED BECAUSE THE VALUE OFHIS INTEREST THEREIN WOULD BE IMPAIRED :

36



• This fact of itself is not sufficient to give him an individualcause of action since th e corporation is a person distinctand separate from him, and can and should itself sue the

wrongdoer.• Otherwise, not only would the theory of s eparate entity be

violated, but there would be multiplicity of suits as well asa violation of t he p riority rights o f creditors.

• Furthermore, there is the difficulty of determining theamount of damages that should be paid to each i ndividualstockholder.

IN CASES OF MISMANAGEMENT WHERE THE WRONGFUL ACTSCOMMITTED BY THE DIRECTORS OR TRUSTEES THEMSELVES :• A stockholder or member may nd that he has no redress

because the directors or trustees are vested by law withthe right to decide whether or no t the corporation shouldsue, and they will never be w illing to su e themselves.

• The corporation would thus be helpless to seek remedy.• Because of t he frequent occurrence of such a situation,

the common law gradually recognized the right of astockholder to sue on behalf of a corporation in whateventually became known as a "derivative su it."

• It has been proven to be an effective remedy of theminority against the abuses of management.

AN INDIVIDUAL STOCKHOLDER IS PERMITTED TO INSTITUTE ADERIVATIVE SUIT ON BEHALF OF THE CORPORATION WHEREIN HEHOLDS STOCK IN ORDER TO PROTECT OR VINDICATE CORPORATERIGHTS , WHENEVER OFFICIALS OF THE CORPORATION REFUSE TOSUE OR ARE THE ONES TO BE SUED OR HOLD THE CONTROL OF THECORPORATION :• In such actions, the su ing stockholder is regarde d as t he

nominal party , with the corporation as the party-in-interest.

IT IS THE CORPORATION THAT IS THE REAL PARTY -IN -INTEREST IN A DERIVATIVE SUIT THE RELIEFS PRAYED FOR MUST BE FOR THE

BENEFIT OR INTEREST OF THE CORPORATION .• When the reliefs prayed for do not pertain to the

corporation, then it is an improper de rivative su it.

T HE REQUISITES FOR A DERIVATIVE SUIT ARE AS FOLLOWS :1. The party bringing suit should be a shareholder as o f thetime of the act or transaction complained of , thenumber of his sh ares n ot being material;

2. He has tried to exhaust intra-corporate remedies , i. e.,has made a demand on the board of directors for theappropriate relief bu t the latter h as failed or refused toheed his plea; and

3. The cause of action actually devolves on thecorporation, the wrongdoing or harm having been, or being

caused to the corporation and not to the particularstockholder bri nging the su it.

T HE STOCKHOLDER ’S RIGHT TO FILE A DERIVATIVE SUIT IS NOTBASED ON ANY EXPRESS PROVISION OF T HE C ORPORATION C ODE :

It is impliedly recognized when the law makescorporate directors or officers liable for damagessuffered by the corporation and its stockholders for

violation of their duciary duties:

HEIRS OF FE TAN UY VS. INTERNATIONAL EXCHANGEBANKG.R. NO. 166282, FEBRUARY 13, 2013

A CORPORATION IS A JURIDICAL ENTITY WHICH IS VESTED WITH ALEGAL PERSONALITY SEPARATE AND DISTINCT FROM THOSE ACTING

37



FOR AND IN ITS BEHALF AND , IN GENERAL , FROM THE PEOPLECOMPRISING IT :• The obligations incurred by the corporation, acting

through its directors, officers an d employees, are its so leliabiliti es.

• A director, officer or employee of a corporation is generally

not h eld personally liable for obligations incurred by thecorporation.• Nevertheless, t his legal ction may be disregarded if it is

used as a means to perpetrate fraud or an illegal act, or asa vehicle for the evasion of an existing obligation, thecircumvention of st atutes, or t o confuse l egitimate i ssues.

SEC. 31. LIABILITY OF DIRECTORS, TRUSTEES OROFFICERS :1. Willfully and knowingly vote for or assent to patently

unlawful acts of the corporation or who are guilty ofgross negligence or bad faith in directing the affairs ofthe corporation or acquire any personal or pecuniaryinterest in conict with their duty as su ch directors ortrustees shall be liable jointly and severally for alldamages resulting therefrom suffered by the corporation,its stockholders or members and other persons.

SOLIDARY LIABILITY WILL THEN ATTACH TO THE DIRECTORS ,OFFICERS OR EMPLOYEES OF THE CORPORATION IN CERTAIN

CIRCUMSTANCES , SUCH AS :1. When directors and trustees or, in appropriate cases, the

officers of a corporation:1. Vote for or assen t to patently unlawful acts of the

corporation;2. Act in bad faith or with gross negligence in

directing the corporate aff airs; and3. Are gu ilty of conict of interest to the prejudice of

the corporation, its stockholders or m embers, andother persons;

2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not

forthwith le with the corporate secretary his writtenobjection thereto;

3. When a director, trustee or officer has contractuallyagreed or stipulated to hold himself personally andsolidarily liable with th e corporation; or

4. When a director, trustee or officer is made, by specicprovision of law, personally liable for h is co rporate action.

BEFORE A DIRECTOR OR OFFICER OF A CORPORATION CAN BEHELD PERSONALLY LIABLE FOR CORPORATE OBLIGATIONS ,HOWEVER , THE FOLLOWING REQUISITES MUST CONCUR :(1)The complainant must allege in the complaint that the

director or offi cer assen ted to patently unlawful acts of thecorporation, or that the officer was guilty of grossnegligence or b ad faith; and

(2)The complainant must clearly and convincingly prove suchunlawful acts, negligence or ba d faith.

THE DETERMINATION OF THE EXISTENCE OF ANY OF THECIRCUMSTANCES THAT WOULD WARRANT THE PIERCING OF THE

VEIL OF CORPORATE FICTION IS A QUESTION OF FACT WHICHCANNOT BE THE SUBJECT OF A PETITION FOR REVIEW ONCERTIORARI UNDER R ULE 45:• This Court can take cognizance of factual issues if the

ndings of the lower court are not supported by theevidence on record or are based on a misapprehension offacts.

A COURT MUST BE CERTAIN THAT THE CORPORATEFICTION WAS MISUSED TO SUCH AN EXTENT THATINJUSTICE, FRAUD, OR CRIME WAS COMMITTED

AGAINST ANOTHER, IN DISREGARD OF ITS RIGHTS: • The wrongdoing must be clearly and convincingly

established;

38



• It cannot be presumed.• Otherwise, an injustice that was never unintended may

result from an erroneous a pplication.

VARIATION OF THE DOCTRINE OF PIERCING THE VEIL OFCORPORATE FICTION :•

When two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties,

disregard the legal ction that two corporations aredistinct en tities and treat them as identical or one andthe same .

PROBATIVE FACTORS OF IDENTITY THAT WILL JUSTIFY THE APPLICATION OF THE DOCTRINE OF PIERCING THE CORPORATE VEIL

(CONCEPT B UILDERS , I NC . V NLRC) :

(1) Stock ownership by one or common ownership of bothcorporations;(2) Identity of directors a nd officers;(3) The manner of keeping corporate books and records, and(4) Methods of conducting the business.

STRONGHOLD INSURANCE CO., INC. VS. CUENCAG.R. NO. 173297, MARCH 6, 2013

EVEN WHEN THE FORECLOSURE ON THE ASSETS OF THECORPORATION WAS WRONGFUL AND DONE IN BAD FAITH THESTOCKHOLDERS HAD NO STANDING TO RECOVER FOR THEMSELVESMORAL DAMAGES :• Otherwise, they would be appropriating and distributing

part of t he corporation’s assets p rior to th e dissolution ofthe corporation and the liquidation of its debts andliabiliti es.

WHETHER OR NOT THE MINORITY STOCKHOLDERS HAD THE RIGHT TO BRING AN ACTION FOR DAMAGES AGAINST THE PRINCIPAL

OFFICERS OF THE CORPORATION FOR THEIR OWN BENEFIT :• The complaint is for action for damages resulting from

mismanagement of the affairs and assets of the

corporation by its principal officer, it b eing alleged thatdefendant’s maladministration has brought about the ruinof the corporation and the consequent loss of value of itsstocks.

• The injury complained of is thus primarily to thecorporation, so that the suit for the damages claimedshould be by the corporation rather than by thestockholders;

• The stockholders may not directly claim those damages forthemselves for that would result in the appropriation by,and the distribution among them of part of the corporateassets before the dissolution of the corporation and theliquidation of its debts and liabilities, som ething whichcannot be legally done

o In the p resent case, the p laintiff stockholders havebrought the action not for the benet of thecorporation but for t heir ow n benet, since t hey askthat the d efendant make go od the losses occasi onedby his mismanagement and pay to them the valueof thei r resp ective participation in the corporateassets o n the b asis o f their r espective h oldings.

o Clearly, t his cannot be done until al l corporatedebts, if there b e a ny, are p aid and the ex istence ofthe corporation terminated by the limitation of itscharter or by lawful d issolution in view of the

provisions of section 16 of the Corporation Law.

PNB VS. HYDRO RESOURCES CONTRACTORS CORP

39



G.R. No. 167530 March 13, 2013

A CORPORATION IS AN ARTIFICIAL ENTITY CREATED BY OPERATIONOF LAW . I T POSSESSES THE RIGHT OF SUCCESSION AND SUCHPOWERS , ATTRIBUTES , AND PROPERTIES EXPRESSLY AUTHORIZEDBY LAW OR INCIDENT TO ITS EXISTENCE :• It ha s a personality separate an d distinct from that of i ts

stockholders an d from that of other corporat ions to whichit may be connected.

• As a consequence of its status as a distinct legal entityand as a result of a conscious policy decision to promotecapital formation, a corporation incurs its ownliabilities and is legally responsible for payment of itsobligations .

o The corporate debt or credit is not the debt orcredit of t he stockholder.

o This protection from liability for shareholders is theprinciple of limited liability.

THE CORPORATE MASK MAY BE REMOVED OR THE CORPORATE VEILPIERCED WHEN THE CORPORATION IS JUST AN ALTER EGO OF APERSON OR OF ANOTHER CORPORATION :• The corporate veil will justiably be impaled only when it

becomes a shield for fraud, illegality or inequity committedagainst t hird p ersons.

• Any application of the doctrine of piercing thecorporate veil should be done with caution .

• A court should be mindful of the milieu where it is to beapplied.

• It must be certain that the corporate ction was misusedto such an extent that injustice, fraud, or cri me wascommitted against another, in disregard of its ri ghts.

• The wrongdoing must be clearly and convincinglyestablished; it cannot be p resumed.

T HE DOCTRINE OF PIERCING THE CORPORATE VEIL APPLIES ONLYIN THREE (3 ) BASIC AREAS , NAMELY :1) Defeat of public convenience as w hen the corporate ct ion

is used as a vehicle for the evasion of an existingobligation;

2) Fraud cases or w hen the corp orate en tity is u sed to justify

a wrong, protect fraud, or defend a crime; or3) Alter ego cases, where a corporation is m erely a farce si nce

it is a mere alter ego or bu siness conduit of a person, orwhere t he corporat ion is so organized and controlled and itsaffairs are so conducted as to make it merely aninstrumentality, a gency, cond uit or adjunct of a nothercorporation (not su bscribed by sir: the alter eg o doctrine)

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 com plete stock control , but

complete domination, not only of nances but ofpolicy and business practice in respect to thetransaction attacked so that the corporate entity as tothis transaction had at the time no separate mind, willor exi stence o f its own;

(2) Such control must have been used by the defendant tocommit fraud or wrong, to perpetuate the violation ofa statutory or other positive legal duty, or dishonestand unjust act i n contravention of plaintiff’s legal right;and

(3)The aforesaid control and breach of duty must haveproximately caused the i njury or u njust loss complainedof.

THE FIRST PRONG IS THE "INSTRUMENTALITY" OR"CONTROL" TEST:

40



• This test requires that the subsidiary be completely underthe control and domination of the parent:

• It inquires whether a subsidiary corporation is soorganized and controlled and its affairs are so con ductedas to make it a mere instrumentality or agent of theparent corporation such that its separate existence as

a distinct corporate en tity will be ignored .• It seeks to establish whether the subsidiary corporation

has no autonomy and the parent corporation, thoughacting through the subsidiary in form and appearance, "isoperating th e b usiness directly for i tself."

THE SECOND PRONG IS THE "FRAUD" TEST:• This test requires that the parent corporation’s conduct in

using the subsidiary corporation be unjust, fraudulent or wrongful.

It recognizes that piercing is appropriate only if theparent corporation uses the subsidiary in a way thatharms the p laintiff creditor.

• As such, it requires a showing of "an element of injusticeor fundamental unfairness."

THE THIRD PRONG IS THE "HARM" TEST :• This test requires the plaintiff to show that the defendant’s

control, exerted in a fraudulent, illegal or oth erwise u nfairmanner toward it, caused the ha rm suffered.

•

A causal connection between the fraudulent conductcommitted through the instrumentality of thesubsidiary and the injury suffered or the damageincurred by the plaintiff should be established.

PIERCING THE CORPORATE VEIL BASED ON THE ALTER EGO THEORYREQUIRES THE CONCURRENCE OF THREE ELEMENTS : (1) Control of the corporation by the stockholder or p arent

corporation,

(2) Fraud or f undamental unfairness imposed on the plaintiff,and harm or

(3) Damage caused to the plaintiff by the fraudulent or un fairact of the c orporation.

The absence of any of these elements preventspiercing the corporate veil.

IN APPLYING THE ALTER EGO DOCTRINE , THE COURTS ARECONCERNED WITH REALITY AND NOT FORM , WITH HOW THECORPORATION OPERATED AND THE INDIVIDUAL DEFENDANT ’SRELATIONSHIP TO THAT OPERATION :

• With respect to the control element, it refers not topaper or formal control by m ajority or even completestock control but actual control which amounts to"such domination of nances, policies andpractices that the controlled corporation has, so tospeak, no separate mind, will or existence of itsown, and is but a conduit for its principal ."

• In addition, the control must be shown to have beenexercised at the time the acts complained of tookplace.

W HILE OWNERSHIP BY ONE CORPORATION OF ALL OR A GREAT

MAJORITY OF STOCKS OF ANOTHER CORPORATION AND THEIRINTERLOCKING DIRECTORATES MAY SERVE AS INDICIA OFCONTROL , BY THEMSELVES AND WITHOUT MORE , HOWEVER , THESE

CIRCUMSTANCES ARE INSUFFICIENT TO ESTABLISH AN ALTER EGORELATIONSHIP OR CONNECTION THAT WILL JUSTIFY THEPUNCTURING OF THE LATTER ’S CORPORATE COVER :

MERE OWNERSHIP BY A SINGLE STOCKHOLDER OR BY ANOTHERCORPORATION OF ALL OR NEARLY ALL OF THE CAPITAL STOCK OF ACORPORATION IS NOT OF ITSELF SUFFICIENT GROUND FORDISREGARDING THE SEPARATE CORPORATE PERSONALITY :

41



• No su ch injury w as proven i n this case.

A FAMILY CORPORATION IS NOT EXEMPT FROM COMPLYING WITH THE CLEAR REQUIREMENTS AND FORMALITIES OF THE RULES FOR

FILING A DERIVATIVE SUIT :• There is nothing in the pertinent laws or rules which state

that there is a distinction between x x x familycorporations x x x and other types of corporations in theinstitution by a stockholder of a d erivative su it.

PROHIBITION AGAINST NUISANCE AND HARASSMENT SUITS . -NUISANCE AND HARASSMENT SUITS ARE PROHIBITED . I NDETERMINING WHETHER A SUIT IS A NUISANCE OR HARASSMENTSUIT , THE COURT SHALL CONSIDER , AMONG OTHERS , THEFOLLOWING :(1) The extent of the shareholding or interest of the

initiating stockholder o r m ember;(2) Subject m atter of the s uit;(3) Legal and factual basis of t he complaint;(4) Availability of appraisal rights for the act or actscomplained of; and(5) Prejudice or damage to the corporation, partnership, orassociation in relation to the relief sou ght.• In case of nuisance or ha rassment sui ts, the court may,

motu p roprio or upon m otion, forthwith d ismiss t he cas e.

T&H SHOPFITTERS/GIN QUEEN CORPORATION, ET AL. VS. T&H SHOPFITTERS/GIN QUEEN WORKERS UNION, ET AL

G.R. NO. 191714, FEBRUARY 26, 2014

IN ESSENCE , ULP RELATES TO THE COMMISSION OF ACTS THAT TRANSGRESS THE WORKERS ’ RIGHT TO ORGANIZE :

• Indubitably, t he various acts of p etitioners, taken together,reasonably s upport an inference t hat, indeed, such w ere a llorchestrated to restrict r espondents’ f ree exercise of thei rright t o self-orga nization.

• The Court is of the considered view that petitioners’undisputed actions prior and immediately before thescheduled certication election, while seemingly innocuous,unduly meddled in the affairs o f its e mployees in selectingtheir exclusive b argaining rep resentative.

LIVESEY VS. BINSWANGER PHILIPPINES, INC., ET ALG.R. NO. 177493, MARCH 19, 2014

THE LAW VESTS A CORPORATION WITH A PERSONALITY DISTINCT AND SEPARATE FROM ITS STOCKHOLDERS OR MEMBERS :

• Circumstances might deny a claim for corporatepersonality, under the “ doctrine of piercing the veil ofcorporate ction. ”

PIERCING THE VEIL OF CORPORATE FICTION IS AN EQUITABLEDOCTRINE DEVELOPED TO ADDRESS SITUATIONS WHERE THESEPARATE CORPORATE PERSONALITY OF A CORPORATION IS

ABUSED OR USED FOR WRONGFUL PURPOSES : •

The corporate existence may be disregarded where theentity is formed or used for non–legitimate purposes ,such as to evade a just and due obligation, or to justify a

wrong, to shield or perpetrate fraud or to carry out similaror inequitable considerations, ot her u njustiable aims orintentions,in which case, t he ction will be disregardedand the i ndividuals composing it and the t wo corporations

will be treated as identical.

43



In the indubitable link between CBB’s closure andBinswanger’s incorporation.• CBB ceased to exist only in name; it re–emerged in the

person of Binswanger for an urgent purpose — to avoid payment by CBB of the last two installments of its

monetary ob ligation to Livesey, as w ell as i ts other nancial

liabilities.• Freed of C BB’s liabilities, especially that ow ing to Livesey,Binswanger can continue, as it did continue, CBB’s realestate brokerage b usiness.

• To close the corporation and organize another for the purpose of evading CBB’s liabilities to Livesey and it nancial liabilities.

• This w rongful intent we can not an d must not condone, for itwill give a premium to an iniquitous business strategywhere a corporation is formed or use d for a non–legitimate

purpose, such as to evade a just and due obligation.

FILIPINAS BROADCASTING NETWORK, INC., VS AGOMEDICAL AND EDUCATIONAL CENTER-BICOL CHRISTIANCOLLEGE OF MEDICINE, (AMEC-BCCM)

G.R. No. 141994, January 17, 2005

A JURIDICAL PERSON IS GENERALLY NOT ENTITLED TO MORALDAMAGES BECAUSE , UNLIKE A NATURAL PERSON , IT CANNOTEXPERIENCE PHYSICAL SUFFERING OR SUCH SENTIMENTS AS

WOUNDED FEELINGS , SERIOUS ANXIETY , MENTAL ANGUISH ORMORAL SHOCK :• AMEC's claim for moral damages falls under item 7 of

Article 2219 of the Civil Code.

• This provision expressly authorizes the recovery of moraldamages in cases of l ibel, slander or a ny other form ofdefamation.

• Article 2219(7) does n ot qualify whether the plaintiff is anatural 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.o Moreover, where t he b roadcast i s l ibelous p er se, the

law implies d amages. In such a case, evidence ofan honest mistake or the want of c haracter orreputation of the party libeled goes only inmitigation of damages. Neither i n such a case is t he

plaintiff required to introduce evidence of actualdamages a s a condition precedent to the recovery ofsome damages. In this case, the broadcasts arelibelous per se. Th us, A MEC is entitled to moraldamages.

S TO CK H O LDER S

PHILIPPINE TRUST COMPANY VS. MARCIANO RIVERAG.R. NO. L-19761, JANUARY 29, 1923

Reduction of subscription is ineffectual and Rivera muststill pay:

SUBSCRIPTION TO THE CAPITAL OF A CORPORATION CONSTITUTE AFUND TO WHICH CREDITORS HAVE A RIGHT TO LOOK FORSATISFACTION OF THEIR CLAIMS AND THAT THE ASSIGNEE ININSOLVENCY CAN MAINTAIN AN ACTION UPON ANY UNPAID STOCKSUBSCRIPTION IN ORDER TO REALIZE ASSETS FOR THE PAYMENT OFITS DEBTS :• A corporation has no power to release an original

subscriber t o its ca pital stock from the ob ligation of paying

44



for h is shares, without a valuable consideration for su chrelease;

• And as against creditors a reduction of the capital stockcan take place only in the manner an under theconditions prescribed by the stat ute or the charter or thearticles o f incorporation.

• Moreover, strict com pliance with the stat utory regu lationsis necessary

o In the case before us the resolution releasing theshareholders from their obligation to pay 50 percentum of their respective subscriptions was anattempted withdrawal of so m uch capital from the

fund upon which the company's creditors wereentitled ultimately to rely and, having been effectedwithout compliance w ith the st atutory r equirements,was w holly ineffectual.

HALLEY VS PRINTWELL, INC., G.R. No. 157549, May 30, 2011

A CORPORATION HAS NO POWER TO RELEASE A SUBSCRIPTION ORITS CAPITAL STOCK , WITHOUT VALUABLE CONSIDERATION FOR SUCHRELEASES , AND AS AGAINST CREDITORS , A REDUCTION OF THECAPITAL STOCK CAN TAKE PLACE ONLY IN THE MANNER AND UNDER

THE CONDITIONS PRESCRIBED BY THE STATUTE OR THE CHARTEROR THE A RTICLES OF I NCORPORATION :

T HE TRUST FUND DOCTRINE ENUNCIATES A RULE THAT THEPROPERTY OF A CORPORATION IS A TRUST FUND FOR THE PAYMENTOF CREDITORS , BUT SUCH PROPERTY CAN BE CALLED A TRUSTFUND ‘ ONLY BY WAY OF ANALOGY OR METAPHOR :’ • It i s established doctrine that su bscriptions to the capital

of a corporation constitute a fund to which creditors h avea ri ght to look for sa tisfaction of their claims a nd that t heassignee in insolvency can maintain an action upon

any unpaid stock subscription in order to realizeassets for the payment of its debts.

T RUST FUND DOCTRINE IS NOT LIMITED TO REACHING THESTOCKHOLDER ’S UNPAID SUBSCRIPTIONS :• The scope of the doctrine when the corporation is

insolvent encom passes n ot on ly the capital stock, bu t alsoother p roperty an d assets generally regarded in equity as atrust f und for the payment of corporate debts.

• All assets and property belonging to the corporation heldin trust for the benet of creditors tha t were d istributed orin the possession of the stockholders, r egardless of fullpayment of t heir subscriptions, may be reached by thecreditor in satisfaction of i ts cl aim.

UNDER THE TRUST FUND DOCTRINE , A CORPORATION HAS NOLEGAL CAPACITY TO RELEASE AN ORIGINAL SUBSCRIBER TO ITSCAPITAL STOCK FROM THE OBLIGATION OF PAYING FOR HISSHARES , IN WHOLE OR IN PART , WITHOUT A VALUABLECONSIDERATION , OR FRAUDULENTLY , TO THE PREJUDICE OFCREDITORS :• The creditor is allowed to maintain an action upon any

unpaid subscriptions and thereby steps into the shoes ofthe corporation for th e s atisfaction of its d ebt.

• To make out a prima facie case in a suit againststockholders of an insolvent corporation to compel them to

contribute to the payment of its debts by making goodunpaid balances upon their subscriptions, it is onlynecessary to est ablish that the stockholders have not ingood faith paid the par value of the stocks of thecorporation.

LIABILITY OF STOCKHOLDERS FOR CORPORATE DEBTS IS UP TO THE EXTENT OF THEIR UNPAID SUBSCRIPTION :

45



o It is therefore within the power of respondent SECto adjudicate.

SEC CORRECTLY RULED IN FAVOR OF THE REGISTERING OF THE

SHARES OF STOCK IN QUESTION IN PRIVATE RESPONDENT 'S NAMES .SUCH RULING FINDS SUPPORT UNDER S ECTION 63 OF THE

CORPORATION C ODE , TO WIT :

Sec. 63. . . . Shares of st ock so issued are p ersonal propert yand may be transferred by delivery of the certicate orcerticates indorsed by the owner or his attorney-in-fact orother p erson legally authorized to make the tr ansfer.

•

No transfer, however, shall be valid, except as between theparties, un til the tr ansfer is record ed in the books of thecorporation . . .

SEC . 63 OF THE C ORPORATION C ODE CONTEMPLATES NO

RESTRICTION AS TO WHOM THE STOCKS MAY BE TRANSFERRED :

•

It does not suggest that any discrimination may be created by the corporation in favor of, or against a certain

purchaser.

• The owner of shares, as owner of personal property, is atliberty, under said section to dispose them in favor of

whomever he pleases, without limitation in this respect,than the gen eral provisions o f law. . . .

• The only limitation imposed by Section 63 of theCorporation Code is when the corporation holds anyunpaid claim against the shares intended to betransferred, which is ab sent here.

A CORPORATION , EITHER BY ITS BOARD , ITS BY-LAWS , OR THE ACT

OF ITS OFFICERS , CANNOT CREATE RESTRICTIONS IN STOCK

TRANSFERS , BECAUSE :

• . . . Restrictions in the traffic of stock must have theirsource in legislative enactment, as the corporation itselfcannot create such impediment.

• By-laws are intended merely for the protection of thecorporation, and prescribe regu lation, not r estriction; theyare a lways su bject t o th e ch arter of the corporation.

• The corporation, in the absence of such power, cannotordinarily inquire into or pass upon the legality of thetransactions by w hich its stock passes from one person toanother, nor can it question the consideration upon whicha sa le is based.

T HE RIGHT OF A TRANSFEREE / ASSIGNEE TO HAVE STOCKS

TRANSFERRED TO HIS NAME IS AN INHERENT RIGHT FLOWING FROM

HIS OWNERSHIP OF THE STOCKS :

47



• Whenever a corporation refuses to transfer and registerstock in cases like the present, mandamus will lie tocompel the officers of the corporation to transfer saidstock in the books of the corp oration"

T HE CORPORATION 'S OBLIGATION TO REGISTER IS MINISTERIAL :

• In transferring stock , the sec retary of a corp oration acts inpurely ministerial cap acity, and does not try to d ecide thequestion of ownership.

• The duty of the corporation to transfer is a ministerial oneand if it refuses to make such transaction without good

cause, it may be compelled to do so b y mandamus .

BATANGAS LAGUNA TAYABAS BUS CO, INC. VS BITANGA

G.R. NO. 137934, AUGUST 10, 2001

UNTIL REGISTRATION IS ACCOMPLISHED , THE TRANSFER , THOUGH

VALID BETWEEN THE PARTIES , CANNOT BE EFFECTIVE AS AGAINST

THE CORPORATION :

• Thus, the unrecorded transferee, the Bitanga group in thiscase, can not vote n or b e voted for.

• The purpose of registration, therefore, is two-fold:

1. To enable the transferee t o exercise al l the rights ofa stockholder, including the right to vote and to be

voted for, and

2. To inform the corporation of any change in shareownership so that it can ascertain the personsentitled to th e ri ghts a nd subject t o th e liabilities o fa stockholder.

UNTIL CHALLENGED IN A PROPER PROCEEDING , A STOCKHOLDER

OF RECORD HAS A RIGHT TO PARTICIPATE IN ANY MEETING :

• His vote can be properly counted to determine whether astockholders' resolution was a pproved, despite the claim ofthe alleged transferee.

• On the other hand, a person who has purchased stock,and who desires to be recognized as a st ockholder for thepurpose of voting, must secure such a standing by h avingthe tr ansfer r ecorded on the corp orate books.

• Until the transfer is registered, the transferee is not astockholder b ut an outsider.

THE RURAL BANK OF LIPA CITY, INC. VS COURT OF APPEALS

48



G.R. NO. 124535, SEPTEMBER 28, 2001

SECTION 63. Certicate of stock and transfer of shares . — The capital stock of stock corporations shall be divided into

shares for which certicates signed by the president or vi cepresident, countersigned by the secretary or assistantsecretary, and sealed with the sea l of the corporation shall beissued in accordance with the by-laws.

Shares of stocks so issued are personal propertyand may be transferred by delivery of thecerticate or certicates indorsed by the owner orhis attorney-in-fact or other person legallyauthorized to make the transfer.

• No transfer, how ever, sha ll be valid, except as

between the parties, until the transfer is

recorded in the b ooks o f the corporat ion so a s t oshow the names of the parties to the

transaction, the date of t he transfer, the numberof t he certicate or cer ticates and the number

of sh ares transferred .

• No sh ares o f stock a gainst which t he corporat ion

holds a ny unpaid claim shall be transferable in

the b ooks of the corp oration.

While it may be true that there was an assignment ofprivate respondents' shares to the petitioners, saidassignment was not sufficient to effect the transfer ofshares since there was no endorsement of the certicatesof stock by the owners, their attorneys-in-fact or any

other person legally authorized to make the transfer :

• Moreover, petitioners a dmit that t he assignment of shares was not coupled with delivery, the absence of which is a

fatal de fect.

• The rule is that the delivery of the stock certicateduly endorsed by the owner is the operative act oftransfer of shares from the lawful owner to the

transferee.• Thus, title may be vested in the transferee only by

delivery o f the d uly indorsed certicate of st ock.

W E HAVE UNIFORMLY HELD THAT FOR A VALID TRANSFER OF

STOCKS , THERE MUST BE STRICT COMPLIANCE WITH THE MODE OF

TRANSFER PRESCRIBED BY LAW . T HE REQUIREMENTS ARE :

(a)There must be delivery of the stock certicate:

(b)The certicate must be endorsed by the owner or hisattorney-in-fact or other persons legally authorized tomake the tr ansfer; and

49



(c)To be valid against third parties, the transfer must berecorded in the books of the corp oration.

• As it is, compliance with any of these requisites hasnot been clearly and sufficiently shown.

It may be argued that despite non-compliance with therequisite endorsement and delivery, the assignment was valid

between the parties, meaning the private respondents asassignors an d the petitioners as a ssignees.

While the assignment may be valid and binding on thepetitioners and private respondents, it does notnecessarily make the transfer effective :

• Consequently, the petitioners, as mere assignees,cannot enjoy the status of a st ockholder, cannot votenor be voted for, and will not be entitled to dividends,insofar as t he assigned shares ar e concerned

•

Parenthetically, the p rivate respo ndents ca nnot, as yet, be deprived of their rights as stockholders, until and

unless the issue of ownership and transfer of t heshares i n question is resol ved with nality.

Guy vs. Guy, et al., G.R. 89486, September 5, 2012

LIM TAY VS COURT OF APPEALS

G.R. NO. 126891 AUGUST 5, 1998

T HE DUTY OF A CORPORATE SECRETARY TO RECORD TRANSFERS

OF STOCKS IS MINISTERIAL :

• However, he cannot be compelled to do so when thetransferee's ti tle to sa id shares has no pri ma facie validityor is u ncertain.

• More sp ecically, a pledgee, pri or to f oreclosure an d sale,does not acquire ownership rights over the pledged sharesand thus can not compel the corporate secretary to recordhis alleged ownership of such shares on the basis merelyof the contract of pledge.

• Similarly, the SEC does not acquire jurisdiction over a

dispute when a party's claim to being a shareholder is, onthe face of the complaint, invalid or inadequate or isotherwise negated by the very allegations of suchcomplaint.

• Mandamus will not issue to establish a right, but only toenforce on e tha t is a lready estab lished.

50



GARCIA VS. JOMOUADG.R. No. 133969, January 26, 2000

ATTACHMENT PREVAILS OVER THE UNRECORDED TRANSFER:

•

All transfers of shares should be entered, as required, on the books of the corp oration.• All transfers of shares not so entered are invalid as to

attaching or execu tion creditors of t he assignors, as wellas to the corporation and to subsequent purchasers ingood faith, and, indeed, as to a ll persons interested, exceptthe parties to su ch transfers.

• All transfers not so entered on the books of thecorporation are absolutely void; not because they are

without notice or fraudulent in law or fact, but becausethey are m ade so voi d by statute.

APODACA VS. NLRC

G.R. NO. 80039 APRIL 18, 1989

THE NLRC HAS NO JURISDICTION TO DETERMINE SUCH INTRA -CORPORATE DISPUTE BETWEEN THE STOCKHOLDER AND THE

CORPORATION AS IN THE MATTER OF UNPAID SUBSCRIPTIONS :

• This controversy is within the exclusive jurisdiction of theSecurities and Exchange Commission.

• Assuming arguendo that the NLRC may exercise jurisdiction over the said subject matter under the

circumstances of this case, t he unpaid subscriptions arenot due and payable until a call is made by thecorporation for p ayment.

• Private respon dents h ave not present ed a resol ution of the board of directors of respondent corporation calling for the

payment of the unpaid subscriptions.

• It does n ot even appear t hat a n otice of such call has b eensent to petitioner by the resp ondent corporation.

• WHAT the records show is that the respondentcorporation deducted the amount du e to petitioner from

the amount receivable from him for the unpaidsubscriptions.

• No doubt such set-off was without lawful basis, if notpremature.

• As there was no notice or call for the payment of unpaidsubscriptions, the sam e is not yet due and payable.

LEE VS COURT OF APPEALS

G.R. NO. 93695 FEBRUARY 4, 1992

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THE IMMEDIATE EFFECT OF A VOTING TRUST AGREEMENT ON THE

STATUS OF A STOCKHOLDER WHO IS A PARTY TO ITS EXECUTION — FROM LEGAL TITLEHOLDER OR OWNER OF THE SHARES SUBJECT OF

THE VOTING TRUST AGREEMENT , HE BECOMES THE EQUITABLE OR

BENEFICIAL OWNER :

IN ORDER TO BE ELIGIBLE AS A DIRECTOR , WHAT IS MATERIAL IS

THE LEGAL TITLE TO , NOT BENEFICIAL OWNERSHIP OF , THE STOCK

AS APPEARING ON THE BOOKS OF THE CORPORATION

• The petitioners, by virtue of the voting trust agreementexecuted in 1981 disposed of all their s hares through

assignment and delivery i n favor of the DBP, as t rustee .

• Consequently, the petitioners ceased to own at least on eshare standing in their names on the books of ALFA asrequired under Section 23 of the new Corporation Code.

• They also ceased to have anything to do with themanagement of the enterprise.

• The petitioners ceased to be directors.

• Hence, the transfer of t he petitioners' shares t o the DBPcreated vacancies in their respective positions a s d irectorsof ALFA.

• The transfer of shares from the stockholder of ALFA to theDBP is the essence o f the subject voting trust agreementas e vident from the following sti pulations: xxx

3. The TRUSTEE shall vote upon the shares ofstock at all meetings of ALFA, annual orspecial, upon any resolution, matter or

business that may be submitted to any suchmeeting, and shall possess in that r espect thesame powers as ow ners of the equ itable as w ell

as the legal title to th e s tock ;

GSIS VS COURT OF APPEALSG.R. NO. 183905, APRIL 16, 2009

CORRELATED PROVISIONS OF THE SRC. THESE ARE

SECTION 53.1 AND SECTION 20.1:

SEC. 53. INVESTIGATIONS, INJUNCTIONS AND PROSECUTION OF OFFENSES . - 53.1.

• The Commission may, in its discretion, make suchinvestigations as i t deems necessary t o determine whetherany person has v iolated o r is ab out to violate an y provisionof th is Code, any rule, regulation or order thereunder ,or any rule of an Exchange, registered securitiesassociation, clearing agency, other self-regulatory

organization; and• To investigate any fact, condition, practice or matter which

it may deem necessary or pr oper to aid in the enforcementof the provisions of this Code, in the prescribing of rulesand regulations thereu nder, or in securing information toserve as a basis for recommending further legislationconcerning the m atters to which this Code relates:

52



SEC. 20. PROXY SOLICITATIONS . – 2 0.1 . Proxies must beissued and proxy solicitation must be made in accordance

with rules and regulations to be issued by the Commission;

SINCE PROXY SOLICITATIONS FOLLOWING S ECTION 20.1 HAVE TO BE MADE IN ACCORDANCE WITH RULES AND REGULATIONS

ISSUED BY THE SEC, IT IS THE SEC UNDER S ECTION 53.1 THAT HAS THE JURISDICTION TO INVESTIGATE ALLEGED VIOLATIONS OF THE RULES ON PROXY SOLICITATIONS :

THE TWO PARTICULAR CLASSES OF CASES IN THEENUMERATION UNDER SECTION 5 OF PRESIDENTIALDECREE NO. 902-A:1. Controversies a rising out of intra-corporate , partnership,

or associ ation relations, between and among stockholders,members, or associates; or association of which they are

stockholders, members, or ass ociates, respectively;2. Controversies in the election or appointment of

directors, trustees, officers or m anagers of corporat ions,partnerships, or a ssociations;

INTERIM R ULES ON I NTRA -C ORPORATE C ONTROVERSIES (I NTERIMRULES ) PROMULGATED BY THIS C OURT IN 2001, MOSTPERTINENTLY , S ECTION 2 OF R ULE 6 ( ON E LECTION C ONTESTS ),

WHICH DEFINES " ELECTION CONTESTS " AS FOLLOWS :

SEC. 2. D EFINITION . – AN ELECTION CONTEST :• Refers to a ny controversy o r d ispute involving ti tle o r cl aim

to any elective office in a stock or n onstock corporation;• The validation of proxies ;• The manner and validity of elections;• The qualications of candidates;• The proclamation of winners, to the office of director,

trustee or other officer di rectly elected by the stockholdersin a close corporation or by members of a nonstock

corporation where the articles of incorporation or bylawsso p rovide.

T HE RIGHT OF A STOCKHOLDER TO VOTE BY PROXY IS GENERALLYESTABLISHED BY THE C ORPORATION C ODE , BUT IT IS THE SRC

WHICH SPECIFICALLY REGULATES THE FORM AND USE OF PROXIES ,MORE

PARTICULARLY

THE

PROCEDURE

OF

PROXY

SOLICITATION

,PRIMARILY THROUGH S ECTION 20. AIRR-SRC R ULE 20 DEFINES THE TERMS SOLICIT AND SOLICITATION :

T HE TERMS SOLICIT AND SOLICITATION INCLUDES : A.Any request for a proxy whether or not accompanied by or

included in a form of proxyB. Any request to execute or not t o execute, or to revoke, a

proxy; orC. The furnishing of a form of proxy or other communication to

security holders u nder c ircumstance reasonably calculatedto resu lt in the p rocurement, withholding or r evocation of a

proxy.

PROXY SOLICITATION IS A PROCEDURE THAT ANTECEDES PROXY VALIDATION:

• The former involves the securing and submission ofproxies;

• While the latter concerns the validation of such securedand submitted proxies.

UNDER S ECTION 20.1, THE SOLICITATION OF PROXIES MUST BE IN ACCORDANCE WITH RULES AND REGULATIONS ISSUED BY THE SEC,

SUCH AS AIRR-SRC R ULE 4 :• And by virtue of Section 53.1, the SEC has the

discretion "to make such investigations as it deemsnecessary to determine whether any person has

violated" any rule issued by it , such as AIRR-SRC Rule4.

53



• The investigatory power of the SEC established by Section53.1 is cen tral to its regu latory authority, most cru cial t othe public interest especially as it may pertain tocorporations with publicly traded shares.

I T IS POSSIBLE THAT AN INTRA -CORPORATE CONTROVERSY MAY ANIMATE A DISGRUNTLED SHAREHOLDER TO COMPLAIN TO THE

SEC A CORPORATION ’S VIOLATIONS OF SEC RULES ANDREGULATIONS :• But that motive alone should not be sufficient to deprive

the SEC of its investigatory and regulatory powers,especially so si nce such powers ar e exercisable on a motuproprio basis.

NOTHING IN THE SRC EMPOWERS THE SEC TO ANNUL ORINVALIDATE IMPROPER PROXIES ISSUED IN CONTRAVENTION OF

SECTION 20 :• The penalties dened by the SEC itself for violation ofSection 20 or AIRR-SRC Rule 20 are limited to areprimand/warning for the rst offense, and pecuniarynes for succeed ing offenses.

o Indeed, if the SEC does not have the power toinvalidate proxies solicited in violation of its

promulgated rules , serious questions may beraised whether it ha s the power to adjudicateclaims o f violation in the rst place, sinc e th e rel ief i t

may extend does not di rectly redress the cause ofaction of the complainant seeki ng the exclusion ofthe p roxies.

SECTION 6( G) OF P RESIDENTIAL D ECREE N O. 902-A: SEC. 6. I NORDER TO EFFECTIVELY EXERCISE SUCH JURISDICTION , THECOMMISSION SHALL POSSESS THE FOLLOWING POWERS : XXX ( G) T O

PASS UPON THE VALIDITY OF THE ISSUANCE AND USE OF PROXIES AND

VOTING TRUST AGREEMENTS FOR ABSENT STOCKHOLDERS ORMEMBERS ; The provision would confer on the SEC the power to

adjudicate controversies relating not only to proxysolicitation, but also to p roxy validation.

o Section 6 of Presidential Decree No. 902-A was notexpressly repealed or abrogated by the SRC.

• The provision indicates that such power of the SEC then was incidental or ancillary to the "exercise of such jurisdiction."

Section 6 is immediately preceded by Section 5:o Section 5 originally conferred on the SEC "original

and exclusive jurisdiction to hear and decidecases" i nvolving " controversies in the election orappointments of directors, trustees, offi cers ormanagers of such corporations, partnerships

or associations." The cases referred to in Section 5 weretransferred from the jurisdiction of t he SECto the regu lar court s w ith the p assage o f theSRC, specically S ection 5.2.

Thus, the SEC’s power to pass upon thevalidity of proxies in relation to electioncontroversies has effectively beenwithdrawn, t ied as it is to its abrogated

jurisdictional powers.

The linchpin in deciding the q uestion is w hether or not t hecause of act ion before the SEC is intimately tied to anelection controversy, a s dened under Section 5(c) ofPresidential Decree No. 90 2-A.

SHARES OF STOCK IN CORPORATIONS MAY BE DIVIDED INTO VOTING SHARES AND NON - VOTING SHARES , WHICH ARE GENERALLY

ISSUED AS " PREFERRED " OR " REDEEMABLE " SHARES :

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• Voting rights are exercised during regular or specialmeetings of stockholders;

• Regular meetings to be held annually on a xed date, while special meetings may be held at any time necessary

or as p rovided in the by-laws, upon due notice.• The Corporation Code provides for a whole range of

matters which can be voted upon by stockholders,including a limited set on which even non-votingstockholders a re en titled to vote on.

o On any of these matters which may be voted upon by stockholders, the proxy device is generally

available.

UNDER S ECTION 5( C) OF P RESIDENTIAL D ECREE N O. 902-A, INRELATION TO THE SRC, THE JURISDICTION OF THE REGULAR

TRIAL COURTS WITH RESPECT TO ELECTION -RELATEDCONTROVERSIES IS SPECIFICALLY CONFINED TO " CONTROVERSIES IN THE ELECTION OR APPOINTMENT OF DIRECTORS , TRUSTEES , OFFICERS OR MANAGERS OF CORPORATIONS , PARTNERSHIPS , OR

ASSOCIATIONS " • The jurisdiction of the regular courts over so-called

election contests or con troversies u nder Section 5(c) doesnot extend to every p otential subject that m ay be voted on

by shareholders, but only to the election of directors ortrustees, in which stockholders are authorized toparticipate under Section 24 of the Corporation Code.

THE STATUTORY RIGHT OF THE SEC TO REGULATE PROXYSOLICITATION AND THE STATUTORY JURISDICTION OF REGULARCOURTS OVER ELECTION CONTESTS OR CONTROVERSIES : The power of the SEC to investigate violations of its rules

on proxy solicitation is unquestioned when proxies areobtained to vote on matters unrelated to the casesenumerated under Section 5 of Presidential Decree No.902-A.

• However, when proxies are solicited in relation to theelection of corp orate directors, t he resu lting controversy,even if it ost ensibly raised the violation of the SEC ruleson proxy solicitation, should be properly seen as anelection controversy within the original and exclusive

jurisdiction of the trial courts by virtue of Section 5.2 ofthe SRC in relation to Section 5(c) of Presidential DecreeNo. 902-A.

T HE CONFERMENT OF ORIGINAL AND EXCLUSIVE JURISDICTION ON THE REGULAR COURTS OVER SUCH CONTROVERSIES IN THE

ELECTION OF CORPORATE DIRECTORS MUST BE SEEN AS INTENDED TO CONFINE TO ONE BODY THE ADJUDICATION OF ALL RELATED

CLAIMS AND CONTROVERSY ARISING FROM THE ELECTION OF SUCHDIRECTORS :• For that reason, the aforequoted Section 2, Rule 6 of the

Interim Rules broadly denes the term " election contest"as encompassing all plausible incidents arising from theelection of corporate directors, including:

1. Any controversy or dispute involving title or cl aimto any elective office in a stock or nonstockcorporation;

2. The validation of proxies ;3. The manner and validity of elections; and4. The qualications of candidates, including the

proclamation of winners.• If all matters a nteceding the h olding of su ch election

which affect its manner and conduct, such a s the proxy solicitation process, are deemed within the

original and exclusive jurisdiction of t he S EC, thenthe prospect of overlapping and competing

jurisdictions between that body and the regularcourts b ecomes frighteningly real.

FROM THE LANGUAGE OF S ECTION 5( C) OF P RESIDENTIAL D ECREENO. 902-A, IT IS INDUBITABLE THAT CONTROVERSIES AS TO THE

55



QUALIFICATION OF VOTING SHARES , OR THE VALIDITY OF VOTESCAST IN FAVOR OF A CANDIDATE FOR ELECTION TO THE BOARD OFDIRECTORS ARE PROPERLY COGNIZABLE AND ADJUDICABLE BY THEREGULAR COURTS EXERCISING ORIGINAL AND EXCLUSIVE

JURISDICTION OVER ELECTION CASES : • Questions relating to the proper so licitation of p roxies used

in such election are indisputably related to s uch issues, yetif the position of GSIS were to be upheld, t hey would beresolved by the S EC and not the r egular courts, even if they

fall within "controversies in the electi

SECTION 5 OF P RES . D ECREE N O. 902-A SETS FORTH ADEFINITIVE RULE ON JURISDICTION , EXPRESSLY GRANTING AS ITDOES " ORIGINAL AND EXCLUSIVE JURISDICTION " TO THE REGULARCOURTS :• The fact that the jurisdiction of the regular courts under

Section 5(c) is conned to the voting on election ofofficers , and not on all matters which may be voted upon by stockholders, elucidates that the power of the SEC to

regulate proxies remains extant and could very well beexercised when stockholders vote on matters otherthan the election of directors.

That the proxy challenge raised by GSIS relates to theelection of the directors of Meralco is undisputed :• The controversy was engendered by the looming annual

meeting, during which the stockholders o f Meralco w ere toelect the d irectors o f the co rporati on.

• In addition, the Information Statement/Proxy form led byFirst Philippine Holdings Corporation with the SECpursuant to Section 20 of the SRC, states— REASON FORSOLICITATION OF VOTES:

• The S olicitor i s s oliciting proxies from stockholders o fthe Company for the purpose of electing thedirectors named under the subject headed

‘Directors’ in this Statement as well as to votethe matters in the agenda of the meeting as

provided for in the Information Statement of theCompany. All of the nominees are curr ent di rectorsof the C ompany.

• Under t he circumstances, we do not see i t feasible for GSIS to posit that its challenge to the

solicitation or validation of proxies bore norelation at all to the scheduled election of theboard of directors of Meralco during theannual meeting .

• GSIS very well knew that the controversy fallswithin the contemplation of an election controversy

properly within the jurisdiction of the regular courts.• Otherwise, i t w ould have never led its original

petition with the RTC of Pasay.•

GSIS may have w ithdrawn its pet ition with the RTCon a new assessment made in good faith that thecontroversy falls within the jurisdiction of t he SEC,yet t he reality is that t he reassessment i s preciselywrong a s a m atter of law.

• THE LACK OF JURISDICTION OF THE SEC OVER A SUBJECT

MATTER INVALIDATES THE CDO AND SDO ISSUED BY THAT

BODY .

CHUA VS COURT OF APPEALSG.R. NO. 150793, NOVEMBER 19, 2004

A MONG THE BASIC REQUIREMENTS FOR A DERIVATIVE SUIT TOPROSPER IS THAT THE MINORITY SHAREHOLDER WHO IS SUING FOR

AND ON BEHALF OF THE CORPORATION MUST ALLEGE IN HISCOMPLAINT BEFORE THE PROPER FORUM THAT HE IS SUING ON ADERIVATIVE CAUSE OF ACTION ON BEHALF OF THE CORPORATION AND

ALL OTHER SHAREHOLDERS SIMILARLY SITUATED WHO WISH TO JOIN :

56



UNDER S ECTION 36 OF THE C ORPORATION C ODE , READ INRELATION TO S ECTION 23 WHERE A CORPORATION IS AN INJUREDPARTY , ITS POWER TO SUE IS LODGED WITH ITS BOARD OFDIRECTORS 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 corporaterights, whenever the officials of the corporation refuse tosue, or are t he ones to be su ed, or hol d the control of thecorporation.

• In such actions, the suing stockholder is regarded as anominal part y, with the corporation as the real party ininterest.

A DERIVATIVE ACTION IS A SUIT BY A SHAREHOLDER TO ENFORCE A CORPORATE CAUSE OF ACTION :

• The corporation is a necessary party to the suit.• And the relief which is granted is a judgment against a

third p erson in favor of the c orporation.• Similarly, if a corporation has a defense to an action

against it and is not asserting it, a stockholder mayintervene a nd defend on behalf of the corpo ration.

NOT EVERY SUIT FILED IN BEHALF OF THE CORPORATION IS ADERIVATIVE SUIT :• For a derivative suit to prosper, it is required that th e

minority stockholder suing for and on behalf of thecorporation must allege in his complaint that h e is su ingon a derivative cause of action on behalf of thecorporation and all other stockh olders si milarly situated

who may wish to join him in the suit.

I T IS A CONDITION SINE QUA NON THAT THE CORPORATION BEIMPLEADED 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 corporationin order that the corporation may get t he benet of thesuit and may not bring subsequent suit against the samedefendants for the sam e cau se of action.

• The corporation must be joined as party because it is itscause of action that is being litigated and because

judgment must be a res adjudicata against it.o In the cr iminal complaint led by herein respondent,

nowhere is it s tated that she is ling the same inbehalf an d for t he benet of the corporation. Thus,the criminal com plaint including the civil asp ectthereof could not be deemed in the nature of aderivative s uit.

Although, the corporation was not a complainant in thecriminal action, the subject of the falsication was thecorporation's project and the falsied documents werecorporate documents:• Therefore, the corporation is a proper party in the petition

for cert iorari because the proceedings in the criminal casedirectly and adversely affected the corp oration.

R.N. SYMACO TRADING CORPORATION VS LUISITO T.SANTOS,

G.R. NO. 142474. AUGUST 18, 2005

T HE WHOLE PURPOSE OF THE LAW AUTHORIZING A DERIVATIVE

SUIT IS TO ALLOW THE STOCKHOLDER / MEMBER TO ENFORCE

RIGHTS WHICH ARE DERIVATIVE ( SECONDARY ) IN NATURE . A

57



DERIVATIVE ACTION IS A SUIT BY A SHAREHOLDER / MEMBER TOENFORCE A CORPORATE CAUSE OF ACTION :

• One of the requ isites of a d erivative suit is th at the party bringing the suit should be a stockholder/member at the

time of the action or transaction complained of.

• The right to sue derivatively is an attribute of corporateownership which, to be exercised, requires t hat the injuryalleged be indirect as far as the stockholders/members areconcerned, and direct only insofar a s th e corporation isconcerned.

I T IS ENOUGH THAT A MEMBER OR A MINORITY OF SUCH MEMBERSFILE A DERIVATIVE SUIT FOR AND IN BEHALF OF THE

CORPORATION :

• After all, the members/stockholders who led a derivativesuit are m erely nominal pa rties, t he real party-in-interest

being the corporation itself for and in whose behalf thesuit i s led.

• Any monetary benets under the decision of the courtshall pertain to the co rporation.

YU VS YUKAYGUAN

G.R. NO. 177549, JUNE 18, 2009

WHERE A CORPORATION IS AN INJURED PARTY , ITS POWER TO SUE

IS LODGED WITH ITS BOARD OF DIRECTORS OR TRUSTEES :

• Nonetheless, an individual stockholder is permitted to

institute a derivative suit on behalf of t he corporation wherein he holds stocks in order to protect or vindicate

corporate ri ghts, whenever the officials of the corporationrefuse to sue, or ar e the ones to be sued, or h old thecontrol of the corporation.

• In such actions, the suing stockholder is regarded as a

nominal party, with the corporation as the real party ininterest.

• A derivative action is a suit by a shareholder to enforce acorporate cau se of act ion.

• The corporation is a necessary party to the suit.

• And the relief which is granted is a judgment against athird p erson in favor of the corporation.

• Similarly, if a corporation has a defense to an actionagainst it and is not asserting it, a stockholder mayintervene a nd defend on behalf of the corp oration.

• By virtue of Republic Act No. 8799, otherwise k nown a s the

Securities Regulation Code, jurisdiction over intra-corporate

disputes, i ncluding derivative suits, i s now vested in the

Regional Trial Courts d esignated by this C ourt pursuant

58



to A.M. No. 00-11-03-SC promulgated on 21 November

2000.

FOLLOWING THE VOLUNTARY OR INVOLUNTARY DISSOLUTION OF A

CORPORATION , LIQUIDATION IS THE PROCESS OF SETTLING THE AFFAIRS OF SAID CORPORATION , WHICH CONSISTS OF ADJUSTING

THE DEBTS AND CLAIMS , THAT IS , OF COLLECTING ALL THAT IS

DUE THE CORPORATION , THE SETTLEMENT AND ADJUSTMENT OF

CLAIMS AGAINST IT AND THE PAYMENT OF ITS JUST DEBTS :

• Winding up the affairs of the corporation means thecollection of all assets , the payment of all itscreditors , and the distribution of the remaining assets ,if any among the stockholders thereof in accordance withtheir con tracts, or if there b e no special con tract, on the

basis of their respective interests.

• The manner of liquidation or winding up may be providedfor in the corporate by-laws a nd this would prevail unlessit i s i nconsistent w ith law.

• It may be undertaken by the corp oration itself, through itsBoard of Directors; or by trustees to whom all corporateassets are conveyed for liquidation; or by a receiverappointed by the SEC upon its decree dissolving thecorporation.

A DERIVATIVE SUIT IS FUNDAMENTALLY DISTINCT AND

INDEPENDENT FROM LIQUIDATION PROCEEDINGS :

• They are neither part of each other nor the necessaryconsequence of the other .

o There is totally no justication for the Court of Appeals to convert what was supposedly a

derivative suit i nstituted by respondents, on their

own behalf and on behalf of Winchester, Inc. against

petitioners, to a proceeding for the liquidation ofWinchester, Inc.

T HE C OURT HAS RECOGNIZED THAT A STOCKHOLDER ’S RIGHT TOINSTITUTE A DERIVATIVE SUIT IS NOT BASED ON ANY EXPRESS

PROVISION OF THE C ORPORATION C ODE , OR EVEN THE S ECURITIES

REGULATION C ODE :

• It is impliedly recognized when the said laws makecorporate di rectors or offi cers liable for damages suffered

by the corporation and its stockholders for violation oftheir duciary duties.

• Hence, a stockholder may sue for mismanagement, wasteor dissipation of corporate assets because of a specialinjury t o h im for which he is otherw ise w ithout r edress.

• In effect, the suit is an action for specic performanceof an obligation owed by the corporation to thestockholders to assist its rights of action when the

59



corporation has been put in default by the wrongfulrefusal of the directors or m anagement to make suitablemeasures for its protection.

• The basis of a stockholder’s suit is always one in equity.

• However, it cannot prosper w ithout rst complying withthe legal requisites f or i ts i nstitution.

SECTION 1, R ULE 8 OF THE I NTERIM R ULES OF P ROCEDURE

GOVERNING I NTRA -C ORPORATE C ONTROVERSIES LAYS DOWN THE

FOLLOWING REQUIREMENTS WHICH A STOCKHOLDER MUST COMPLY

WITH IN FILING A DERIVATIVE SUIT :

SEC . 1. D ERIVATIVE ACTION . – A STOCKHOLDER OR MEMBER MAY

BRING AN ACTION IN THE NAME OF A CORPORATION OR ASSOCIATION , AS THE CASE MAY BE , PROVIDED , THAT :

(1)He was a stockholder or member at t he time the acts ortransactions subject of the action occurred and at thetime the action was led;

(2)He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all

remedies a vailable u nder t he a rticles o f incorporation, by-laws, laws or rules governing the corporation orpartnership to obtain the rel ief he desires;

(3) No appraisal rights are available for the act or actscomplained of; and

(4)The su it is not a nuisance or harassment suit.

T HE WORDINGS OF S ECTION 1, R ULE 8 OF THE I NTERIM R ULES OF

PROCEDURE G OVERNING I NTRA -C ORPORATE C ONTROVERSIES ARE

SIMPLE AND DO NOT LEAVE ROOM FOR STATUTORY CONSTRUCTION :

• The stockholder ling a derivative suit should have exertedall reasonable efforts to exhaust all remedies availableunder t he a rticles o f incorporation, by-laws, laws o r ru lesgoverning the corporation or partnership to obtain therelief he desires; and to allege such fact with particularityin the complaint.

• REASON: To make the d erivative suit the nal recourse ofthe stockholder, after al l other rem edies to ob tain the rel iefsought had failed.

o The allegation of respondent Joseph in his Affidavitof his repeated attempts to talk to petitioner

Anthony regarding their dispute hardly constitutes"all reasonable efforts to exhaust all remediesavailable."

o Respondents did not refer to or m ention at all anyother remedy under the articles of i ncorporation or

by-laws of Winchester, Inc., available for disputeresolution among stockholders, which respondentsunsuccessfully ava iled themselves of.

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o And the Court is not prepared to conclude that thearticles o f incorporation and by-laws of W inchester,Inc. absolutely failed to provide for su ch remedies.

T HE FACT THAT W INCHESTER , I NC . IS A FAMILY CORPORATIONSHOULD NOT IN ANY WAY EXEMPT RESPONDENTS FROM COMPLYING

WITH THE CLEAR REQUIREMENTS AND FORMALITIES OF THE RULES

FOR FILING A DERIVATIVE SUIT . T HERE IS NOTHING IN THE

PERTINENT LAWS OR RULES SUPPORTING THE DISTINCTION

BETWEEN , AND THE DIFFERENCE IN THE REQUIREMENTS FOR ,FAMILY CORPORATIONS VIS - À - VIS OTHER TYPES OF CORPORATIONS ,IN THE INSTITUTION BY A STOCKHOLDER OF A DERIVATIVE SUIT :

• Neither can this Court accept the reasons proffered byrespondents to excuse themselves from complying withthe second requirement under Section 1, Rule 8 of theInterim Rules of Procedure Governing Intra-CorporateControversies.

• They are imsy and insufficient, compared to theseriousness of respondents’ accusations of fraud,misappropriation, an d falsication of corporate recordsagainst the petitioners.

The Court further notes that, with respect to the thirdand fourth requirements of Section 1, Rule 8 of theInterim Rules of Procedure Governing Intra-CorporateControversies:

• The respondents’ Complaint failed to allege, explicitly orotherwise, the fact that there were no appraisal rightsavailable for th e acts o f petitioners co mplained of, as w ellas a categorical statement that the suit was not anuisance or a h arassment suit.

LEGASPI TOWERS 300 VS. MUERG.R. No. 170783, June 18, 2012

A derivative suit must be differentiated from individualand representative or class suits.

SUITS BY STOCKHOLDERS OR MEMBERS OF A CORPORATION BASEDON WRONGFUL OR FRAUDULENT ACTS OF DIRECTORS OR OTHERPERSONS MAY BE CLASSIFIED INTO INDIVIDUAL SUITS , CLASS SUITS ,

AND DERIVATIVE SUITS :1. Where a stockholder or member is denied the right of

inspection, his suit would be individual because the wrong is done to him personally and not to the other

stockholders or t he corp oration.2. Where the wrong is done to a group of stockholders, as

where preferred stockholders' rights are violated,a class or representative suit will be proper for th eprotection of all stockholders belonging to the samegroup.

3. But where the acts complained of constitute a wrongto the corporation itself, the cause o f action belongs tothe corporation and not to the individual stockholderor member.

IN MOST EVERY CASE OF WRONG TO THE CORPORATION , EACHSTOCKHOLDER IS NECESSARILY AFFECTED BECAUSE THE VALUE OFHIS INTEREST THEREIN WOULD BE IMPAIRED :

61



• Not sufficient to give him an individual cause of act ionsince the corporation is a person distinct and separatefrom him, and can and should itself sue the wrongdoer.

• Otherwise, not only would the theory of s eparate entity be violated, but there would be multiplicity of suits as well as

a violation of t he p riority rights o f creditors.• Furthermore, there is the difficulty of determining the

amount of damages that should be paid to each i ndividualstockholder.

IN CASES OF MISMANAGEMENT WHERE THE WRONGFUL ACTSCOMMITTED BY THE DIRECTORS OR TRUSTEES THEMSELVES :• A stockholder or member may nd that he has no redress

because the directors or trustees are vested by law withthe right to decide whether or no t the corporation shouldsue, and they will never be w illing to su e themselves.

• The corporation would thus be helpless to seek remedy.• Because of t he frequent occurrence of such a situation,

the common law gradually recognized the right of astockholder to sue on behalf of a corporation in whateventually became known as a "derivative suit."

o It has b een proven to be a n effective remedy of theminority against t he abuses of management.

AN INDIVIDUAL STOCKHOLDER IS PERMITTED TO INSTITUTE ADERIVATIVE SUIT ON BEHALF OF THE CORPORATION WHEREIN HEHOLDS STOCK IN ORDER TO PROTECT OR VINDICATE CORPORATE

RIGHTS , WHENEVER OFFICIALS OF THE CORPORATION REFUSE TOSUE OR ARE THE ONES TO BE SUED OR HOLD THE CONTROL OF THECORPORATION .• The suing stockholder is regarded as the nominal party ,

with the corporation as the party-ininterest.

IT IS THE CORPORATION THAT IS THE REAL PARTY -IN -INTEREST IN A DERIVATIVE SUIT THE RELIEFS PRAYED FOR MUST BE FOR THE

BENEFIT OR INTEREST OF THE CORPORATION :

• When the reliefs prayed for do not pertain to thecorporation, then it is an improper de rivative su it.

T HE REQUISITES FOR A DERIVATIVE SUIT ARE AS FOLLOWS :1. The party bringing suit should be a shareholder as of

the time of the act or transaction complained of ,the number of his sh ares n ot being material;

2. He has tried to exhaust intra-corporate remedies ,i.e., has made a demand on the board of directors forthe appropriate relief but the latter has failed orrefused to heed his p lea; and

3. The cause of action actually devolves on thecorporation, the wrongdoing or harm having been, orbeing ca used to the corpo ration and not to t he p articularstockholder bri nging the s uit.

T HE STOCKHOLDER ’S RIGHT TO FILE A DERIVATIVE SUIT IS NOTBASED ON ANY EXPRESS PROVISION OF T HE C ORPORATION C ODE :

It is impliedly recognized when the law makescorporate directors or officers liable for damagessuffered by the corporation and its stockholders for

violation of their duciary duties.

B OARD O F D IREC TOR S

A0-AS VS COURT OF APPEALSG.R. NO. 128464, JUNE 20, 2006

SECTION 89 OF THE C ORPORATION C ODE PERTAINING TO NON -STOCK CORPORATIONS PROVIDES THAT " THE RIGHT OF THEMEMBERS OF ANY CLASS OR CLASSES ( OF A NON -STOCKCORPORATION ) TO VOTE MAY BE LIMITED , BROADENED OR DENIED

TO THE EXTENT SPECIFIED IN THE ARTICLES OF INCORPORATIONOR THE BY-LAWS :

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• This is an exception to Section 6 of the same code where itis p rovided that "no share m ay be deprived of voting rightsexcept those classied and issued as ‘preferred’ or‘redeemable’ shares, unless otherwise provided in thisCode."

• The stipulation in the By-Laws providing for the election ofthe Board of Directors b y districts is a form of limitationon the voting rights of the members of a non-stockcorporation as recognized under the aforesaid Section 89.

• Section 24, which requires the presence of a majority ofthe members enti tled to vote in the election of the board ofdirectors, applies only when the directors a re elected bythe members at l arge, such as is always the case i n stockcorporations by virtue of Section 6.

MISCONDUCT OF CORPORATE DIRECTORS OR OTHER OFFICERS ISNOT A GROUND FOR THE APPOINTMENT OF A RECEIVER WHERE

THERE ARE ONE OR MORE ADEQUATE LEGAL ACTION AGAINST THEOFFICERS , WHERE THEY ARE SOLVENT , OR OTHER REMEDIES :• Refusal to allow stockholders (or members of a non-stock

corporation) to examine books of the company is not aground for appointing a receiver (or creating amanagement committee) since there are other adequateremedies, such as a w rit of mandamus.

T HE APPOINTMENT OF A RECEIVER FOR A GOING CORPORATION IS A LAST RESORT REMEDY , AND SHOULD NOT BE EMPLOYED WHEN

ANOTHER REMEDY IS AVAILABLE :• Relief by receivership is an extraordinary remedy and is

never exercised if there is an adequate remedy at law or ifthe harm can be prevented by an injunction or arestr aining order.

• Bad judgment by di rectors, or even unauthorized use andmisapplication of the company’s funds, will not justify th eappointment of a receiver for the corporation ifappropriate r elief can otherwise b e had.

UICHICO VS NLRC

G.R. NO. 121434 JUNE 2, 1997

A CORPORATION IS A JURIDICAL ENTITY WITH LEGAL PERSONALITY

SEPARATE AND DISTINCT FROM THOSE ACTING FOR AND IN ITS

BEHALF AND , IN GENERAL , FROM THE PEOPLE COMPRISING IT : T HE

GENERAL RULE IS THAT OBLIGATIONS INCURRED BY THE

CORPORATION , ACTING THROUGH ITS DIRECTORS , OFFICERS AND

EMPLOYEES , ARE ITS SOLE LIABILITIES :

T HERE ARE TIMES , HOWEVER , WHEN SOLIDARY LIABILITIES MAY BE

INCURRED BUT ONLY WHEN EXCEPTIONAL CIRCUMSTANCES WARRANT

SUCH AS IN THE FOLLOWING CASES :

1. When directors and trustees or, in appropriate cases,the offi cers of a corporation :

(a) Vote f or o r as sent t o patently unlawful acts of t hecorporation;

(b) Act in bad faith or with gross negligence indirecting the co rporate aff airs;

63



capital stock at a regular or special stockholders'meeting.

In no ca se sh all the total yearly compensation of directors,as such directors , exceed ten (10%) percent of the netincome before income tax of t he corporation during the

preceding year.

DIRECTORS OR TRUSTEES ARE NOT ENTITLED TO SALARY OR

OTHER COMPENSATION WHEN THEY PERFORM NOTHING MORE THAN

THE USUAL AND ORDINARY DUTIES OF THEIR OFFICE :

• Directors/trustees render service gratuitously, an d thatthe return upon their shares adequately furnishes themotives for servi ce, without com pensation.

T HERE ARE ONLY TWO (2) WAYS BY WHICH MEMBERS OF THE

BOARD CAN BE GRANTED COMPENSATION APART FROM REASONABLE

PER DIEMS :

(1)When there is a provision in the by-laws xing theircompensation; and

(2)When the stockholders representing a majority of theoutstanding capital stock at a regular or specialstockholders' meeting agree t o give it to the m.

PHRASEOLOGY OF S ECTION 30 WHICH STATES : "T HE DIRECTORS

SHALL NOT RECEIVE ANY COMPENSATION , AS SUCH DIRECTORS :”

• The phrase as such directors delimits the scope of theprohibition to compensation given to them for servicesperformed purely in their cap acity as d irectors or tr ustees.

• The members of the board may receive compensation, inaddition to reasonable per diems, when they renderservices to the corporation in a capacity other than asdirectors/ trustees.

o The l ast sentence o f Section 30 which provides:.. In

no case shall the total yea rly compensation ofdirectors, as such directors , exceed ten (10%)

percent of the net income before income tax of thecorporation during the p receding year doe s n ot nd

application in this case since t he compensation isbeing given to private respondents in their cap acity

as officers of WIT and not as board members.

A DERIVATIVE SUIT IS AN ACTION BROUGHT BY MINORITY

SHAREHOLDERS IN THE NAME OF THE CORPORATION TO REDRESS WRONGS COMMITTED AGAINST IT , FOR WHICH THE DIRECTORS

REFUSE TO SUE :

It is a remedy designed by equity and has been theprincipal defense of the minority shareholders againstabuses by t he majority.

65



Among the basic requirements for a derivative suit toprosper is that the minority shareholder who is su ing forand on behalf of the corporation must allege in hiscomplaint before the proper forum that he i s suing on aderivative cau se of action on behalf of the corp oration andall other sh areholders si milarly si tuated w ho wish to join.

LITONJUA, JR. VS ETERNIT CORPORATION

G.R. NO. 144805 JUNE 8, 2006

A CORPORATION IS A JURIDICAL PERSON SEPARATE AND DISTINCTFROM ITS MEMBERS OR STOCKHOLDERS AND IS NOT AFFECTED BY

THE PERSONAL RIGHTS , OBLIGATIONS AND TRANSACTIONS OF THE

LATTER :

• It may act only through its board of directors or, whenauthorized either by its b y-laws or by its b oard resol ution,through its officers or agents in the normal course of

business.

o The general principles of agency govern the relation between the corporation and its officers or agents,

subject t o th e articles o f incorporation, by-laws, orrelevant provisions o f law.

UNDER S ECTION 36 OF THE C ORPORATION C ODE , A CORPORATION

MAY SELL OR CONVEY ITS REAL PROPERTIES , SUBJECT TO THE

LIMITATIONS PRESCRIBED BY LAW AND THE C ONSTITUTION , AS

FOLLOWS :

• The property of a corporation is not the property of thestockholders or m embers, and as such, may not be sold

without express authority from the board of directors;

Physical act s, like the offering of the properties of thecorporation for sal e, or t he acceptance of a cou nter-offer ofprospective buyers of such properties an d the execution ofthe deed of sale covering such property, can be performed

by the corporation only by officers or agents dulyauthorized for the purpose by corporate by-laws or byspecic acts of the board of directors.

• Absent such valid delegation/authorization, the rule isthat th e declarations of an individual d irector relating tothe affairs of the corp oration, but not in the cou rse of, orconnected with, the performance of au thorized duties ofsuch director, are not binding on the corporati on.

W HILE A CORPORATION MAY APPOINT AGENTS TO NEGOTIATE FOR

THE SALE OF ITS REAL PROPERTIES , THE FINAL SAY WILL HAVE TO

BE WITH THE BOARD OF DIRECTORS THROUGH ITS OFFICERS AND

AGENTS AS AUTHORIZED BY A BOARD RESOLUTION OR BY ITS BY-LAWS :

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An unauthorized act of an officer of the corporation is not

binding on it unless the latter raties the same expresslyor i mpliedly by its b oard of di rectors.

Any sale of real property of a corporation by a personpurporting to be an agent thereof but without written

authority from the corp oration is null and void.

The declarations of the agent alone are generallyinsufficient to establish the fact or extent of his/herauthority.

BY THE CONTRACT OF AGENCY , A PERSON BINDS HIMSELF TO RENDER

SOME SERVICE OR TO DO SOMETHING IN REPRESENTATION ON BEHALFOF ANOTHER , WITH THE CONSENT OR AUTHORITY OF THE LATTER :

• Consent of both principal and agent i s necessary to create

an agency.

• The p rincipal must intend that the a gent shall act for hi m;

• The a gent must i ntend to accept t he authority and act on it,

and the intention of the p arties m ust nd expression eitherin words or conduct between them.

A N AGENCY MAY BE EXPRESSED OR IMPLIED FROM THE ACT OF THE

PRINCIPAL , FROM HIS SILENCE OR LACK OF ACTION , OR HIS FAILURE TO

REPUDIATE THE AGENCY KNOWING THAT ANOTHER PERSON IS ACTING

ON HIS BEHALF WITHOUT AUTHORITY :

• Acceptance by the agent may be expressed, or implied from

his a cts w hich ca rry out the a gency, or from his si lence orinaction according to the ci rcumstances.

• Agency may be oral unless the law requires a specic form.

However, to create or convey real rights overimmovable property, a special power of attorney isnecessary.

• Thus, when a sale of a piece of land or any portion thereof

is throu gh an agent, the a uthority of t he latter sh all be inwriting, ot herwise, the s ale s hall be v oid.

IN AN AGENT -PRINCIPAL RELATIONSHIP , THE PERSONALITY OF THE

PRINCIPAL IS EXTENDED THROUGH THE FACILITY OF THE AGENT :

• The agent, by legal ction, becomes the principal,

authorized to perform all acts w hich the latter w ould have

him do.

• Such a relationship ca n only be effected with the consent of

the principal, which m ust not , in any way, be compelled bylaw or by any court .

A PERSON DEALING WITH A KNOWN AGENT IS NOT AUTHORIZED ,UNDER ANY CIRCUMSTANCES , BLINDLY TO TRUST THE AGENTS ;STATEMENTS AS TO THE EXTENT OF HIS POWERS :

67



• Such person must not act negligently but must usereasonable diligence and prudence to ascertain whetherthe agent acts w ithin the sco pe of hi s a uthority.

• Persons dealing with an assumed agent are bound at theirperil, and if they would hold the principal liable, to

ascertain not only the fact of agency but also the natureand extent of authority, and in case either is co ntroverted,the burden of proof is u pon them to prove it.

o In this case, the petitioners f ailed to discharge their

burden; hence, p etitioners are not entitled to

damages from respondent EC.

A REAL ESTATE BROKER IS ONE WHO NEGOTIATES THE SALE OF REAL

PROPERTIES :

• His business, generally speaking, is only to nd a

purchaser who is willing to buy the land upon terms xed

by the ow ner.

• He has no authority to bind the principal by signing a

contract of sa le .

• Indeed, an authority to nd a purchaser of r eal property

does not include a n authority to se ll.

FOR AN AGENCY BY ESTOPPEL TO EXIST , THE FOLLOWING MUST BE

ESTABLISHED :

(1)The principal manifested a representation of the agent’sauthority or kn owlingly allowed the agent to assume su chauthority;

(2)The third person, in good faith, relied upon suchrepresentation;

(3)Relying upon such representation, such third person haschanged his p osition to h is d etriment.

A N AGENCY BY ESTOPPEL , WHICH IS SIMILAR TO THE DOCTRINE OF APPARENT AUTHORITY , REQUIRES PROOF OF RELIANCE UPON THE

REPRESENTATIONS , AND THAT , IN TURN , NEEDS PROOF THAT THE

REPRESENTATIONS PREDATED THE ACTION TAKEN IN RELIANCE :

• Such proof i s l acking in this ca se. I n their com munications

to the petitioners, G lanville and Delsaux positively and

unequivocally declared that t hey were acting for a nd in

behalf of respondent ESAC.

• Neither m ay respondent EC be deemed to have ratied the

transactions b etween the petitioners a nd respondent ESAC,

through Glanville, Delsaux and Marquez.

• The transactions a nd the various com munications inter se

were never submitted to the Board of Directors ofrespondent EC for ratication.

68



FILIPINAS PORT SERVICES, INC VS GO

G.R. NO. 161886, MARCH 16, 2007

T HE GOVERNING BODY OF A CORPORATION IS ITS BOARD OF

DIRECTORS :

• The corporate powers of all corporations shall be

exercised, al l business conducted and all property of the

corporation shall be controlled and held by a board ofdirectors.

• With the exception only of some powers expressly granted by law to stockholders (or members, in case of non-stock

corporations), the board o f directors ( or tr ustees, i n case o fnon-stock corporations) has the sole authority todetermine policies, ent er into contracts, an d conduct t heordinary business of t he corporation within the scope of

its charter, i.e., its a rticles of incorporation, by-l aws andrelevant prov isions o f law.

• The authority of the board of directors is restricted to themanagement of the regular business affairs of thecorporation, unless more extensive power is expresslyconferred.

THE CONCENTRATION IN THE BOARD OF THE POWERS OF CONTROL

OF CORPORATE BUSINESS AND OF APPOINTMENT OF CORPORATE

OFFICERS AND MANAGERS IS necessary for effi ciency in anylarge organization .

• Stockholders are t oo numerous, scattered and unfamiliar with the business of a corporation to conduct its business

directly.

• And so the plan of corporate organization is for thestockholders to ch oose the d irectors w ho shall control andsupervise the conduct of corporate business.

UNDER S ECTION 35 OF THE C ORPORATION C ODE , THE CREATION

OF AN EXECUTIVE COMMITTEE MUST BE PROVIDED FOR IN THE BY-LAWS OF THE CORPORATION :

• Notwithstanding the silence of Filport’s bylaws on thematter, we cannot rule tha t the creat ion of the executivecommittee by th e board o f directors i s illegal or u nlawful.

One reason is the absence of a showing as to the truenature and functions of said executive committeeconsidering that the "executive committee," referred to inSection 35 of the Corporation Code which is as powerfulas the board of directors an d in effect acting for t he boarditself, should be distinguished from other committees

which are within the competency of the board to create at

69



anytime and whose actions require ratication andconrmation by the board.

• The Board of Directors ha s t he p ower t o create p ositions n ot

provided for in Filport’s bylaws since the board is thecorporation’s g overning b ody, clearly upholding the p ower of

its board to exercise its prerogatives in managing thebusiness affairs of t he corporat ion.

ASSUMING , IN GRATIA ARGUMENTI , THAT THERE WAS MISMANAGEMENT

RESULTING TO CORPORATE DAMAGES AND / OR BUSINESS LOSSES , STILL

THE RESPONDENTS MAY NOT BE HELD LIABLE IN THE ABSENCE , AS

HERE , OF A SHOWING OF BAD FAITH IN DOING THE ACTS COMPLAINED

OF :

• If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence,

directors an d/or officers are not l iable.

• For them to be held accountable, the mismanagement andthe resu lting losses on account thereof are not the onlymatters t o be proven;

It is likewise n ecessary to sh ow that t he directors an d/orofficers acted in bad faith and with malice in doing theassailed acts.

• Bad faith does not simply connote bad judgment ornegligence;

o It imports a dishonest purpose or some moralobliquity and conscious doing of a w rong;

o A breach of a known duty through some motive or

interest or ill-will partaking of the nature offraud.

QUESTIONS OF POLICY OR OF MANAGEMENT ARE LEFT SOLELY TO

THE HONEST DECISION OF THE BOARD AS THE BUSINESS MANAGER

OF THE CORPORATION :

• The court is without authority to substitute its judgmentfor tha t of the board, and as long as it act s in good faith

and in the exercise of ho nest judgment in the interest ofthe corporation, its orders are not reviewable by thecourts.

WHERE A CORPORATION IS AN INJURED PARTY , ITS POWER TO SUE

IS LODGED WITH ITS BOARD OF DIRECTORS OR TRUSTEES :

• But an individual stockholder may be permitted toinstitute a derivative suit in behalf of the corporation in

order to protect or vindicate corporate rights wheneverthe offi cials of t he corporation refuse to sue, or whena demand upon them to le the necessary action

would be futile because they are the ones to be sued,or because they hold control of the corporation .

70



• In such actions, the corporation is the real party-in-interest while the suing stockholder, in behalf of t hecorporation, is on ly a n ominal party.

o The a ction is p rincipally for d amages resu lting from

alleged mismanagement by its d irectors/officers, it

being alleged that the acts of m ismanagement ar edetrimental to th e i nteres ts o f Filport.

o The injury complained of pri marily pertains to the

corporation so that the suit for r elief sh ould be by

the co rporation.

o However, since the ones to be sued are the

directors/officers of the corporation itself, a

stockholder m ay validly institute a "derivative suit"to vindicate the alleged corporate injury, i n which

case Cruz is only a nominal pa rty while Filport isthe rea l party-in-interest.

THE REQUISITES BEFORE A DERIVATIVE SUIT CAN BE FILED BY ASTOCKHOLDER :

a) The party bringing suit should be a sh areholder as of thetime of t he act or t ransaction complained of, the numberof his sh ares n ot being material;

b) He has tried to exhaust intra-corp orate rem edies, i .e., hasmade a demand on the board of directors for the

appropriate relief bu t the latter h as failed or refused toheed his plea; and

c) The cause of act ion actually devolves on the corporation,the wrongdoing or harm having been, or being caused tothe corporation and not to the particular stockholder

bringing the suit.

WHILE THE COMPLAINING STOCKHOLDER MUST SHOW TO THE

SATISFACTION OF THE COURT THAT HE HAS EXHAUSTED ALL THE

MEANS WITHIN HIS REACH TO ATTAIN WITHIN THE CORPORATION

ITSELF THE REDRESS FOR HIS GRIEVANCES , OR ACTIONS IN

CONFORMITY TO HIS WISHES , NONETHELESS , WHERE THE

CORPORATION IS UNDER THE COMPLETE CONTROL OF THE PRINCIPALDEFENDANTS , AS HERE , THERE IS NO NECESSITY OF MAKING ADEMAND UPON THE DIRECTORS :

• A demand upon the board to institute an action andprosecute the same effectively would have been uselessand an exercise in futility.

VALLE VERDE COUNTRY CLUB, INC VS AFRICA

G.R. NO. 151969, SEPTEMBER 4, 2009

71



T HE HOLDOVER PERIOD IS NOT PART OF THE TERM OF OFFICE OF

A MEMBER OF THE BOARD OF DIRECTORS :

• The " term " is the time during which the officer may claim

to hold the office as of right , and xes the interval af ter which the several incumbents shall succeed one another.

• The term of office is not affected by the holdover.

• The term is xed by statute and it does not changesimply because the office may have become vacant, nor

because the incumbent holds over in office beyond the endof the term due to the fact that a su ccessor has not beenelected and has failed to qualify.

AN OFFICER ’S " TENURE " REPRESENTS THE TERM DURING WHICH

THE INCUMBENT ACTUALLY HOLDS OFFICE :

• The tenure may be shorter (or, in case of holdover, longer)than the term for reasons within or beyond the power ofthe incumbent.

SECTION 23 OF THE C ORPORATION C ODE DECLARES THAT " THE

BOARD OF DIRECTORS …SHALL HOLD OFFICE FOR ONE (1) YEAR

UNTIL THEIR SUCCESSORS ARE ELECTED AND QUALIFIED :"

• The term of the members of the board of directors shall beonly for on e yea r;

• Term expires one year after election to the office.

T HE HOLDOVER PERIOD —that time from the lapse of one year from a member’s election to the Board and until his

successor’s election and qualication – is not part of thedirector’s original term of offi ce, nor is it a new term;

• The holdover period, however, constitutes part of histenure.

W HEN AN INCUMBENT MEMBER OF THE BOARD OF DIRECTORS

CONTINUES TO SERVE IN A HOLDOVER CAPACITY , IT IMPLIES THAT

THE OFFICE HAS A FIXED TERM , WHICH HAS EXPIRED , AND THE

INCUMBENT IS HOLDING THE SUCCEEDING TERM :

• Resignation as a holdover director did not change the

nature of the va cancy;

• The vacancy due to the expiration of term had been created

long before a resignation.

• With the expiration of term of office, a vacancy resulted

which, by the terms of Sect ion 29 of the Corporation Code,must be lled by the stockholders in a regular or sp ecial

meeting ca lled for t he p urpose.

UNDER S ECTION 29 OF THE C ORPORATION C ODE , IN CASES WHERE

THE VACANCY IN THE CORPORATION ’S BOARD OF DIRECTORS IS

72



CAUSED NOT BY THE EXPIRATION OF A MEMBER ’S TERM , THE

SUCCESSOR " SO ELECTED TO FILL IN A VACANCY SHALL BE

ELECTED ONLY FOR THE UNEXPIRED TERM OF THE HIS

PREDECESSOR IN OFFICE :"

• The law has authorized the remaining members of the

board to ll in a vacancy only in specied instances, so asnot to ret ard or i mpair the corp oration’s op erations;

• Yet, in recognition of the stockholders’ right to elect themembers of the board, it limited the period during whichthe su ccessor sh all serve on ly to the " unexpired term of h ispredecessor i n office."

THE VACANCY REFERRED TO IN S ECTION 29 CONTEMPLATES A VACANCY OCCURRING WITHIN THE DIRECTOR ’S TERM OF OFFICE :

• When a vacancy is created by the expiration of a term,logically, there is n o more u nexpired ter m to sp eak of.

• Hence, Section 29 declares that it shall be thecorporation’s stockholders who shall possess the au thority

to ll in a vacancy caused by the expiration of a member’sterm.

o When remaining members of the Board elected

Ramirez to replace Makalintal, there was no more

unexpired term to speak of, as Makalintal’s one-year term had already e xpired.

o Pursuant to law, the a uthority to ll in the vacancy

caused by Makalintal’s leaving lies w ith the V VCC’s

stockholders, not t he remaining members of itsboard of d irector s.

O FFICER S

EASYCALL COMMUNICATIONS PHILS., INC., VS KING

G.R. NO. 145901 DECEMBER 15, 2005

• NLRC has jurisdiction over case involving an “officer”

whose position is not provided by the by-laws a nd who

was n ot elected by the B oard of Directors

UNDER S ECTION 5 OF PD 902-A, THE LAW APPLICABLE AT THE

TIME THIS CONTROVERSY AROSE , THE SEC, NOT THE NLRC, HADORIGINAL AND EXCLUSIVE JURISDICTION OVER CASES INVOLVING

THE REMOVAL OF CORPORATE OFFICERS :

• A corporate officer’s dismissal was a corporate act and/oran intra-corporate con troversy.

73

Fiblihdhh ddi id GARCIA VS EASTERN TELECOMMUNICATIONS



• First established that the person removed or dismissed was a corporate officer before the removal or dismissal

could properly fall within the jurisdiction of the SEC andnot the NLRC.

o Petitioner f ailed to s how that respondent was i n fact

a corporate offi cer.

"C ORPORATE OFFICERS " ARE THOSE OFFICERS OF A CORPORATION

WHO ARE GIVEN THAT CHARACTER EITHER BY THE C ORPORATION CODE OR BY THE CORPORATION ’S BY-LAWS :

• The "corporate officers" are the president, secretary,

treasurer and such other officers as m ay be p rovided for inthe b y-laws.

• The SEC and not the NLRC which had jurisdiction;

A N " OFFICE " IS CREATED BY THE CHARTER OF THE CORPORATION

AND THE OFFICER IS ELECTED BY THE DIRECTORS OR

STOCKHOLDERS :• An employee occupies no office and generally is employed

by the managing officer of the corporation who alsodetermines the compensation to be p aid to such employee.

GARCIA VS. EASTERN TELECOMMUNICATIONSPHILIPPINES:

G.R. NO. 173115, APRIL 16, 2009

Dismissal or r emoval of V ice-President is an intra-

corporate con troversy.

ISSUE : Whether or not the removal or termination of

employment of an officer of a corporation is a n intra-corporatecontroversy that falls u nder t he o riginal exclusive jurisdiction of

the RTC.

A CORPORATE OFFICER ’S DISMISSAL OR REMOVAL IS ALWAYS ACORPORATE ACT AND / OR AN INTRA -CORPORATE CONTROVERSY ,OVER WHICH THE S ECURITIES AND E XCHANGE C OMMISSION [SEC](NOW THE R EGIONAL T RIAL C OURT ) HAS ORIGINAL AND EXCLUSIVE

JURISDICTION :

AN INTRA -CORPORATE CONTROVERSY IS ONE WHICH PERTAINS TO ANY OF THE FOLLOWING RELATIONSHIPS :

(1)Between the corporation, partnership or association and

the public;

74

(2)Bhihiii d Th bfffiili idhh



(2)Between the corporation, partnership or association and

the State insofar as the former’s franchise, permit orlicense to op erate is co ncerned;

(3) Between the corporation, partnership or association andits stockholders, partners, members or officers; and

(4) Among the stockholders, partners or associatesthemselves.

LOZON V . N ATIONAL L ABOR R ELATIONS C OMMISSION :

• Presidential Decree No. 902-A confers o n the S EC original

and exclusive jurisdiction to hear a nd decide controversies

and cases involving intra-corporate and partnershiprelations between or among the corporation, officers and

stockholders and partners, including their elections or

appointments;

• First established that the person removed or dismissed was a corporate officer;

• "Corporate officers" are those officers of t he corporation who are given that character by t he C orporat ion Code or by

the corporation’s by-laws.

• There are three specic officers whom a corporation musthave under Section 25 of the Corporation Code:

o These are the president, secretary and the

treasurer.

• The number of officers is not limited to these three.

• A corporation may have such other officers as may beprovided for by its by-laws;

• The number of corporate officers is thus limited by law

and by the corp oration’s b y-laws.

• One who is included in the by-laws of a corporation in itsroster of corporate officers i s a n officer of said corporationand not a mere employee.

MATLING INDUSTRIAL AND COMMERCIAL CORPORATION VS. COROS

G.R. NO. 157802, OCTOBER 13, 2010

Vice-President for F inance & Administration appointed by

the President pursuant to the By-laws not a corporate

officer

A POSITION MUST BE EXPRESSLY MENTIONED IN THE B Y -L AWS IN

ORDER TO BE CONSIDERED AS A CORPORATE OFFICE :

• The creation of an office pursuant to or under a By-Lawenabling provision is not enough to make a position acorporate office.

75

THE CORPORATE OFFICERS ARE THE P RESIDENT S ECRETARY



T HE ONLY OFFICERS OF A CORPORATION WERE THOSE GIVEN THAT

CHARACTER EITHER BY THE C ORPORATION C ODE OR BY THE B Y -L AWS ;

• The rest of the corporate officers could be considered onlyas employees or subordinate officials.

E ASYCALL C OMMUNICATIONS P HILS ., I NC . V . K ING :

• An " office " is created by the charter of the corporationand the officer is elected by the directors or st ockholders.

• An employee occupies no o ffice and generally is employednot by the action of the directors or st ockholders b ut bythe managing officer of the corporation who alsodetermines the compensation to be p aid to such employee:

o In this case, respondent was appointed vice

president for nationwide expansion by petitioner’'s

general m anager, not by the board of directors of

petitioner; It was also Malonzo who determined thecompensation package of respondent.

o Thus, respondent was an employee, not a "corporate

officer."

THE CORPORATE OFFICERS ARE THE P RESIDENT , S ECRETARY , T REASURER AND SUCH OTHER OFFICERS AS MAY BE PROVIDED FOR

IN THE B Y -L AWS :

• The corporate officers are exclusively those who are giventhat character either by the Corporation Code or by the

corporation’s By-Laws.

WHOEVER ARE THE CORPORATE OFFICERS ENUMERATED IN THE

BY-LAWS ARE THE EXCLUSIVE O FFICERS OF THE CORPORATION

AND THE B OARD HAS NO POWER TO CREATE OTHER O FFICES

WITHOUT AMENDING FIRST THE CORPORATE B Y -LAWS :

• The Board may create appointive positions other t hanthe positions of corporate Officers, but the personsoccupying such positions are not consi dered as corporat eofficers within the meaning of Section 25 of theCorporation Code and are not empowered to exercise thefunctions of t he corporate Officers, except those functionslawfully delegated to th em.

• Their functions and duties are to be determined by the

Board of Directors/Trustees.

THE B OARD OF D IRECTORS MUST ELECT THE CORPORATE

OFFICERS :

76

• Thepowertoelectthecorporateofficerswasa oldstillcomendert hej risdictionoft hereg larco rts



• The power to elect the corporate officers was adiscretionary power that t he law exclusively vested i n theBoard of Directors, and could not be delegated tosubordinate officers or a gents.

o The office of Vice President for Finance and

Administration created by Matling’s President pursuant to By Law No. V was an ordinary, not a

corporate, offi ce.

WHETHER A DISPUTE CONSTITUTES AN INTRA -CORPORATE

CONTROVERSY OR NOT , THE TWO ELEMENTS MUST BE

CONSIDERED :

1. The status or relationship of t he p arties; and

2. The nature of the question that i s the subject of t heircontroversy.

NOT EVERY CONFLICT BETWEEN A CORPORATION AND ITS

STOCKHOLDERS INVOLVES CORPORATE MATTERS THAT ONLY THESEC CAN RESOLVE IN THE EXERCISE OF ITS ADJUDICATORY OR

QUASI - JUDICIAL POWERS :

• A person leases an apartment owned by a corporation of

which h e i s a stockholder, there should be no question thata complaint for h is ejectment for n on-payment of r entals

would still come u nder t he j urisdiction of t he regu lar cou rts

and not of the SEC.

• By the same token, if one person injures another in a

vehicular acci dent, the complaint for da mages led by thevictim will not come u nder t he j urisdiction of t he S EC simply

because of the happenstance that both parties arestockholders of t he same corporation.

• A contrary interpretation would dissipate the powers of the

regular courts a nd distort the m eaning and intent of PD No.902-A.

M AINLAND

CONSTRUCTION

CO

., INC

. V

. MOVILLA

: IN

ORDER

THAT

THE SEC ( NOW THE REGULAR COURTS ) CAN TAKE COGNIZANCE OF

A CASE , THE CONTROVERSY MUST PERTAIN TO ANY OF THE

FOLLOWING RELATIONSHIPS :

1. Between the corporation, partnership or association andthe public;

2. Between the corporation, part nership or a ssociation and

its stockholders, partners, members or officers;

3. Between the corporation, partnership or association andthe State as far as its franchise, perm it or license tooperate is concerned; and

4. Among the stockholders, partners or associatesthemselves.

77

• Thecircumstancessurroundinganappointmenttooffice



T HE FACT THAT THE PARTIES INVOLVED IN THE CONTROVERSY ARE

ALL STOCKHOLDERS OR THAT THE PARTIES INVOLVED ARE THE

STOCKHOLDERS AND THE CORPORATION DOES NOT NECESSARILY

PLACE THE DISPUTE WITHIN THE AMBIT OF THE JURISDICTION OF

SEC:

• The better policy to be followed in determining jurisdictionover a case sh ould be to consider concurrent factors su chas the status or relationship of the parties or thenature of the question that is the subject of t heircontroversy.

• In the absence of any one of t hese factors, the SEC will

not h ave jurisdiction.

• Furthermore, it does not necessarily follow that everyconict between the corporation and its stockholders

would involve such corporate matters as only the SEC canresolve in the exercise of its a djudicatory or q uasi-judicialpowers.

T HE CRITERIA FOR DISTINGUISHING BETWEEN CORPORATE

OFFICERS WHO MAY BE OUSTED FROM OFFICE AT WILL , ON ONE

HAND , AND ORDINARY CORPORATE EMPLOYEES WHO MAY ONLY BE

TERMINATED FOR JUST CAUSE , ON THE OTHER HAND , DO NOT

DEPEND ON THE NATURE OF THE SERVICES PERFORMED , BUT ON THE MANNER OF CREATION OF THE OFFICE :

The circumstances surrounding an appointment to officemust be fully considered to determine whether thedismissal con stituted an intra-corporate con troversy or alabor t ermination dispute.

• Must also consider whether the status as Director and

stockholder h ad any relation at al l to the a ppointment andsubsequent dismissal as Vice President for F inance and

Administration.

REAL VS. SANGU PHILIPPINES, INC. AND/ OR KIICHI ABE

G.R. NO. 168757, JANUARY 19, 2011

TWO-TIER TEST IN DETERMINING THE EXISTENCE OFINTRA-CORPORATE CONTROVERSY

T ABANG V . N ATIONAL L ABOR R ELATIONS C OMMISSION :

• An intra-corporate controversy is one which arises between a stockholder and the corporation.

• There is no distinction, qualication nor any exemption whatsoever.

• The provision is broad and covers all kinds ofcontroversies b etween stockholders a nd corporations.

78



SEC( nowtheRTC )regardlessofthesubjectm atter o Iftherelationshipanditsincidentsaremerely



SEC ( now the RTC ), regardless of the subject m atterof the dispute.

This came to be known as the relationship test.

1984 CASE OF DMRC E NTERPRISES V. E STA DEL S OL M OUNTAIN

RESERVE , I NC ., THE S UPREME C OURT INTRODUCED THE NATURE

OF THE CONTROVERSY TEST .

• It is n ot t he m ere ex istence o f an intra-corporate rel ationship

that gives ri se to a n intra-corporate co ntroversy ;

• There is no legal sense in disregarding or m inimizing the

value of t he nature of t he transactions which gives rise tothe dispute.

UNDER THE NATURE OF THE CONTROVERSY TEST, THEINCIDENTS OF THAT RELATIONSHIP MUST ALSO BECONSIDERED FOR THE PURPOSE OF ASCERTAINING

WHETHER THE CONTROVERSY ITSELF IS INTRA-

CORPORATE:

The controversy must not only be rooted in theexistence of an intra-corporate relationship, but mustas well pertain to the enforcement of the parties’correlative rights and obligations under theCorporation Code and the internal and intra-corporate regulatory rules of the corporation.

o If the relationship and its incidents are merely

incidental t o the controversy or if t here will still be

conict even if t he relationship does not exi st, thenno intra-corporate con troversy exists.

COMBINATION OF THE TWO TESTS ; JURISDICTION SHOULD BE

DETERMINED BY CONSIDERING NOT ONLY THE STATUS OR

RELATIONSHIP OF THE PARTIES , BUT ALSO THE NATURE OF THE

QUESTION UNDER CONTROVERSY .

SPEED D ISTRIBUTION I NC . V . C OURT OF A PPEALS :

• To determine whether a case involves an intra-corporate

controversy, and is to be heard and decided by the branches of the RTC specically designated by the Court

to try and decide such cases, two elements must concur:

a) The status or relationship of t he p arties, and

b) The nature of the question tha t is the subject oftheir con troversy.

T HE FIRST ELEMENT REQUIRES THAT THE CONTROVERSY MUST

ARISE OUT OF INTRA -CORPORATE OR PARTNERSHIP RELATIONS :

1. Between any or all of the parties and the corporation,partnersh ip, or asso ciation of which they are st ockholders,members or ass ociates,

80

2Betweenanyorallofthemandthecorporation



2. Between any or all of them and the corporation,partnership or associ ation of which they are st ockholders,members o r associ ates, respectively; and

3. Between such corporation, partnership, or association andthe State i nsofar as i t concerns the individual franchises.

T HE SECOND ELEMENT REQUIRES THAT THE DISPUTE AMONG THE

PARTIES BE INTRINSICALLY CONNECTED WITH THE REGULATION OF THE CORPORATION :

• If the nature of the controversy involves matters t hat arepurely civil in character, nece ssarily, the case does not

involve an intra-corp orate controversy.’

NOT ALL CONFLICTS BETWEEN THE STOCKHOLDERS AND THE

CORPORATION ARE CLASSIFIED AS INTRA -CORPORATE :

• There are other factors to consider in determining whetherthe dispute involves corp orate matters as t o consider themas intra-corp orate con troversies.

What then is the nature of peti tioner’s Complaint for I llegal

Dismissa l? I s i t intra-corporate a nd thus b eyond the j urisdictionof t he Labor A rbiter? We shall answer this question by usingthe standards set forth i n the Reyes case.

No intra-corporate rel ationship between the p arties:

As earlier stated, petitioner’s status as a stockholder anddirector of respondent corporation is not disputed .

• The root of the controversy is petitioner’s dismissal as

Manager of respondent corporation, a position whichrespondents cl aim to b e a corporate offi ce.

• Hence, petitioner i s involved in this ca se not i n his capacity

as a stockholder or d irector, but as an alleged corporateofficer.

IN APPLYING THE RELATIONSHIP TEST , IT IS NECESSARY TODETERMINE IF A PERSON IS A CORPORATE OFFICER OF ACORPORATION SO AS TO ESTABLISH THE INTRA -CORPORATE

RELATIONSHIP BETWEEN THE PARTIES :

AN ‘ OFFICE ’ IS CREATED BY THE CHARTER OF THE CORPORATION AND THE OFFICER IS ELECTED ( OR APPOINTED ) BY THE DIRECTORS

OR STOCKHOLDERS ; ‘C ORPORATE OFFICERS ’ IN THE CONTEXT OF

PRESIDENTIAL D ECREE N O. 902-A ARE THOSE OFFICERS OF THE

CORPORATION WHO ARE GIVEN THAT CHARACTER BY THE

CORPORATION C ODE OR BY THE CORPORATION ’S BY-LAWS :

81



• The creation of an office pursuant to or under a by-law



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 :

E ASYCALL C OMMUNICATIONS P HILS ., I NC . V . K ING :

Corporate officers are t hose officers of a corporation whoare given that cha racter either by t he Corporation Code or

by the corporation’s by-laws.

Section 25 of the Corporation Code specicallyenumerated who are these corporate officers, to wit: (1)president; (2) secretary; ( 3) treasu rer; an d (4) such otherofficers a s m ay be p rovided for in the by -laws .

SECTION 25 OF THE C ORPORATION C ODE ; THE PHRASE " SUCH

OTHER OFFICERS AS MAY BE PROVIDED FOR IN THE BY-LAWS ;"M ATLING I NDUSTRIAL AND C OMMERCIAL C ORPORATION V . C OROS :

• A position must be expressly mentioned in the by-laws inorder to be considered a s a corpo rate office.

pyenabling provision is not enough to make a position acorporate office.

• GUERREA V . L EZAMA :

o

The only officers of a corporation were those giventhat charact er either by the C orporation Code or bythe b y-laws;

o The rest of the corporate officers could beconsidered only as employees or subordinateofficials.

• E ASYCALL C OMMUNICATIONS P HILS ., I NC . V . K ING :

o An " office " is created by the charter of thecorporation and the officer is elected by thedirectors o r st ockholders.

o An employee occupies no office and generally is

employed not by the action of the directors orstockholders but by the managing officer of thecorporation who also determines the compensation

to be paid to such employee.

THE CORPORATE OFFICERS ARE THE P RESIDENT , S ECRETARY , T REASURER AND SUCH OTHER OFFICERS AS MAY BE PROVIDED FOR

IN THE BY-LAWS :

83

• The corporate officers are exclusively those who are given corporate officers under Section 25 of the Corporation



pygthat character either by the Corporation Code or b y thecorporation’s by-laws.

WHOEVER ARE THE CORPORATE OFFICERS ENUMERATED IN THEBY-LAWS ARE THE EXCLUSIVE O FFICERS OF THE CORPORATION

AND THE B OARD HAS NO POWER TO CREATE OTHER O FFICES

WITHOUT AMENDING FIRST THE CORPORATE BY-LAWS :

• The Board may create appointive positions other t hanthe positions of corporate Officers, but the personsoccupying such positions are not considered ascorporate offi cers within the meaning of Section 25 of

the Corporation Code and are not empowered to exercisethe functions of the corporate Officers , except those

functions lawfully delegated to them .

• Their functions and duties are to be determined by theBoard of Directors/Trustees.

BOARD OF DIRECTORS HAS NO POWER TO CREATE OTHERCORPORATE 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 appointivepositions other than the positions of corporate officers,the persons occu pying such positions cannot be viewed as

p pCode.

o Unless and until the corporation’s by-laws is

amended for the inclusion of General Manager in the

list of i ts co rporate offi cers, such position cannot be

considered as a corporate office w ithin the realm ofSection 25 of the Corporation Code.

SECTION 25 OF THE C ORPORATION C ODE ; SAFEGUARDS THE

CONSTITUTIONALLY ENSHRINED RIGHT OF EVERY EMPLOYEE TOSECURITY OF TENURE :

•

To allow the creation of a corporate officer position by asimple inclusion in the corporate by-laws of an enablingclause empowering the board of directors to do so canresult in the circumvention of that co nstitutionally well-protected right.

ONLY OFFICERS OF A CORPORATION ARE THOSE GIVEN THAT

CHARACTER EITHER BY THE C ORPORATION C ODE OR BY THECORPORATE BY-LAWS :

• The corporate officers enumerated in the by-laws are theexclusive officers of the corporation while the rest cou ldonly be regarded as mere employees or subordinateofficials.

84

o Occupying a high ranking and vital position in a o Respondent was n ot a corporate officer of petitioner



pygggpcorporation but which position was not specicallyenumerated or mentioned in the latter’s by-laws,can only be regarded as its employee orsubordinate official.

Indication of a position as an employee and not acorporate officer:

o Compensation as corporation’s General Manager

was set, xed and determined not by the latter’s

Board of Directors bu t simply b y its P resident;

o The same was not subject to the approval of

petitioner corporation’s Board of Directors.

A DIRECTOR AND A STOCKHOLDER OF A CORPORATION WILL NOT

AUTOMATICALLY MAKE THE CASE FALL WITHIN THE AMBIT OF

INTRA -CORPORATE CONTROVERSY AND BE SUBJECTED TO RTC’ S

JURISDICTION ; NOT ALL CONFLICTS BETWEEN THE STOCKHOLDERS

AND THE CORPORATION ARE CLASSIFIED AS INTRA -CORPORATE :

• Factors such as the status or relationship of the partiesand the nature of the question th at i s th e su bject of thecontroversy must be considered in determining whetherthe dispute involves corporate matters so as to regardthem as intra-corporate controversies.

p pp

corporation but a mere employee thereof so there

was n o intra-corporate r elationship b etween them.

W ITH

RESPECT

TO

THE

CONTENTION

THAT

THE

M ANAGEMENT

CONTRACT EXECUTED HAS NO BINDING EFFECT ON THE CORPORATION

FOR HAVING BEEN EXECUTED WAY BEFORE ITS INCORPORATION IS

MERITORIOUS :

SEC . 19. C OMMENCEMENT OF CORPORATE EXISTENCE :

• A private corporation formed or organized under this Code

commences to have corporate existence and juridical

personality and is deemed incorporated from the date theSecurities and Exchange Commission issues acerticate of i ncorporation under i ts offi cial seal;

• And thereupon the incorporators, stockholders/members

and their su ccessors shall const itute a body politic andcorporate under the name stated in the articles of

incorporation for the period of time mentioned therein,

unless said period is e xtended or t he corporat ion is s ooner

dissolved in a ccordance w ith law.

THERE IS NO CORPORATION TO SPEAK OF PRIOR TO AN ENTITY ’SINCORPORATION A ND NO CONTRACT ENTERED INTO BEFORE

INCORPORATION CAN BIND THE CORPORATION :

85

• The Management Contract was executed months before o Thus, the creation of an office pu rsuant to or un der



corporation’s i ncorporation;

• It cannot have any binding and legal effect on the

corporation;

•

No evidence presen ted to prove that pet itioner corporat ionadopted, ratied or conrmed the Management Contract;

• The corporation cannot be considered estopped from

questioning its binding effect now that it was beinginvoking the sa me a gainst it;

• In no w ay, then, can it be enforced against the corporat ion.

BARBA VS LICEO DE CAGAYAN UNIVERSITYG.R. NO. 193857, N OVEMBER 28, 2012

CORPORATE OFFICERS ARE ELECTED OR APPOINTED BY THEDIRECTORS OR STOCKHOLDERS , AND ARE THOSE WHO ARE GIVEN

THAT CHARACTER EITHER BY THE C ORPORATION C ODE OR BY THECORPORATION ’S BY-LAWS :• Section 25 of the Corporation Code enumerates corporate

officers as the president, the secret ary, the treasurer an dsuch other officers as m ay be provided for in the by-laws.

M ATLING I NDUSTRIAL AND C OMMERCIAL C ORPORATION V . COROS :• The phrase “such other officers as may be provided for in

the by-laws” has b een claried:o A position must be expressly mentioned in the By-

Laws in order t o be con sidered as a corporate office.

a By-Law enabling provision is n ot enough to makea position a corporate offi ce.

o The only officers of a corporation were those giventhat character ei ther by the Corporat ion Code or bythe By-Laws;

o The rest of the corporat e offi cers cou ld be considered

only as employees of subordinate offi cials.

E ASYCALL C OMMUNICATIONS P HILS ., I NC . V . K ING :• An “ office ” is created by the charter of t he corporation

and th e officer is elected by the directors or st ockholders.• An employee occupies no office and generally is employed

not by the action of the directors or st ockholders b ut bythe managing officer of the corporation who alsodetermines the compensation to be p aid to such employee.

CORPORATE OFFICERS ARE ELECTED OR APPOINTED BY THEDIRECTORS OR STOCKHOLDERS , AND ARE THOSE WHO ARE GIVEN

THAT CHARACTER EITHER BY THE C ORPORATION C ODE OR BY THECORPORATION ’S BY-LAWS :• Section 25 of the Corporation Code enumerates corporate

officers a s the president, the secret ary, the treasurer an dsuch other officers as m ay be provided for in the by-laws.

THE BOARD OF DIRECTORS MAY CREATE APPOINTIVE POSITIONSOTHER THAN THE POSITIONS OF CORPORATE OFFICERS ; THEPERSONS OCCUPYING SUCH POSITIONS CANNOT BE DEEMED ASCORPORATE OFFICERS AS CONTEMPLATED BY S ECTION 25 OF THECORPORATION C ODE :M ATLING I NDUSTRIAL AND C OMMERCIAL C ORPORATION V . C OROS :• Whoever are the corporate officers enumerated in the by-

laws are t he exclusive Officers of the corporation and theBoard has no power to create other Offices withoutamending rst the corporate Bylaws.

86

• The Board may create appointive positions other than the 3.He agrees to hold himself personally and solidarily



positions of cor porate Officers, but the persons occupyingsuch positions are not considered as corporate officers

within the meaning of Section 25 of the Corporation Codeand are not em powered to exercise the functions of thecorporate Officers, except those functions lawfullydelegated to th em.

•

Their functions and duties are to be determined by theBoard of Directors/Trustees.

TRAMAT MERCANTILE, INC. VS COURT OF APPEALS

G.R. NO. 111008 NOVEMBER 7, 1994

PERSONAL LIABILITY OF A CORPORATE DIRECTOR , TRUSTEE OR

OFFICER ALONG ( ALTHOUGH NOT NECESSARILY ) WITH THE

CORPORATION MAY SO VALIDLY ATTACH , AS A RULE , ONLY WHEN :

1. He assents (a) to a patently unlawful act of thecorporation, or(b) for bad faith, or gross negligence in directing its

affairs, or (c) for conict of interest , resulting in

damages to the corporation, its stockholders or otherpersons;

2. He consents to the issuance of watered stocks or who,having knowledge thereof, does not forthwith le with thecorporate secretary h is written objection thereto;

pyyliable with the corpo ration; or

4. He is made, by a specic provision of law , t o personallyanswer for his corp orate action.

PEOPLE'S AIRCARGO AND WAREHOUSING VS COURT OF APPEALS

G.R. NO. 117847 OCTOBER 7, 1998

CONTRACTS ENTERED INTO BY A CORPORATE PRESIDENT WITHOUTEXPRESS PRIOR BOARD APPROVAL BIND THE CORPORATION WHEN :

1. SUCH OFFICER 'S APPARENT AUTHORITY IS ESTABLISHED

AND

2. WHEN THESE CONTRACTS ARE RATIFIED BY THE

CORPORATION .

IN THE ABSENCE OF AUTHORITY FROM THE BOARD OF DIRECTORS ,NO PERSON , NOT EVEN ITS OFFICERS , CAN VALIDLY BIND ACORPORATION :

• A corporation is a juridical person, separate and distinctfrom its stockholders and members, having powers,

87

attributes and properties expressly authorized by law or



incident to its ex istence.

• A corporation may, thru the board of directors, which exercises almost all corporate powers,

lays d own all corporate bu siness p olicies an d is

responsible for the efficiency of management.

SEC . 23. T HE B OARD OF D IRECTORS OR T RUSTEES . — U NLESS

OTHERWISE PROVIDED IN THIS C ODE :

THE CORPORATE POWERS SHALL BE EXERCISED , ALL BUSINESS

CONDUCTED AND ALL PROPERTY OF SUCH CORPORATIONS

CONTROLLED AND HELD BY THE BOARD OF DIRECTORS OR TRUSTEES .

• The power and the responsibility to decide whether thecorporation should enter into a contract that will bind thecorporation is lodged in the board , subject t o the a rticlesof incorporation, bylaws, or rel evant provi sions o f law.

T HE 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 corporationis generally derived from law, corporate by-laws orauthorization from the board, either exp ressly or impliedlyby habit, custom or acqu iescence in the general course of

business.

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 :

Includes powers which have been intentionally conferred;

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 u sually pertainingto the particular officer or agen t;

Such apparent powers as the corporation has causedpersons dealing with the officer or agen t to believe that ithas conferred;

• The a uthority to a ct for an d to bind a corporation may be

presumed from acts of recognition in other instances,

wherein the power was in fact exercised without anyobjection from its b oard or sh areholders.

APPARENT AUTHORITY IS DERIVED NOT MERELY FROM

PRACTICE ; I TS EXISTENCE MAY BE ASCERTAINED THROUGH :

(1)The general manner in which the corporation holds outan officer or agent as having the power to act or;

88

• The apparent authority to act in general, with • The president is presumed to have the authority to act



which it clothes him; or

(2)The acquiescence in his a cts o f a particular n ature, with

actual or constructive knowledge thereof, whether withinor beyond the scope of his ordinary p owers.

• It requ ires p resentation of evidence of similar act(s)executed either i n its favor o r in favor o f other p arties.

It is n ot t he quantity of similar a cts which establishesapparent authority, bu t the vesting of a corporateofficer 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 :

• The corporation will, as against anyone who has in goodfaith dealt with it through such agent, be estopped fromdenying th e a gent's a uthority.

A CORPORATE PRESIDENT IS OFTEN GIVEN GENERAL SUPERVISION

AND CONTROL OVER CORPORATE OPERATIONS :

• Officer ha s certain limited powers in the transaction of t he

usual and ordinary b usiness o f the corporat ion .

within the d omain of the general objectives of its b usinessand within the scop e of his or her u sual duties.

A

PARTY

DEALING WITH

THE

PRESIDENT

OF

A

CORPORATION

IS

ENTITLED TO ASSUME THAT HE HAS THE AUTHORITY TO ENTER , ON

BEHALF OF THE CORPORATION , INTO CONTRACTS THAT ARE WITHIN

THE SCOPE OF THE POWERS OF SAID CORPORATION AND THAT DO

NOT VIOLATE ANY STATUTE OR RULE ON PUBLIC POLICY :

• The president of a corporation possesses the power toenter into a contract for the corporation when the"conduct on the part of both the president and the

corporation shows that he had been in the habit of actingin similar m atters on behalf of the company and that the

company had authorized h im so to a ct and had recognized,

approved a nd ratied his f ormer an d similar a ctions.

CARAG VS NLRC

G.R. NO. 147590, APRIL 2, 2007

A DIRECTOR IS NOT PERSONALLY LIABLE FOR THE DEBTS OF THE

CORPORATION WHICH HAS A SEPARATE LEGAL PERSONALITY OF ITS

89

OWN. S ECTION 31 OF THE C ORPORATION C ODE LAYS DOWN THE • Bad faith partakes o f the n ature o f fraud.



EXCEPTIONS TO THE RULE :

LIABILITY OF DIRECTORS , TRUSTEES OR OFFICERS :

1. Willfully and knowingly vote for or assent to patently

unlawful acts of the corporation; or

2. Who are guilty of gross negligence or bad faith indirecting the affairs of the corporation; or

3. Acquire any personal or pecuniary interest in conictwith their duty as such directors or trustees shall beliable jointly and severally for all damages resultingtherefrom suffered by the corporation, its stockholders o r

members and other persons.

T O HOLD A DIRECTOR PERSONALLY LIABLE FOR DEBTS OF THE

CORPORATION , AND THUS PIERCE THE VEIL OF CORPORATE

FICTION , THE BAD FAITH OR WRONGDOING OF THE DIRECTOR MUST

BE ESTABLISHED CLEARLY AND CONVINCINGLY :

• Bad faith is n ever pr esumed;

• Bad faith d oes n ot connote b ad judgment or negligence;

• Bad faith imports a dishonest purpose;

• Bad faith means breach of a known duty through some ill

motive or i nterest ;

BUSINESSDAY I NFORMATION S YSTEMS AND S ERVICES , I NC . V .NLRC :

• A corporate officer is not personally liable for the moneyclaims of discharged corporate employees unless he acted

with evident malice and bad faith in terminating theiremployment.

NEITHER DOES BAD FAITH ARISE AUTOMATICALLY JUST BECAUSE A

CORPORATION FAILS TO COMPLY WITH THE NOTICE REQUIREMENT

OF LABOR LAWS ON COMPANY CLOSURE OR DISMISSAL OF

EMPLOYEES :

• The failure to give notice is not an unlawful act becausethe law does not dene su ch failure as u nlawful.

• Such failure to give notice is a violation of proceduraldue process but does not amount to an unlawful or

criminal act.

• Such procedural defect is called illegal dismissal because it fails to comply with mandatory procedural

requirements , but it is not illegal in the sense that itconstitutes an u nlawful or criminal act.

90

THE WRONGDOING APPROVED OR ASSENTED TO BY THE DIRECTOR • Article 212(e) of the Labor Code, by itself, does not make a



MUST BE A PATENTLY UNLAWFUL ACT :

• Mere failure to comply with the n otice requ irement of laborlaws on company closure or di smissal of employees doesnot amount to a patently unlawful act.

P ATENTLY UNLAWFUL ACTS ARE THOSE DECLARED UNLAWFUL BY

LAW WHICH IMPOSES PENALTIES FOR COMMISSION OF SUCH UNLAWFUL ACTS :

• There must be a law declaring the act unlawful and

penalizing the act.

REQUIRING A ONE -MONTH PRIOR NOTICE TO EMPLOYEES AND THE

DEPARTMENT OF L ABOR AND E MPLOYMENT BEFORE ANY PERMANENT

CLOSURE OF A COMPANY DOES NOT STATE THAT NON -COMPLIANCE

WITH THE NOTICE IS AN UNLAWFUL ACT PUNISHABLE UNDER THE

CODE :

• There is no provision in any other Article of the LaborCode declaring failure to gi ve such notice an unlawful actand providing for i ts p enalty.

MCLEOD V . NLRC AND S POUSES S ANTOS V . NLRC:

corporate officer personally liable for the debts of thecorporation.

• The governing law on personal liability of directors fordebts of the corporation is still Section 31 of the

Corporation Code.

MCLEOD V . NLRC:

P ERSONAL LIABILITY OF CORPORATE DIRECTORS , TRUSTEES OR

OFFICERS ATTACHES ONLY WHEN :

(1)Theyassent to a patently unlawful act

of the corporation,or when they are guilty of ba d faith or gross negligence indirecting its affairs , or when there is a conict of i nterest

resulting in damages to the corporation, its st ockholders orother person s;

(2)They consent to the issuance of watered down stocks or when, having knowledge of such issuance, do not

forthwith le with the corporate secretary their writtenobjection;

(3)They agree to hold themselves personally and solidarilyliable with th e co rporation; or

(4)They are made by specic provision of law personallyanswerable f or t heir cor porate a ction .

91

Various cases when corporate officers w ere themselves hel d by leviable assets evi dently in order t o evade its j ust and due



the Court to be personally accountable for the payment of

wages a nd money claims t o its em ployees:

• In A.C. Ransom Labor Union-CCLU vs. NLRC , the Courtruled that under the Minimum Wage Law, the responsible

officer of an employer corporation could be held personallyliable for n onpayment of backwages for "if the policy of thelaw were otherwise, the corporation employer would havedevious ways for evading payment of backwages.

• In the absence of a clear identication of the officerdirectly responsible for failure to pay the backwages, theCourt considered the President of the corporation as su chofficer.

• The case was cited in Chua vs. NLRC in holding personallyliable the v ice-president of the company, being the highestand most ranking official of the corporation next to thePresident who was dismissed for the latter's claim forunpaid wages.

A REVIEW OF THE ABOVE EXCEPTIONAL CASES WOULD READILY

DISCLOSE THE ATTENDANCE OF FACTS AND CIRCUMSTANCES THAT

COULD RIGHTLY SANCTION PERSONAL LIABILITY ON THE PART OF

THE COMPANY OFFICER :

• In A.C. Ransom , the corporate entity was a familycorporation and execution against it could not be

implemented because of the disposition posthaste of its

obligations. T he doctrine of "pi ercing the veil of corpora te

ction" was thus clearly appropriate.

• Chua likewise involved another family corporation, andthis time the conict was between two brothers occupying

the highest ranking positions in the company.

o There were incontrovertible facts which pointed toextreme personal animosity tha t resulted, evidentlyin bad faith, in the easing out from the company ofone of the brothers by the o ther.

A CORPORATION IS INVESTED BY LAW WITH A PERSONALITY

SEPARATE AND DISTINCT FROM THOSE OF THE PERSONS

COMPOSING IT AS WELL AS FROM THAT OF ANY OTHER LEGAL

ENTITY TO WHICH IT MAY BE RELATED :

• Mere ownership by a single stockholder or by anothercorporation of a ll or n early all of the capital st ock of a

corporation is not of itself sufficient ground fordisregarding the separate co rporate personality.

• The doctrine of piercing the corporate veil applies only when the corporate ction is used to defeat public

convenience, justify wrong, protect fraud, or de fend crime.

92

• In the absence of malice, bad faith, or a specic provisionffi

• The power and responsibility to decide whether the



of law making a corporate officer liable, such corporateofficer cannot be made personally liable for corporateliabiliti es.

• Neither A rticle 212[e] nor A rticle 2 73 (now 272) of t he Labor

Code expressly makes any corporate officer personally

liable for t he d ebts o f the co rporation.

ASSOCIATED BANK VS SPOUSES PRONSTROLLER

G.R. NO. 148444, JULY 14, 2008

If a corporation knowingly permits its officer, or a ny other

agent, to perform acts within the scope of an apparent

authority, hol ding him out to the public as possessing power to do those acts, the corporation will, as g

person who has dealt in good faith with the corporationthrough such agent, be estopped from denying such

authority.

IN THE ABSENCE OF AUTHORITY FROM THE BOARD OF DIRECTORS ,NO PERSON , NOT EVEN ITS OFFICERS , CAN VALIDLY BIND ACORPORATION :

corporation should enter into a contract that will bind thecorporation is lodged in the board of directors.

• The board may validly delegate some of its functions andpowers to officers, committees and agents.

• The authority of such individuals to bind the corporationis gen erally derived from the following:

1. Law

2. Corporate by-laws

3. Authorization from the board, either expressly orimpliedly

4. By habit

5.Custom

6. Acquiescence, in the general course of business.

T HE AUTHORITY OF A CORPORATE OFFICER OR AGENT IN DEALING WITH THIRD PERSONS MAY BE ACTUAL OR APPARENT ; A PPARENT

AUTHORITY IS DERIVED NOT MERELY FROM PRACTICE . I TS

EXISTENCE MAY BE ASCERTAINED THROUGH :

1) The general manner in which the corporation holds out anofficer or agent as having the power to act, or in other

93

words, the apparent authority to act in general, withhihilhhi

• The integrity of commercial transactions can only bedbhldhlh



which it clothes him; or

2) The acquiescence in his a cts of a particular n ature, withactual or constructive knowledge thereof, within or beyondthe scope of his ordinary p owers.

THE AUTHORITY TO ACT FOR AND TO BIND A CORPORATION MAY BE

PRESUMED FROM ACTS OF RECOGNITION IN OTHER INSTANCES ; WHEREIN THE POWER WAS EXERCISED WITHOUT ANY OBJECTION

FROM ITS BOARD OR SHAREHOLDERS :

• Petitioner h ad previously allowed Atty. S oluta to enter i nto

the rst agr eement w ithout a board resolution expresslyauthorizing him; thus, i t ha d clothed him with apparentauthority to modify the same via the second letter-

agreement.

It is not the quantity of similar acts which establishes

apparent authority, but the vesting of a corporateofficer with the power to bind the corporation.

N ATURALLY , THE THIRD PERSON HAS LITTLE OR NO INFORMATION AS

TO WHAT OCCURS IN CORPORATE MEETINGS ; AND HE MUST

NECESSARILY RELY UPON THE EXTERNAL MANIFESTATIONS OF

CORPORATE CONSENT :

maintained by holding the corporation strictly to theliability xed upon it by i ts a gents in accordance with law.

• What transpires in the corporate board room is entirely aninternal m atter.

• Hence, petitioner m ay not i mpute n egligence on the part of

the respondents in failing to nd out the scope of Atty.Soluta’s authority.

• Indeed, the public has the right to rely on the

trustworthiness of ba nk officers a nd their act s.

WESTMONT BANK VS INLAND CONSTRUCTION ANDDEVELOPMENT CORP

G.R. NO. 123650, MARCH 23, 2009

IN THE ABSENCE OF AUTHORITY FROM THE BOARD OF DIRECTORS ,NO PERSON , NOT EVEN ITS OFFICERS , CAN VALIDLY BIND ACORPORATION :• If a corporation consciously lets one of its officers, or an y

other agent, to act within the scope of an apparentauthority, it will be estopped from denying such officer’sauthority.

o The records show that Calo was t he on e assi gned totransact on petitioner’s behalf respecting the loantransactions a nd arrangements of Inland as well asthose of H anil-Gonzales a nd Abrantes.

94

o Since i t conducted business t hrough Calo, who is a nAccountOfficeritispresumedthathehadauthority

• The com pany’s b oard of directors even forthwith issued a

lidih



Account Officer, it is presumed that he had authorityto si gn for t he bank in the Deed of Assignment.

o Petitioner-bank failed to discharge its primaryburden of proving that Calo was not au thorized tobind it, as it di d not pr esent pr oof that Calo wasunauthorized.

o It di d not pr esent, much less cite, an y Resolution from its Board of Directors or its Charter or By-laws from which the Court could reasonably infer that he

indeed had no a uthority to s ign in its b ehalf or bi ndit in the Deed of Assignment.

A CORPORATION SHOULD FIRST PROVE BY CLEAR EVIDENCE THAT

ITS CORPORATE OFFICER IS NOT IN FACT AUTHORIZED TO ACT ON

ITS BEHALF BEFORE THE BURDEN OF EVIDENCE SHIFTS TO THE

OTHER PARTY TO PROVE , BY PREVIOUS SPECIFIC ACTS , THAT AN

OFFICER WAS CLOTHED BY THE CORPORATION WITH APPARENT

AUTHORITY :

Y AO K A S IN T RADING V . C OURT OF A PPEALS :

• The respondent cement company had shown by clear and

convincing evidence t hat its p resident was n ot authorized toundertake a p articular transaction.

• It present ed its by-laws stating that on ly its board of

directors has the power to enter into an agreement or

contract of any k ind.

resolution to rep udiate the contract.

• Thus, it was only after the company successfully

discharged its burden that the other p arty, t he therein

petitioner Yao Ka Sin Trading, had to prove that indeed the

cement company had clothed its president with theapparent pow er to execute the contract by evidence ofsimilar acts ex ecuted in its f avor or i n favor of other p arties.

W ESTMONT B ANK V . P RONSTROLLER :

• Westmont B ank (petitioner) proved that i t r ejected the letter-

agreement entered into b y its a ssistant vice-president;

• Consequently, the t herein respondent had to p rove b y citing

other i nstances of the said officer’s apparent au thority tobind the b ank-therein p etitioner.

W HAT ARE THE TESTS TO DETERMINE WHETHER A DISPUTECONSTITUTES AN INTRA -CORPORATE CONTROVERSY AND DISPUTE ? HOW WOULD JURISDICTION BE DETERMINED ?1. Relationship Test; and2. Nature o f the C ontroversy T est.

J URISDICTION SHOULD BE DETERMINED BY CONSIDERING NOT ONLY THE STATUS OR RELATIONSHIP OF THE PARTIES , BUT ALSO OF THE

NATURE OF THE QUESTION UNDER CONTROVERSY :

95

TWO TIER TEST :S PEED D ISTRIBUTION I NC VS C OURT OF T HE TYPES OF RELATIONSHIPS EMBRACED UNDER S ECTION 5( B),AS DECLARED IN THE CASE OFU NION G LASS &C ONTAINER C ORP



TWO - TIER TEST : S PEED D ISTRIBUTION , I NC . VS . C OURT OF A PPEALS :

• “To determine whether a case involves an intra-corporatecontroversy, and is to be heard and decided by the

branches of the RTC specically designated by the Courtto try and decide such cases, two elements must concur:

1. The status or relationship of the parties (relationshiptest) ; and

2. The nature of the question that is subject of thecontroversy ( nature of the controversy test ).

T HE FIRST ELEMENT REQUIRES THAT THE CONTROVERSY MUST ARISE OUT OF INTRA -CORPORATE PARTNERSHIP RELATIONS :

1. Between any or all of the parties and the corporation,partnership, or asso ciation of which they are st ockholders,members, or asso ciates, respectively; and

2. Between such corporation, partnership, or association and the State i nsofar as i t concerns the ir individual franchises.

T HE S ECOND ELEMENT REQUIRES THAT THE DISPUTE AMONG THEPARTIES BE INTRINSICALLY CONNECTED WITH THE REGULATION OF

THE CORPORATION :• If the nature of the controversy involves matters t hat are

purely civil in character, nece ssarily, the case does notinvolve an intra-corporate co ntroversy. (Reyes vs. Zen ithInsurance Corp., G.R. No. 165744, August 11, 2008,

[Brion, J.])

W HAT IS MEANT BY THE R ELATIONSHIP T EST ? INITIALLY , THE MAIN CONSIDERATION IN DETERMINING WHETHER

A DISPUTE CONSTITUTES AN INTRA -CORPORATE CONTROVERSY WAS LIMITED TO A CONSIDERATION OF THE INTRA -CORPORATE

RELATIONSHIP ( ALSO KNOWN AS THE R ELATIONSHIP T EST )EXISTING BETWEEN OR AMONG PARTIES :

AS DECLARED IN THE CASE OF U NION G LASS & C ONTAINER C ORP . VS . SEC, WERE AS FOLLOWS :

1. Between the corporation, partnership, or associ ation andthe public;

2. Between the corporation, partnership, or associ ation andits stockholders, partners, members or officers;

3. Between the corporation, partnership, or associ ation andthe State as far as its franchise, perm it or license tooperate is con cerned; and

4. Among the stockholder, partners, or associatesthemselves. (Reyes vs. Zenith Insurance Corp., G.R. No.165744, August 11, 2008, [Brion, J.])

W HAT IS MEANT BY THE N ATURE OF THE C ONTROVERSY T EST ?

UNDER THE NATURE OF THE CONTROVERSY TEST , THE INCIDENTS OF THAT RELATIONSHIP MUST ALSO BE CONSIDERED FOR THE PURPOSE

OF ASCERTAINING WHETHER THE CONTROVERSY ITSELF IS INTRA -CORPORATE :• The controversy must be rooted in the existence of an

intra-corp orate rel ationship;• Must pert ain to the en forcement of the parties’ correlative

rights and obligations under the Corporation Code andthe internal and intra-corporate regulatory rules of thecorporation.

• If the relationship and its incidents a re m erely incidentalto th e co ntroversy o r if there w ill still be co nict even if therelationship does not exist, then no intra-corporatecontroversy exists. (Reyes vs. Zenith Insurance Corp.,G.R. No. 165744, August 11, 2008, [Brion, J.])

M EETING S

LOPEZ VS ERICTA96



A CORPORATION MAY PRESCRIBE IN ITS BY-LAWS " THE

QUALIFICATIONS DUTIES AND COMPENSATION OF DIRECTORS

• It cannot therefore b e justly sa id that t he contract, expressorimpliedbetweenthecorporationandthestockholders



QUALIFICATIONS , DUTIES AND COMPENSATION OF DIRECTORS ,OFFICERS AND EMPLOYEES ; " 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 :

GOVERNMENT V . E L H OGAR : Valid a provision in the corporateby-law requiring that persons elected to the Board of D irectors

must be h olders of sha res of t he paid up value of P5,000.00,which shall be held as s ecurity for t heir act ion, on the g round

that sect ion 21 of the Corporation Law expressly gives the

power to the corporation to provide in its by-laws for thequalications of directors and is "highly prudent and in

conformity w ith good practice. "

NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTEDDIRECTOR:

• Any person "who buys stock in a corporation does so withthe knowledge that its affairs are dominated by a majorityof the stockholders an d that he i mpliedly contracts tha t thewill of the majority shall govern in all matters within the

limits of the act of incorporation and lawfully enacted by-laws an d not forbidden by law."

• The stockholder may be considered to have "parted withhis p ersonal r ight or pri vilege to reg ulate the disposition ofhis property which he has invested in the capital stock ofthe corporation, and surrendered it to the will of t hemajority of h is fellow incorporators.

or implied, between the corporation and the stockholdersis infringed ... by any a ct of the former w hich is a uthorized

by a majority.

ANY CORPORATION MAY AMEND ITS ARTICLES OF INCORPORATION BY A

VOTE OR WRITTEN ASSENT OF THE STOCKHOLDERS REPRESENTING AT

LEAST TWO -THIRDS OF THE SUBSCRIBED CAPITAL STOCK OF THE

CORPORATION I F THE AMENDMENT CHANGES , DIMINISHES OR

RESTRICTS THE RIGHTS OF THE EXISTING SHAREHOLDERS THEN THE

DISSENTING MINORITY HAS ONLY ONE RIGHT , VIZ .:

"To object thereto in writing and demand payment for

his share."

THE OWNERS OF THE MAJORITY OF THE SUBSCRIBED CAPITAL

STOCK MAY AMEND OR REPEAL ANY BY-LAW OR ADOPT NEW BY- LAWS :

• It cannot be s aid petitioner h as a vested right to b e e lected

director, in the f ace o f the f act that t he l aw at the time suchright as stockholder was acquired contained the

prescription that the corporate charter and the by-law shallbe subject to a mendment, alteration and modication.

• The corporation has the power to provide for the

qualications of i ts d irect ors.

98

• Corporations have the power to make by-laws declaring apersonemployedintheserviceofarivalcompanytobe



A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THECORPORATION AND ITS SHAREHOLDERS :

• The character is that of a duciary insofar as the

corporation and the stockholders as a body are concerned .• As agents entrusted with the management of the

corporation for th e collective benet of t he stockholders,"they occupy a duciary relation, and in this sense therelation is o ne o f trust."

• "The ordinary trust relationship of directors of acorporation and stockholders springs from the fact thatdirectors ha ve t he con trol and guidance of cor porate a ffairs

and property and hence of the property interests of the

stockholders.

• Equity recogn izes that st ockholders are t he proprietors ofthe corporate interests and are ultimately the only

beneciaries thereof.

AN AMENDMENT TO THE CORPORATION BY-LAW WHICHRENDERS A STOCKHOLDER INELIGIBLE TO BEDIRECTOR, IF HE BE ALSO DIRECTOR IN ACORPORATION WHOSE BUSINESS IS IN COMPETITION

WITH THAT OF THE OTHER CORPORATION, HAS BEENSUSTAINED AS VALID:

person employed in the service of a rival company to beineligible for th e c orporation's B oard of Directors.

• An amendment which renders ineligible, or if elected,subjects t o rem oval, a d irector if he be also a director in acorporation whose business is in competition with or isantagonistic to th e other co rporation is va lid."

o This is based upon the principle that where thedirector is so employed in the service of a rivalcompany, he cannot serve both, but must betrayone or t he other.

• An officer of a corporation cannot engage in a business indirect competition with that of the corp oration where he i sa director by utilizing information he has received as suchofficer, under "the established law that a di rector or officerof a corporation may not enter into a competing enterprise

which cripples or injures the business of the corporationof which he is an officer or di rector.

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 arecognition by the courts that the duciary standardscould not be upheld where the duciary was acting for twoentities w ith competing interests.

99

This doctrine rests fundamentally on the unfairness, inparticularcircumstancesofanofficerordi rectortaking

The inspection has to be germane to the petitioner'sinterestasastockholderandhastobeproperand



particular circumstances, of an officer or di rector takingadvantage of an opportunity for his own personal prot

when the interest of the corporation justly calls forprotection.

THE RECORD OF ALL BUSINESS TRANSACTIONS OF THE

CORPORATION AND MINUTES OF ANY MEETING SHALL BE OPEN TO THE INSPECTION OF ANY DIRECTOR , MEMBER OR STOCKHOLDER OF

THE CORPORATION AT REASONABLE HOURS :

• The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the

assets a nd property of the corp oration.

• It is an incident of ownership of the corporate property, whether this ownership or interest be termed an equitable

ownership, a benecial ownership, or a ow nership.

• This right is predicated upon the necessity of self-protecti on.

•

It is gen erally held by majority of the courts th at wherethe right is granted by statute to the stock holder, it isgiven to him as such and must be exercised by him withrespect to his interest as a stockholder and for somepurpose germane thereto or in the interest of thecorporation.

interest as a stockholder, and has to be proper andlawful in character and not inimical to the interest ofthe corporation.

sagun

THE RIGHT TO EXAMINE THE BOOKS OF THE CORPORATION

MUST BE EXERCISED IN GOOD FAITH , FOR SPECIFIC AND

HONEST PURPOSE , AND NOT TO GRATIFY CURIOSITY , OR FOR

SPECIFIC AND HONEST PURPOSE , AND NOT TO GRATIFY

CURIOSITY , OR FOR SPECULATIVE OR VEXATIOUS PURPOSES :

• On application for mandamus to enforce the right, it isproper for the court to inquire into and consider the

stockholder's good faith and his purpose and motivesin seeking inspection.

• The right given by statute is not absolute and may berefused when the information is not sought in goodfaith or is u sed to th e d etriment of the co rporation

• But the "impropriety of purpose such as will defeatenforcement must be set up the corporation

defensively if the Court is to tak e cognizance of itas a qualication.

• The specic provisions take from the stockholder the

burden of showing propriety of purpose and placeupon the corporation the burden of showingimpropriety of purpose or motive .

100

• Stockholders a re en titled to full information as to themanagementofthecorporationandthemannerof

• A writ of mandamus, may be granted, as the records ofthesubsidiaryweretoallincontentsandpurposesthe



management of the corporation and the manner ofexpenditure of its funds, an d to inspection to obtainsuch information, especially where it app ears t hat t hecompany is being mismanaged or that it is beingmanaged for the personal benet of officers ordirectors or certain of the stockholders to theexclusion of others.

THE RIGHT OF A STOCKHOLDER TO EXAMINE THE BOOKS AND

RECORDS OF A CORPORATION FOR A LAWFUL PURPOSE IS AMATTER OF LAW :

• The right to examine the books and records of a wholly-owned subsidiary of the corporation in which he is astockholder is a d ifferent thing.

A CORPORATION OWNS APPROXIMATELY NO PROPERTY EXCEPT THE

SHARES OF STOCK OF SUBSIDIARY CORPORATIONS WHICH ARE

MERELY AGENTS OR INSTRUMENTALITIES OF THE HOLDING

COMPANY :

• The legal ction of distinct corporate entities may bedisregarded and the books, papers and documents of allthe corporations may be required to be produced forexamination;

the subsidiary were, to all in contents and purposes, therecords of the parent even though subsidiary was notnamed as a p arty.

• Mandamus was proper to inspect both the subsidiary'sand the p arent cor poration's books upon proof of sufficient

control or d ominion by the parent show ing the relation of

principal or agent or something similar thereto.

MANDAMUS AT THE SUIT OF A STOCKHOLDER WAS REFUSED WHERE

THE SUBSIDIARY CORPORATION IS A SEPARATE AND DISTINCT

CORPORATION DOMICILED AND WITH ITS BOOKS AND RECORDS IN

ANOTHER JURISDICTION , AND IS NOT LEGALLY SUBJECT TO THE

CONTROL OF THE PARENT COMPANY , ALTHOUGH IT OWNED A VAST

MAJORITY OF THE STOCK OF THE SUBSIDIARY :

• Inspection of the books of an allied corporation by

stockholder of the parent company which owns all thestock of the subsidiary has been refused on the groundthat the stockholder was n ot within the class o f "personshaving an interest.

THE CONTRACTUAL RIGHT OF FORMER STOCKHOLDERS TO INSPECT

BOOKS AND RECORDS OF THE CORPORATION INCLUDED THE RIGHT

TO INSPECT CORPORATION 'S SUBSIDIARIES ' BOOKS AND RECORDS

WHICH WERE IN CORPORATION 'S POSSESSION AND CONTROL :

101



THE RULING OF THE SEC EN BANC AS AFFIRMED BY THE C OURT

OFA PPEALS AND S UPREME COURT :

O To ru le ot herwise w ould not only encourage v iolation

of clear m andate of Sec. 74 of the Corporation Code



OF A PPEALS AND S UPREME COURT :

In the absence of (any) provision to the contrary, thecorporate secret ary is the custodian of corporate r ecords.

He keeps the stock and transfer book and makes properand necessary en tries t herein.

O The stock an d transfer book of TORMIL was n ot kept

by Ms. Maria Cristina T. Carlos, the corporate

secretary but by respondent Tor res, t he Presidentand Chairman of the Board of Directors of TORMIL.

O In contravention to the above cited provision, the

stock and transfer book was not kept at t he

principal office of the corporation either but at the

place of respondent Torres.

O Any entries made in the stock and transfer book on

March 8, 1987 by respondent Torres of an allegedtransfer of nom inal shares to Pabalan and Co.

cannot therefore b e g iven any valid effect.

O Where the entries m ade a re n ot valid, Pabalan and

Co. c annot t herefore be considered stockholders ofrecord of TORMIL.

O Because they are not stockholders, t hey cannot

therefore be e lected as d irectors of TORMIL.

p

that stock and transfer book shall be kept in the principal office of the corporation but would likewise

open the ood gates o f confusion in the corporat ionas to who has the proper custody of the stock and

transfer book and who are t he real stockholders ofrecords of a ce rtain corporation as a ny holder of t he

stock and transfer bo ok, t hough not t he corporatesecretary, at pleasure w ould make entries t herein.

O The fact t hat respondent Torres h olds 8 1.28% of the

outstanding capital stock of TORMIL is of no moment

and is n ot a license f or hi m to a rrogate u nto h imselfa d uty lodged to (sic) the corp orate se cretary.

PROVIDENT INTERNATIONAL RESOURCES CORPORATION VS VENUS

G.R. No. 167041, June 17, 2008

THE SECURITIES REGULATION CODE: T HE C OMMISSION SHALL HAVE , AMONG OTHERS , THE FOLLOWING

POWERS AND FUNCTIONS :• Have jurisdiction and supervision over a ll corporations,

partnerships or associations who are the grantees of primary franchises and /or a license or permit issued by

the Government;

104

• Approve, reject, suspend, revoke or require amendments toregistration statements, a nd registration and licensing

o The SEC has the primary competence and means todetermine and verify whether t he subject 1979 STB



applications;• Regulate, i nvestigate or s upervise the activities of pe rsons

to en sure com pliance;• Impose sa nctions for the violation of laws and the ru les,

regulations an d orders issued pursuant thereto;•

Exercise such ot her powers a s m ay be provided by law aswell as those which may be implied from, or which arenecessa ry or i ncidental to the carrying out of , the express

powers granted the Commission to achieve the objectivesand purposes of these l aws. (Italics supplied.)

THE SEC' S REGULATORY AUTHORITY OVER PRIVATECORPORATIONS ENCOMPASSES A WIDE MARGIN OF AREAS ,

TOUCHING NEARLY ALL OF A CORPORATION 'S CONCERNS :• The SEC may pass upon applications for, or may suspend

or revoke (after due notice and hearing), certicates ofregistration of corpo rations, pa rtnerships and associations(excluding cooperatives, homeowners' association, andlabor unions);

• Compel legal and regulatory compliances; conductinspections;

• And impose nes or other penalties for violations of theRevised Securities

• Act, as well as implementing rules and directives of theSEC, such as may be warranted.

CONSIDERING THAT THE SEC, AFTER DUE NOTICE AND HEARING ,HAS THE REGULATORY POWER TO REVOKE THE CORPORATEFRANCHISE — FROM WHICH A CORPORATION OWES ITS LEGALEXISTENCE :• The SEC must likewise have the lesser power of merely

recalling and canceling a STB that was erroneouslyregistered

presented by the incumbent assistant corporatesecretary was indeed authentic, and duly regi steredby the S EC as ea rly a s S eptember 1979 .

A S THE ADMINISTRATIVE AGENCY RESPONSIBLE FOR THE

REGISTRATION AND MONITORING OF STB S, IT IS THE BODYCOGNIZANT OF THE STB REGISTRATION PROCEDURES , AND INPOSSESSION OF THE PERTINENT FILES , RECORDS AND SPECIMENSIGNATURES OF AUTHORIZED OFFICERS RELATING TO THEREGISTRATION OF STB S: • The evaluation of whether a STB was authorized by the

SEC primarily requires an examination of the STB itselfand the SE C les.

• This function necessarily belongs to the SEC as part of itsregulatory jurisdiction.

• The issues involved can be resolved without going into theintra-corp orate con troversies.

IT IS THE SEC' S DUTY TO ENSURE THAT THERE IS ONLY ONE SETOF STB FOR EACH CORPORATION :• The d etermination of whether or not a STB is va lid and of

whether to cancel and revoke the August 6, 2002certication and the registration of the 2002 STB on theground that t here already is an existing STB is impliedlyand necessa rily within the regulatory jurisdiction of t he

SEC.

THE SEC WAS TO EVALUATE THE 1979 STB. THE 1979 STB WAS

VALIDLY REGISTERED :• After careful examination of the 1979 stock and transfer

book, it has been observed that subject book w as p roperly presented and stamped received by the then SEC employee

in charge o f registration.

105

• It is w orthy to n ote t hat the si gnature of M s. Nelly C. Gabrielappears to be genuine and validly executed on 25

2. Including a balance sheet as of t he end of the lasttaxable year;



September 1979 after comparing with Ms. Gabriel'ssignature on the available records on le with theCommission, exi sting stock and transfer book s and other

public documents.• This fact was further certied and attested by Ms. Angeli G.

Villanueva, da ughter of M s. Nelly C. Gabriel, who iscurrently working with the Commission that the signatureappearing in the 1979 stock and transfer book isunquestionably the si gnature of Ms. Gabriel.

• The 1979 stock and transfer book is authentic and dulyexecuted, the Commission hereby recall the certicationissued on 6 August 2002 and cancel the stock an d transferbook registered on October 2 002.

• Accordingly, the stock and transfer book registered on 25September 19 79 shall remain va lid.

• SUPREME COURT: The above ruling is proper and withinthe S EC's j urisdiction to m ake.

PUNO VS PUNO ENTERPRISES, INCG.R. NO. 177066, SEPTEMBER 11, 2009

T HE RECORDS OF ALL BUSINESS TRANSACTIONS OF THE

CORPORATION AND THE MINUTES OF ANY MEETING SHALL BE OPEN

TO THE INSPECTION OF ANY DIRECTOR , TRUSTEE , STOCKHOLDER

OR MEMBER OF THE CORPORATION AT REASONABLE HOURS ONBUSINESS DAYS AND HE MAY DEMAND , IN WRITING , FOR A COPY OF

EXCERPTS FROM SAID RECORDS OR MINUTES , AT HIS EXPENSE : Within ten (10) days from receipt of a written request of

any stockholder or m ember, the corporation shall furnishthe following:1. Its most r ecent nancial statement;

y;3. A prot or loss of statement for sa id taxable year,

showing in reasonable detail its a ssets a nd liabilitiesand the

4. Result of its operations.

T HE STOCKHOLDER ’S RIGHT OF INSPECTION OF THE

CORPORATION ’S BOOKS AND RECORDS IS BASED UPON HIS

OWNERSHIP OF SHARES IN THE CORPORATION AND THE NECESSITY

FOR SELF -PROTECTION :• A shareholder has the right to be intelligently informed

about corporate affairs.• Such right rests upon the stockholder’s underlying

ownership of the corpo ration’s asset s an d property.

ONLY STOCKHOLDERS OF RECORD ARE ENTITLED TO RECEIVE

DIVIDENDS DECLARED BY THE CORPORATION , A RIGHT INHERENT IN THE OWNERSHIP OF THE SHARES :

• Upon the death of a shareholder, the heirs do notautomatically become stockholders of the corporation andacquire the rights and privileges of the deceased asshareholder of the corp oration.

• The stocks must be distributed rst to the h eirs i n estate

proceedings, and the transfer of the stocks must be

recorded in the books of the corp oration.• Section 63 of the Corporation Code provides that no

transfer sh all be valid, except as b etween the p arties, untilthe transfer is recorded in the books of the corp oration.

• During such interim period, the heirs stand as the

equitable owners of t he st ocks;• The executor or administrator duly appointed by the court

being vested with the legal title to the stock.106

• Until a settlement an d division of the estat e is eff ected, thestocks of the decedent are held by the administrator or

• Once this basis ceases, membership in the religiouscorporation must also cea se.



executor.• Consequently, during such time, it is the administrator or

executor who is entitled to exercise the rights of thedeceased as stockholder.

R ELIGIO US C OR PORATIONS

LONG VS BASA

G.R. NOS. 134963-64, SEPTEMBER 27, 2001

A religious corporation whose Board of Directors had

expelled certain members thereof on purely spiritual or

religious g rounds s ince they refused to follow its tea chingsand doctrines. Th e controversy here centers on the legality

of the ex pulsion.

THE NATURE OF A RELIGIOUS CORPORATION IS VIS - À -VIS AN

ORDINARY CORPORATION ORGANIZED FOR PROFIT :

• The basis of the relationship between a religiouscorporation and its members is the latter’s absoluteadherence to a common religious or spiritual belief .

• Thus, generally, there is no room for dissension in areligious corporation.

• And where any member of a religious corporation isexpelled from the membership for espousing doctrines an dteachings contrary t o that of h is church, the establisheddoctrine in this jurisdiction is th at su ch action from thechurch authorities i s co nclusive u pon the civil courts.

United States vs. Canete:

• "…in matters purely ecclesiastical the decisions of theproper church tribunals are conclusive upon the civiltribunals.

• A church member who is expelled from the membership by the church authorities, or a priest or minister who is by

them deprived of his sacred office, is w ithout remedy in the

civil courts, w hich will not i nquire i nto the correctne ss of t hedecisions of t he ecclesiastical tribunals .”

THE C ORPORATION C ODE LEAVES THE MATTER OF ECCLESIASTICAL

DISCIPLINE TO THE RELIGIOUS GROUP CONCERNED ;

107

SEC. 91. TERMINATION OF MEMBERSHIP .- M EMBERSHIP 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 ofextinguishing all rights of a m ember in the corporation orin its property, unless o therwise p rovided in the a rticles o fincorporation or the by-laws:

o The p etitioners ha ve n o reason to bewail the lack of

prior notice in the By-laws;

o They h ave waived such n otice by adhering to those

By-laws.

o They became members of the CHURCH voluntarily.

o They entered into its coven ant and subscribed to its

rules.

o By d oing so, they are bo und by their consent.

D ISSO LUT IO N

CLEMENTE VS COURT OF APPEALS

G.R. NO. 82407 MARCH 27, 1995

VARIOUS MODES PROVIDED BY THE C ORPORATION C ODE FOR

DISSOLVING , LIQUIDATING OR WINDING UP , AND TERMINATING THE

LIFE OF THE CORPORATION :

• Among the causes for such dissolution are when thecorporate term has expired or when, upon a veriedcomplaint and after notice and hearing;

T HE S ECURITIES AND E XCHANGE C OMMISSION ORDERS THE

DISSOLUTION OF A CORPORATION FOR ITS CONTINUOUS INACTIVITY

FOR AT LEAST FIVE (5) YEARS :

• The corporation continues to be a body corporate for three(3) years a fter i ts dissolution for purposes of prosec utingand defending su its by and against it and for en abling it tosettle and close its affairs, culminating in the dispositionand distribution of its rem aining as sets.

• It m ay, during th e three- year term, appoint a tr ustee or areceiver who may act beyond tha t period.

• The termination of the life of a juridical entity does not byitself cause th e extinction or d iminution of the rights a ndliabilities of such entity nor those of its owners andcreditors.

• If the three-year extended life has expired without atrustee or r eceiver hav ing been expressly designated b y the

108

corporation within that p eriod, the board of d irectors ( or

trustees) itself may be p ermitted to s o con tinue a s "t rustees"Limpin, Jr. v. Intermediate Appellate Court:



by l egal implication to com plete t he co rporate l iquidation.

• Still in the absence of a board of directors or trustees,those having any pecuniary interest in the assets,including not only the shareholders but likewise thecreditors of the corporation, acting for a nd in its b ehalf,might make proper representations with the Securitiesand Exchange commission, which has primary andsufficiently broad jurisdiction in matters of this n ature, for

working out a nal settlement of the corporate concerns.

REBURIANO VS COURT OF APPEALS

G.R. NO. 102965 JANUARY 21, 1999

T HE LAW SPECIFICALLY ALLOWS A TRUSTEE TO MANAGE THE

AFFAIRS OF

THE

CORPORATION

IN

LIQUIDATION

:• Consequently, any supervening fact, such as the

dissolution of the co rporation, repeal of a l aw, or an y otherfact of similar n ature would not serve as a n effective bar t othe enforcement of such right.

• Execution of nal and executory judgments may no longer

be contested and prevented, an d no appeal should lietherefrom;

• Otherwise, cases would be interminable, and there would

be negation of t he o vermastering need to end litigations;

• There m ay be instances w hen an error may be committed in

the course of execu tion proceedings prejudicial to the rights

of a party:

1. The w rit of execution va ries t he judgment;

2. There has been a change in the situation of the

parties making execution inequitable or unjust;

3. Execution is so ught t o be en forced against propertyexempt from execution;

4. It appears that the controversy has never been

submitted to the judgment of the cou rt;

5. The terms of the judgment are n ot clear enough and

there r emains room for i nterpretation thereof; or,

6. It appears that the writ of ex ecution has beenimprovidently issued, or that it is defective in

substance, or is issued against t he w rong party, orthat the judgment debt ha s b een paid or otherwise

satised, or t he w rit was i ssued without authority;

109

• That mode of elevation may be either by appeal (writ of

error or certiorari) or b y a special ci vil ac tion of certiorari,

• There is substantial compliance with Sec. 78 [now §122] ofthe Corporation Law and could still continue prosecuting



prohibition, or mandamus.

BOARD OF L IQUIDATORS V . K ALAW :

• The legal interest became vested in the trustee — theBoard of Liquidators.

• The benecial interest remained with the solestockholder — the government.

GELANO V. C OURT OF A PPEALS : T HE COUNSEL OF A DISSOLVED

CORPORATION IS DEEMED A TRUSTEE OF THE SAME FOR PURPOSES

OF CONTINUING SUCH ACTION OR ACTIONS AS MAY BE PENDING AT

THE TIME OF THE DISSOLUTION .

• A corporation that has a pending action and which cannot be terminated within the three-year period after its

dissolution is authorized to convey all its property totrustees to enable it to prosecute an d defend suits by oragainst the corp oration beyond th e three-year pe riod.

• The counsel who prosecuted and defended the interest ofthe corporation and who in fact app eared in behalf of thecorporation may be considered a tr ustee of the corpo rationat least w ith res pect to th e m atter i n litigation only.

a case even beyond the period of three (3) years from thetime of dissolution.

o . . . The trustee may commence a suit which canproceed to nal judgment even beyond the three-

year period. No reason can be conceived why a su it

already commenced by the corpor ation itself du ringits e xistence, not by a mere tr ustee who, by ction,

merely continues the legal personality of thedissolved corporation should not be accorded

similar treatment allowed — to proceed to nal judgment and execution thereof.

CLEMENTE V . C OURT OF A PPEALS :

• The board of directors may be permitted to complete thecorporate l iquidation by continuing as "trustees" by legalimplication.

SUMERA V . V ALENCIA :

It is to be noted that the time during which thecorporation, through its own officers, may conduct theliquidation of its assets and sue and be sued as acorporation is limited to three years from the time theperiod of dissolution commences;

110

But there is no time limit within which the trusteesmust complete a liquidation placed in their hands;

• This provision safeguards the rights of acorporation which is d issolved pending litigation.



It is provided only (Corp. Law, Sec. 78 [now Sec. 122]) thatthe conveyance to the t rustees must be made within thethree-year pe riod.

It may be found impossible to complete the work ofliquidation within the three-year period or to reducedisputed claims to judgment.

The authorities are to the effect that suits by or against acorporation abate when it ceased to be an entity capableof suing or bei ng su ed (7 R.C.L., Corps., par. 750);

But trustees to whom the corporate assets have beenconveyed pursuant to the authority of Sec. 78 [now Sec.122] may sue and be sued as such in all mattersconnected with the liquidation. . . .

THE C ORPORATION L AW PROVIDES :

§145. Amendment or repeal . — No right or remedy infavor of or against any corporation, its stockholders,members, directors, trustees, or offi cers, nor a ny liabilityincurred by any such corporation, stockholders, members,directors, trustees, or officers, shall be removed or

impaired either by the subsequent d issolution of sa idcorporation or by a ny subsequent amendment or repeal of

this C ode or of an y part thereof.

• The law specically allows a trustee to manage theaffairs of the corporation in liquidation.

• Consequently, any supervening fact, such as thedissolution of the corporation, repeal of a law, orany other f act of similar n ature would not serve asan effective bar to the en forcement of such right.

PARAMOUNT INSURANCE CORP. VS A.C. ORDOÑEZCORPORATION

G.R. NO. 175109, AUGUST 6, 2008

A LTHOUGH THE CANCELLATION OF A CORPORATION ’S CERTIFICATE OF

REGISTRATION PUTS AN END TO ITS JURIDICAL PERSONALITY , S EC .122 OF THE C ORPORATION C ODE , HOWEVER PROVIDES THAT ACORPORATION WHOSE CORPORATE EXISTENCE IS TERMINATED IN ANY

MANNER CONTINUES TO BE A BODY CORPORATE FOR THREE YEARS

AFTER ITS DISSOLUTION FOR PURPOSES OF PROSECUTING AND

DEFENDING SUITS BY AND AGAINST IT AND TO ENABLE IT TO SETTLE

AND CLOSE ITS AFFAIRS :

• The rights of a corporation, which is dissolved pendinglitigation, are a ccorded protection by law;

111

• SECTION 145. A MENDMENT OR REPEAL : not for t he p urpose o f continuing the b usiness for w hich i twas established.



o No right or r emedy in favor of or a gainst any

corporation, i ts stockholders, members, directors,trustees, or officers, n or a ny liability incurred by

any such corporation, stockholders, members,directors, trustees, or offi cers, sha ll be removed or

impaired either by the subsequent dissolution ofsaid corporation or by a ny subsequent amendment

or r epeal of t his C ode o r of any part thereof.

• Dissolution or even the expiration of the three-yearliquidation period should not be a bar to a corporation’senforcement of its ri ghts as a corporation.

AGUIRRES VS FBQ+7G.R. NO. 170770, JANUARY 9, 2013

SECTION 122 OF THE C ORPORATION C ODE PROHIBITS ADISSOLVED 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 .•

Every corporation whose charter: expires by its ownlimitation or is annulled by forfeiture or otherwise, or

whose corporate existence for other purposes isterminated in any other manner, shall nevertheless becontinued as a body corporate for three (3) years a fter thetime when it would have been so dissolved, for thepurpose of prose cuting and defending suits by or againstit an d enabling it to settle and close its affairs, to disposeof an d convey its p roperty an d to distribute its a ssets, but

The Supreme Court fails to nd in the prayers above anyintention to continue the corporate business of FQB+7:• The Complaint does not seek to en ter into con tracts, issue

new stocks, acquire properties, execute business

tran sactions, etc.• Its aim is not to continue the corporate business, bu t t o

determine and vindicate an alleged stockholder’s right tothe return of h is stockholdings and to participate in theelection of d irectors, and a corporation’s right to removeusurpers a nd strangers f rom its a ffairs.

• The C ourt fails t o se e h ow the resol ution of these issues ca nbe sa id to cont inue the b usiness of FQB+7.

A CORPORATION ’S BOARD OF DIRECTORS IS NOT RENDERED

FUNCTUS OFFICIO BY ITS DISSOLUTION : Since Section 122 allows a corporation to continue its

existence for a l imited purpose, necessarily there must bea board that will continue acting for and on behalf ofthe dissolved corporation for that pu rpose.

• In fact, Section 122 authorizes th e d issolved corporation’s board of directors to conduct its liquidation within three years from its dissolution.

• Jurisprudence has even recognized the board’sauthority to ac t as tr ustee for p ersons in interest beyond

the sa id three-year p eriod.• Thus, the determination of which group is the bona de or

rightful board of t he dissolved corporation will still providepractical relief t o the parties involved.

A PARTY ’S STOCKHOLDINGS IN A CORPORATION , WHETHEREXISTING OR DISSOLVED , IS A PROPERTY RIGHT WHICH HE MAY

112

VINDICATE AGAINST ANOTHER PARTY WHO HAS DEPRIVED HIM THEREOF :

Thti’diltidttiihh

1. Between and among stockholders, members, orassociates;

2Betweenanyorallofthemandthecorporation



The corporation’s dissolution does not extinguish suchproperty right.Section 145 of the Corporation Code ensures theprotection of t his right, thus:

O No right or r emedy in favor of or a gainst any

corporation, i ts stockholders, members, directors,trustees, or officers, n or a ny liability incurred byany such corporation, stockholders, members,directors, trustees, or offi cers, sha ll be removed orimpaired either by the subsequent dissolution ofsaid corporation or by a ny subsequent amendmentor r epeal of t his C ode o r of any part thereof.

INTRA -CORPORATE DISPUTES REMAIN EVEN WHEN THECORPORATION IS DISSOLVED :•

R.A. No. 8799 conferred jurisdiction over intra-corporatecontroversies o n courts of general jurisdiction or RTCs, to be designated by the Supreme Court.

• As long as the nature of the controversy is intra-corporate,the designated RTCs have the authority to exercise

jurisdiction over such cases.

INTRA-CORPORATE CONTROVERSIES; R.A. N O. 8799REFERS TO S ECTION 5 OF P RESIDENTIAL D ECREE (P.D.) N O. 902-

A ( OR T HE SEC R EORGANIZATION A CT ) FOR A DESCRIPTION OFSUCH

CONTROVERSIES

:a) Devices or s chemes employed by or any acts, of the boardof directors, business a ssociates, its officers or p artners,amounting to fraud and misrepresentation which may bedetrimental to the interest of the public and/or of thestockholder, partners, members of associations ororganizations registered with the Commission;

b) Controversies arising out of intra-corporate or partnership relations:

2. Between any or all of them and the corporation,partnership or association of which they arestockholders, members or associ ates, respectively; and

3. Between such corporation, partnership or associationand the state insofar a s it concerns their individualfranchise o r ri ght t o exist as such entity;

c) Controversies in the election or appointments ofdirectors, trustees, officers or managers of suchcorporations, partnerships o r asso ciations.

RULE 1 OF THE I NTERIM R ULES OF P ROCEDURE G OVERNINGINTRA -CORPORATE C ONTROVERSIES UNDER R.A. N O. 8799:SECTION 1. ( A ) C ASES C OVERED – T HESE R ULES SHALL GOVERN

THE PROCEDURE TO BE OBSERVED IN CIVIL CASES INVOLVING THEFOLLOWING :(1) Devices or schemes employed by, or any a ct of, the board

of directors, business associates, officers or partners,amounting to fraud or misrepresentation which may bedetrimental to the interest of the public and/or of t hestockholders, partners, or members of an y corporation,partnersh ip, or a ssociation;

(2) Controversies ari sing out of intra-corporate, partnership,or a ssociation relations:

a. Between and among stockholders, members, orassociates; and

b. Between, any or all of them and the corporation,

partnership, or association of which they arestockholders, members, or as sociates, respectively

(3) Controversies in the election or appointment ofdirectors, trustees, officers, or managers of corporations,partnersh ips, or a ssociations;

(4) Derivative suits ; and(5) Inspection of corporate book s.

113

RELATIONSHIP TEST : T WO TESTS IN DETERMINING WHETHER ACONTROVERSY IS INTRA -CORPORATE . R EYES V . R EGIONAL T RIALCOURT OFMAKATI B R142

• The controversy must not only be rooted in the existenceof an intra-corporate relationship, but must as well

pertaintotheenforcementoftheparties'correlative



COURT OF M AKATI , B R. 142:• The main consideration in determining whether a dispute

constitutes a n intra-corporate con troversy was limited to aconsideration of the intra-corporate relationship existing

between or among the parties.•

The types of relationships were as follows: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, orassociation and the State as far a s its franchise,permit or license to operate is con cerned; and

d. Among the stockholders, partners or associatesthemselves.

• The existence of any of the above intra-corporate relations was sufficient to confer jurisdiction to the SEC now the

RTC , regardless o f the su bject m atter of the dispute. This came to be known as the relationship test.

DMRC E NTERPRISES V . E STA DEL S OL M OUNTAIN R ESERVE ,INC .,1984; THE NATURE OF THE CONTROVERSY TEST :• It is not the mere existence of an intra-corporate

relationship that gives rise to an intra-corporate

controversy;• There is no legal sense in disregarding or minimizing the value of the nature of the transactions which gives ri se

to the d ispute.

UNDER THE NATURE OF THE CONTROVERSY TEST , THE INCIDENTSOF THAT RELATIONSHIP MUST ALSO BE CONSIDERED FOR THEPURPOSE OF ASCERTAINING WHETHER THE CONTROVERSY ITSELF ISINTRA -CORPORATE :

pertain to the enforcement of the parties correlativerights and obligations under the Corporation Code andthe internal and intra-corporate regulatory rules ofthe corporation.

• If the relationship and its incidents a re m erely incidental

to th e co ntroversy o r if there w ill still be co nict even if therelationship does not exist, then no intra-corporatecontroversy ex ists.

• Jurisdiction should be determined by considering not onlythe status or relationship of the parties, bu t also thenature of the question under controversy .

T HIS TWO - TIER TEST ; S PEED D ISTRIBUTION , I NC . V . C OURT OF A PPEALS :

'T O DETERMINE WHETHER A CASE INVOLVES AN INTRA -CORPORATE

CONTROVERSY , AND IS TO BE HEARD AND DECIDED BY THEBRANCHES OF THE RTC SPECIFICALLY DESIGNATED BY THE C OURT

TO TRY AND DECIDE SUCH CASES , TWO ELEMENTS MUST CONCUR :(a) The status or relationship of the parties, and(b) The nature of the question that is the subject of their

controversy.

T HE FIRST ELEMENT REQUIRES THAT THE CONTROVERSY MUST ARISE

OUT OF INTRA -CORPORATE OR PARTNERSHIP RELATIONS BETWEEN ANY OR ALL OF THE FOLLOWING :

(a)The parties and the corporation, partnership, orassociation of which they are st ockholders, members orassociates;

(b)Any or all of them and the corporation, partnership orassociation of which they are st ockholders, members orassociates, r espectively; an d

(c) Between such corporation, partnership, or associationand the State insofar as it concerns the individualfranchises.

114

T HE SECOND ELEMENT REQUIRES THAT THE DISPUTE AMONG THEPARTIES BE INTRINSICALLY CONNECTED WITH THE REGULATION OF

SECTION 145 OF THE C ORPORATION C ODE PROTECTS , AMONGOTHERS , THE RIGHTS AND REMEDIES OF CORPORATE ACTORS

AGAINST OTHER CORPORATE ACTORS



PARTIES BE INTRINSICALLY CONNECTED WITH THE REGULATION OF THE CORPORATION :

• If the nature of the controversy involves matters t hat arepurely civil in character, nece ssarily, the case does notinvolve an intra-corp orate con troversy.

T HUS , TO BE CONSIDERED AS AN INTRA -CORPORATE DISPUTE , THECASE :(a) Must arise ou t of intra-corporate or partnership relations,

and(b) The nature of the question subject of t he controversy

must be su ch that it is intrinsically connected with theregulation of the corporation or the enforcement ofthe parties’ rights and obligations under theCorporation Code an d the internal regulatory ru les of the

corporation.• So long as these two criteria are satised, the

dispute is intra-corporate an d the RTC , acting as aspecial commercial court, has jurisdiction over it.

Examining the case before us in relation to these twocriteria, the Court nds and so holds that the case isessentially an intra-corporate dispute:• It arose from the intra-corporate relations between the

parties, and the questions involved pertain to their rights

and obligations under the Corporation Code and mattersrelating to the regulation of t he corporation.

• The nature of t he case as an intra-corporate dispute wasnot affected by the subsequent dissolution of thecorporation.

AGAINST OTHER CORPORATE ACTORS :• The statutory provision assures an aggrieved party that

the corporation’s dissolution will not impair, much lessremove, his/her rights or remedies against thecorporation, its st ockholders, directors or offi cers.

• It also states that corporate dissolution will notextinguish any liability already incurred by thecorporation, its stock holders, directors, or offi cers.

• Section 145 preserves a corporate actor’s cause ofaction and remedy against an other co rporate a ctor.

• Section 145 also preserves the nature of thecontroversy between the parties as an intra-corporatedispute .

T HE DISSOLUTION OF THE CORPORATION SIMPLY PROHIBITS IT FROM CONTINUING ITS BUSINESS : • Despite such dissolution, the parties involved in the

litigation are sti ll corporate a ctors .• The dissolution does not automatically convert the parties

into total strangers or change their intra-corporaterelationships.

• Neither does it change or terminate existing causes ofaction, which arose b ecause of the corporate ties betweenthe parties.

• A cause of action involving an intra-corporate controversy

remains and must be led as an intra-corporate disputedespite the su bsequent dissolution of the corp oration.

F OR EIGN C OR PORATIONS

B. VAN ZUIDEN BROS. VS GTVL MANUFACTURINGINDUSTRIES, INC.,

115



• Nor a ppointing a representative or d istributor d omiciled inthe Philippines which transacts business in its own nameandforitsownaccount

While petitioner a nd respondent ent ered into a series of

transactions implying a continuity of commercial dealings,

thftid tifthtti



and for its own account.

A N ESSENTIAL CONDITION TO BE CONSIDERED AS " DOING

BUSINESS " IN THE P HILIPPINES :

The actual performance of speci c commercial acts within

the terri tory of t he P hilippines;

Reason: The Philippines h as n o jurisdiction over c ommercial

acts p erformed in foreign territories.

The series of transactions between petitioner andrespondent cannot be classied as "doing business" in thePhilippines under Section 3(d) of RA 7042.

No showing that petitioner pe rformed within the P hilippine

territory the specic a cts of doi ng business mentioned in

Section 3(d) of RA 7042.

Petitioner d id not open an office h ere in the Philippines,appoint a representative or distributor, or manage,

supervise or con trol a local business.

the perfection and consummation of these transactions

were d one ou tside the Philippines.

The series of transactions between petitioner andrespondent transpired and were consummated in HongKong :

• No single activity which petitioner p erformed here in the

Philippines pursuant to its purpose and object a s a

business o rganization.

• Desire to do business within the Philippines is not

discern ible fr om the a llegations o f the co mplaint or f rom itsattachments.

• Therefore, there i s no b asis for ru ling that petitioner i s d oing

business in the P hilippines.

SUPREME COURT disagreed with the C ourt of Appeals’ ruling

that t he proponents to the transaction determine whether a

foreign corporation is doing business in the Philippines,regardless of the place of delivery or place where the

transaction took place.

• To accede to such theory makes it possible to classify, f or

instance, a series of t ransactions b etween a Filipino in the

117

United States and an American company based in the

United States as "doing business in the Philippines," even

whentheset ransactionsa renegotiateda ndconsummated

This will require Philippine exporters to secure a

business license in every foreign country where they

usuallyexportt heirproductseven iftheydonot



when these t ransactions a re negotiated a nd consummatedonly w ithin the United States.

A N EXPORTER IN ONE COUNTRY MAY EXPORT ITS PRODUCTS TOMANY FOREIGN IMPORTING COUNTRIES WITHOUT PERFORMING IN

THE IMPORTING COUNTRIES SPECIFIC COMMERCIAL ACTS THAT

WOULD CONSTITUTE DOING BUSINESS IN THE IMPORTING

COUNTRIES :

• The mere act of exporting from one’s own country, withoutdoing any specic commercial act within the territory ofthe importing country, cannot be deemed as doing

business in the importing country.

• The importing country does not acquire jurisdiction overthe foreign exporter who has not performed any speciccommercial act w ithin the territory of the importingcountry.

• Without jurisdiction over the foreign exporter, theimporting country cannot compel the foreign exporter tosecure a l icense t o do business i n the importing cou ntry.

Otherwise, Ph ilippine e xporters, by the m ere a ct alone

of expo rting their produ cts, could be considered by the

importing countries to be doing business in those

countries.

usually export t heir products, even if they do not

perform any specic commercial act within the territoryof such i mporting co untries.

Such a legal concept w ill have a deleterious e ffect not

only on Philippine e xports, but also on global trade.

T O BE DOING OR " TRANSACTING BUSINESS IN THE P HILIPPINES "FOR PURPOSES OF S ECTION 133 OF THE C ORPORATION C ODE ,

THE FOREIGN CORPORATION MUST ACTUALLY TRANSACT BUSINESS

IN THE P HILIPPINES , THAT IS , PERFORM SPECIFIC BUSINESS

TRANSACTIONS WITHIN THE P HILIPPINE TERRITORY ON A CONTINUING BASIS IN ITS OWN NAME AND FOR ITS OWN ACCOUNT :

• Actual transaction of business within the Philippineterritory is an essential requ isite for the Philippines toacquire jurisdiction over a foreign corporation and thusrequire the foreign corporation to secure a Philippine

business license.

•

If a foreign corporation does not transact such kind of business in the Philippines, even if it exports its productsto the Philippines, t he Philippines has no jurisdiction torequire su ch foreign corporation to secure a Philippine

business license.

118

CARGILL, INC. VS INTRA STRATA ASSURANCECORPORATION

5. And any other act or acts that imply:

a) A continuity ofcommercialdealings or



G.R. NO. 168266, MARCH 15, 2010

A FOREIGN CORPORATION MUST FIRST OBTAIN A LICENSE AND ACERTIFICATE FROM THE APPROPRIATE GOVERNMENT AGENCY

BEFORE IT CAN TRANSACT BUSINESS IN THE P HILIPPINES :

• Where a foreign corporation does business in thePhilippines without the proper l icense, it cannot maintainany action or proceed ing before Ph ilippine cou rts.

THE PHRASE " DOING BUSINESS " SHALL INCLUDE :

1. Soliciting orders, purchases, service con tracts;

2. Opening offices, whether called ‘liaison’ offices or branches;

3. Appointing representatives or distributors who aredomiciled in the Philippines or w ho in any calendar yearstay in the Philippines for a period or p eriods tot aling onehundred eighty days or m ore;

4. Participating in the management, supervision or control ofany domestic business rm, entity or corporation in thePhilippines;

a) A continuity of commercial dealings orarrangements, and contemplate to that extent theperformance of acts or w orks, or

b) The exercise of some of the functions normally

incident to, and in progressive prosecution of,commercial gain or of the purpose and object ofthe business organ ization.

THE F OREIGN I NVESTMENTS A CT OF 1991; " DOING BUSINESS ."SECTION 3( D) OF RA 7042 STATES T HE PHRASE " DOING

BUSINESS " SHALL INCLUDE :

1. Soliciting orders, service co ntracts;

2. Opening offices, whether called ‘liaison’ offices or branches;

3. Appointing representatives or d istributors d omiciled in thePhilippines or who in any calendar year stay in thecountry for a period or periods totaling one hundred

eighty (180) days or more;

4. Participating in the management, supervision or control ofany domestic business, rm, entity or corpo ration in thePhilippines;

5. And any other act or acts that imply a continuity of

commercial dealings or arr angements, and contemplate to119

that extent the p erformance of act s o r w orks, or t he e xercise

of some of the functions normally incident to, an d in

progressiveprosecutionofcommercialgainorofthe T HE I MPLEMENTING R ULES AND R EGULATIONS OF RA7042



progressive prosecution of, commercial gain or of the purpose and object of the business organization.

T HE PHRASE ‘ DOING BUSINESS ’ SHALL NOT BE DEEMED TOINCLUDE :

1. Mere investment as a shareholder by a foreign entity indomestic corporations duly registered to do business,and/or t he exerci se of rights as such investor;

2. Nor having a nominee director or officer to represent itsinterests in such corporation;

3. Nor ap pointing a representative or d istributor d omiciled inthe Philippines which transacts business in its own nameand for its own account.

T HE DETERMINATION OF WHETHER A FOREIGN CORPORATION IS

DOING BUSINESS IN THE P HILIPPINES MUST BE BASED ON THE FACTS

OF EACH CASE : A NTAM C ONSOLIDATED , I NC . V . C OURT OF A PPEALS :

• The Court emphasized the importance of the element ofcontinuity of commercial activities to constitute doing

business in the Philippines.

T HE I MPLEMENTING R ULES AND R EGULATIONS OF RA 7042PROVIDE UNDER S ECTION 1( F), R ULE I, THAT " DOING BUSINESS "DOES NOT INCLUDE THE FOLLOWING ACTS :

1. Mere investment as a shareholder by a foreign entity indomestic corporations duly registered to do business,and/or t he exerci se o f rights a s su ch investor;

2. Having a nominee director or officer to represent itsinterests in such corporation;

3. Appointing a representative or d istributor domiciled in thePhilippines which transacts business in therepresentative's or distributor's own name and account;

4. The publication of a general advertisement through anyprint or broad cast m edia;

5. Maintaining a stock of goods in the Philippines solely forthe purpose of having the same processed by anotherentity in the Philippines;

6. Consignment by a f oreign entity of equipment with a local

company to be used in the processing of products forexport;

7. Collecting information in the Philippines; and

8. Performing services auxiliary to an existing isolatedcontract of sale which are n ot on a continuing basis, suchas installing in the Philippines machinery it has

120

manufactured or exp orted to the Philippines, servicing thesame, training domestic workers t o operate it, and similarincidentalservi ces

• Under Section 3(d) of RA 7042, " soliciting purchases" has

been deleted from the enumeration of act s or a ctivitieswhichconstitute"doingbusiness"



incidental servi ces.

Most of t hese activities do not b ring any direct

receipts o r pro ts to t he f oreign corporation.

NATIONAL SUGAR TRADING CORP. V. COURT OF APPEALS:

• That activities within Philippine jurisdiction that do notcreate earnings or p rots t o the f oreign corporation do notconstitute doing business i n the Philippines.

o The foreign corporation did not sel l sugar an d deriveincome from the Philippines, but m erely purchasedsugar f rom the Philippine government and allegedly

paid for it in full.

o The contract bet ween petitioner a nd NMC involved

the pu rchase of molasses b y p etitioner from NMC.

o It was NMC, the domestic corporation, which

derived income from the transaction and not petitioner.

T O CONSTITUTE " DOING BUSINESS ," THE ACTIVITY UNDERTAKEN IN

THE P HILIPPINES SHOULD INVOLVE PROFIT -MAKING :

which constitute doing business.

FACTORS WHICH MAY SUPPORT THE FINDING THAT A FOREIGN

CORPORATION IS NOT DOING BUSINESS IN THE P HILIPPINES :

(1)No office in the Philippines;

(2)Importing products from the Philippines through its n on-exclusive local broker, whose a uthority to act on behalf ofthe foreign corporation is limited to soliciting purchases o fproducts from suppliers in the Philippines; and

(3)The local broker is an independent contractor and not anagent of peti tioner.

B. V AN Z UIDEN B ROS ., L TD . V . GTVL M ARKETING I NDUSTRIES ,INC :

An exporter in one country may export its products to

many foreign importing countries without performing inthe importing countries specic commercial acts that

would constitute doing business in the importingcountries.

The mere act of exporting from one’s own country, withoutdoing any specic commercial act w ithin the territory of

121

the importing country, cannot be deemed as doing business in the importing country.

TRANSACTIONS WITHIN THE P HILIPPINE TERRITORY ON ACONTINUING BASIS IN ITS OWN NAME AND FOR ITS OWN ACCOUNT :



The importing country does not require jurisdiction overthe foreign exporter who has not yet performed anyspecic commercial act within the territory of theimporting country.

Without jurisdiction over the foreign exporter, theimporting country cannot compel the foreign exporter tosecure a l icense to do business in the importing country.

O Otherwise, Philippine exporters, by the mere actalone of exporting their products, could beconsidered by the importing countries to b e doing

business in those countries.

O This will require Philippine exporters to secure a business license in every foreign country where

they usually export t heir prod ucts, even if they donot perform any specic commercial act within theterritory of su ch importing countries.

O Such a legal concept will have deleterious effect notonly on Philippine exports, but also on global

trade.

T O BE DOING OR " TRANSACTING BUSINESS IN THE P HILIPPINES ," THE FOREIGN CORPORATION MUST ACTUALLY TRANSACT BUSINESS

IN THE P HILIPPINES , THAT IS , PERFORM SPECIFIC BUSINESS

• Actual transaction of business within the Philippineterritory is an essential requ isite for the Philippines toacquire jurisdiction over a foreign corporation and thusrequire the foreign corporation to secure a Philippine

business license.

• If a foreign corporation does not transact such kind of business in the Philippines, even if it exports its products

to the Philippines, t he Philippines has no jurisdiction torequire su ch foreign corporation to secure a Philippine

business license.

• A foreign company that merely imports goods from aPhilippine exporter, without opening an office orappointing an agent in the Philippines, is not doing

business in the Philippines.

SECURITY REGULATION CODE

LICENSING OF BROKERSNICOLAS V. CAG.R. NO. 122857. MARCH 27, 1998BROKERS; CHARGES FOR SERVICES PERFORMED:• Charges by brokers or dealers, if any, for service

performed including miscellaneous services such ascollection of monies d ue for p rincipal, dividends, interests,

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exchange or t ransfer of secu rities, appeals, safekeeping orcustody of securities, and other services, shall bereasonable and not unfairly discriminatory between

• To regulate the volume of credit ow, by way of speculativetransactions, into the securities market and redirectresources i nto more p roductive uses. . . .



customers.

LICENSE TO SELL SECURITIES:• Lastly, the futility of petitioner's action became more

pronounced by the fact that he traded securities for theaccount of others without the necessary license from theSecurities and Exchange Commission (SEC).

• Clearly, such omission was i n violation of Section 19 of theRevised Securities Act which provides that no broker sh allsell any secu rities u nless h e is regi stered with the SEC.

• The purpose of the statute requiring the registration of brokers selling securities and the ling of data regarding

securities which they propose to sell, is to protect t hepublic and strengthen the secu rities mechanism.

• An unlicensed person may not recover compensation for

services as a broker where a statute or ordinancerequiring a license is applicable and such statute orordinance is of a regulatory nature, was enacted in theexercise of the police power for the purpose of protectingthe public, requires a license as evidence of qualicationand tness, and expressly precludes an unlicensed personfrom recovering compensation by suit, or at leastmanifests an intent to prohibit an d render unlawful thetransaction of business by an unlicensed person.

WHERE BOTH PARTIES ARE EQUALLY AT FAULT,NEITHER ONE COULD HAVE RECOURSE AGAINST THEOTHER

ABACUS SECURITIES CORP. V. AMPILG.R. NO. 160016. FEBRUARY 27, 2006MARGIN REQUIREMENTS; PURPOSE:

• The stabilization of the economy.• Restrictions on margin percentages are imposed "in order

to achieve the objectives of the government with dueregard for the promotion of the economy and prevention ofthe use of exces sive credit."

• Otherwise stated, the margin requirements set out in theRSA are primarily intended to achieve a macroeconomicpurpose — the protection of the overall economy fromexcessive s peculation in securities.

• Their recognized secondary purpose is to protect smallinvestors.

T HE LAW PLACES THE BURDEN OF COMPLIANCE WITH MARGINREQUIREMENTS PRIMARILY UPON THE BROKERS AND DEALERS :• Sections 23 and 25 and Rule 25-1, otherwise known as

the "mandatory close-out rule," clearly vest uponpetitioner th e obligation, not just t he right, to cancel orotherwise liquidate a customer's order, if payment is n otreceived within three days f rom the date of purchase.

• The word "shall" as opposed to the word "may," isimperative and operates to impose a duty, which may belegally enforced.

• For transactions subsequent to an unpaid order, the broker should require its customer to deposit funds into

the account sufficient to cover eac h purchase transaction

prior to i ts e xecution.• These duties are imposed upon the broker to ensure

faithful compliance with the margin requirements of t helaw, which forbids a Broker from extending undue crebit toa customer.

INCREASING MARGINS IS THE MOST DIRECT ANDEFFECTIVE METHOD OF DISCOURAGING AN ABNORMAL

ATTRACTION OF FUNDS INTO THE STOCK MARKET:123

• Trading on credit (or "margin trading") allows investors to buy more securities than their cash position would

normally a llow.

than proceeds from the mandatory sell out of the sharespursuant to the RSA Rules.

• Petitioner's right to collect i s justied under th e general



• Investors pay only a portion of the purchase price of thesecurities;

• Their broker advances for them the balance of thepurchase price and keeps the securities as collateral forthe advance or l oan.

• 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 i.e., decreasing the amounts

which brokers may lend for the speculative purchase andcarrying of s tocks is the m ost direct and effective methodof discouraging an abnormal attraction of funds into thestock market and achieving a more balanced use of suchresources.

T HE NATURE OF THE STOCK BROKERAGE BUSINESS ENABLESBROKERS , NOT THE CLIENTS , TO VERIFY , AT ANY TIME , THESTATUS OF THE CLIENT 'S ACCOUNT :• Brokers , therefore, are i n the su perior position to prevent

the unlawful extension of credit.• Because of this awareness, the law imposes upon them

the primary obligation to enforce the marginrequirements.

MARGIN REQUIREMENTS APPLICABLE ONLY TO TRANSACTIONS ENTERED INTO BY THE PRESENT

PARTIES SUBSEQUENT TO THE INITIAL TRADES:• Nonetheless , these margin requirements are applicable

only to transactions entered into by the present pa rtiessubsequent to the initial trades of April 10 and 11, 1997.

• Thus, we hold that petitioner can still collect fromrespondent to the extent of t he difference between thelatter's outstanding obligation as of April 11, 1997 less

law on obligations a nd contracts. . . .Since a brokerage relationship is essentially a contractfor the employment of an agent, principles of contractlaw also govern the broker-principal relationship.

THE BROKER WAS DUTY-BOUND TO ADVANCE THEPAYMENT TO THE SETTLEMENT BANKS WITHOUTPREJUDICE TO THE RIGHT OF THE BROKER TO COLLECTLATER FROM THE CLIENT:• Elucidating further, since the buyer was not able to pay

for the transactions that t ook place on April 10 and 11,that is at T+4, the broker w as duty-bound to advance thepayment to the set tlement banks without prejudice to theright of t he b roker t o collect l ater f rom the cl ient.

• In securities trading, the brokers are essentially thecounterparties to the stock transactions at theExchange.

• Since the principals of the broker are generallyundisclosed, the broker is personally liable for thecontracts thus made.

• Hence, petitioner had to advance the payments forrespondent's tr ades.

• Brokers have a ri ght to be reimbursed for sums advanced by them with the express or implied authorization of the

principal, in this ca se, respondent.• It should be clear that Congress imposed the margin

requirements to p rotect the general economy, not to givethe customer a f ree r ide at the expense of the brok er.

• Not to require respondent to pay for his April 10 and 11trades would put a premium on his circumvention of thelaws and would enable him to enrich himself unjustly atthe ex pense of petitioner.

124



• Where the complaint is criminal in nature , the SEC shallindorse the complaint to the DOJ for preliminaryinvestigation and prosecution as provided in Section

BECAUSE IT WOULD BECOME POWERLESS TO REGULATE AND IMPELEMENT THE LAW. A NOTHER PROVISION OF THE STATUTE , WHICH PROVIDES THE

()



53.1.

TENDER OFFER RULES APPLY TO INDIRECT ACQUISITION OF SHARES

CEMCO HODINGS, INC. V. NATIONAL LIFE INSURANCE COG.R. NO. 171815. AUGUST 7, 2007

IN TAKING COGNIZANCE OF RESPONDENT 'S COMPLAINT AGAINSTPETITIONER AND EVENTUALLY RENDERING A JUDGMENT WHICHORDERED THE LATTER TO MAKE A TENDER OFFER , THE SEC WAS

ACTING PURSUANT TO R ULE 19 (13) OF THE A MENDEDIMPLEMENTING R ULES AND R EGULATIONS OF THE S ECURITIESREGULATION C ODE :13. Violation• If there shall be violation of this Rule by pursuing a

purchase of equity shares of a public company at thresholdamounts w ithout the required tender offer, the C ommission,upon complaint, may nullify the sa id acquisition and directthe h olding o f a tender off er.

• This shall be without pr ejudice to the imposition of othersanctions u nder the Code.

o The foregoing rule emanates from the SEC's powerand authority to regulate, investigate or supervisethe activities of persons to ensure com pliance with

the Securities Regulation Code, more specicallythe provision on mandatory tender offer underSection 19 thereof. 7

SEC HAS INCIDENTAL POWER TO CONDUCT HEARING ANDRENDER DECISIONS FIXING THE RIGHTS ANDOBLIGATIONS OF THE PARTIES—TO DEPRIVE THE SEC OF

THIS POWER WOULD RENDER THE AGENCY INUTILE

BASIS OF R ULE 19 (13) OF THE A MENDED I MPLEMENTING R ULES AND R EGULATIONS OF THE S ECURITIES R EGULATION C ODE , IS

SECTION 5.1 ( N), VIZ : T HE C OMMISSION SHALL HAVE , AMONG OTHERS , THE FOLLOWING

POWERS AND FUNCTIONS : SECTION 5.1 ( N):• Exercise such other powers as m ay be provided by law as well as those which may be implied from, or which are

necessary or i ncidental to th e ca rrying out of, the expresspowers granted the Commission to achieve the objectivesand purposes of these laws.

• The foregoing provision bestows upon the SEC the generaladjudicative power which is implied from the expresspowers of the Commission or which is incidental to, orreasonably necessary t o carry ou t, the performance of theadministrative d uties e ntrusted to it.

• As a regulatory agency, it has the incidental power toconduct hearings and render decisions xing the rightsand obligations of t he parties.

SEC HAS THE COMPETENCE TO RENDER THE PARTICULARDECISION IT MADE IN THIS CASE :• A denite inference may be drawn from the provisions of

the SRC that the SEC has the authority not only toinvestigate complaints of violations of the tender offer ru le,

but to adjudicate certain rights and obligations of thecontending parties and grant appropriate reliefs in theexercise of its regu latory f unctions u nder t he SRC.

• Section 5.1 of the SRC allows a general grant ofadjudicative powers to the SEC which may be implied fromor a re necessary or incidental to the carrying out of i tsexpress powers to achieve the objectives and purposes ofthe SRC.

127

• The powers and functions of the SEC that the law hasmade the SEC primarily a regulatory body with theincidental power to conduct administrative hearings and

kdii

1. A corporation which is listed on an exchange, or 2.A corporation with assets exceeding

P50,000,000.00 and with 200 or morekhldl20 0fh hldil



make decisions.• A regulatory body like the SEC may conduct hearings in

the exercise of its regulatory powers, an d if the caseinvolves violations or conicts in connection with theperformance of its regulatory f unctions, it will have theduty and authority to resolve the dispute for the bestinterests o f the p ublic.

T HE POWER CONFERRED UPON THE SEC TO PROMULGATE RULES AND REGULATIONS IS A LEGISLATIVE RECOGNITION OF THE

COMPLEXITY AND THE CONSTANTLY -FLUCTUATING NATURE OF THEMARKET AND THE IMPOSSIBILITY OF FORESEEING ALL THEPOSSIBLE CONTINGENCIES THAT CANNOT BE ADDRESSED IN

ADVANCE :• Rules and regulations when promulgated in pursuance of

the procedure or authority conferred upon theadministrative agency by law, partake of t he nature of astatute, and compliance therewith may be enforced by apenal sanction provided in the law.

• This is so because statutes are usually couched in generalterms, af ter expressing the policy, purposes, ob jectives,remedies a nd sanctions intended by the legislature.

• The details and the manner of carrying out the law areoften times left to the administrative agency entrusted

with its enforcement.• In this sen se, it ha s b een said that rul es a nd regulations

are the product of a delegated power to create new oradditional legal provisions that ha ve the effect of law.

T ENDER OFFER IS A PUBLICLY ANNOUNCED INTENTION BY A PERSON ACTING ALONE OR IN CONCERT WITH OTHER PERSONS TO ACQUIRE

EQUITY SECURITIES OF A PUBLIC COMPANY :• A public company is dened as:

stockholders, at least 20 0 of them holding not lessthan 100 shares of such company.

• A tender offer is an offer by the acquiring person tostockholders of a public company for them to tender theirshares t herein on the terms specied in the offer.

• Tender offer is in place to protect minority shareholdersagainst any scheme that dilutes the share value of theirinvestments.

• It gives the minority shareholders the chance to exi t thecompany under reasonable terms, giving them theopportunity to sell their sha res at the sam e price as thoseof the m ajority sh areholders.

UNDER S ECTION 19 OF R EPUBLIC A CT N O. 8799, IT IS STATED :• Any person or group of persons acting in concert who

intends to acquire at least fteen percent (15%) of anyclass of any equity security of a l isted corporation or ofany class of any equity security of a corporation withassets of at l east F ifty million pesos (P50,000,000.00) andhaving two hundred (200) or more stockholders with atleast one hundred (100) shares each or who intends toacquire at l east t hirty percent (30%) of such equity over aperiod of twelve (12) months shall make a tender offer tostockholders by ling with the Commission a declarationto that effect; and furnish the issuer, a statement

containing such of the information required in Section 17of this Code as t he Commission may prescribe.• Such person or group of persons sh all publish all requests

or invitations for tender, or m aterials making a tenderoffer or requ esting or inviting letters o f such a security.

• Copies of an y additional m aterial sol iciting or requ estingsuch tender offers su bsequent to the initial sol icitation orrequest shall contain such information as the C ommissionmay prescribe, and shall be led with the Commission and

128

sent to the issuer not later than the time copies of su chmaterials are rst pu blished or sen t or gi ven to securityholders.

SALE OF UNREGISTERED TIMESHARE CONTRACTS NOTRATIFIED BY SUBSEQUENT REGISTRATION THEROF



Under existing SEC Rules, the 15% and 30% thresholdacquisition of shares u nder the foregoing provision wasincreased to thirty-ve percent (35%).t is further provided therein that mandatory tenderoffer i s still ap plicable even if the acquisition is lessthan 35% when the purchase would result inownership of over 51% of the total outstanding equitysecurities of the public company.

THE COVERAGE OF THE MANDATORY TENDER OFFERRULE COVERS NOT ONLY DIRECT ACQUISITION BUT ALSOINDIRECT ACQUISITION OF “ANY TYPE OF ACQUISITION;”• The SEC and the Court of Appeals ruled that the indirect

acquisition by petitioner of 36% of UCC shares through

the acquisition of the non-listed UCHC shares is covered by the mandatory tender offer rule.

• The coverage of the mandatory tender offer rule covers notonly direct acquisition but also indirect acquisition or "anytype of acquisition".

T HE LEGISLATIVE INTENT OF S ECTION 19 OF THE C ODE IS TOREGULATE ACTIVITIES RELATING TO ACQUISITION OF CONTROL OF

THE LISTED COMPANY AND FOR THE PURPOSE OF PROTECTING THEMINORITY STOCKHOLDERS OF A LISTED CORPORATION :• Whatever may be the method by which control of a public

company is obtained, either through the direct purchaseof its stocks or through an indirect means, mandatorytender offer ap plies.

As appropriately held by the Court of Appeals:

TIMESHARE REALTY V. LAO ET.AL.G.R. NO. 158941. FEBRUARY 11, 2008

THE PROVISIONS OF B.P. B LG . 178 DO NOT SUPPORT THE

CONTENTION OF PETITIONER THAT ITS MERE REGISTRATION AS ACORPORATION ALREADY AUTHORIZES IT TO DEAL WITHUNREGISTERED TIMESHARES :• CORPORATE REGISTRATION IS JUST ONE OF SEVERAL

REQUIREMENTS BEFORE IT MAY DEAL WITH TIMESHARES :SECTION 8. P ROCEDURE FOR REGISTRATION :(a) All securities requ ired to b e registered under su bsection

(a) of Section four of this Act sh all be regi stered throughthe ling by the issuer or b y any dealer or u nderwriterinterested in the sale thereof, in the office of the

Commission, of a sworn registration statement withrespect t o su ch securities, containing or having attachedthereto, the following: xxx

(36) Unless previously led and registered with theCommission and brought up to date:(a) A copy of its articles of incorporation with allamendments thereof and its existing by-laws or i nstrumentscorresponding thereto, whatever the name, if the issuer be acorporation.

PRIOR TO FULFILLMENT OF ALL THE OTHER REQUIREMENTS OF

SECTION 8, PETITIONER IS ABSOLUTELY PROSCRIBED UNDERSECTION 4 FROM DEALING WITH UNREGISTERED TIMESHARES ,

THUS :SECTION 4.R EQUIREMENT OF REGISTRATION OF SECURITIES . — (a) No secu rities, except of a class ex empt u nder an y of theprovisions of Section ve hereof or unless sold in anytransaction exempt under a ny of t he provisions of Sectionsix hereof, shall be so ld or offered for sa le or d istributionto the public within the Philippines u nless su ch securities

129

shall have been registered and permitted to be sold ashereinafter p rovided.

INVESTMENTCONTRACTSASSECURITIES

R.A. N O. 8799 FOLLOWS THE FLEXIBLE CONCEPT FOR IT DEFINES AN INVESTMENT CONTRACT AS A CONTRACT , TRANSACTION OR

SCHEME ( COLLECTIVELY " CONTRACT ") WHEREBY A PERSON INVESTS



INVESTMENT CONTRACTS AS SECURITIES

POWER HOMES UNLIMITED CORP. V. SECG.R. NO. 164182. FEBRUARY 26, 2008

A N INVESTMENT CONTRACT IS DEFINED IN THE A MENDEDIMPLEMENTING R ULES AND R EGULATIONS OF R.A. N O. 8799 AS

A :• "CONTRACT , TRANSACTION OR SCHEME ( COLLECTIVELY

'CONTRACT ') WHEREBY A PERSON INVESTS HIS MONEY IN ACOMMON ENTERPRISE AND IS LED TO EXPECT PROFITS PRIMARILYFROM THE EFFORTS OF OTHERS ."

• The US Supreme Court: The use of the catch-all term"investment con tract" indicated a congressional intent tocover a w ide range of investment transactions.

T EST TO DETERMINE WHETHER A TRANSACTION FALLS WITHIN THESCOPE OF AN " INVESTMENT CONTRACT " K NOWN AS THE H OWEY

T EST : • 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 prots;4. To be derived solely from the efforts of others.

• The Howey Test "embodies a exible rather tha n a staticprinciple, one that is capable of adaptation to meet thecountless and variable schemes devised by those who seekthe use of the money of others on the promise of prots."

• 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.

HIS MONEY IN A COMMON ENTERPRISE AND IS LED TO EXPECTPROFITS NOT SOLELY BUT PRIMARILY FROM THE EFFORTS OFOTHERS :

TO BE A SECURITY SUBJECT TO REGULATION BY THE SEC, ANINVESTMENT CONTRACT IN OUR JURISDICTION MUST BE PROVED TOBE :1. An investment of money;2. In a common enterprise;3. With expectation of prots;4. Primarily from efforts of others.

A S AN INVESTMENT CONTRACT THAT IS SECURITY UNDER R.A. N O.8799, IT MUST BE REGISTERED WITH PUBLIC RESPONDENT SEC,

OTHERWISE THE SEC CANNOT PROTECT THE INVESTING PUBLICFROM FRAUDULENT SECURITIES :• The strict regulation of securities is founded on the

premise that t he capital markets depend on the investingpublic's level of condence in the syst em.

POSTDATED CHECKS COULD BE CONSIDERED ASCOMMERCIAL PAPERS EVIDENCING INDEBTEDNESS AND,

THEREFORE, CLASSIABLE AS SECURITIES

GABIONZA, ET AL V. CAG.R. NO. 161057. SEPTEMBER 12, 2008.

IT IS POSSIBLE TO HOLD THE BORROWER IN A MONEY MARKETPLACEMENT LIABLE FOR ESTAFA IF THE CREDITOR WAS INDUCED

TO EXTEND A LOAN UPON THE FALSE OR FRAUDULENTMISREPRESENTATIONS OF THE BORROWER :• Such estafa is one by m eans of deceit.

130



• As the DOJ Resolution noted, ASBHI adopted this schemein an attempt to circumvent the Revised Securities Act,

which requires a prior license to sell or deal in securiti• AfterallifASBHI'sactivitieswereactuallyregulatedby

SECTIONS 8, 30 AND 36 OF THE R EVISED S ECURITIES A CT DONOT REQUIRE THE ENACTMENT OF IMPLEMENTING RULES TO MAKE

THEM BINDING AND EFFECTIVE .Ithbf tittilt tti it



After all, if ASBHIs activities were actually regulated bythe SEC, it is hardly likely that the design it chose toemploy would have been permitted at all.

THE DEFINITION OF " SECURITIES " SET FORTH IN S ECTION 2 OF THE R EVISED S ECURITIES A CT INCLUDES " COMMERCIAL PAPERS

EVIDENCING INDEBTEDNESS OF ANY PERSON , FINANCIAL OR NON -FINANCIAL ENTITY , IRRESPECTIVE OF MATURITY , ISSUED ,ENDORSED , SOLD , TRANSFERRED OR IN ANY MANNER CONVEYED TO

ANOTHER :"• A check is a commercial paper evidencing indebtedness of

any person, nancial or non-nancial entity.• Since the checks in this ca se were gen erally rolled over to

augment the creditor's existing investment with ASBHI,they most denitely take on the attributes of traditionalstocks.

ASBHI balance sheets: Over ve billion pesos were booked as"advances to stockholder;"• Considering that ASBHI had an authorized capital stock of

only P500,000 and a subscribed capital of P125,000, itcan be reasonably deduced that such large amounts

booked as "advances to stockholder" could have only comefrom the loans extended by over 700 investors to ASBHI.

INVESTIGATION OF INSIDER TRADING:

SEC V. INTERPORT RESOURCES CORPG.R. NO. 135808. OCTOBER 6, 2008EN BANK

• In the absence of any constitutional or st atutory inrmity, which may concern Sections 30 and 36 of the Revised

Securities Act, the Supreme Court upholds theseprovisions a s legal and binding.

• Every l aw has in its favor the presumption of validity.• Unless a nd until a sp ecic 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 effectivelyinvalidate provisions of law, where a reasonableconstruction that will support the law may be given.

SECTION 30 OF THE R EVISED S ECURITIES A CTSECTION 30 OF THE R EVISED S ECURITIES A CT READS :SEC . 30. I NSIDER 'S DUTY TO DISCLOSE WHEN TRADING :( A ) I T SHALL BE UNLAWFUL FOR AN INSIDER TO SELL OR BUY ASECURITY OF THE ISSUER , IF HE KNOWS A FACT OF SPECIALSIGNIFICANCE WITH RESPECT TO THE ISSUER OR THE SECURITY THATIS NOT GENERALLY AVAILABLE , UNLESS :1. The insider proves tha t the fact i s gen erally available or2. If the other party to the transaction (or his agent) is

identied:a. The insider proves t hat the other party knows it, or

b. That other party in fact knows it from the insideror otherw ise.

(B) "I NSIDER " MEANS :1. The issuer;2. A director or officer of, or a person controlling,

controlled by, or under common control with, theissuer;

3. A person whose relationship or former relationshipto the issuer gives or gave h im access to a fact of

132



securities and such changes in his or her ownershipthereof.

SEC36 D IRECTORS OFFICERS AND PRINCIPAL

USUALLY , BENEFICIAL OWNERSHIP IS DISTINGUISHED FROM NAKEDOWNERSHIP , WHICH IS THE ENJOYMENT OF ALL THE BENEFITS ANDPRIVILEGES OF OWNERSHIP , AS AGAINST POSSESSION OF THE BARE

TITLE TO PROPERTY :



SEC . 36. D IRECTORS , OFFICERS AND PRINCIPALSTOCKHOLDERS :

Every person who is directly or indirectly the benecialowner of more than ten per centum of any [class] of anyequity secu rity which is regi stered p ursuant to th is Act, or

who is [a] director or an officer of the issuer of suchsecurity, shall le, at t he time of the registration of su chsecurity on a securities exchange or b y the effective dateof a registration statement or w ithin ten days after he

becomes such a benecial owner, director or officer, astatement with the Commission and, if such security isregistered on a securities exchange, also with theexchange, of the amount of all equity securities ofsuch issuer of which he is the benecial owner; and

Within ten days after the close of each calendar monththereafter, if there has been a change in such ownershipduring such month, shall le with the Commission, and ifsuch security is registered on a securities exch ange, shallalso le with the exchange , a statement indicating hisownership at the close of the calendar month andsuch changes in his ownership as have occurredduring such calendar month.

SECTION 36 ( A ) REFERS TO THE " BENEFICIAL OWNER ". B ENEFICIALOWNER HAS BEEN DEFINED IN THE FOLLOWING MANNER :1. First, to indicate th e interest of a beneciary in trust

property (also called " equitable ownership "; and2. Second, to refer t o the power of a corporate sh areholder to

buy or sell the shares, though the shareholder is notregistered i n the corp oration's books a s the owner.

TITLE TO PROPERTY :• Sections 30 and 36 of the Revised Securities Act were

enacted to prom ote full disclosure in the secu rities m arketand prevent unscrupulous individuals, who by their

positions obtain non-public information, from takingadvantage of an uninformed public.• No individual would invest in a market which can be

manipulated by a limited number of corporate insiders.• Such reaction would stie, if not stunt, the growth of the

securities market.• To avert the occurrence of such an event, Section 30 of the

Revised Securities Act prevented the unfair use of non-public information in securities transactions, whileSection 36 allowed the SEC to monitor the transactionsentered into by corporate officers an d directors as reg ardsthe secu rities o f their com panies.

T HE S ECURITIES R EGULATIONS C ODE DID NOT REPEAL S ECTIONS8, 30 AND 36 OF THE R EVISED S ECURITIES A CT SINCE SAIDPROVISIONS WERE REENACTED IN THE NEW LAW :• Section 8 of the Revised Securities Act, which previously

provided for the registration of securities and theinformation that n eeds to be included in the registrationstatements, was expanded under Section 12, inconnection with Section 8 of the Securities RegulationsCode.

• Section 30 of the Revised Securities Act has beenreenacted as Section 27 of the Securities RegulationsCode, still penalizing an insider's m isuse of material an dnon-public information about the issuer, for the purposeof protecti ng public investors.

• Section 26 of the Securities Regulations Code even w idensthe coverage of punishable acts, which intend to defraud

135



PERSONAL LIABILITY OF A CORPORATE DIRECTOR , TRUSTEE , OROFFICER , ALONG ( ALTHOUGH NOT NECESSARILY ) WITH THECORPORATION , MAY VALIDLY ATTACH , AS A RULE , ONLY WHEN :1. He assents to a patently unlawful act of the corporation,

issuer as t he Commission may prescribe as necessaryto keep current information on the operation of the

business and nancial condition of the issuer.



pypor when he is guilty of bad faith or gross n egligence indirecting its affairs, or when there i s a conict of i nterestresulting in damages to the corporation, its stockholders,or other person s;

2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith le with the corporate secretary his written objection thereto;

3. He agrees to hold himself personally and solidarily liable with the corporation; or

4. He is made by a specic provision of law personallyanswerable for his corp orate action.

PHILIPPINE VETARANS BANK IS A PUBLIC COMPANYEVEN THOUGH ITS SHARES ARE AVAILABLE ONLY TO ALIMITED SECTOR:PVB V. CALLANGANG.R. NO. 191995. AUGUST 3, 2011

REPORTORIAL REQUIREMENTSSection 17. Periodic a nd Other Reports o f Issuer. 17.1. Everyissuer sat isfying the requirements in Subsection 17.2 hereofshall le with the Commission within one hundred thirty-ve(135) days, after the end of the issuer’s scal year , or su chother time as t he Commission may prescribe an annual report

which shall include, among others:1. A balance sheet;2. Prot and loss statement and statement of cash ows,

for su ch last scal year , certied public a ccountant,3. An a management discussion and analysis of results of

operation; and4. Such other periodical reports for interim scal periods

and current reports on signicant developments of the

T O DETERMINE WHETHER THE B ANK IS A " PUBLIC COMPANY "BURDENED WITH THE REPORTORIAL REQUIREMENTS ORDERED BY

THE SEC, S UPREME C OURT LOOKED TO S UBSECTIONS 17.1 AND

17.2OF

THE

SRC, WHICH

PROVIDE

:SECTION 17. P ERIODIC AND O THER R EPORTS OF I SSUERS . — 17.2. The reportorial requirements of Subsection 17.1shall apply to the following: xxx(c) An issuer with assets of at least Fifty million pesos

(P50,000,000.00) or such other amount as theCommission shall prescribe, and having two hundred(200) or more holders each holding at least one hundred(100) shares o f a c lass o f its equ ity secu rities:Provided, however, That t he obligation of such issuer to

le reports shall be terminated ninety (90) days afternotication to the Commission by the issuer that thenumber of its holders holding at l east one hundred (100)shares is reduced to l ess t han one hundred (100).

PUBLIC COMPANY —any corporation with a class of equitysecurities listed on an Exchange or with assets in excessof Fifty Million Pesos (P50,000,000.00) and having twohundred (200) or more holders, at least two hundred (200) of

which are holding at least one hundred (100) shares of a classof i ts eq uity se curities."• A "public company" is not limited to a company whose

shares of st ock are p ublicly listed;• Even companies like the Bank, whose shares are offered

only to a specic group of people, are con sidered a publiccompany, provided they meet the requirementsenumerated above.

137

The records establish, and the Bank does not dispute,that the Bank has assets exceeding P50,000,000.00 andhas 395,998 shareholders:• Itisthusconsideredapubliccompanythatm ustcomply

FOR AN INVESTMENT CONTRACT TO EXIST , THE FOLLOWINGELEMENTS , REFERRED TO AS THE H OWEY TEST MUST CONCUR : 1. A contract, transaction, or schem e;



It is thus considered a public company that m ust comply with the reportorial requirements set forth in Section 17.1

of the SRC.

THE B ANK 'S OBLIGATION TO PROVIDE ITS STOCKHOLDERS WITH COPIES OF ITS ANNUAL REPORT IS ACTUALLY FOR THE BENEFIT OF

THE VETERANS -STOCKHOLDERS :• It gives these stockholders access to information on the

Bank's nancial status and operations, resulting ingreater transparency on the part of the Bank.

• While compliance with this requirement will undoubtedlycost the Bank money, the benet provided to theshareholders cl early outweighs the expense.

• For many stockholders, these annual reports a re the onlymeans of keeping in touch with the state of heal th of theirinvestments;

• To them, these are invaluable and continuing links withthe Bank that immeasurably contribute to thetransparency in public companies that the law envisions.

SCHEME NOT AN INVESTMENT CONTRACT

SEC V. PROSPERITY.COMG.R. NO. 164197. JANUARY 25, 2012

T HE S ECURITIES R EGULATION C ODE TREATS INVESTMENTCONTRACTS AS " SECURITIES " THAT HAVE TO BE REGISTERED WITH

THE SEC BEFORE THEY CAN BE DISTRIBUTED AND SOLD :• An investment contract is a contract, transaction, or

scheme where a person invests his money in a commonenterprise a nd is led to expect prots pri marily from theefforts of others.

,,;2. An investment of money;3. Investment is made in a common enterprise;4. Expectation of prots; and

Prots ari sing primarily from the efforts of ot hers.

An example would be the long-term commercial papersthat large companies, like San Miguel Corporation (SMC),offer to the public for raising funds that it needs forexpansion :• When an investor buys these papers or securities, he

invests his money, together with others, in SMC with anexpectation of prots a rising from the efforts of t hose whomanage and operate that company.

• SMC has to register these commercial papers with theSEC before offering them to investors.

Here, PCI's clients do not make such investments .• They buy a product of some value to them: an Internet

website of a 15-MB capacity.• The client can use this website to enable people to have

internet access to what he h as to offer to them, say, someskin cream.

• The buyers of the website do not invest money in PCI thatit could use for running some business that wouldgenerate pro ts for the investors.

• The price of US$234.00 is what the buyer pays for the useof the website, a tan gible a sset t hat P CI creates, using itscomputer f acilities and technical skills.

138

CITIBANK NA VS. GABALDON:

G.R. NO. 198444, SEPTEMBER 4, 2013

(d)After twelve years for any other offense punished by imprisonment for six years or more, except t he

crime of t reason, which shall prescribe after t wenty

years



GIVEN THE ABSENCE OF A PRESCRIPTIVE PERIOD FOR THE

ENFORCEMENT OF THE CRIMINAL LIABILITY IN VIOLATIONS OF THE

SRC, A CT N O. 3326 NOW COMES INTO PLAY .P ANAGUITON , J R. V .DEPARTMENT OF J USTICE EXPRESSLY RULED THAT A CT N O. 3326IS THE LAW APPLICABLE TO OFFENSES UNDER SPECIAL LAWS WHICH

DO NOT PROVIDE THEIR OWN PRESCRIPTIVE PERIODS :

SECTION 1 OF A CT N O. 3326 PROVIDES :

• Violations penalized by special acts shall, unless otherwiseprovided in such acts, prescribe in accordance with thefollowing rules:

(a)After a year for offenses punished only by a ne or

by imprisonment for not more than one month, or both ;

(b)after four years for those punished byimprisonment for more than one month, but l essthan two years;

(c)After eight years for those punished byimprisonment for two years or m ore, but less thansix years; and

years .

(e)Violations penalized by municipal ordinances sh allprescribe after two months.

UNDER S ECTION 73 OF THE SRC, VIOLATION OF ITS PROVISIONS

OR THE RULES AND REGULATIONS IS PUNISHABLE WITH

IMPRISONMENT OF NOT LESS THAN SEVEN (7) YEARS NOR MORE

THAN TWENTY -ONE (21) YEARS :

• Applying Section 1 of Act No.3326, a criminal prosecution

for violations of the SRC shall, therefore, prescribe intwelve (12) years .

• Hand in hand with Section 1, Section 2 of Act No. 3326states t hat" prescription shall begin to ru n from the day ofthe commission of the violation of the law, and if the sam e

be not known at the time, from the discovery thereof andthe in stitution of judicial proceedings for it s inv estigationand punishment.

• In Republic v. Cojuangco, Jr.the Court ruled that Section2 provides two ru les for determining when the prescriptiveperiod shall begin to ru n:

139

1. First, from the day of the commission of the violation of the law, if such commission is known;

and

1. UNITED COCONUT PLANTERS BANK VS. E. GANZON,INC.,

G.R. No. 168859, June 30, 2009



2. Second, from its discovery, if not then known, andthe institution of judicial proceedings for itsinvestigation and punishment.

In Resolution dated July 18,2007, however, the prosecutor’s offi ce referred the complaint to the

SEC. Finally, the respondents led the complaint withthe SEC on September 21,2007.

• Based on the foregoing antecedents, only seven (7) yearslapsed since the respondents invested their funds withthe petitioners , and three (3) years since therespondents’ discovery of the alleged offenses, that t hecomplaint was correctly led with the SEC forinvestigation.

• Hence, the respondents’ complaint was led well withinthe twelve (12)-year presc riptive period provided by Section1 of Act No. 3326.

BANKING ATTY. ROWENA MARTINEZ

RA NO 7653 SECTION 1 TO SECTION 47 CASES

,,

COURT OF APPEALS HAS JURISDICTION, BECAUSE BSP

IS A QUASI-JUDICIAL AGENCY:• Section 9(3) of BP 129, and Section 1, Rule 43 reveals that

the BSP Monetary Board is not included among the quasi- judicial agencies explicitly named therein, whose nal judgments, orders, resolutions or awards are appealable to

the Court of Appeals.• Such omission, however, does not necessarily mean that

the Court of Appeals has n o appellate jurisdiction over the judgments, orders, resolutions or awards of the BSP

Monetary Board.• Section 9(3) of BP 129 on the appellate jurisdiction of the

CA, generally refers to quasi-judicial agencies,instrumentalities, boards, or commissions.

• The use of the word " including " in the said provision,prior to the naming of several quasi-judicial agencies,necessarily conveys th e very idea of non-exclusivity of theenumeration.

• Enumeration was not intended to be exclusive, or wherethe enumeration is by w ay of example only.

BSP MONETARY BOARD IS A QUASI-JUDICIAL AGENCYEXERCISING QUASI-JUDICIAL POWERS OR FUNCTIONS :• BSP Monetary Board is an independent central monetary

authority and a body corporate with scal andadministrative autonomy, mandated to provide policydirections in the areas o f money, banking and cred it.

• At any rate, under the new law, i.e., Sec. 30 of RA 7653,the order of the BSP Monetary Board, even regarding theliquidation of a b ank, can be questioned via a Petition for

140



HEARING NOT REQUIRED; SEC.29. THERE IS NOREQUIREMENT WHETHER EXPRESS OR IMPLIED, THAT

A HEARING BE FIRST CONDUCTED BEFORE A BANKINGINSTITUTION MAY BE PLACED UNDER RECEIVERSHIP:

• In this latter case (i.e., the bank can no longer resume business with safety to depositors, creditors and the

public, et c.) its li quidation will be o rdered and a liquidatorappointed by t he Monetary Board.



T HE CONDITIONS PREREQUISITE TO THE ACTION OF THE MB TOFORBID THE INSTITUTION TO DO BUSINESS IN THE P HILIPPINES AND

TO APPOINT A RECEIVER ARE :(a) An examination made by the examining department ofthe Central Bank;

(b)Report by sai d department to the Monetary Board; and(c)Prima facie showing that the bank is in a condition of

insolvency or so si tuated tha t its con tinuance in business would involve probable loss to its depositors or creditors.

W HENEVER IT SHALL APPEAR PRIMA FACIE THAT A BANKINGINSTITUTION IS IN " A CONDITION OF INSOLVENCY " OR SO SITUATED

" THAT ITS CONTINUANCE IN BUSINESS WOULD INVOLVED PROBABLELOSS TO ITS DEPOSITORS OR CREDITORS ," THE M ONETARY B OARDHAS AUTHORITY :

( A )F IRST , TO FORBID THE INSTITUTION TO DO BUSINESS AND APPOINT A RECEIVER THEREFOR ; AND

(B)S ECOND , TO DETERMINE , WITHIN 60 DAYS , WHETHER ORNOT :

1. The institution may be reorganized andrehabilitated to such an extent as to bepermitted to resume business with safety todepositors, creditors an d th e gen eral public; or

2. It is indeed insolvent or cannot resume business with safety to depositors, creditors

and the general public, and public interestrequires th at i t be liquidated.

• The Central Bank shall thereafter le a petition in theRegional Trial Court pray ing for the Court's as sistance inthe l iquidation of the bank."

T HE CLOSURE AND LIQUIDATION OF A BANK MAY BE CONSIDERED AS AN EXERCISE OF POLICE POWER :

• The evident implication of the law is that theappointment of a receiver may be made by the MB

without notice and hearing o But its action is subject to judicial inquiry to

insure t he p rotection of the b anking institution.• Due process do es n ot necessari ly requ ire a prior h earing;• A hearing or an opportunity to be heard may

be subsequent to the closure.• One can just imagine the dire consequences of a prior

hearing:• Bank runs would be the order of the day, resulting

in panic an d hysteria.• In the process, fortunes may be wiped out, and

disillusionment will run the gamut of t he entire banking community.

T HE RTC HAS JURISDICTION TO ADJUDICATE THE QUESTION OF WHETHER OR NOT THE ACTION OF THE MB DIRECTING THE

DISSOLUTION OF THE SUBJECT R URAL B ANK IS ATTENDED BY ARBITRARINESS AND BAD FAITH :

• A banking institution's claim that a resolution of theMonetary Board under Section 29 of the Central Bank

Act should be set aside as plainly arbitrary and madein bad faith, may be asserted as:

142



shall designate an official of the BSP or other competentperson as recei ver to immediately take charge o f its as setsand liabilities.

• Actions of the Monetary Board in proceedings on

• PDIC as a party-litigant on ly in representative ca pacity asthe rec eiver/ liquidator.

• Both BSP and PDIC cannot therefore be held directly andsolidarily liable.



insolvency are ex plicitly declared by law to be "nal andexecutory."

• They may not be set aside, or restrained, or enjoined by

the courts, except u pon "convincing proof that t he actionis p lainly arbitrary an d made in bad faith.

• The rationale behind judicial liquidation is intended toprevent multiplicity of actions ag ainst the i nsolvent bank.

• It is a pragmatic arrangement designed to establish dueprocess a nd orderliness in the liquidation of the bank, toobviate th e p roliferation of l itigations a nd to av oid i njusticeand arb itrariness.

• Only one court, if possible should pass upon the claims

against the insolvent ban k and that t he liquidation courtshould assist the Superintendent of Banks and regulatehis op erations.

SOLIDARY LIABILITY CANNOT ATTACH TO THE BSP, IN ITS

CAPACITY AS GOVERNMENT REGULATOR OF BANKS , AND THE PDIC AS STATUTORY RECEIVER UNDER R.A. N O. 7653:

• They are the principal government agencies mandated bylaw to determine the nancial viability of ban ks and quasi-

banks, and facilitate receivership and liquidation of closednancial institutions, upon a factual determination of thelatter's in solvency.

• The BSP, through the MB was well within its discretion toexercise power granted by law to issue a resolutionsuspending the interbank clearing privileges having madea factual determination that the bank had decient cashreserves dep osited before the BSP.

IN THE ABSENCE OF FRAUD , THE PURCHASE OF A CASHIER 'S CHECK ,LIKE THE PURCHASE OF A DRAFT ON A CORRESPONDENT BANK ,

CREATES THE RELATION OF CREDITOR AND DEBTOR , NOT THAT OFPRINCIPAL AND AGENT , WITH THE RESULT THAT THE PURCHASER OR

HOLDER THEREOF IS NOT ENTITLED TO A PREFERENCE OVER

GENERAL CREDITORS IN THE ASSETS OF THE BANK ISSUING THE

CHECK , WHEN IT FAILS BEFORE PAYMENT OF THE CHECK :• However, in a situation involving the element of f raud,

where a cashier's check i s p urchased from a bank at a t ime

when it is insolvent, as its officers know or ar e bound to

know by the exercise of reasonable diligence, it ha s been

held that the purchase is entitled to a preference in theassets of the bank on its liquidation before the check is paid.

5. CENTRAL BANK, TIAOQUI VS. COURT OF APPEALSG.R. NO. 76118 MARCH 30, 1993

DO LACK OF PRIOR NOTICE AND HEARING ARBITRARY AND IN BAD FAITH? NO

• Sec. 29 does not contemplate prior notice and hearing

before a bank may be directed to stop operations andplaced under receivership.

• A previous hearing is nowhere required in Sec. 29 nordoes the constitutional requirement of due processdemand that t he correctness of the MB's resolution to stopoperation and proceed to liquidation be rst adjudged

before making the resolution effective.

144



6. RURAL BANK OF SAN MIGUEL, INC VS. MONETARYBOARD, BSP, PDICG.R. NO. 150886, FEBRUARY 16, 2007

• The purpose of the law is to make the closure of a banksummary and expeditious in order to protect publicinteres t.

• This is also why prior notice and hearing are no longerqidbfb kbld



IS COMPLETE EXAMINATION REQUIRED BEFORE MBRESOLUTION 105 BE ISSUED? NO, ONLY A REPORT ISNECESSARY.DOES “REPORT OF THE SUPERVISING OR EXAMININGDEPT” UNDER SEC.30 MEAN REPORT OF THE BANK?Section 25, 28, 30 of RA 7653

"E XAMINATION " CONNOTES IN -DEPTH ANALYSIS , EVALUATION ,INQUIRY OR INVESTIGATION WHILE " REPORT " CONNOTES A SIMPLEDISCLOSURE OR NARRATION OF FACTS FOR INFORMATIVEPURPOSES :REQUIREMENTS BEFORE A BANK FOUND TO BE INSOLVENT ISORDERED CLOSED AND FORBIDDEN TO DO BUSINESS IN THEPHILIPPINES :(a)An examination shall be conducted by the head of the

appropriate supervising or examining department or h isexaminers or agents into the con dition of the bank;

(b)It shall be disclosed in the examination that t he con ditionof the bank is one of insolvency, or t hat i ts co ntinuance in

business would involve probable loss to its depositors orcreditors;

(c)Thirdly, the department head concerned shall inform theMonetary B oard in writing, of the facts; and

(d)Lastly, the Monetary Board shall nd the statements ofthe department head to be t rue.

IN RA 7653, ONLY A " REPORT OF THE HEAD OF THESUPERVISING OR EXAMINING DEPARTMENT" ISNECESSARY:• Section 30 RA 7653 no longer requires that an

examination be made before the MB can issue a closureorder.

required before a ba nk can be closed.• The lawmakers could have easily retained the word

"examination" and in the process also preserved the jurisprudence attached to it but they did not and instead

opted to u se the word "report."

T HE ABSENCE OF AN EXAMINATION BEFORE THE CLOSURE OF RBSMDID NOT MEAN THAT THERE WAS NO BASIS FOR THE CLOSURE ORDER :• The basis need not arise from an examination as required

in the old law.• MB had sufficient basis to arrive at a sound conclusion

that there were grounds that would justify RBSM’sclosure.

• It relied on the report of the head of the supervising or

examining department, with the ndings that: (1) RBSM was unable to pay its liabilities as they became due in theordinary course of business and (2) that it could notcontinue in business without incurring probable losses t oits d epositors a nd creditors.

• The report detailing the facts supporting those grounds,an extensive chronology of events revealing the multitudeof problems which faced RBSM and the recommendations

based on those ndings.• In short, MB and BSP complied with all the requirements

of RA 7653.o By relying on a report before placing a bank under

receivership, the MB and BSP did not only followthe letter o f the law, they were a lso faithful to itsspirit, which was to ac t expeditiously.

o Accordingly, the issuance of Resolution No. 105 was untainted with arbitrariness.

146

7. BANCO FILIPINO VS. THE MONETARY BOARDG.R. NO. 70054 DECEMBER 11, 1991

FORECLOSURES INSTITUTED ARE VALID

CLOSURE OF BANK NULL AND VOID AS THEY ARE MADE ARBITRARILY AND IN BAD FAITH

Mandatory Requirements:



ACTS OF LIQUIDATION ARE THOSE WHICH CONSTITUTE THE

CONVERSION OF THE ASSETS OF THE BANKING INSTITUTION TOMONEY OR THE SALE , ASSIGNMENT OR DISPOSITION OF THE S TO

CREDITORS AND OTHER PARTIES FOR THE PURPOSE OF PAYINGDEBTS OF SUCH INSTITUTION :• Not prohibited are acts of receiving collectibles and

receivables or paying off credits claims and othertransactions p ertaining to n ormal operate of a b ank.

• The prosecution of suits collection and the foreclosure ofmortgages against debtors the bank by the liquidator areamong the usual and ordinary transactions pertaining tothe ad ministration of a bank.

•

The mere duty of the comptroller is to su pervise countsand nances undertaken by the liquidator and todetermine the propriety of the latter's expendituresincurred behalf of the b ank.

• The liquidator is empowered under the law to continue thefunctions of r eceiver in preserving and keeping intact t heassets of the bank in substitution of its formermanagement, and to prevent the dissipation of its asset sto th e detriment of the credi tors of the bank.

•

Liquidator or t hrough counsel has the authority to bringactions for foreclosure of mortgages execu ted by debtors i nfavor of t he bank.

• The liquidator is authorized to resist or defend suitsinstituted against the bank by debtors an d creditors of the

bank and by other private persons.

I. AN EXAMINATION SHALL BE CONDUCTED BY THEHEAD OF THE APPROPRIATE SUPERVISING OREXAMINING DEPARTMENT OR HIS EXAMINERS OR

AGENTS INTO THE CONDITION OF THE BANK;II. IT SHALL BE DISCLOSED IN THE EXAMINATION THAT

THE CONDITION OF THE BANK IS ONE OFINSOLVENCY, OR THAT ITS CONTINUANCE INBUSINESS WOULD INVOLVE PROBABLE LOSS TO ITSDEPOSITORS OR CREDITORS.

III. THE DEPARTMENT HEAD CONCERNED SHALLINFORM THE MONETARY BOARD IN WRITING, OF THE

FACTS; ANDIV. THE MONETARY BOARD SHALL FIND THESTATEMENTS OF THE DEPARTMENT HEAD TO BE

TRUE.

T HE TEST OF INSOLVENCY LAID DOWN IN S ECTION 29 IS

MEASURED BY DETERMINING WHETHER THE REALIZABLE ASSETS OF

A BANK ARE LESS THAN ITS LIABILITIES :

• A bank is solvent if the fair cash value of all its assets,realizable within a reasonable time by a reasonableprudent p erson, would equal or ex ceed its total liabilitiesexclusive o f stock liability;

147

• But if such fair cash value so realizable is n ot sufficient topay such liabilities within a reasonable time, the bank isinsolvent.

• If the bank is not "non-insolvent" in contemplation of thedenition under Section 29 of RA 265, as amended by PDNo. 10 07, because it can not p ay its liabilities as they falldue in the ordinary course of business, the presence or



• The CB Manual of Examination Procedures does notconne examination of a bank solely with thedetermination of the books of the bank.

• Examination appraises the soundness of the institution'sassets, the quality and character of management anddetermines the institution's compliance with laws, r ulesand regulations.

• Examination concerns i tself with review and appraisal;

8. GENERAL BANK AND TRUST VS. CENTRAL BANKG.R. NO. 152551, JUNE 15, 2006

THE TERM "INSOLVENCY" UNDER OF SECTION 29, RA265:• The inability to pay of an otherwise non-insolvent bank

caused by extraordinary demands induced by nancialpanic commonly evidenced by a run on the bank in the

banking community ."• The provision presupposes that the struggling bank

should, in the rst place be "an otherwise non-insolvent bank" and the existence of a bank run is the sole and

exclusive c ause o f its i nability t o p ay its ob ligations.• The existence of a bank run is not, without more, a saving

grace for any bank, absolutely preventing the CB or theMonetary Board from ordering its closure due toinsolvency.

absence of a bank run is of no determinative moment onthe issue of the justiability of an order of cl osure.

• The CB had, as it were, ample basis other than the bank

run to consider p etitioner i nsolvent.• Upon the issuance of an order of closure, which by

express p rovision of law is nal and executory, the burdenof proving non-insolvency is upon the bank whichchallenges th e validity of such closure.

WAS THERE DENIAL BY CB OF DUE PROCESS?• Petitioner’s nancial predicament did not crop up

overnight, nor is it a product of a single nancialindiscretion, so to s peak.

• The root of its problem and eventual downfall is traceableto unsound banking practices employed by managementlike all-out nancial support given to FilcapitalDevelopment and the standing practice of extendingDOSRI loans;

• All these unsound practices occurred way before theirresulting crippling effects became manifest further leadingthe bank to resort to other unsound banking practices,like incurring daily overdrafts.

• Petitioner was totally aware of the predicament it hasgotten itself into and the conditions which the CB hadimposed to address the situation for the protection of thedepositors an d the banking public.

9. JERRY ONG VS. COURT OF APPEALSG.R. NO. 112830, FEBRUARY 1, 1996

148

LIQUIDATION COURT: THE PROPERTIES WERE STILLUNDER NAME OF THE BANK AND THEREFORE PART OF ITS

ASSETS.

• Hence, it would be necessary i n justice to all concernedthat Regional Trial Courts . . . assi st an d supervise theliquidation and . . . . act a s umpire or a rbitrator in theallowance a nd disallowance of cl aims.



T HE FACT THAT THE INSOLVENT BANK IS FORBIDDEN TO DO

BUSINESS , THAT ITS ASSETS ARE TURNED OVER TO THE

SUPERINTENDENT OF B ANKS , AS A RECEIVER , FOR CONVERSION INTOCASH , AND THAT ITS LIQUIDATION IS UNDERTAKEN WITH JUDICIAL

INTERVENTION MEANS THAT , AS FAR AS LAWFUL AND

PRACTICABLE , ALL CLAIMS AGAINST THE INSOLVENT BANK SHOULD BE

FILED IN THE LIQUIDATION PROCEEDING :• The judicial liquidation is intended to prevent multiplicity

of actions aga inst the insolvent bank.• It is a pragmatic arrangement designed to establish due

process a nd orderliness in the liquidation of the bank, toobviate th e p roliferation of l itigations a nd to av oid i njusticeand arb itrariness.

• Only one court, if possible should pass upon the claimsagainst the insolvent ban k and that t he liquidation courtshould assist the Superintendent of Banks and regulatehis op erations.

MEANING OF T HE PHRASE "T HE COURT SHALL HAVE JURISDICTION

IN THE SAME PROCEEDINGS TO ADJUDICATE DISPUTED

CLAIMS AGAINST THE BANK " • It is n ot n ecessary th at a claim be initially disputed in a

court or a gency before i t i s led with the liquidation court.• The term "disputed claim" in the provision simply

connotes tha t in the course of the liquidation, contentiouscases might arise wherein a full-dress h earing would berequired an d legal issues would have to be resol ved.

10. FIDELITY SAVINGS VS. CENZONG.R. NO. L-46208 APRIL 5, 1990

A BANKING INSTITUTION WHICH HAS BEEN DECLARED INSOLVENT

AND SUBSEQUENTLY ORDERED CLOSED BY THE C ENTRAL B ANK OF

THE P HILIPPINES CANNOT BE HELD LIABLE TO PAY INTEREST ON

BANK DEPOSITS WHICH ACCRUED DURING THE PERIOD WHEN THE

BANK IS ACTUALLY CLOSED AND NON -OPERATIONAL :• What enables a bank to pay stipulated interest on money

deposited with it is that thru the other aspects o f itsoperation it is a ble to generate funds to cover the payment

of such interest.• Unless a bank can lend money, engage in international

transactions, acqu ire foreclosed mortgaged properties ortheir proceeds and generally engage in other ban king andnancing activities from which it can derive income, it isinconceivable how it can carry on as a depositoryobligated to pay s tipulated interest.

• It should be deemed read into every contract of deposit with a bank that the obligation to pay interest on the

deposit ceases the m oment the operation of the bank iscompletely suspended by the duly constituted authority,the CB.

• Petitioner cannot be held liable for interest on bankdeposits which accrued from the time it was prohibited bythe CB to continue with its banking operations

149



SECTION 8 OF THE A NTI -G RAFT L AW IS INTENDED TO AMENDSECTION 2 OF R.A. 1405 BY PROVIDING ADDITIONAL EXCEPTION

TO THE RULE AGAINST THE DISCLOSURE OF BANK DEPOSITS :

SEC2 OF RA1405 DECLARES BANK DEPOSITS TO BE

BEFORE AN IN CAMERA INSPECTION MAY BE ALLOWED, THE FOLLOWING MUST CONCUR:

1. There must be a pending case b efore a cou rt of competentjurisdiction



SEC . 2 OF R.A. 1405 DECLARES BANK DEPOSITS TO BE" ABSOLUTELY CONFIDENTIAL ," IT NEVERTHELESS ALLOWS SUCHDISCLOSURE IN THE FOLLOWING :1. Upon written permission of the depositor;2. In cases of impeachment;3. Upon order of a competent court in cases of bribery or

dereliction of du ty of public officials;4. In cases where the money deposited is the subject matter

of the li tigation.

C ASES OF UNEXPLAINED WEALTH ARE SIMILAR TO CASES OFBRIBERY OR DERELICTION OF DUTY AND NO REASON IS SEEN WHY

THESE TWO CLASSES OF CASES CANNOT BE EXCEPTED FROM THERULE MAKING BANK DEPOSITS CONFIDENTIAL :• The policy as to one cannot be different from the policy as

to th e oth er.• This policy express the motion that a public office is a

public trust and any person who enters u pon its dischargedoes so with the full knowledge that h is life, so far asrelevant to his duty, is open to public scrutiny.

2. MARQUEZ , UNION BANK VS. DESIERTOG.R. NO. 135882, JUNE 27, 2001

AN EXAMINATION OF R.A. 1405 WOULD REVEAL THEFOLLOWING EXCEPTIONS:1. Where the depositor con sents in writing;2. Impeachment case;3. By court order in bribery or dereliction of duty casesagainst public officials;4. D eposit i s subject of l itigation;5. Sec. 8, R.A. No.3019, in cases of un explained wealth asheld in the case of PNB vs. Gancayco.

jurisdiction.2. The account must be clearly identied;3. The inspection limited to the subject matter of the

pending case before t he cou rt of competent jurisdiction.

4. The bank personnel and the account holder must benotied to be present during the inspection, and

3. EJERCITO VS. SANDIGANBAYANG.R. NOS. 157294-95 NOVEMBER 30, 2006

THE TERM "DEPOSIT" AS USED IN R.A. 1405: THE TERM " DEPOSITS " USED THEREIN IS TO BE UNDERSTOOD

BROADLY AND NOT LIMITED ONLY TO ACCOUNTS WHICH GIVE RISE

TO A CREDITOR -DEBTOR RELATIONSHIP BETWEEN THE DEPOSITOR AND THE BANK .

• The policy behind the law is hereby declared to be thepolicy of the Government to give encouragement to thepeople to deposit their money in banking institutions an dto discourage private hoarding so that the same may beproperly utilized by banks in authorized loans to assi st inthe economic development of the country.

• If the money deposited under an account may be u sed by banks for authorized loans to third persons, then such

account, regardless of whether i t cr eates a creditor-debtorrelationship between the depositor and the bank, fallsunder the category of accounts which the law preciselyseeks to protect for the purpose of boosting the econ omicdevelopment of the country.

Including trust

PLUNDER BEING THUS ANALOGOUS TO BRIBERY.

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other order or process of any court, legislative body, government agency or any administrative body whatsoever, is applicable to a foreign

transient, injustice would result esp ecially to acitizen aggrieved by a foreign guest.

the court could render a valid judgment upon the same inaccordance with the prayer .• It was properly alleged that the proceeds of the unlawful

activities were t ransacted and deposited with CSBI.• In particular, susp icious transaction reports showed that



o This situation calls for fairness against legaltyranny.

RA NO. 9160 ANTI-MONEY LAUNDERING ACT CASES

1. REPUBLIC OF THE PHILIPPINES VS. GLASGOW CREDITG.R. NO. 170281, JANUARY 18, 2008

THE COMPLAINT WAS FILED IN THE PROPER VENUE• The order dismissing the Republic’s complaint for civil

forfeiture of Glasgow’s account in CSBI has not yetattained nality on account of the pendency of this

appeal.• Thus, the Rule of Procedure in Cases of Civil Forfeiture

applies to th e Republic’s complaint .• Under S ection 3, Title II of the Rule of Procedu re in Cases

of Civil Forfeiture, t herefore, th e venue of civi l forfeiturecases is any RTC of the judicial region where themonetary instrument, property or proceeds representing,involving, or rel ating to an unlawful activity or t o a moneylaundering offense are l ocated.

• Pasig City, where t he account sou ght to be forfeited in this

case is situated, is within the National Capital Ju dicialRegion (NCJR).

• Clearly, the complaint for civil forfeiture of the accountmay be led in any RTC of the NCJR. Since the RTCManila is one of the RTCs of the NCJR.

The test of the sufficiency of the facts alleged in thecomplaint is whether or not, admitting the facts alleged,

p,ppGlasgow engaged in unlawful activities of estafa and

violation of the Securities Regulation Code thereby makingthem appear to have originated from legitimate sou rces; assuch, Glasgow engaged in money laundering.

• Whether or not there is truth in the allegation thataccount contains the proceeds of unlawful activitiesis an evidentiary matter that may be proven duringtria l.

• The complaint, however, did not even have to show orallege that Glasgow had been implicated in a convictionfor, or th e commission of, the u nlawful activities o f estafaand violation of the Securities Regulation Code.

A CRIMINAL CONVICTION FOR AN UNLAWFUL ACTIVITY IS NOT A PREREQUISITE FOR THE INSTITUTION OF A CIVIL FORFEITURE PROCEEDING .

Stated otherwise, a nding of guilt for an unlawfulactivity is n ot an essential element of ci vil forfeiture.

Service Of Summons May Be By Publication: • Forfeiture proceed ings a re acti ons in rem.• Since as in other k inds of forfeiture c ases, ci vil forfeiture

do not terminate in the imposition of a penalty but merelyin the forfeiture o f the properties, ei ther a cquired illegallyor rel ated to u nlawful activities i n favor o f the State.

• In actions in rem or quasi in rem, jurisdiction over theperson of the defendant is n ot a p rerequisite to con ferring

jurisdiction on the court, provided that the court acquires jurisdiction over the res.

• As an action in rem, it is a proceeding against the thingitself instead of aga inst t he p erson.

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