LYCEUM OF THE PHILIPPINES UNIVERSITY
COLLEGE OF LAW
3A 1st Semester, School Year 2019-2020
COURSE OUTLINE
ON
PHILIPPINE CORPORATION LAW
AND SECURITIES REGULATIONS
Professor Timoteo B. Aquino
3A CORPORATION LAW 2019-2020 pg. 1
(1)
Tayag v. Benguet Consolidated, Inc., G.R. No. L-23145, November
29, 1968, 26 SCRA 242
(2) J.R.S. Business Corp. v. Imperial Insurance, G.R. No. L-19891, July
31, 1964, 11 SCRA 634
(3) Dante Liban v. Richard J. Gordon, G.R. No. 175352, January 18, 2011
DANTE V. LIBAN et.al. vs RICHARD GORDON
GR 175352
January 18, 2011
Digested by: Abrhiem Nico Angeles
----------------------------------------------------------------------------------Petitioner: DANTE V. LIBAN, REYNALDO M. BERNARDO and SALVADOR M. VIARI
Respondent: RICHARD J. GORDON
Ponente: LEONARDO-DE CASTRO, J.:
Topic: Attributes of Corporation - Creation by General Law and by Special Law
----------------------------------------------------------------------------------Doctrine:
The PNRC, as a National Society of the International Red Cross and Red Crescent Movement,
can neither “be classified as an instrumentality of the State, so as not to lose its character of
neutrality” as well as its independence, nor strictly as a private corporation since it is regulated by
international humanitarian law and is treated as an auxiliary of the State.
----------------------------------------------------------------------------------Facts:
Petitioners Liban, et al., who were officers of the Board of Directors of the Quezon City Red Cross
Chapter, filed with the Supreme Court a “Petition to Declare Richard J. Gordon as Having
Forfeited His Seat in the Senate” against respondent Gordon, who was elected Chairman of the
Philippine National Red Cross (PNRC) Board of Governors during his incumbency as a Senator.
Petitioners alleged that by accepting the chairmanship of the PNRC Board of Governors,
respondent Gordon ceased to be a member of the Senate pursuant to Sec. 13, Article VI of the
Constitution, which provides that “[n]o Senator . . . may hold any other office or employment in
the Government, or any subdivision, agency, or instrumentality thereof, including governmentowned or controlled corporations or their subsidiaries, during his term without forfeiting his seat.”
Formerly, in its Decision dated July 15, 2009, the Court held that the office of the PNRC Chairman
is NOT a government office or an office in a GOCC for purposes of the prohibition in Sec. 13,
Article VI of the 1987 Constitution. The PNRC Chairman is elected by the PNRC Board of
Governors; he is not appointed by the President or by any subordinate government official.
Moreover, the PNRC is NOT a GOCC because it is a privately-owned, privately-funded, and
privately-run charitable organization and because it is controlled by a Board of Governors four3A CORPORATION LAW 2019-2020 pg. 2
fifths of which are private sector individuals. Therefore, respondent Gordon did not forfeit his
legislative seat when he was elected as PNRC Chairman during his incumbency as Senator.
The Court however held further that the PNRC Charter, R.A. 95, as amended by PD 1264 and
1643, is void insofar as it creates the PNRC as a private corporation since Section 7, Article XIV
of the 1935 Constitution states that “[t]he Congress shall not, except by general law, provide for
the formation, organization, or regulation of private corporations, unless such corporations are
owned or controlled by the Government or any subdivision or instrumentality thereof.” The Court
thus directed the PNRC to incorporate under the Corporation Code and register with the
Securities and Exchange Commission if it wants to be a private corporation.
Respondent Gordon filed a Motion for Clarification and/or for Reconsideration of the Decision.
The PNRC likewise moved to intervene and filed its own Motion for Partial Reconsideration. They
basically questioned the second part of the Decision with regard to the pronouncement on the
nature of the PNRC and the constitutionality of some provisions of the PNRC Charter.
----------------------------------------------------------------------------------Issue: Whether or not the Philippine National Red Cross (PNRC) is a government office or an
office in a government-owned or controlled corporation for purposes of the prohibition in Section
13, Article VI of the 1987 Constitution.
Ruling: NO.
The passage of several laws relating to the PNRC’s corporate existence notwithstanding the
effectivity of the constitutional proscription on the creation of private corporations by law is a
recognition that the PNRC is not strictly in the nature of a private corporation contemplated by the
aforesaid constitutional ban.
A closer look at the nature of the PNRC would show that there is none like it, not just in terms of
structure, but also in terms of history, public service and official status accorded to it by the State
and the international community. There is merit in PNRC’s contention that its structure is sui
generis. It is in recognition of this sui generis character of the PNRC that R.A. No. 95 has remained
valid and effective from the time of its enactment in March 22, 1947 under the 1935 Constitution
and during the effectivity of the 1973 Constitution and the 1987 Constitution
The PNRC, as a National Society of the International Red Cross and Red Crescent Movement,
can neither “be classified as an instrumentality of the State, so as not to lose its character of
neutrality” as well as its independence, nor strictly as a private corporation since it is regulated by
international humanitarian law and is treated as an auxiliary of the State.
Although the PNRC is neither a subdivision, agency, or instrumentality of the government, nor a
GOCC or a subsidiary thereof . . . so much so that respondent, under the Decision, was correctly
allowed to hold his position as Chairman thereof concurrently while he served as a Senator, such
a conclusion does not ipso facto imply that the PNRC is a “private corporation” within the
3A CORPORATION LAW 2019-2020 pg. 3
contemplation of the provision of the Constitution, that must be organized under the Corporation
Code
PNRC enjoys a special status as an important ally and auxiliary of the government in the
humanitarian field in accordance with its commitments under international law. This Court cannot
all of a sudden refuse to recognize its existence, especially since the issue of the constitutionality
of the PNRC Charter was never raised by the parties. It bears emphasizing that the PNRC has
responded to almost all national disasters since 1947, and is widely known to provide a substantial
portion of the country’s blood requirements. Its humanitarian work is unparalleled. The Court
should not shake its existence to the core in an untimely and drastic manner that would not only
have negative consequences to those who depend on it in times of disaster and armed hostilities
but also have adverse effects on the image of the Philippines in the international community. The
sections of the PNRC Charter that were declared void must therefore stay.
[Thus, R.A. No. 95 remains valid and constitutional in its entirety. The Court MODIFIED the
dispositive portion of the Decision by deleting the second sentence, to now read as follows:
WHEREFORE, we declare that the office of the Chairman of the Philippine National Red Cross
is not a government office or an office in a government-owned or controlled corporation for
purposes of the prohibition in Section 13, Article VI of the 1987 Constitution.]
3A CORPORATION LAW 2019-2020 pg. 4
(4) Torres v. De Leon, G.R. No. 199440, January 18, 2016.
—————————————————————————
TORRES V DE LEON
G.R. No. 199440
January 18, 2016
Digested by: Sarah Bagis
Petitioner: Mary Lou Geturbos Torres
Respondent: Corazon Alma G. De Leon
Ponente: Peralta, J.
Topic: Creation by General Law and by Special Law
————————————————————————Doctrine: By requiring the PNRC to organize under the Corporation Code like any other private
corporation, does not ipso facto imply that the PNRC is a “private corporation”. The PNRC,
as a National Society, can neither "be classified as an instrumentality of the State, so as
not to lose its character of neutrality" as well as its independence, nor strictly as a private
corporation since it is not a profit-making entity, it is directly regulated by international
humanitarian law and is treated as an auxiliary of the State. It’s controversies are therefore
approached with a case-to-case basis.
—————————————————————————
FACTS
Petitioner was the Chapter Administrator of the Philippine National Red Cross PNRC in
General Santos City. Based on an audit report submitted to respondent De Leon,
petitioner incurred a “technical shortage” in the amount of 4.3 Million.
Hence, respondent in a Memorandum, formally charged petitioner with Grave Misconduct for
violating PNRC Financial Policies. After investigation, respondent issued a Memorandum
imposing upon petitioner a penalty of 1 month suspension and transfer to the National
Headquarters.
Petitioner filed a Notice of Appeal addressed to the PNRC Board of Governors and furnished
a copy to the CIvil Service Commission (CSC). Petitioner addressed her appeal
memorandum to the CSC and sent copies thereof to the PNRC and the CSC. Respondent,
denied petitioner's appeal, while CSC in its resolution imposed a penalty of dismissal from
service.
Petitioner filed a petition for review with the CA, claiming that CSC has no jurisdiction to review
the appeal because PNRC is not a GOCC. That her respondent had denied her notice of
appeal, therefore there was no more appeal to speak of.
ISSUE
WON the CSC has appellate jurisdiction over petitioner because the PNRC is not a GOCC
3A CORPORATION LAW 2019-2020 pg. 5
HELD
Yes. The PNRC, although not a GOCC is sui generics in character. The Sui generics character
of PNRC requires the court to approach controversies involving the PNRC on a casetocase basis.
The PNRC is a National Society which acts as an auxiliary to the State in the humanitarian
field and provide aid for disaster relief and health and social programmes. As a National
Society, it also benefits from recognition at the International level. This is an element
distinguishing National Societies from other organizations (mainly NGOs) and other forms
of humanitarian response. No other organization has a duty to be its government's
humanitarian partner while remaining independent.
By requiring the PNRC to organize under the Corporation Code like any other private
corporation, does not ipso facto imply that the PNRC is a “private corporation”. The PNRC,
as a National Society, can neither "be classified as an instrumentality of the State, so as
not to lose its character of neutrality" as well as its independence, nor strictly as a private
corporation since it is not a profit-making entity, it is directly regulated by international
humanitarian law and is treated as an auxiliary of the State.
Having established the sui generis character of the PNRC, CSC therefore has jurisdiction
because the issue at hand is the enforcement of labor laws and penal statutes, in this
case, PNRC can be treated as a GOCC.
Under the Administrative Code of 1987, as well as decisions of this Court, the CSC has
appellate jurisdiction on administrative disciplinary cases involving the imposition of a
penalty of suspension for more than thirty (30) days, or fine in an amount exceeding thirty
(30) days salary. In this case, petitioner’s actual penalty imposed is 31 days and Transfer
to the NHQ, and that her appeal memorandum had substantially complied with sec 43 of
the URACCS.
3A CORPORATION LAW 2019-2020 pg. 6
(5) SME Bank Inc. V. De Guzman Nos. 184517 & 186641, Oct. 8, 2013
BERNALDO
SME Bank Inc. V. De Guzman
GR No. 184517 & 186641
Date: Oct. 8, 2013
Digested by: Michael Bernaldo
----------------------------------------------------------------------------------Petitioner: SME BANK, INC., ABELARDO P. SAMSON, OLGA SAMSON and AURELIO
VILLAFLOR, JR
Respondent: PEREGRIN T. DE GUZMAN, EDUARDO M. AGUSTIN, JR., ELICERIO GASPAR,
RICARDO GASPAR JR., EUFEMIA ROSETE, FIDEL ESPIRITU, SIMEON ESPIRITU, JR., and
JR., EUFEMIA ROSETE, FIDEL ESPIRITU, SIMEON ESPIRITU, JR., and LIBERATO
MANGOBA LIBERATO MANGOBA,
Ponente: Chief Justice Sereno
Topic: Right of Succession
----------------------------------------------------------------------------------Doctrine:
The SME Bank, Inc. personality is not affected by the change of its stockholders, directors and
officers.
----------------------------------------------------------------------------------Facts:
Eduardo M. Agustin, Jr. (Agustin) and Peregrin de Guzman, Jr. (De Guzman) were the principal
stockholders of SME Bank, Inc. (Bank). The Bank encountered financial difficulties in June 2001,
which prompted the proposed sale to Abelardo P. Samson (Samson). The formal offer was given
to Samson. Samson likewise sent his preconditions for the sale. The preconditions were duly
signed by Augustin and De Guzman.
3A CORPORATION LAW 2019-2020 pg. 7
The general manager, Simeon Espiritu, held a meeting will all of the branches of the Bank and
persuaded them to tender their resignations with the promise that they would be rehired upon
reapplication. Said promise was allegedly with the directive from Olga Samson.
Relying on the said representation, Elicerio, Ricardo, Fidel, Simeon, Jr,, Liberato tendered their
resignation. Eufermia submitted her intent to retire.
Majority of the shares of the Bank (86.365%) was transferred to spouses Samson a month after
the resignation of employees. Aurelio Villafor, Jr. was appointed as president of the bank. All
of the employees were not rehired except for Simeon Jr. Simeon, Jr. resigned a month after. The
Respondent-employees demanded the payment of their separation pays, but their requests were
denied.
A complaint was filed before the National Labor Relations Commission (NLRC) - Regional
Arbitration Branch No. III suing the Bank and Samson Group (Sps. Samson and Villafor) for unfair
labor practice; illegal dismissal, illegal deductions, underpayment; and non-payment of
allowances, separation pay and 13th month pay. Agustin and De Guzman were later implicated
with the amended complaint.
The decision of the Labor Arbiter ruled that the buyer of an enterprise is not bound to absorb its
employees, unless there is an express stipulation to the contrary. The respondent employees
were considered illegally dismissed due to their reliance to the representation that they will be
rehired. De Guzman and Agustin were found guilty while the Samson Group were found not
liable.
The respondent employees, De Guzman and Agustin filed separate appeals.
The NLRC
modified the decision of the Labor Arbiter finding De Guzman, Agustin and Samson Group liable
jointly and severally to pay the backwages and separation pay. De Guzman, Agustin and
Samson Group filed a motion for reconsideration, which was denied.
Agustin and De Guzman and the Samson filed their respective a Rule 65 Petition for Certiorari
with the CA. Both petitions were denied affirming the ruling of the NLRC. Likewise the motion
for reconsideration was also denied.
The Samson group filed two separate Rule 45 Petitions questioning the respective decisions of
the CA.
3A CORPORATION LAW 2019-2020 pg. 8
----------------------------------------------------------------------------------Issue:
The primary issue is whether the respondent employees were illegally dismissed and, if so, which
of the parties are liable for the claims of the employees and the extent of the reliefs that may be
awarded.
Ruling:
The instant Petitions are partly meritorious.
The Court found the dismissal of the employees were illegal. The retirement of Eufermia was
considered as involuntary in nature.
The Court distinguished the types of corporate acquisitions. They are asset sale and stock sale.
The transaction between the Sps Samson and Agustin and De Guzman is considered as a stock
sale. This type of corporate acquisition does not allow the dismissal of employees in the absence
of a just or authorized causes under the Labor Code.
The Court also pointed out that the separate personality of the Corporation will not be affected by
the change in the composition of its stockholders will not affect its existence and continuity. The
corporation still remains the employer and is liable for the payment of their just claims.
There was no evidence to support that Sps. Samson has control of the Corporation during the
dismissal of the employees. After the transfer of shares, the Sps. Samson has control of the
corporation but they were never directors or officers of the corporation. De Guzman and Agustin
were found to have acted in bad faith.
Decsion:
WHEREFORE, premises considered, the instant Petitions for Review are PARTIALLY GRANTED
PARTIALLY GRANTED.
The assailed Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 97510 dated 13
March 2008 and 1 September 2008, respectively, are hereby REVERSED and SET ASIDE insofar
as it held Abelardo P. Samson, Olga Samson and Aurelio Villaflor, Jr. solidarily liable for illegal
dismissal.
3A CORPORATION LAW 2019-2020 pg. 9
The assailed Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 97942 dated 15
January 2008 and 19 February 2009, respectively, are likewise REVERSED and SET ASIDE SET
ASIDE insofar as it held Abelardo P. Samson, Olga Samson and Aurelio Villaflor, Jr.
We REVERSE our ruling in Manlimos v. NLRC insofar as it upheld that, in a stock sale, the buyer
in good faith has no obligation to retain the employees of the selling corporation, and that the
dismissal of the affected employees is lawful even absent a just or authorized cause.
(6) Alvarado v. Ayala Land, Inc., et. al., G.R. No. 208426, September 20,
2017. BERNALDO
Alvarado vs. Ayala Land, Inc., Ayala Hillside Estates Homeowners' Association, Inc. et al
GR No. 208426
Date: September 20, 2017
Digested by: Michael Bernaldo
3A CORPORATION LAW 2019-2020 pg. 10
----------------------------------------------------------------------------------Petitioner: Samuel M. Alvarado
Respondent: Ayala Land, Inc., Ayala Hillside Estates Homeowners' Association, Inc.,
Alexander P. Aguirre, Horacio Paredes, Ricardo F. De Leon, Reynato Y. Sawit, Agustin N.
Perez, Geronimo M. Collado, Emmanuel C. Ching, Macabangkit Lanto, Manuel Dizon,
Tarcisio Calilung, Irineo Aguirre, Ernesto Ortiz Luis, Bernardo Jambalos Iii, Francisco
Arcillana, Luis S. Tanjangco, And Pablito Villega
Ponente: Justice Leonen
Topic: Doctrine of Separate Personality
----------------------------------------------------------------------------------Doctrine:
Capitol Hills Golf and Country Club, Inc. (Capitol) is a juridical entity with its own, distinct
personality. As a golf and country club, Capitol primarily exists for the utility and benefit of its
members. While legal title in its properties is vested in Capitol, beneficial use redounds to its
membership. Proprietary interest in Capitol is secured through club shares.
----------------------------------------------------------------------------------Facts:
Capitol owned a 15,598-square-meter parcel in Quezon City covered by Transfer Certificate of
Title (TCT) No. N-253850. This parcel of land was alleged to have had an assessed value of
P17,547,750.00 and a zonal value of P249,568,000.00. On November 16, 2007, the property
was levied by the Quezon City Treasurer on account of unpaid real estate taxes amounting to
P1,857,136.89 plus penalties of P668,569.28. On December 13, 2007, the said property was
subjected to a tax delinquency sale. Alvarado was the higher bidder with the bid of P 2.6 M. A
Certificate of Sale of Delinquent Property was issued in Alvarado's favour.
The Respondents filed a complaint with the Quezon City RTC assailing the validity of the tax sale.
The petitioners of the compliant were composed of the above mentioned members of the Capitol,
Ayala Hillside, an Association of Homeowners of Ayala Hillside Estate and Ayala Land, Inc.
The Complaint alleged several anomalies in the sale stating the following:
·
The amount of P 2.6 M equated to 14.41% of the assessed value, 6.48% of its market
value, and 1.01% of its zonal value;
3A CORPORATION LAW 2019-2020 pg. 11
· The sale of entire parcel was not necessary when a usable portion of the parcel can cover
the tax delinquency and is a violation of the Section 260 of the Local Government Code and
Chapter Two, Article 7, Section 14, paragraph 4 of the Quezon City Revenue Code;
· The parties were not given the opportunity to use the redemption period and the proper
notices were not posted in publicly accessible and conspicuous places, contrary to the
requirements of Section 254 of the Local Government Code;
Alvarado led his Answer with Compulsory Counterclaim dated April 4, 2011. This Answer asserted
that the Complaint was "procedurally and fatally defective on its face." Amongst the reason raise
are:
APPLYING SECTION 1 (G), RULE 16 OF THE 1997 RULES OF CIVIL PROCEDURE,
[RESPONDENTS] FAILED TO STATE A CAUSE OF ACTION AGAINST THE [PETITIONER] —
[RESPONDENTS] NOT BEING THE REGISTERED OWNER OF THE AUCTIONED PROPERTY
AND NOT HAVING ANY AUTHORITY FROM THE REGISTERED OWNER OF THE
PROPERTY.
APPLYING SECTION 1 (B), RULE 16 OF THE 1997 RULES OF CIVIL PROCEDURE, THE
HONORABLE COURT HAS NO JURISDICTION OVER THE SUBJECT MATTER OF THE
CLAIM CONSIDERING THAT [RESPONDENTS] HAVE NOT SHOWN ANY REAL, ACTUAL,
MATERIAL OR SUBSTANTIAL LEGAL RIGHTS OR INTEREST ON THE AUCTIONED
PROPERTY. AS A MATTER OF FACT, [RESPONDENTS'] ALLEGED RIGHTS DO NOT
APPEAR IN THE TITLE ITSELF. Thus, Section 267 of the Local Government Code provides that
"Neither shall any court declare a sale at public auction invalid by reason of irregularities or
informalities in the proceedings unless the substantive rights of the delinquent owner of the real
property or the person having legal interest therein have been impaired."
Alvarado filed a Motion to Dismiss on April 14, 2011 stating the same procedural defects. The
judge issued an order denying the Motion to Dismiss on September 6, 2011. The Judge ruled
that the motion was filed out of time and Alvarado was considered estopped from filing the Motion
to Dismiss. The motion for reconsideration was also denied by the RTC on January 6, 2012.
Alvarado filed a Petition for Certiorari with the Court of Appeals. The CA affirmed the decision of
the RTC. Likewise, the motion for reconsideration was denied.
----------------------------------------------------------------------------------Issue:
3A CORPORATION LAW 2019-2020 pg. 12
Whether or not the private respondents (members of Capitol) have real, actual, material or
substantial legal or interest on the auctioned property despite the fact the absence of their names
in the title.
Ruling:
Yes, they do have rights with respect to the auctioned property.
The Supreme Court recognized the substantial rights of the members of Capitol by acknowledging
relationship with the juridical entity (Capitol). Capitol is a juridical entity with its own, distinct
personality. Consistent with Article 46 of the Civil Code, it may "acquire and possess property"
such as the lot put up for a tax delinquency sale. As owner, it exclusively enjoyed the entire bundle
of rights associated with dominion over this parcel. Capitol is the registered owner of the
auctioned property. The primary purpose of said juridical entity is for the utility and benefit of its
members. The legal title is vested in Capitol. By virtue of the membership thru club shares, the
benefit of the right to use and enjoy the property and limited right to possess the premises and
facilities is provided to the members. Capitol’s right of dominion over the said parcel of land
should be for the benefit of members. This is the basis for the capacity of the members to
question the validity of the tax sale. The tax sale will deprive the capacity to use and enjoy the
entire 15,598 square-meter parcel which covers the entire Hole No. 5 of the 18-Hole Capitol Golf
Course and part of the road way called Mactan Road. Capitol's loss of legal title was tantamount
to the loss of the quintessence of their membership and holdings in Capitol. The removal of Hole
No. 5 will make the golf course dysfunctional and incomplete.
The Supreme Court appreciated the position of the Respondents that the Tax Sale did violate the
requirements of Local Government Code and the Quezon City Revenue Code, bypassed the
requisite redemption period, avoided the posting of requisite notices, and made for a grossly
inadequate price. Likewise, the Respondents were deemed as parties of interest with respect to
the auctioned property.
WHEREFORE, the Petition for Review on Certiorari is DENIED. The assailed April 17, 2013
Decision and August 2, 2013 Resolution of the Court of Appeals in CA-G.R. SP No. 123929 are
AFFIRMED.
3A CORPORATION LAW 2019-2020 pg. 13
(7)
National Electrification Administration v. Maguindanao Electric
Cooperative, Inc., G.R. Nos. 192595-96, April, 11, 2018.
NATIONAL ELECTRIFICATION ADMINISTRATION (NEA), PETITIONER, VS. MAGUINDANAO
ELECTRIC COOPERATIVE, INC.,
[G.R.
Nos.
192595-96]
[G.R.
Nos.
192676-77]
Date: April 11, 2018
Digested by: Brawner, Yvette
----------------------------------------------------------------------------------Petitioner: National Electrification Administration (NEA)
3A CORPORATION LAW 2019-2020 pg. 14
Respondent: Maguindanao Electric Cooperative – Palma Area
Ponente: : Justice Francis H. Jardeleza
Topic: Attributes of Corporation
----------------------------------------------------------------------------------Doctrine: Doctrine of Separate Personality;
The decision of the MAGELCO to amend its by-laws to create a new branch was never
intended to give rise to a new cooperative since PD269 provides for methods by which a
cooperative is duly organized; No ownership can be transferred to a mere branch without a
separate legal personality; When an entity has no separate juridical personality, it has no legal
capacity to sue; MAGELCO-PALMA was created as a branch within a cooperative, it never
existed as a juridical person and has no legal capacity to institute the special civil action for
certiorari before the CA.
----------------------------------------------------------------------------------Facts:
Maguindanao Electric Cooperative Inc (MAGELCO) is a duly organized cooperative with
a franchise to distribute electric light and power to specific municipalities in Maguindanao as well
as six municipalities in Cotabato, called the PPALMA Area. Cotabato Electric Cooperative Inc
(COTELCO) is also a duly organized cooperative with a franchise to distribute electric light and
power to the province of Cotabato except the PPALMA area. In 2000, COTELCO filed before the
National Electrification (NEA) an application to amend its franchise, to include the PPALMA area.
MAGELCO opposed. NEA conducted hearings which both cooperatives attended, and through
the National Electrification Commission (NEC), rendered a decision that granted COTELCO’s
application. It also ordered the transfer of MAGELCO’s assets in the PPALMA area to COTELCO
upon payment of just compensation.
MAGELCO filed before the CA a petition for review under Rule 43 to challenge the NEA
decision (First Case). While the case was pending, MAGELCO passed GA Resolution No. 4 which
amended the MAGELCO bylaws. The resolution approved the division and separation of
MAGELCO into two separate units, MAGELCO Main and MAGELCO – PALMA. NEA approved
the GA Resolution No. 4, and ordered both to submit a transition plan. Upon submission, both
units began to operate separately.
Shortly after commencement, MAGELCO Main filed before the RTC an action for
injunction and prohibition against the NEA Administrator and MAGELCO-PALMA. The action
sought the annulment of MAGELCO’s division for being contrary to law and asked the RTC to
order MAGELCO-PALMA to return to MAGELCO Main all the properties in its possession.
However MAGELCO Main and MAGELCO-PALMA entered into a memorandum of agreement
which served as a compromise agreement. The agreement allocated properties for both and
stated that MAGELCO Main consents to the grant to MAGELCO-PALMA of the power, authority
and jurisdiction to apply for a separate electric franchise over the PPALMA area. It also provided
that MAGELCO transfers its electric franchise in favor of MAGELCO-PALMA. The RTC approved
the compromise agreement.
The NEA approved the memorandum of agreement by issuing a letter-directive. It stated
that pending MAGELCO-PALMA’s acquisition of its own franchise, MAGELCO Main shall
designate MAGELCO-PALMA as its agent in the distribution of electricity in the PPALMA area.
Meanwhile, the CA rendered its decision in the First Case. It held that the NEA had
jurisdiction to rule on COTELCO’s application and affirmed the NEA ruling that granted
COTELCO’s application for the amendment of its franchise. It ruled that the NEA had the power
to order the transfer of assets upon payment of just compensation but NEA did not observe the
proper proceedings for its exercise of its right of eminent domain.
3A CORPORATION LAW 2019-2020 pg. 15
In 2008 MAGELCO issued Board Resolution No. 40 that cancelled the memorandum of
agreement and transition plan between MAGELCO Main and MAGELCO-PALMA. It also issued
Board Resolution No. 132 that the memorandum of agreement is unenforceable in the absence
of a writ of execution. It also repudiated acts performed by MAGELCO-PALMA arising from the
memorandum of agreement.
COTELCO for its part, issued two resolutions concerning MAGELCO-PALMA. It issued
Board Resolution No. 98-2008 requesting NEA to revoke MAGELCO’s GA Resolution No. 4, and
Resolution No. 99-2008 that requested NEA to dissolve MAGELCO-PALMA, to allow COTELCO
to withdraw from MAGELCO-PALMA’s bank accounts to defray expenses. COTELCO also filed
before the NEA a motion for the issuance of a writ of execution of the CA’s Decision in the First
Case. The NEA responded to this motion through a letter stating that by virtue of the Electric
Power Industry Reform Act of 2001 (EPIRA 2001), the NEC has ceased to exist and referred
COTELCO’s motion to NEA’s Institutional Development Department for appropriate action.
MAGELCO-PALMA filed an action before the RTC for the declaration of the validity of
MAGELCO’s franchise and the invalidity of COTELCO’s franchise, with a prayer for the issuance
of a writ of preliminary injunction/TRO.
Meanwhile NEA issued two letter-directives. The first approved MAGELCO’s Board
Resolution No.40 and COTELCO’s Board Resolution No. 98-2008 and revoked its approval of
MAGELCO’s Board Resolution No. 4. The second declared that the PPALMA area is under the
coverage of COTELCO and ordered MAGELCO-PALMA’s banks to disburse funds solely to
COTELCO for necessary and incidental expenses. COTELCO took over MAGELCO Main’s
assets in the PPALMA area. MAGELCO-PALMA filed a case for forcible entry against COTELCO,
which was granted. Other motions were filed in order for MAGELCO-PALMA retain its control
over the PPALMA area, which were granted.
COTELCO filed a special civil action for certiorari before the CA. the CA consolidated the
COTELCO petition with the MAGELCO-PALMA petition challenging the two NEA letter-directives.
CA: dismissed COTELCO’s petition and granted that of MAGELCO-PALMA. It nullified NEA’s
letter directives and enjoined MAGELCO Main and MAGELCO-PALMA to comply with the terms
and conditions of the compromise agreement. It ruled that in dissolving MAGELCO-PALMA, NEA
acted without jurisdiction. According to the CA the power to dissolve a cooperative rests in its
general membership under Section 33 of PD269. CA also found that NEA nullified MAGELCO
Main and MAGELCO-PALMA’s compromise agreement which NEA had no power to do so.
----------------------------------------------------------------------------------Issue: WON MAGELCO-PALMA is created as a separate juridical personality when
MAGELCO Main amended its bylaws - NO
WON it had a capacity to sue before the CA - NO
Ruling: No, MAGELCO-PALMA has no separate juridical personality from MAGELCO. No, it had
no legal capacity to sue before the CA.
MAGELCO Main is a duly organized cooperative under PD269. PD269 details the process
by which cooperatives are formed and dissolved. When MAGELCO Main’s board of directors
amended its bylaws and established two branches within MAGELCO Main, it did not create a
separate cooperative but only established a branch, specifically a separate branch to handle the
distribution of electricity in the PPALMA area. The decision of the board of directors of MAGELCO
Main to amend its bylaws to create a new branch was never intended to give rise to a new
3A CORPORATION LAW 2019-2020 pg. 16
cooperative. It only reorganized its own structure to improve its services. The amendment
appears to be a means for the eventual separation of MAGELCO-PALMA once it acquires the
necessary franchise but it never met the requirements necessary to be an independent
cooperative.
That said, MAGELCO-PALMA never acquired ownership over the assets in the PPALMA
area. No ownership can be transferred to a mere branch without a separate legal personality.
MAGELCO Main retained ownership over the assets and no transfer of ownership can take place
because the parent cooperative cannot transfer ownership to its unit within the same cooperative.
Since MAGELCO-PALMA never existed as a separate juridical entity, it affects its capacity
to file the special civil action for certiorari before the CA. When an entity has no separate juridical
personality, it has no legal capacity to sue. Section 1, Rule 3 of the Rules of Court states that
"only natural or juridical persons or entities authorized by law may be parties in a civil action."
Article 44 of the Civil Code enumerates the entities that are considered as juridical persons:
Art. 44. The following are juridical persons: (1) The State and its political subdivisions; (2)
Other corporations, institutions and entities for public interest or purpose, created by law; their
personality begins as soon as they have been constituted according to law; (3) Corporations,
partnerships and associations for private interest or purpose to which the law grants a juridical
personality, separate and distinct from that of each shareholder, partner or member.
MAGELCO-PALMA was created as a branch within a cooperative. It never existed as a
juridical person and hence, in accordance with the established rules and jurisprudence,
MAGELCO-PALMA does not have the legal capacity to sue (or own property).
(8) Donina C. Halley v. Printwell, Inc., G.R. No. 157549, May 30, 2011
Donnina C. Halley vs. Printwell, Inc.
GR No. 157549
Date: May 30, 2011
Digested by: Brawner, Yvette
----------------------------------------------------------------------------------Petitioner: Donnina C. Halley
Respondent: Printwell, Inc.
Ponente: Justice Bersamin
Topic: Attributes of Corporation - Limited Liability
3A CORPORATION LAW 2019-2020 pg. 17
----------------------------------------------------------------------------------Doctrine: Piercing the Veil of Corporate Fiction; Although a corporation has a personality separate
and distinct from those of its stockholders, directors, or officers, such separate and distinct
personality is merely a fiction created by law for the sake of convenience and to promote the ends
of justice.The corporate personality may be disregarded, and the individuals composing the
corporation will be treated as individuals, if the corporate entity is being used as a cloak or cover
for fraud or illegality;as a justification for a wrong; as an alter ego, an adjunct, or a business conduit
for the sole benefit of the stockholders.As a general rule, a corporation is looked upon as a legal
entity, unless and until sufficient reason to the contrary appears. Thus,the courts always presume
good faith, and for that reason accord prime importance to the separate personality of the
corporation, disregarding the corporate personality only after the wrongdoing is first clearly and
convincingly established. It thus behooves the courts to be careful in assessing the milieu where
the piercing of the corporate veil shall be done.
The trust fund doctrine enunciates a –
xxx rule that the property of a corporation is a trust fund for the payment of creditors, but such
property can be called a trust fund ‘only by way of analogy or metaphor.’ As between the
corporation itself and its creditors it is a simple debtor, and as between its creditors and
stockholders its assets are in equity a fund for the payment of its debts.
----------------------------------------------------------------------------------Facts:
BMPI (Business Media Philippines Inc.) is a corporation under the control of its
stockholders, including Donnina Halley. In the course of its business, BMPI commissioned
PRINTWELL to print Philippines, Inc. (a magazine published and distributed by BMPI).
PRINTWELL extended 30-day credit accommodation in favor of BMPI and in a period of 9 mos.
BMPI placed several orders amounting to 316,000. However, only 25,000 was paid hence a
balance of 291,000. PRINTWELL sued BMPI for collection of the unpaid balance and later on
impleaded BMPI’s original stockholders and incorporators to recover on their unpaid
subscriptions. It appears that BMPI has an authorized capital stock of 3M divided into 300,000
shares with P10 par value. Only 75,000 shares worth P750,000 were originally subscribed of
which P187,500 were paid up capital. Halley subscribed to 35,000 shares worth P350,000 but
only paid P87,500.
Halley contends that:
1.
They all had already paid their subscriptions in full
2.
BMPI had a separate and distinct personality
3.
BOD and SH had resolved to dissolve BMPI
RTC and CA
o Defendant merely used the corporate fiction as a cloak/cover to create an injustice
(against PRINTWELL)
3A CORPORATION LAW 2019-2020 pg. 18
o
Rejected allegations of full payment in view of irregularity in the issuance of ORs
(Payment made on a later date was covered by an OR with a lower serial number than
payment made on an earlier date.
----------------------------------------------------------------------------------Issue: WON a stockholder who was in active management of the business of the corporation and
still has unpaid subscriptions should be made liable for the debts of the corporation by piercing
the veil of corporate fiction
Ruling: YES. Such stockholder should be made liable up to the extent of her unpaid subscription
Ø It was found that at the time the obligation was incurred, BMPI was under the control
of its stockholders who know fully well that the corporation was not in a position to pay
its account (thinly capitalized).
Ø And, that the stockholders personally benefited from the operations of the corporation
even though they never paid their subscriptions in full.
The stockholders cannot now claim the doctrine of corporate fiction otherwise (to deny creditors
to collect from SH) it would create an injustice because creditors would be at a loss (limbo) against
whom it would assert the right to collect.
On piercing the veil:
Although the corporation has a personality separate and distinct from its SH, such personality is
merely a legal fiction (for the convenience and to promote the ends of justice) which may be
disregarded by the courts if it is used as a cloak or cover for fraud, justification of a wrong, or an
alter ego for the sole benefit of the SH.
As to the Trust Fund Doctrine:
Ø The RTC and CA correctly applied the Trust Fund Doctrine
Ø Under which corporate debtors might look to the unpaid subscriptions for the
satisfaction of unpaid corporate debts
Ø Subscriptions to the capital of a corporation constitutes a trust fund for the payment of
the creditors (by mere analogy) In reality, corporation is a simple debtor.
Ø Moreover, the corporation has no legal capacity to release an original subscriber to its
capital stock from the obligation of paying for his shares, in whole or in part, without
valuable consideration, or fraudulently, to the prejudice of the creditors.
Ø The creditor is allowed to maintain an action upon any unpaid subscriptions and thereby
steps into the shoes of the corporation for the satisfaction of its debt.
Ø The trust fund doctrine is not limited to reaching the SH’s unpaid subscriptions. The
scope of the doctrine when the corporation is insolvent encompasses not only the
capital stock but also other property and assets generally regarded in equity as a trust
fund for the payment of corporate debts.
3A CORPORATION LAW 2019-2020 pg. 19
(9) Atilano II, et. al., v. Asaali, G.R. No. 174982, September 10, 2012
Atilano vs. Asaali
GR No. 174982
Date: September 10, 2012
Digested by: Gillian Briones
-----------------------------------------------------------------Petitioner: Jose Vicente Atilano II, Heirs of Carlos V. Tan represented by Conrad K. Tan,
Carlos K. Tan, Camilo Karl K. Tan, Carlsa Rosenda T. Go, Nelida F. Atilano, Isidra K. Tan
3A CORPORATION LAW 2019-2020 pg. 20
Respondent: Hon. Judge Tibing Asaali, Presiding Judge of RTC of Zamboanga City and
Atlantic Merchandising, Inc.
Ponente: Perlas-Bernanabe, J.
Topic: Doctrine of Limited Liability
-------------------------------------------------------------------Doctrine: It is well-settled that no man shall be affected by any proceeding to which he is a
stranger, and strangers to a case are not bound by a judgment rendered by the court. Execution
of a judgment can only be issued against one who is a party to the action, and not against one
who, not being a party thereto, did not have his day in court. Due process dictates that a court
decision can only bind a party to the litigation and not against innocent third parties.
--------------------------------------------------------------------Facts:
This is a case wherein Respondent Atlantic Merchandising filed an action for revival of judgment
against Zamboanga Alta Consolidated Inx. (ZACI). The Regional Trial Court of Zamaboanga,
revived the judgment, ordering ZACI to pay the principal obligation with legal interest and
attorney’s fees.
A writ of execution was issued to enforce Regional Trial Court’s decision. However, it was returned
unsatisfied, private respondent sought the examination of ZACI’s debtors which included the
petitioner’s as its stockholders. In the course of the proceedings, the petitioner’s denied their
liability for any unpaid subscriptions with ZACI and offered various documentary evidence to
support their claim.
The Regional Trial Court found the petitioners to be indebted to ZACI as incorporators by way of
unpaid stock subscriptions according to the records of the Securities and Exchange Commission
(SEC). With this, the Regional Trial Court, ordered the petitioners to pay ZACI.
Petitioners then appealed before the Court of Appeals contending that they were not a party to
the former judgment, but their petition was dismissed outright due to the following grounds:
1. Failure to attach certified true copires of the assailed RTC Decision and Order
2. That only three out of four petitioners signed the Verification and Certification of nonforum shopping
3. That the Integrated Bar of the Philippines Official Receipt Number of the counsel for
the petitioners was outdated, therefore violating Bar Matter No. 287; and
4. That there is a deficiency in the docket and other fees in the sum of P1,530
Petitioners then filed a Motion for Reconsideration with technical defects. That the Motion for
Reconsideration was denied despite compliance for the payment of the deficiency in the docket
fee was made beyond the reglementary period.
Issue:
3A CORPORATION LAW 2019-2020 pg. 21
W/N the petitioners may be held liable to pay for any unpaid subscriptions with ZACI, NO
W/N there was a denial of due process of law due against the petitioner, YES
Ruling:
Petitioners were total strangers to the civil case between ZACI and respondent, and to order them
to settle an obligation which they persistently denied would be tantamount to deprivation of their
property without due process of law. The only power of the RTC, in this case, is to make an order
authorizing respondent to sue in the proper court to recover an indebtedness in favor of ZACI. It
has no jurisdiction to summarily try the question of whether petitioners were truly indebted to ZACI
when such indebtedness is denied. On this note, it bears stressing that stock subscriptions are
considered a debt of the stockholder to the corporation.
Records show that petitioners merely became involved in this case when, upon failure to execute
the revived final judgment in its favor in Civil Case No. 3776, respondent sought to examine the
debtors of ZACI, the judgment obligor, which included petitioners on the allegation that they had
unpaid stock subscriptions to ZACI, as its incorporators and stockholders. During the
proceedings, petitioners vehemently denied any such liability or indebtedness.
Under the circumstances, therefore, the RTC should have directed respondent to institute a
separate action against petitioners for the purpose of recovering their alleged indebtedness to
ZACI, in accordance with Section 43, Rule 39 of the Rules of Court, which provides:
Section 43. Proceedings when indebtedness denied or another person claims the property. – If it
appears that a person or corporation, alleged to have property of the judgment obligor or to be
indebted to him, claims an interest in the property adverse to him or denies the debt, the court
may authorize, by an order made to that effect, the judgment obligee to institute an action against
such person or corporation for the recovery of such interest or debt, forbid a transfer or other
disposition of such interest or debt within one hundred twenty (120) days from notice of the order,
and may punish disobedience of such order as for contempt. Such order may be modified or
vacated at any time by the court which issued it, or the court in which the action is brought, upon
such terms as may be just.
It is well-settled that no man shall be affected by any proceeding to which he is a stranger, and
strangers to a case are not bound by a judgment rendered by the court. Execution of a judgment
can only be issued against one who is a party to the action, and not against one who, not being
a party thereto, did not have his day in court. Due process dictates that a court decision can only
bind a party to the litigation and not against innocent third parties.
3A CORPORATION LAW 2019-2020 pg. 22
(10)
Concept Builders, Inc. v. NLRC, G.R. No. 108734, May 29,
1996, 257 SCRA 149
Concept Builders vs. NLRC
GR No. 108734
Date: May 29, 1996
Digested by: Gillian Briones
Petitioner: Concept Builders
3A CORPORATION LAW 2019-2020 pg. 23
Respondent: NLRC
Ponente: Hermosisima, Jr., J
Topic: Piercing the Corporate Veil
Doctrine:
It is a fundamental principle of corporation law that a corporation is an entity separate and
distinct from its stockholders and from other corporations to which it may be connected. But, this
separate and distinct personality of a corporation is merely a fiction created by law for
convenience and to promote justice.
Facts:
Petitioner Concept Builders, Inc., a domestic corporation, while private respondents were
employed by said company as laborers, carpenters and riggers.
On November, 1981, private respondents were served individual written notices of termination
of employment by petitioner, stating that their contracts of employment had expired and the
project in which they were hired had been completed.
Public respondent found however, that at the time of said termination, the project in which they
were hired had not yet been finished and completed. In fact, petitioner had to engage the
services of sub-contractors whose workers performed the functions of private respondents.
Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and
non-payment of their legal holiday pay, overtime pay and thirteenth-month pay against petitioner
with the Labor Arbiter (LA).
Labor Arbiter: ruled against petitioner and order the latter to reinstate private respondents and
to pay them back wages.
NLRC: Petitioner moved for reconsideration with the National Labor Relations Commission
(NLRC) but it dismissed the motion on the ground that the said decision had already become
final and executory.
A writ of execution directing the sheriff to execute the Decision, which was partially satisfied
through garnishment of sums from petitioner’s debtor, the Metropolitan Waterworks and
Sewerage Authority. Thereafter, an Alias Writ of Execution was issued by the Labor Arbiter
directing the sheriff to collect from herein petitioner representing the balance of the judgment
award, and to reinstate private respondents to their former positions.
The alias Writ of Execution cannot be enforced by the sheriff because all the employees inside
petitioner’s premises in Valenzuela claimed that they were employees of Hydro Pipes
Philippines, Inc. (HPPI) and not by petitioner. Thus, NLRC issued a break-open order against
Concept Builders and HPPI.
Hence, this present case. Petitioner alleges that the NLRC committed grave abuse of discretion
3A CORPORATION LAW 2019-2020 pg. 24
when it ordered the execution of its decision despite a third-party claim on the levied
property. Petitioner further contends, that the doctrine of piercing the corporate veil should not
have been applied, in this case, in the absence of any showing that it created HPPI in order to
evade its liability to private respondents.
ISSUE: Whether or not the doctrine of piercing the corporate veil should apply in this case?
RULING: YES.
It is a fundamental principle of corporation law that a corporation is an entity separate and
distinct from its stockholders and from other corporations to which it may be connected. But, this
separate and distinct personality of a corporation is merely a fiction created by law for
convenience and to promote justice. So, when the notion of separate juridical personality is
used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a
device to defeat the labor laws, this separate personality of the corporation may be disregarded
or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an
adjunct, a business conduit or an alter ego of another corporation.
There is no hard and fast rule but there are some probative factors of identity that will justify the
application of the doctrine of piercing the corporate veil, to wit:
1. Stock ownership by one or common ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business.
Likewise, the Court laid down the test in determining the applicability of the doctrine of piercing
the veil of corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but complete domination, not only
of finances but of policy and business practice in respect to the transaction attacked so
that the corporate entity as to this transaction had at the time no separate mind, will or
existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.
4.
The absence of any one of these elements prevents piercing the corporate veil in applying the
instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendants relationship to that operation.
In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations
on April 29, 1986, it filed an Information Sheet with the Securities and Exchange Commission
on May 15, 1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro
Manila. On the other hand, HPPI, the third-party claimant, submitted on the same day, a similar
3A CORPORATION LAW 2019-2020 pg. 25
information sheet stating that its office address is at 355 Maysan Road, Valenzuela, Metro
Manila.
Clearly, petitioner ceased its business operations in order to evade the payment to private
respondents of backwages and to bar their reinstatement to their former positions. HPPI is
obviously a business conduit of petitioner corporation and its emergence was skillfully
orchestrated to avoid the financial liability that already attached to petitioner corporation.
Also, in view of the failure of the sheriff, in the case at bar, to effect a levy upon the property
subject of the execution, private respondents had no other recourse but to apply for a breakopen order after the third-party claim of HPPI was dismissed for lack of merit by the NLRC.
Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open
order issued by the Labor Arbiter.
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April
23, 1992 and December 3, 1992, are AFFIRMED.
(11)
Donina C. Halley v. Printwell, Inc., G.R. No. 157549, May 30,
2011, 649 SCRA 116.
Donnina C. Halley vs. Printwell, Inc.
GR No. 157549
Date: May 30, 2011
Digested by: Carlos, Kaira Marie Bernardino
----------------------------------------------------------------------------------Petitioner: Donnina C. Halley
Respondent: Printwell, Inc.
Ponente: Justice Bersamin
Topic: Attributes of Corporation - Limited Liability
----------------------------------------------------------------------------------3A CORPORATION LAW 2019-2020 pg. 26
DOCTRINE:
Trust Fund Doctrine-- It is established doctrine that subscriptions to the capital of a
corporation constitute a fund to which creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debts
Facts:
BMPI (Business Media Philippines Inc.) is a corporation under the control of its stockholders,
including Donnina Halley. In the course of its business, BMPI commissioned PRINTWELL to print
Philippines, Inc. (a magazine published and distributed by BMPI). PRINTWELL extended 30-day
credit accommodation in favor of BMPI and in a period of 9 mos. BMPI placed several orders
amounting to Php 316,000. However, only 25,000 was paid hence a balance of 291,000
PRINTWELL sued BMPI for collection of the unpaid balance and later on impleaded BMPI’s
original stockholders and incorporators to recover on their unpaid subscriptions. It appears that
BMPI has an authorized capital stock of 3M divided into 300,000 shares with P10 par value. Only
75,000 shares worth P750,000 were originally subscribed of which P187,500 were paid up capital.
Halley subscribed to 35,000 shares worth P350,000 but only paid P87,500.
Arguing that she already paid her subscription to the stocks of the corporation, the petitioner said
that she should not be held personally liable as she and the corporation have separate and distinct
personality.
ISSUE:
May the stockholder who has an unpaid stock subscription be personally liable for the debts of
the corporation?
HELD:
Yes.
According to the Supreme Court:
“Although a corporation has a personality separate and distinct from those of its stockholders,
directors, or officers, such separate and distinct personality is merely a fiction created by law for
the sake of convenience and to promote the ends of justice. The corporate personality may be
disregarded, and the individuals composing the corporation will be treated as individuals, if the
corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a
wrong; as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders.
As a general rule, a corporation is looked upon as a legal entity, unless and until sufficient reason
to the contrary appears. Thus, the courts always presume good faith, and for that reason accord
prime importance to the separate personality of the corporation, disregarding the corporate
personality only after the wrongdoing is first clearly and convincingly established .It thus behooves
the courts to be careful in assessing the milieu where the piercing of the corporate veil shall be
done.
Further, the Court ruled:
xxx rule that the property of a corporation is a trust fund for the payment of creditors, but such
property can be called a trust fund ‘only by way of analogy or metaphor.’ As between the
3A CORPORATION LAW 2019-2020 pg. 27
corporation itself and its creditors it is a simple debtor, and as between its creditors and
stockholders its assets are in equity a fund for the payment of its debts.
SC clarified that the trust fund doctrine is not limited to reaching the stockholder’s unpaid
subscriptions. The scope of the doctrine when the corporation is insolvent encompasses not only
the capital stock, but also other property and assets generally regarded in equity as a trust fund
for the payment of corporate debts. All assets and property belonging to the corporation held in
trust for the benefit of creditors that were distributed or in the possession of the stockholders,
regardless of full payment of their subscriptions, may be reached by the creditor in satisfaction of
its claim.
Also, under the trust fund doctrine, a corporation has no legal capacity to release an original
subscriber to its capital stock from the obligation of paying for his shares, in whole or in part,
without a valuable consideration, or fraudulently, to the prejudice of creditors. The creditor is
allowed to maintain an action upon any unpaid subscriptions and thereby steps into the shoes of
the corporation for the satisfaction of its debt. To make out a prima facie case in a suit against
stockholders of an insolvent corporation to compel them to contribute to the payment of its debts
by making good unpaid balances upon their subscriptions, it is only necessary to establish that
the stockholders have not in good faith paid the par value of the stocks of the corporation.
The Court specified her personal liability as equivalent to the extent of her unpaid subscription on
the stock of the corporation (P262,500) plus legal interest.
(12)
29, 2010.
Kukan International Corporation v. Hon. Amor Reyes, G.R. No. 182729, September
GR No. 182729
Date: September 29, 2010
Digested by: De Guzman, Aldrin John Joseph E.
----------------------------------------------------------------------------------Petitioner: Kukan International Corporation
Respondent: HON. AMOR REYES, in her capacity as Presiding Judge of the Regional Trial Court
of Manila, Branch 21, and ROMEO M. MORALES, doing business under the name and style "RM
Morales Trophies and Plaques
Ponente: C.J. Sereno
Topic: Doctrine of Piercing the veil of Corporate Fiction
3A CORPORATION LAW 2019-2020 pg. 28
----------------------------------------------------------------------------------DOCTRINE: Veil-piercing in fraud cases requires that the legal fiction of separate juridical
personality is used for fraudulent or wrongful ends. The totality of which strongly indicate that
MPEI was a sham corporation formed merely for the purpose of perpetrating a fraudulent scheme.
---------------------------------------------------------------------------------FACTS:
Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and installation of
signages in a building being constructed in Makati City. Morales tendered the winning bid and
was awarded the PhP 5 million contract.
Despite his compliance with his contractual undertakings, Morales was only paid the amount of
PhP 1,976,371.07, leaving a balance of PhP 1,412,130.93, which Kukan, Inc. refused to pay
despite demands. Shortchanged, Morales filed a Complaint6 with the RTC against Kukan, Inc.
for a sum of money.
Kukan, Inc. no longer appeared and participated in the proceedings before the trial court,
prompting the RTC to declare Kukan, Inc. in default and paving the way for Morales to present
his evidence ex parte.
After the above decision became final and executory, Morales moved for and secured a writ of
execution8 against Kukan, Inc. The sheriff then levied upon various personal properties found at
what was supposed to be Kukan, Inc.’s office. Kukan International Corporation (KIC) filed an
Affidavit of Third-Party Claim. Notably, KIC was incorporated in August 2000, or shortly after
Kukan, Inc. had stopped participating in Civil Case.
Morales prayed, applying the principle of piercing the veil of corporate fiction, that an order be
issued for the satisfaction of the judgment debt of Kukan, Inc. with the properties under the name
or in the possession of KIC, it being alleged that both corporations are but one and the same
entity.
RTC- defendant Kukan, Inc. and newly created Kukan International Corp. -as one and the same
corporation;
CA-affirmed.
ISSUE: whether the trial and appellate courts correctly applied, under the premises, the principle
of piercing the veil of corporate fiction.
HELD:
SC: NO. The principle of piercing the veil of corporate fiction, and the resulting treatment of two
related corporations as one and the same juridical person with respect to a given transaction, is
basically applied only to determine established liability;34 it is not available to confer on the court
a jurisdiction it has not acquired, in the first place, over a party not impleaded in a case. Elsewise
put, a corporation not impleaded in a suit cannot be subject to the court’s process of piercing the
veil of its corporate fiction. In that situation, the court has not acquired jurisdiction over the
3A CORPORATION LAW 2019-2020 pg. 29
corporation and, hence, any proceedings taken against that corporation and its property would
infringe on its right to due process.
corporations involved before its or their separate personalities are disregarded; and (2) the
doctrine of piercing the veil of corporate entity can only be raised during a full-blown trial over a
cause of action duly commenced involving parties duly brought under the authority of the court
by way of service of summons or what passes as such service.
The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent the matter
of the time and manner of raising the principle in question, it is undisputed that no full-blown trial
involving KIC was had when the RTC disregarded the corporate veil of KIC. The reason for this
actuality is simple and undisputed: KIC was not impleaded in Civil Case No. 99-93173 and that
the RTC did not acquire jurisdiction over it. It was dragged to the case after it reacted to the
improper execution of its properties and veritably hauled to court, not thru the usual process of
service of summons, but by mere motion of a party with whom it has no privity of contract and
after the decision in the main case had already become final and executory.
(13)
Heirs of Fe Tan Uy v. International Exchange Bank, G.R. No.
166282, February 13, 2013 CARLOS
3A CORPORATION LAW 2019-2020 pg. 30
(14)
Pacific Rehouse Corporation v. Court of Appeals, G.R. Nos.
199687 & 201537, March 24, 2014
PACIFIC REHOUSE CORPORATION V. COURT OF APPEALS
G.R. No. 199687 / G.R. No. 201537
Date: March 24, 2014
Digested by: Aldrin John Joseph E. De Guzman
----------------------------------------------------------------------------------Petitioner: Pacific Rehouse Corporation
3A CORPORATION LAW 2019-2020 pg. 31
Respondent: EXPORT AND INDUSTRY BANK, INC.
Ponente: Justice Reyes
Topic: Doctrine of Piercing the Veil of Corporate Fiction
----------------------------------------------------------------------------------Doctrine:
he alleged control exercised by Export Bank upon its subsidiary E–Securities, by itself, does not
mean that the controlled corporation is a mere instrumentality or a business conduit of the mother
company. Even control over the financial and operational concerns of a subsidiary company does
not by itself call for disregarding its corporate fiction. There must be a perpetuation of fraud behind
the control or at least a fraudulent or illegal purpose behind the control in order to justify piercing
the veil of corporate fiction. Such fraudulent intent is lacking in this case.
----------------------------------------------------------------------------------Facts:
The said complaint was filed with the Makati City Regional Trial Court (RTC), Branch 66, against
EIB Securities Inc. (E–Securitiesfor vrevity) for unauthorized sale of 32,180,000 DMCI shares of
Pacific Rehouse Corporation, Pacific Concorde Corporation, Mizpah Holdings, Inc., Forum
Holdings Corporation, and East Asia Oil Company, Inc. In its October 18, 2005 Resolution, the
RTC rendered judgment on the pleadings, directing the E–Securities to return to the petitioners
32,180,000 DMCI shares, as of judicial demand. On the other hand, petitioners are directed to
reimburse the defendant the amount of [P]10,942,200.00, representing the buy back price of the
60,790,000 KPP shares of stocks at [P]0.18 per share. The Resolution was ultimately affirmed by
the Supreme Court and attained finality.
When the Writ of Execution was returned unsatisfied, petitioners moved for the issuance of an
alias writ of execution to hold Export and Industry Bank, Inc. liable for the judgment obligation as
E–Securities is “a wholly–owned controlled and dominated subsidiary of Export and Industry
Bank, Inc., and is[,] thus[,] a mere alter ego and business conduit of the latter. E–Securities
opposed the motion[,] arguing that it has a corporate personality that is separate and distinct from
the respondent.
The RTC eventually concluded that E–Securities is a mere business conduit or alter ego of
petitioner, the dominant parent corporation, which justifies piercing of the veil of corporate fiction,
and issued an alias writ of summons directing defendant EIB Securities, Inc., and/or Export and
Industry Bank, Inc., to fully comply therewith. It ratiocinated that being one and the same entity in
the eyes of the law, the service of summons upon EIB Securities, Inc. (E–Securities) has
bestowed jurisdiction over both the parent and wholly–owned subsidiary.
3A CORPORATION LAW 2019-2020 pg. 32
Export and Industry Bank, Inc. (Export Bank) filed before the Court of Appeals a petition for
certiorari with prayer for the issuance of a temporary restraining order (TRO) seeking the
nullification of the RTC Order. The Court of Appeals reversed the RTC Order and explained that
the alter ego theory cannot be sustained because ownership of a subsidiary by the parent
company is not enough justification to pierce the veil of corporate fiction. There must be proof,
apart from mere ownership, that Export Bank exploited or misused the corporate fiction of E–
Securities. The existence of interlocking incorporators, directors and officers between the two
corporations is not a conclusive indication that they are one and the same. The records also do
not show that Export Bank has complete control over the business policies, affairs and/or
transactions of E–Securities. It was solely E–Securities that contracted the obligation in
furtherance of its legitimate corporate purpose; thus, any fall out must be confined within its limited
liability.
----------------------------------------------------------------------------------Issue:
Whether or not E-Securities is merely an alter ego of Export Bank and that the “piercing the veil
of corporate fiction” is proper in the case at bar?
----------------------------------------------------------------------------------Ruling:
NO. An alter ego exists where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the other. The control necessary
to invoke the alter ego doctrine is not majority or even complete stock control but such domination
of finances, policies and practices that the controlled corporation has, so to speak, no separate
mind, will or existence of its own, and is but a conduit for its principal.
The Court has laid down a three–pronged control test to establish when the alter ego doctrine
should be operative:
a. Control, not mere majority or complete stock control, but complete domination, not only
of finances but of policy and business practice in respect to the transaction attacked so
that the corporate entity as to this transaction had at the time no separate mind, will or
existence of its own;
b. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
act in contravention of plaintiff’s legal right; and
c.The aforesaid control and breach of duty must [have] proximately caused the injury or unjust
loss complained of.
The absence of any one of these elements prevents ‘piercing the corporate veil’ in applying the
‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant’s relationship to that operation. Hence,
all three elements should concur for the alter ego doctrine to be applicable.
3A CORPORATION LAW 2019-2020 pg. 33
In this case, the alleged control exercised by Export Bank upon its subsidiary E–Securities, by
itself, does not mean that the controlled corporation is a mere instrumentality or a business conduit
of the mother company. Even control over the financial and operational concerns of a subsidiary
company does not by itself call for disregarding its corporate fiction. There must be a perpetuation
of fraud behind the control or at least a fraudulent or illegal purpose behind the control in order to
justify piercing the veil of corporate fiction. Such fraudulent intent is lacking in this case.
While the courts have been granted the colossal authority to wield the sword which pierces
through the veil of corporate fiction, concomitant to the exercise of this power, is the responsibility
to uphold the doctrine of separate entity, when rightly so; as it has for so long encouraged
businessmen to enter into economic endeavors fraught with risks and where only a few dared to
venture.
The decision of the Court of Appeals in favor of Export Bank (reversing the RTC Order) is affirmed.
(15)
2014
Lanuza, Jr. v. BF Corporation, G.R. No. 174938, October 1,
GERARDO LANUZA JR AND ANTONIO O. OLBES vs. BF CORPORATION, SHANGRI-LA
PROPERTIES INC, ALFREDO C. RAMOS, RUFO B. COLAYCO,MAXIMO G. LICAUCO III, AND
BENJAMIN C. RAMOS
GR No 174938
October 1, 2014
Digested by: Noel Galang
----------------------------------------------------------------------------------Petitioner: GERARDO LANUZA JR AND ANTONIO O.
Respondent: BF CORPORATION, SHANGRI-LA PROPERTIES INC, ALFREDO C. RAMOS,
RUFO B. COLAYCO,MAXIMO G. LICAUCO III, AND BENJAMIN C. RAMOS
Ponente:
Topic: Piercing the Corporae Veil
----------------------------------------------------------------------------------Doctrine: Piercing the Veil of Corporate Fiction.
----------------------------------------------------------------------------------Facts:
3A CORPORATION LAW 2019-2020 pg. 34
BF Corporation entered into agreements with Shangri-La wherein it undertook to construct for
Shangri-La a mall and a parking structure along EDSA. Shangri-la had been consistent in paying
BF Corporation until it started defaulting in payments. Despite demands by petitioner, they refused
to pay. BF Corporation filed a case against Shangri-La and its Board of Directors including
Petitioners herein who, on their defense, alleged that they already had resigned and vacated their
roles as Board of Directors of Shangri-La.
BF Corporation alleged that the BOD were in bad faith in the affairs of the corporation and that
they should be held solidarily liable with Shangri-la for damages. A motion to suspend
proceedings was filed by Shangri-la on the ground that all issues arising from the contract, as
agreed upon in the arbitration clause, should be submitted to arbitration. Denied by the RTC it
was reversed by the CA.
Petitioners then filed a comment praying that they should not be in included in the arbitration as
they are not parties to the agreement between BF Corp and Shangrila. CA ruled that they were
parties to the proceeding.
----------------------------------------------------------------------------------Issue: WON Lanuza and Obles are real parties to the proceedings?
----------------------------------------------------------------------------------Ruling: Yes. As a general rule a corporation’s representative cannot be forced to participate in
arbitrations/proceedings if they are not parties to the contract. An exception would be the Doctrine
of Peircing the veil of corporate fiction. Wherein once alleged in the complaint, the separate
personality of a corporation is treated as one with its directors when it is used as a means to
perpetuate fraud or an illegal act or as a vehicle for evasion of an existing obligation. As the
tribunal rendered a decision already, of which the petitioners herein participated in, declaring
petitioners not a party to the contract and thereby disproving the notion of BF Corporation of
existence of circumstance to apply the mentioned Doctrine. The petitioners are bound by such
decisions.
(16)
Guillermo v. Uson, G.R. No. 198967, March 7, 2016
Jose Emmanuel P. Guillermo vs. Crisanto P. Uson
March 7, 2016
Digested by: Gutierrez, Jr.
Petitioner: Jose Emmanuel P. Guillermo
Respondent: Crisanto P. Uson
Ponente: PERALTA, J.:
Doctrine: The veil of corporate fiction can be pierced, and responsible corporate directors and
officers or even a separate but related corporation, may be impleaded and held answerable
solidarily in a labor case, even after final judgment and on execution, so long as it is established
3A CORPORATION LAW 2019-2020 pg. 35
that such persons have deliberately used the corporate vehicle to unjustly evade the judgment
obligation, or have resorted to fraud, bad faith or malice in doing so.
Facts: Respondent Crisanto P. Uson (Uson) began his employment with Royal Class Venture
Phils., Inc. (Royal Class Venture) as an accounting clerk. Eventually, he was promoted to the
position of accounting supervisor, until he was allegedly dismissed from employment. On March
2, 2001, Uson filed with the Sub-Regional Arbitration. Royal Class Venture did not make an
appearance in the case despite its receipt of summons.
The Labor Arbiter rendered a Decision in favor of the complainant Uson and ordering therein
respondent Royal Class Venture to reinstate him to his former position and pay his backwages,
13 month pay as well as moral and exemplary damages and attorney's fees.
Royal Class Venture, as the losing party, did not file an appeal of the decision. Consequently,
upon Uson's motion, a Writ of Execution was issued to implement the Labor Arbiter's decision.
Despite issuance of Alias Writs, the judgment remained unsatisfied. Thus, Uson filed a Motion for
Alias Writ of Execution and to Hold Directors and Officers of Respondent Liable for Satisfaction
of the decision.
The Sheriff found out that the establishment erected thereat is not [in] the respondent's name but
JOEL and SONS CORPORATION, a family corporation owned by the Guillermos of which, Jose
Emmanuel F. Guillermo the General Manager of the respondent, is one of the stockholders who
received the writ using his nickname "Joey," [and who] concealed his real identity and pretended
that he [was] the brother of Jose, which [was] contrary to the statement of the guard-on-duty that
Jose and Joey ]were] one and the same person. The former also informed the undersigned that
the respondent's corporation has been dissolved.
Labor Arbiter issued an Order granting the motion filed by Uson. The order held that officers of a
corporation are jointly and severally liable for the obligations of the corporation to the employees
and there is no denial of due process in holding them so even if the said officers were not parties
to the case when the judgment in favor of the employees was rendered. 16 Thus, the Labor
Arbiter pierced the veil of corporate fiction of Royal Class Venture and held herein
petitioner Jose Emmanuel Guillermo (Guillermo), in his personal capacity, jointly and
severally liable with the corporation for the enforcement of the claims of Uson.
Guillermo filed, by way of special appearance, a Motion for Reconsideration/To Set Aside the
Order of December 26, 2002. 18 The same, however, was not granted as, this time, in an Order
dated November 24, 2003, Labor Arbiter Nifia Fe S. Lazaga-Rafols sustained the findings of the
labor arbiters before her and even castigated Guillermo for his unexplained absence in the prior
proceedings despite notice, effectively putting responsibility on Guillermo for the case's outcome
against him.
The NLRC dismissed Guillermo's appeal and denied his prayers for injunction. On August 20,
2010, Guillermo filed a Petition for Certiorari. On June 8, 2011, the Court of Appeals rendered its
3A CORPORATION LAW 2019-2020 pg. 36
assailed Decision which denied Guillermo's petition and upheld all the findings of the NLRC.
Hence, the instant petition.
Issue: Whether or not the piercing of the veil of corporate fiction proper in the case.
Ruling: The veil of corporate fiction can be pierced, and responsible corporate directors and
officers or even a separate but related corporation, may be impleaded and held answerable
solidarily in a labor case, even after final judgment and on execution, so long as it is established
that such persons have deliberately used the corporate vehicle to unjustly evade the judgment
obligation, or have resorted to fraud, bad faith or malice in doing so.
A finding of personal and solidary liability against a corporate officer like Guillermo must be rooted
on a satisfactory showing of fraud, bad faith or malice, or the presence of any of the justifications
for disregarding the corporate fiction.
It is our finding that such evidence exists in the record. In the case at bar involves an apparent
family corporation. As in those two cases, the records of the present case bear allegations and
evidence that Guillermo, the officer being held liable, is the person responsible in the actual
running of the company and for the malicious and illegal dismissal of the complainant; he, likewise,
was shown to have a role in dissolving the original obligor company in an obvious "scheme to
avoid liability" which jurisprudence has always looked upon with a suspicious eye in order to
protect the rights of labor. Then, it is also clearly reflected in the records that it was Guillermo
himself, as President and General Manager of the company, who received the summons to the
case, and who also subsequently and without justifiable cause refused to receive all notices and
orders of the Labor Arbiter that followed. Finally, the records likewise bear that Guillermo
dissolved Royal Class Venture and helped incorporate a new firm, located in the same
address as the former, wherein he is again a stockholder. The foregoing clearly indicate a
pattern or scheme to avoid the obligations to Uson and frustrate the execution of the
judgment award, which this Court, in the interest of justice, will not countenance.
3A CORPORATION LAW 2019-2020 pg. 37
(17)
Republic of the Philippines v. Mega Pacific eSolutions, Inc.,
G.R. No. 184666, June 27, 2016
Republic vs Mega Pacific eSolutions
GR No. 184666
Date: June 27, 2016
Digested by: Javier, Therese Fatima V.
----------------------------------------------------------------------------------Petitioner: Republic of the Philippines
Respondent: Mega PAcific eSolutions
Ponente: C.J. Sereno
Topic: Doctrine of Piercing the veil of Corporate Fiction
----------------------------------------------------------------------------------DOCTRINE: Veil-piercing in fraud cases requires that the legal fiction of separate juridical
personality is used for fraudulent or wrongful ends. The totality of which strongly indicate that
MPEI was a sham corporation formed merely for the purpose of perpetrating a fraudulent scheme.
----------------------------------------------------------------------------------
3A CORPORATION LAW 2019-2020 pg. 38
Facts: COMELEC again attempted to implement the automated election system. For this purpose,
it invited bidders to apply for the procurement of supplies, equipment, and services. Respondent
MPEI, as lead company, purportedly formed a joint venture — known as the Mega Pacific
Consortium (MPC) — together with We Solv, SK C & C, ePLDT, Election.com and Oracle.
Subsequently, MPEI, on behalf of MPC, submitted its bid proposal to COMELEC. The COMELEC
evaluated various bid offers and subsequently found MPC and another company eligible to
participate in the next phase of the bidding process. The two companies were referred to the
DOST for technical evaluation. After due assessment, the Bids and Awards Committee
(recommended that the project be awarded to MPC. The COMELEC favorably acted on the
recommendation which awarded the automation project to MPC.
Despite the award to MPC, the COMELEC and MPEI executed automation contract for the
aggregate amount of P1,248,949,088. MPEI agreed to supply and deliver 1,991 units of ACMs
and such other equipment and materials necessary for the computerized electoral system in the
2004 elections. Pursuant to the automation contract, MPEI delivered 1,991 ACMs to the
COMELEC. The latter, for its part, made partial payments to MPEI in the aggregate amount of
P1.05 billion.
The full implementation of the automation contract was rendered impossible by the fact that, after
a painstaking legal battle, this Court in its 2004 Decision declared the contract null and void.
Issue: WON Mega Pacific eSolutions may invoke the doctrine of piercing the corporate veil
Held: Veil-piercing in fraud cases requires that the legal fiction of separate juridical personality is
used for fraudulent or wrongful ends. The totality of which strongly indicate that MPEI was a sham
corporation formed merely for the purpose of perpetrating a fraudulent scheme.
The red flags are as follows: (1) overly narrow specifications; (2) unjustified recommendations
and unjustified winning bidders; (3) failure to meet the terms of the contract; and (4) shell or
fictitious company.
Overly Narrow Specifications
The World Bank's Fraud and Corruption Awareness Handbook: A Handbook for Civil Servants
Involved in Public Procurement, (Handbook) identifies an assortment of fraud and corruption
indicators and relevant schemes in public procurement. One of the schemes recognized by the
Handbook is rigged specifications:
Scheme: Rigged specifications. In a competitive market for goods and services, any specifications
that seem to be drafted in a way that favors a particular company deserve closer scrutiny. For
example, specifications that are too narrow can be used to exclude other qualified bidders or
justify improper sole source awards. Unduly vague or broad specifications can allow an
unqualified bidder to compete or justify fraudulent change orders after the contract is awarded.
Sometimes, project officials will go so far as to allow the favored bidder to draft the specifications.
Unjustified Recommendations and Unjustified Winning Bidders
3A CORPORATION LAW 2019-2020 pg. 39
Questionable evaluation in a Bid Evaluation Report (BER) is an indicator of bid rigging. The
Handbook expounds: Questionable evaluation and unusual bid patterns may emerge in the BER.
After the completion of the evaluation process, the Bid Evaluation Committee should present to
the implementing agency its BER, which describes the results and the process by which the BEC
has evaluated the bids received. The BER may include a number of indicators of bid rigging, e.g.,
questionable disqualifications, and unusual bid patterns. The Handbook lists unjustified
recommendations and unjustified winning bidders as red flags of a rigged bidding. The red flags
of questionable recommendation and unjustified awards are raised in this case. As earlier
discussed, the project was awarded to MPC, which proved to be a nonentity. It was MPEI that
actually participated in the bidding process, but it was not qualified to be a bidder in the first place.
Moreover, its ACMs failed the accuracy requirement set by COMELEC. Yet, MPC — the nonentity
— obtained a favorable recommendation from the BAC, and the automation contract was
awarded to the former.
Failure to Meet Contract Terms
Failure to meet the terms of a contract is regarded as a fraud by the Handbook: Scheme: Failure
to meet contract terms. Firms may deliberately fail to comply with contract requirements. The
contractor will attempt to conceal such actions often by falsifying or forging supporting
documentation and bill for the work as if it were done in accordance with specifications. In many
cases, the contractors must bribe inspection or project personnel to accept the substandard goods
or works, or supervision agents are coerced to approve substandard work. . . .
As mentioned earlier, this Court already found the ACMs to be below the standards set by the
COMELEC. We reiterated their noncompliant status in Our 2005 and 2006 Resolutions. As early
as 2005, when the COMELEC sought permission from this Court to utilize the ACMs in the then
scheduled ARMM elections, We declared that the proposed use of the machines would expose
the ARMM elections to the same dangers of massive electoral fraud that would have been inflicted
by the projected automation of the 2004 national elections. We based this pronouncement on the
fact that the COMELEC failed to show that the deficiencies had been cured.
Shell or fictitious company
The Handbook regards a shell or fictitious company as a "serious red flag," a concept that it
elaborates upon:Fictitious companies are by definition fraudulent and may also serve as fronts
for government officials. The typical scheme involves corrupt government officials creating a
fictitious company that will serve as a "vehicle" to secure contract awards. Often, the fictitious —
or ghost — company will subcontract work to lower cost and sometimes unqualified firms. The
fictitious company may also utilize designated losers as subcontractors to deliver the work, thus
indicating collusion. Shell companies have no significant assets, staff or operational capacity.
They pose a serious red flag as a bidder on public contracts, because they often hide the interests
of project or government officials, concealing a conflict of interest and opportunities for money
laundering. Also, by definition, they have no experience.
3A CORPORATION LAW 2019-2020 pg. 40
MPEI qualifies as a shell or fictitious company. It was nonexistent at the time of the invitation to
bid; to be precise, it was incorporated only 11 days before the bidding. It was a newly formed
corporation and, as such, had no track record to speak of. Further, MPEI misrepresented itself in
the bidding process as "lead company" of the supposed joint venture. The misrepresentation
appears to have been an attempt to justify its lack of experience. As a new company, it was not
eligible to participate as a bidder. It could do so only by pretending that it was acting as an agent
of the putative consortium. The timing of the incorporation of MPEI is particularly noteworthy. Its
close nexus to the date of the invitation to bid and the date of the bidding (11 days) provides a
strong indicium of the intent to use the corporate vehicle for fraudulent purposes. This proximity
unmistakably indicates that the automation contract served as motivation for the formation of
MPEI: a corporation had to be organized so it could participate in the bidding by claiming to be an
agent of a pretended joint venture.
The totality of the red flags found in this case leads Us to the inevitable conclusion that MPEI was
nothing but a sham corporation formed for the purpose of defrauding petitioner. Its ultimate
objective was to secure the P1,248,949,088 automation contract. The scheme was to put up a
corporation that would participate in the bid and enter into a contract with the COMELEC, even if
the former was not qualified or authorized to do so. Without the incorporation of MPEI, the
defraudation of the government would not have been possible. The formation of MPEI paved the
way for its participation in the bid, through its claim that it was an agent of a supposed joint venture,
its misrepresentations to secure the automation contract, its misrepresentation at the time of the
execution of the contract, its delivery of the defective ACMs, and ultimately its acceptance of the
benefits under the automation contract. The foregoing considered, veil-piercing is justified in this
case.
(18)
2016
De Castro v. Court of Appeals, G.R. No. 204261, October 5,
Edward C. De Castro and Ma. Girlie F. Platon vs. Court of Appeals, NLRC, Silvericon, Inc., and/or
Nuvoland Phils., Inc., and/or Raul Martinez, Ramon Bienvenida, and the Board of Directors of
Nuvoland
G.R. No. 204261
Date: October 5, 2016
Digested by: Yui Recinto
Petitioners: Edward C. De Castro and Ma. Girlie F. Platon
Respondents: Court of Appeals, NLRC, Silvericon, Inc., and/or Nuvoland Phils., Inc., and/or Raul
Martinez, Ramon Bienvenida, and the Board of Directors of Nuvoland
Ponente: Justice Mendoza
Topic: Piercing the Corporate Veil
Doctrine: The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely:
1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion
of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong,
protect fraud, or defend a crime; or 3) alter ego cases, where a corporation merely a farce since
3A CORPORATION LAW 2019-2020 pg. 41
it is a mere alter ego or business conduit of a person, or where the corporation is so organized
and controlled and its affairs are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation.
Facts:
Novuland and Silvericon are corporations engaged in real estate business. Respondent
Bienvenida was the principal stockholder and member of the Board of Directors of Nuvoland,
while Respondent Martinez was its President. Martinez hired De Castro to handle the sales and
marketing operations of Silvericon including the hiring and supervision of the sales and marketing
personnel, a new corporation established by the former. De Castro was appointed the President
and majority stockholder of Silvericon while Bienvenida and Martinez were named as
stockholders and incorporators thereof each owning 1 share of subscribed capital stock.
During De Castro’s tenure as Chief Operating Officer, he recruited 40 sales and marketing
personnel, one of them was petitioner Platon who occupied the position of Executive Property
Consultant. De Castro and his team of sales personnel were responsible for the sale of 100% of
the projects owned and developed by Nuvoland.
A Sales and Marketing Agreement was purportedly executed by the two corporations, stipulating
that all payments made for the projects of Nuvoland were to be given directly to it. In a letter
signed by Bienvenida, Nuvoland terminated the SMA on the ground that Silvericon personnel
committed an unauthorized walkout and abandonment of the Nuvo City Showroom for 2 days and
demanded that SIlvericon make a full accounting of all its uses of the marketing advances from
Nuvoland. Petitioners were barred from entering the office premises and they were not able to
secure their commissions and wages, which caused the filing of a complaint for illegal dismissal
before the Labor Arbiter.
Nuvoland denied a direct contractual relationship with De Castro and Platon, and contended that
if there was any dispute at all, it was merely between the them and Silvericon. Silvericon on the
other hand, admitted that it had employed De Castro, however, asserted the application of PD
902-A, arguing that the claims come within the purview of corporate affairs and management,
thus falling within the jurisdiction of the regular courts.
LA rendered a decision infavor of the petitioners but was later on reversed by NLRC, finding that
SIlvericon was an independent contractor and that it has substantial capital, hence, it cannot
consider Silvericon as a dummy corporation of Nuvoland to effectively evade the latter’s obligation
of providing employment benefits to its sales and marketing agents.
CA affirmed the findings of NLRC; that even assuming De Castro was illegally dismissed, NLRC
was correct in refraining from taking cognizance of the complaint because De Castro’s
employment with Silvericon put him within the ambit of Section 5.2 of RA 8799 (Securities
Regulation Code). As such, his claims should have been brought before the RTC instead.
Petitioners strongly urge the Court to consider numerous factors that would justify the piercing of
the corporate veil showing that Silvericon was just a business conduit of Nuvoland.
Issue: Whether or not the factors considered justifies the piercing of the corporate veil showing
that Silvercoin was just a dummy corporation of Nuvoland.
Ruling:
3A CORPORATION LAW 2019-2020 pg. 42
D.O. No. 18-A (2011), defines substantial capital as the paid-up capital stocks/shares of at least
P3,000,000.00 in the case of corporations, partnerships and cooperatives to avoid the subterfuge
resorted to by entities with the intention to circumvent the law.
The time Nuvoland neganged the services of Silvericon, the latter’s authorized capital was
P4,000,000.00, out of which only P1,000,000.00 was subscribed. The paid-in capitalization of
Silvericon amounting to P1 million was woefully inadequate to be considered as substantial
capital. Thus, Silvericon could not qualify as an independent contractor.
The Court agrees with the observation of the LA that this set-up would not have been resorted to
if Silvericon's capital was substantial enough from the start of the business venture. It is logical to
presume that an established corporation like Nuvoland would select an independent contractor,
which had the financial resources to adequately undertake its marketing and advertising
requirements, and not an undercapitalized company like Silvericon.
The termination of the SMA was actually a ruse to make it appear that Silvericon was an
independent entity. It was simply a way to terminate the employment of several employees
altogether and escape liability as an employer. True enough, Nuvoland insisted that the
petitioners direct their claims to Silvericon.
The conclusion that Silvericon was a mere labor-only contractor and a business conduit of
Nuvoland warrants the piercing of its corporate veil. The piercing of the corporate veil disregards
the seemingly separate and distinct personalities of Nuvoland and Silvericon with the aim of
preventing the anomalous situation abhorred by prevailing labor laws.
Silvericon was independent from Nuvoland's personality could not be given legal imprimatur as
the same would pave the way for Nuvoland's complete exoneration from liability after a
circumvention of the law. In the interest of justice and equity, that veil of corporate fiction must be
pierced, and Nuvoland and Silvericon be regarded as one and the same entity to prevent a denial
of what the petitioners are entitled to. In a situation like this, an employer-employee relationship
between the principal and the dismissed employees arises by operation of law.
Silvericon being merely an agent, its employees were in fact those of Nuvoland. Stated differently,
Nuvoland was the principal employer of the petitioners.
WHEREFORE, the petition is GRANTED. The June 1, 2012 Decision and the September 21,
2012 Resolution of the Court of Appeals in CA-G.R. SP No. 122415 are REVERSED and SET
ASIDE.
The March 15, 2011 Decision of the Labor Arbiter declaring Nuvoland as a labor-only contractor
is REINSTATED, but the pronouncement on the solidary liability of Ramon Bienvenida and Raul
Martinez is ordered DELETED.
The case is hereby REMANDED to the Labor Arbiter for the computation of the separation pay,
back wages and other monetary awards that the petitioners deserve to receive.
No pronouncement as to costs.
3A CORPORATION LAW 2019-2020 pg. 43
(19)
California Manufacturing Company, Inc. v. Advanced
Technology System, Inc., G.R. No. 202454, April 25, 2017.
California Manufacturing Company, Inc. v. Advanced Technology System, Inc.,
G.R. No. 202454
Date: April 25, 2017
Digested by: Jarah Relato
Petitioner: California Manufacturing Company, Inc,
Respondent: Advanced Technology System, Inc.
Ponente: CJ Sereno
Topic: Piercing the Corporate Veil
Doctrine: Any piercing of the corporate veil must be done with caution. It must be certain that the
corporate fiction was misused to such an extent that injustice, fraud, or crime was committed
against another, in disregard of rights. Moreover, the wrongdoing must be clearly and convincingly
established
Facts:
Petitioner CMCI is a domestic corporation engaged in the food and beverage manufacturing
business. Respondent ATSI is also a domestic corporation that fabricates and distributes food
processing machinery and equipment, spare parts, and its allied products
3A CORPORATION LAW 2019-2020 pg. 44
CMCI leased from ATSI a Prodopak machine which was used to pack products in. The parties
agreed to a monthly rental of ₱98,000 exclusive of tax. In November 2003, ATSI filed a Complaint
for Sum of Money against CMCI to collect unpaid rentals for the months of June, July, August,
and September 2003. ATSI alleged that CMCI was consistently paying the rents until June 2003
when the latter defaulted on its obligation without just cause. ATSI also claimed that CMCI ignored
all the billing statements and its demand letter.
CMCI averred that ATSI was one and the same with Processing Partners and Packaging
Corporation (PPPC), CMCI pointed out that ATSI was even a stockholder of PPPC as shown in
the latter's GIS.
CMCI alleged that in 2000, PPPC agreed to transfer the processing of CMCI's product line. Upon
the request of PPPC through its Exec VP Felisima, CMCI advanced 4M as mobilization fund.
PPPC CEO Celones allegedly committed to pay the amount in 12 equal installments. It also
claimed that Felicisima proposed to set off PPPC’s obligation with rentals for the Prodopak
Machine. CMCI argued that the proposal was binding on both PPPC and ATSI because Felicisima
was an officer and a majority stockholder of the two corporations. CMCl argued that legal
compensation had set in and that ATSI was even liable for the balance of PPPC's unpaid
obligation after deducting the rentals for the Prodopak machine.
TC rendered a decision in favor of ATSI and held that legal compensation did not apply because
PPPC had a separate legal personality from its individual stockholders, the Spouses Celones,
and ATSI. Moreover, there was no board resolution or any other proof showing that Felicisima's
proposal to set-off the unpaid mobilization fund with CMCI 's rentals to A TSI for the Prodopak
Machine had been authorized by the two corporations
The CA affirmed the trial court's ruling that legal compensation had not set in because the element
of mutuality of parties was lacking. Likewise, the appellate court sustained the trial court's refusal
to pierce the corporate veil. It ruled that there must be clear and convincing proof that the Spouses
Celones had used the separate personalities of ATSI or PPPC as a shield to commit fraud or any
wrong against CMCI, which was not existing in this case
Issue: Whether or not PPPC and ATSI were alter egos or business conduits of each other thus
warranting the application of the doctrine of piercing the corporate veil
Ruling:
The Court affirmed CA’s decision
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat
of public convenience as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect
fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit
or adjunct of another corporation
Mere ownership by a single stockholder of even all or nearly all of the capital stocks of a
corporation, by itself, is not sufficient ground to disregard the corporate veil. We can only sustain
the CA's ruling. The instrumentality or control test of the alter ego doctrine requires not mere
majority or complete stock control, but complete domination of finances, policy and business
3A CORPORATION LAW 2019-2020 pg. 45
practice with respect to the transaction in question. The corporate entity must be shown to have
no separate mind, will, or existence of its own at the time of the transaction.
The Spouses Celones are indeed incorporators, directors, and majority stockholders of ATSI and
PPPC. However, there is no proof that PPPC controlled the financial policies and business
practices of ATSI either in July 2001 when Felicisima proposed to set off the unpaid ₱3.2 million
mobilization fund with CMCI's rental of Prodopak machines; or in August 2001 when the lease
agreement between CMCI and ATSI commenced. CMCI has not presented any credible proof, or
even just an exact computation, of the supposed debt of PPPC. The uncertainty in the supposed
debt of PPPC to CMCI negates the latter's invocation of legal compensation as justification for its
non-payment of the rentals for the subject Prodopak machine.
(20)
International Academy of Management and Economics v.
Litton and Company, Inc., G.R. No. 191525, December 13, 2017.
International Academy of Management and Economics vs. Litton and Company, Inc.
G.R. No. 191525
December 13, 2017
Digested by: James San Diego
Petitioner: INTERNATIONAL ACADEMY OF MANAGEMENT AND ECONOMICS (I/AME)
Respondent: LITTON AND COMPANY, INC.
Ponente: C. J. Sereno
Topic: Piercing the corporate veil
Doctrine:
3A CORPORATION LAW 2019-2020 pg. 46
The doctrine of alter ego is based upon the misuse of a corporation by an individual for wrongful
or inequitable purposes, and in such case the court merely disregards the corporate entity and
holds the individual responsible for acts knowingly and intentionally done in the name of the
corporation. The piercing of the corporate veil may apply to corporations as well as natural
persons involved with corporations. The Supreme Court has held that the "corporate mask may
be lifted and the corporate veil may be pierced when a corporation is just but the alter ego of a
person or of another corporation.”
Facts:
Atty. Emmanuel T. Santos (Santos), a lessee to two (2) buildings owned by Litton... owed the
latter rental arrears as well as his share of the payment of realty taxes.
Litton filed a complaint for unlawful detainer against Santos before the MeTC of Manila. The MeTC
ruled in Litton's favor and ordered Santos to vacate A.I.D. Building and Litton Apartments and to
pay various sums of money representing unpaid arrears, realty taxes, penalty, and attorney's
fees.
the judgment was not executed.
On 11 November 1996, the sheriff of the MeTC of Manila levied on a piece of real property
covered by Transfer Certificate of Title (TCT) No. 187565 and registered in the name of
International Academy of Management and Economics Incorporated (I/AME), in order to execute
the judgment against Santos.
indicated that such was "only up to the extent of the share of Emmanuel T. Santos."
I/AME claimed that it has a separate and distinct personality from Santos; hence, its properties
should not be made to answer for the latter's liabilities.
Upon motion for reconsideration of I/AME, the MeTC reversed its earlier ruling and ordered the
cancellation of the annotations of levy as well as the writ of execution.
Petitioner avers that its right to due process was violated when it was dragged into the case and
its real property made an object of a writ of execution in a judgment against Santos.
It argues that since it was not impleaded in the main case, the court a quo never acquired
jurisdiction over it.
Petitioner I/AME argues that the doctrine of piercing the corporate veil applies only to stock
corporations, and not to non-stock, nonprofit corporations such as I/AME since there are no
stockholders to hold liable in such a situation but instead only members. Hence, they do not have
investments or shares of stock or assets to answer for possible liabilities. Thus, no one in a nonstock corporation can be held liable in case the corporate veil is disregarded or pierced.
The petitioner also insists that the piercing of the corporate veil cannot be applied to a natural
person - in this case, Santos - simply because as a human being, he has no corporate veil
shrouding or covering his person.
3A CORPORATION LAW 2019-2020 pg. 47
Issue:
Was the International Academy of Management and Economics Incorporated denied of due
process when it was pierced with corporate veil by the court?
Ruling:
No. The court did not deny the I/AME of due process. The Supreme Court agrees with the
CA that Santos used I/AME as means to overthrow judicial process and escape his
responsibilities ought to Litton.
The Supreme Court, in view of the forgoing, find the case as ofArcilla vs. Court of Appeals’ case.
Like Arcilla, Santos: (1) was adjudged liable to pay on a judgment against him; (2) he became
President of a corporation; (3) he formed a corporation to conceal assets which were supposed
to pay for the judgment against his favor; (4) the corporation which has Santos as its President,
is being asked by the court to pay on the judgment; and (5) he may not use as a defense that he
is no longer President of I/AME. Furthermore, the Court agrees with the CA that I/AME is the alter
ego of Santos and Santos - the natural person - is the alter ego of I/AME. Santos falsely
represented himself as President of I/AME in the Deed of Absolute Sale when he bought the
Makati real property, at a time when I/AME had not yet existed. Uncontroverted facts in this case
also reveal the findings of MeTC showing Santos and I/AME as being one and the same person.
3A CORPORATION LAW 2019-2020 pg. 48
(21)
Heirs of Wilson Gamboa v. Teves, G.R. No. 176579, October
9, 2012
(22) Narra Nickel Mining and Development Corp. v. Redmont Consolidated Mines, Corp.,
G.R. No. 195580,
Date: April 21, 2014 and January 28, 2015
Digested by: Ray Mark Vallesteros
----------------------------------------------------------------------------------Petitioner: NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND
DEVELOPMENT, INC., and MCARTHUR MINING, INC.
Respondent: REDMONT CONSOLIDATED MINES CORP.
Ponente: VELASCO, JR., J.
Topic Nationality, Citizenship and Foreign Equity (Place of Incorporation Test, Control Test &
Grandfather Rule)
----------------------------------------------------------------------------------Doctrine: "shares belonging to corporations or partnerships at least 60% of the capital of which is
owned by Filipino citizens shall be considered as of Philippine nationality," pertains to the control
test or the liberal rule.
"if the percentage of the Filipino ownership in the corporation or partnership is less than 60%, only
the number of shares corresponding to such percentage shall be counted as Philippine
nationality," pertains to the stricter, more stringent grandfather rule.
-----------------------------------------------------------------------------------
3A CORPORATION LAW 2019-2020 pg. 49
Facts: December 2006, Redmont, a domestic corporation organized and existing under
Philippine laws, took interest in mining and exploring certain areas of the province of Palawan.
After inquiring with the DENR, it learned that the areas where it wanted to undertake exploration
and mining activities where already covered by Mineral Production Sharing Agreement (MPSA)
applications of petitioners Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an
application for an MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau
(MGB), Office of the DENR. SMMI was issued MPSA-AMA-IVB-153. The MPSA and EP were
then transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006, assigned
to petitioner McArthur
Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and
Patricia Louise Mining & Development Corporation (PLMDC) which previously filed an application
for an MPSA with the DENR. PLMDC conveyed, transferred and/or assigned its rights and
interests over the MPSA application in favor of Narra.
Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSAAMA-IVB-154. SMMI subsequently conveyed, transferred and assigned its rights and interest
over the said MPSA application to Tesoro.
On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3)
separate petitions for the denial of petitioners’ applications for MPSA. Redmont alleged that at
least 60% of the capital stock of McArthur, Tesoro and Narra are owned and controlled by MBMI
Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont reasoned that since MBMI is a
considerable stockholder of petitioners, it was the driving force behind petitioners’ filing of the
MPSAs over the areas covered by applications since it knows that it can only participate in mining
activities through corporations which are deemed Filipino citizens. Redmont argued that given
that petitioners’ capital stocks were mostly owned by MBMI, they were likewise disqualified from
engaging in mining activities through MPSAs, which are reserved only for Filipino citizens.
Petitioners averred that they were qualified persons under Section 3(aq) of Republic Act No. (RA)
7942 or the Philippine Mining Act of 1995.
On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining
MPSAs
In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by
petitioners.
After a careful review of the records, the CA found that there was doubt as to the nationality of
petitioners when it realized that petitioners had a common major investor, MBMI, a corporation
composed of 100% Canadians. Pursuant to the first sentence of paragraph 7 of Department of
Justice (DOJ) Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented
the requirement of the Constitution and other laws pertaining to the exploitation of natural
3A CORPORATION LAW 2019-2020 pg. 50
resources, the CA used the "grandfather rule" to determine the nationality of petitioners. It
provided:
Petitioners reasoned the grandfather rule has no leg to stand on in the instant case since the
definition of a "Philippine National" under Sec. 3 of the FIA does not provide for it.
----------------------------------------------------------------------------------Issue:
1
WON
the
2 WON petitioners are Filipino Corporations
grandfather
rule
is
applicable
Ruling: Yes. The Court finds that this case calls for the application of the grandfather rule since,
as ruled by the POA and affirmed by the OP, doubt prevails and persists in the corporate
ownership of petitioners. Also, as found by the CA, doubt is present in the 60-40 Filipino equity
ownership of petitioners Narra, McArthur and Tesoro, since their common investor, the 100%
Canadian corporation––MBMI, funded them.
The "control test" is still the prevailing mode of determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to undertake
the exploration, development and utilization of the natural resources of the Philippines. When in
the mind of the Court there is doubt, based on the attendant facts and circumstances of the case,
in the 60-40 Filipino-equity ownership in the corporation, then it may apply the "grandfather rule."
2. No. Petitioners McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian
corporation, owns 60% or more of their equity interests. Such conclusion is derived from
grandfathering petitioners’ corporate owners, namely: MMI, SMMI and PLMDC.
McArthur
McArthur, when it is "grandfathered," company layering was utilized by MBMI to gain control over
McArthur. It is apparent that MBMI has more than 60% or more equity interest in McArthur, making
the latter a foreign corporation.
Tesoro
After "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in SMMI’s
corporate structure, it is clear that MBMI is in control of Tesoro and owns 60% or more equity
interest in Tesoro. This makes petitioner Tesoro a non-Filipino corporation and, thus, disqualifies
it to participate in the exploitation, utilization and development of our natural resources.
Narra
Under a joint venture agreement the Company holds directly and indirectly an effective equity
interest in the Alpha Property of 60.4%. Pursuant to a shareholders’ agreement, the Company
exercises joint control over the companies in the Alpha Group
3A CORPORATION LAW 2019-2020 pg. 51
(23)
Roy III v. Herbosa, G.R. No. 207246, April 18, 2017.
Jose M. Roy III vs. Chairperson Teresita Herbosa, et al.
GR No. 207246
April 18, 2017
Digested by: Ivan Earl B. Zapanta
----------------------------------------------------------------------------------Petitioner: Jose M. Roy III
Petitioners-in-Intervention: Wilson Gamboa, Jr., Daniel Cartagena, John Warren Gabinete,
Antonio Pesina, Modesto Mamon, and Gerardo Erebaren.
Respondent: Chairperson Teresita Herbosa, The Securities and Exchange Commission, and
Philippine Long Distance Telephone Company
Respondent-in-Intervention: Philippine Stock Exchange, Inc.
Ponente: Caguioa, J.
Topic: Nationality, Citizenship and Foreign Equity (Place of Incorporation Test, Control Test &
Grandfather Rule)
3A CORPORATION LAW 2019-2020 pg. 52
----------------------------------------------------------------------------------Doctrine: Same with the decision of the Supreme Court in The Decision, SEC-MC No. 8 is valid
as it does not violate the Constitution’s ownership of corporations (60/40 rule).
----------------------------------------------------------------------------------Facts: This is a Motion for Reconsideration of the November 22, 2016 decision of the Supreme
Court entitled: The Decision.
Roy asserts this Court’s decisions (Gamboa Decision 2011 and Gamboa Resolution 2012)
regarding the Security and Exchange Commission’s (SEC) issuance of Memorandum Circular
No. 8. Series of 2013 and whishes that the Court reverse and set aside The Decision.
NOTE: JUST FOR CLARIFICATION, I WILL INCLUDE BELOW THE DIGEST OF THE
DECISION FOR FURTHER UNDERSTANDING OF THIS CASE.
----------------------------------------------------------------------------------Issue: Whether or not the SEC gravely abused its discretion in ruling that PLDT is compliant with
the limitation set for by the Constitution?
----------------------------------------------------------------------------------Ruling: NO. The heart of the issue is the Constitution’s words under Section 11, Art. XII which
states that “No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except citizens of the Philippines xxx at least 60% of whose capital is owned
by such citizens.”
And in the Gamboa Decision, it has been decided that the SEC-MC No. 8 requires that a
corporation requires full and legal beneficial ownership of 60% of the outstanding capital stock,
coupled with 60% of the voting rights must rest in the hands of Filipino nationals.
Subject to The Decision, the SC defines what the words “Full Beneficial Ownership,”
“Beneficial Ownership,” and “Beneficial Owner” mean.
Full beneficial ownership as construed from the Implementing Rules and Regulations of the
Foreign Investment Act of 1991 (FIA-IRR) states that:
“For stocks to be deemed owned and held by the Philippine citizens or Philippine Nationals, mere
legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have
been assigned or transferred to aliens cannot be considered held by Philippine citizens or
Philippine nationals.”
On the other hand, the Implementing Rules and Regulations of the Securities Regulation Code
(SRC-IRR) states that:
3A CORPORATION LAW 2019-2020 pg. 53
“Any person who, directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has or shares voting power (which includes the power to vote or direct
the voting of such security) and/or investment returns or power (which includes power to dispose
of, or direct the disposition of such security).
Thus, the definition of what a beneficial owner is in the SRC-IRR is in consonance with that of
FIA-IRR’s. However, it is only relevant in resolving as to who is the beneficial owner of each
“specific stock” of the public utility company.
Hence, if the Filipino has the voting power of the specific stock (he can vote the stock or direct
another to vote for him) or the Filipino has the investment power over the specific stock (he can
dispose of the stock or direct another to dispose for him), or both (he can vote and dispose), then
such Filipino is the beneficial owner of that specific stock. Being considered as Filipino, that
specific stock is then to be counted as part of the 60% Filipino ownership requirement under the
Constitution.
However, it is to be noted that the way on how the SEC will classify certain stocks with voting
rights held by a trust fund with the limitation on foreign ownership under the Constitution is
speculative as of the moment.
The Court still awaits the SEC’s prior determination of the citizenship of specific shares of stock
held in trust before the SC fully pass upon a final decision.
Wherefore, the SC resolves to deny the motion with finality.
DIGEST OF THE DECISION (2016):
Facts:
On June 28, 2011, the Court issued the Gamboa Decision, wherein it states that the term "capital"
in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in
the election of directors, and thus in the present case only to common shares, and not to the total
outstanding capital stock (common and non-voting preferred shares).
The Gamboa Decision attained finality on October 18, 2012, and Entry of Judgment was
thereafter issued on December 11, 2012
On May 20, 2013, the SEC, through respondent Chairperson Teresita J. Herbosa, issued SECMC No. 8
Section 2 of the SEC-MC No. 8 states that:
“Section 2. All covered corporations shall, at all times, observe the constitutional or statutory
ownership requirement. For purposes of determining compliance therewith, the required
percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding
3A CORPORATION LAW 2019-2020 pg. 54
shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding
shares of stock, whether or not entitled to vote in the election of directors.”
On June 10, 2013, petitioner Roy, as a lawyer and taxpayer, filed the Petition, assailing the validity
of SEC-MC No. 8 for not conforming to the letter and spirit of the Gamboa Decision and Resolution
and for having been issued by the SEC with grave abuse of discretion.
Issue:
Whether the SEC gravely abused its discretion in issuing SEC-MC No. 8 in light of the Gamboa
Decision and Gamboa Resolution?
Ruling:
NO. SEC did not commit grave abuse of discretion amounting to lack or excess of jurisdiction
when it issued SEC--MC No. 8. To the contrary, the Court finds SEC-MC No. 8 to have been
issued in fealty to the Gamboa Decision and Resolution.
Gamboa Decision
"Capital" in Section II, Article XII of the 1987 Constitution refers only to shares of stock entitled to
vote in the election of directors, and thus in the present case only to common shares, and not to
the total outstanding capital stock (common and non-voting preferred shares).
Gamboa Resolution
Foreign Investments Act of 1991 ("FIA")
Gamboa Resolution put to rest the Court's interpretation of the term "capital".
Full beneficial ownership of stocks, coupled with appropriate voting rights is essential which
reiterates and confirms the interpretation that the term "capital" in Section 11, Article XII of the
1987 Constitution refers to shares with voting rights, as well as with full beneficial ownership.
Section 2 of SEC-MC No. 8 clearly incorporates the Voting Control Test or the controlling interest
requirement. In fact, Section 2 goes beyond requiring a 60-40 ratio in favor of Filipino nationals in
the voting stocks; it moreover requires the 60-40 percentage ownership in the total number of
outstanding shares of stock, whether voting or not.
The SEC formulated SEC-MC No. 8 to adhere to the Court's unambiguous pronouncement that
"full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent
of the voting rights is required." Clearly, SEC-MC No. 8 cannot be said to have been issued with
grave abuse of discretion
While SEC-MC No. 8 does not expressly mention the Beneficial Ownership Test or full beneficial
ownership of stocks requirement in the FIA, this will not, as it does not, render it invalid meaning,
it does not follow that the SEC will not apply this test in determining whether the shares claimed
3A CORPORATION LAW 2019-2020 pg. 55
to be owned by Philippine nationals are Filipino, i.e., are held by them by mere title or in full
beneficial ownership. To be sure, the SEC takes its guiding lights also from the FIA and its
implementing rules, the Securities Regulation Code.
(24)
Bataan Shipyard & Engineering Co., Inc. v. PCGG, G.R. No.
L-75885, May 27, 1987 (NOTE: Focus on pages 233 to 235 of Vol.
150 of SCRA)
BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO) vs. PCGG
G.R. No. 75885
Date: May 27, 1987
Digested by: Abrhiem Nico Angeles
----------------------------------------------------------------------------------Petitioner: BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO)
Respondent: PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN JOVITO
SALONGA, COMMISSIONER MARY CONCEPCION BAUTISTA, COMMISSIONER RAMON
DIAZ, COMMISSIONER RAUL R. DAZA, COMMISSIONER QUINTIN S. DOROMAL, CAPT.
JORGE B. SIACUNCO, et al
Ponente: NARVASA, J.:
Topic: Constitutional Rights
----------------------------------------------------------------------------------Doctrine: Corporations are not entitled to all of the constitutional protections which private
individuals have. * *They are not at all within the privilege against self-incrimination, although this
court more than once has said that the privilege runs very closely with the 4th Amendment's
Search and Seizure provisions. It is also settled that an officer of the company cannot refuse to
produce its records in its possession upon the plea that they will either incriminate him or may
incriminate it."
----------------------------------------------------------------------------------Facts:
This case stemmed from the issuance of the Office of the President Executive Orders 1 and 2
mainly to sequester the Properties allegedly ill-gotten by the previous president Ferdinand
Marcos. The executive Order mainly orders PCGG to sequester numerous companies including
3A CORPORATION LAW 2019-2020 pg. 56
the petitioner may require the sequestered corporation to submit and produce all corporate
documents and take over the administration thereto pending the investigation and final
recommendation of the PCGG.
BASECO contends that its right against self-incrimination and unreasonable searches and
seizures had been transgressed by the Order of April 18, 1986 which required it "to produce
corporate records from 1973 to 1986 under pain of contempt of the Commission if it fails to do
so." The order was issued upon the authority of Section 3 (e) of Executive Order No. 1, treating
of the PCGG's power to "issue subpoenas requiring * * the production of such books, papers,
contracts, records, statements of accounts and other documents as may be material to the
investigation conducted by the Commission, " and paragraph (3), Executive Order No. 2 dealing
with its power to "require all persons in the Philippines holding * * (alleged "ill-gotten") assets or
properties, whether located in the Philippines or abroad, in their names as nominees, agents or
trustees, to make full disclosure of the same * *."
BASECO further theorizes that the executive orders in question are a bill of attainder.
"A bill of attainder is a legislative act which inflicts punishment without judicial trial. “Its essence is
the substitution of a legislative for a judicial determination of guilt."
----------------------------------------------------------------------------------Issue: Whether or not the constitutional rights of BASECO was violated?
Ruling: NO. Petition was dismissed.
The Supreme Court stated that nothing in the executive orders can be reasonably construed as
a determination or declaration of guilt. On the contrary, the executive orders, inclusive of
Executive Order No. 14, make it perfectly clear that any judgment of guilt in the amassing or
acquisition of "ill-gotten wealth" is to be handed down by a judicial tribunal, in this case, the
Sandiganbayan, upon complaint filed and prosecuted by the PCGG. In the second place, no
punishment is inflicted by the executive orders, as the merest glance at their provisions will
immediately make apparent. In no sense, therefore, may the executive orders be regarded as a
bill of attainder.
It is elementary that the right against self-incrimination has no application to juridical persons.
While an individual may lawfully refuse to answer incriminating questions unless protected by an
immunity statute, it does not follow that a corporation, vested with special privileges and
franchises, may refuse to show its hand when charged with an abuse of such privileges *
Relevant jurisprudence is also cited by the Solicitor General.* * corporations are not entitled to all
of the constitutional protections which private individuals have. * *They are not at all within the
privilege against self-incrimination, although this court more than once has said that the privilege
runs very closely with the 4th Amendment's Search and Seizure provisions. It is also settled that
an officer of the company cannot refuse to produce its records in its possession upon the plea
that they will either incriminate him or may incriminate it."(Oklahoma Press Publishing Co. v.
Walling, 327 U.S. 186; emphasis, the Solicitor General's).
3A CORPORATION LAW 2019-2020 pg. 57
* * The corporation is a creature of the state. It is presumed to be incorporated for the benefit of
the public. It received certain special privileges and franchises, and holds them subject to the laws
of the state and the limitations of its charter. Its powers are limited by law. It can make no contract
not authorized by its charter. Its rights to act as a corporation are only preserved to it so long as
it obeys the laws of its creation. There is a reserve right in the legislature to investigate its
contracts and find out whether it has exceeded its powers. It would be a strange anomaly to hold
that a state, having chartered a corporation to make use of certain franchises, could not, in the
exercise of sovereignty, inquire how these franchises had been employed, and whether they had
been abused, and demand the production of the corporate books and papers for that purpose.
The defense amounts to this, that an officer of the corporation which is charged with a criminal
violation of the statute may plead the criminality of such corporation as a refusal to produce its
books. To state this proposition is to answer it.While an individual may lawfully refuse to answer
incriminating questions unless protected by an immunity statute, it does not follow that a
corporation, vested with special privileges and franchises may refuse to show its hand when
charged with an abuse of such privileges.(Wilson v. United States, 55 Law Ed., 771, 780
[emphasis, the Solicitor General's])
WHEREFORE, the petition is dismissed. The temporary restraining order issued on October 14,
1986 is lifted.
3A CORPORATION LAW 2019-2020 pg. 58
(25)
Bache & Co (Phils.) Inc. v. Ruiz, G.R. No. L-32409, February
27, 1971
Bache & Co (Phils.) Inc. v. Ruiz
G.R. No. L-32409,
February 27, 1971
Digested by: Sarah Bagis
Petitioner: Bache & Co., Inc and Frederick Seggerman
Respondent: Hon. Judge Vivencio Ruiz (as CIR) Arturo Logronio, Rodolfo de Leon, Gavino
Velasquez, Mimir Dellosa, Nicanor Alcordo, John Doe, John Doe, John Doe, and John Doe,
Ponente: Villamor,J.
——————————————————Doctrine: Respondents contend that corporations are not entitled to the protection against
unreasonable searches and seizures. A corporation is an association of individuals under
an assumed name and with a distinct legal entity. In organizing itself as a collective body it
waives no constitutional immunities appropriate to such body. Its property cannot be taken
without compensation. It can only be proceeded against by due process of law, and is
protected against unlawful discrimination.
———————————————————
FACTS:
Misael
Vera, Commissioner of Internal Revenue (CIR), wrote a letter to respondent
Judge
Vivencio Ruiz (CFI Rizal), to request the issuance of a search warrant against
petitioner Bache & Co., Phil., Inc., for violating Sec. 46(a) of the National Internal Revenue
Code in relation to other sections. It also authorized Revenue Examiner Rodolfo de Leon to
make and file the search warrant.
3A CORPORATION LAW 2019-2020 pg. 59
De Leon, with his witness Arturo Logronio, went to CFI Rizal bringing with them an application,
Logronio’s deposition and an already accomplished search warrant but without Ruiz’s
signature yet.
Judge Ruiz was in a different hearing at the time so he told the Deputy Clerk of Court to take
the depositions of the applicant. After his hearing, he told the stenographer to read to him
the notes from the deposition. He then warned Logronio that if his deposition were found to
be false, he would be charged for perjury. He then signed the application and then issued
the search warrant.
Bureau of Internal Revenue (BIR) agents then went to serve the said warrant against petitioners’
contention that no formal complaint and transcript of testimony were attached to the warrant.
The search yielded 6 boxes of documents.
Petitioners filed a petition in the CFI Rizal to declare the warrant null and void, which Judge
Ruiz dismissed. In the mean time, BIR made tax assessments on the petitioner, partly based
on the documents seized.
And so the present petition for prohibition and prohibitory injunction.
ISSUE
WON the search warrant issued was valid
HELD
NO. Respondents are enjoined from enforcing the warrant; documents seized are ordered
returned; BIR is enjoined from enforcing the tax assessments against petitioner and using
them against petitioner in future cases.
Respondents contend that corporations are not entitled to the protection against unreasonable
searches and seizures. A corporation is an association of individuals under an assumed
name and with a distinct legal entity. In organizing itself as a collective body it waives no
constitutional immunities appropriate to such body. Its property cannot be taken without
compensation. It can only be proceeded against by due process of law, and is protected
against unlawful discrimination.
Petition granted for the following reasons:
1. Respondent judge failed to personally examine the complainant and his witness.
A. While the application and deposition were sworn to before Judge Ruiz, he didn’t
ask them any questions or observe their demeanor to help him determine WON
there was probable cause.
2. Search warrant was issued for more than one specific offense.
A. The warrant issued was for at least four distinct offenses under the Tax Code.
Respondents argue that in Stonehill v. Diokno, the warrant issued was invalid
because it was for violation against Central Bank Law, Internal Revenue Code and
3A CORPORATION LAW 2019-2020 pg. 60
RPC. Here, only one law was violated—National Internal Revenue Code. The
Court made it clear that the alleged violation the law speaks of should be for one
specific offense.
3. Warrant does not particularly describe the things to be seized
A. The language used in the search warrant is so all-embracing as to include all
conceivable records of petitioner corporation, which, if seized, could possibly
render its business inoperative. The description contained in the herein disputed
warrant should have mentioned, at least, the dates, amounts, persons, and other
pertinent data regarding the documents enumerated in the warrant.
B. If the articles desired to be seized have any direct relation to an offense committed,
the applicant must necessarily have some evidence, other than those articles, to
prove the said offense; and the articles subject of search and seizure should come
in handy merely to strengthen such evidence
(26)
Stonehill v. Diokno, G.R. No. L-19550, June 19, 1957
STONEHILL VS DIOKNO
G.r. No. L-19550
June 19, 1967
____________________________________________________________________________
Petitioner: HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS and KARL BECK
Respondent: HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF JUSTICE; JOSE
LUKBAN, in his capacity as Acting Director, National Bureau of Investigation; SPECIAL
PROSECUTORS PEDRO D. CENZON, EFREN I. PLANA and MANUEL VILLAREAL, JR. and
ASST. FISCAL MANASES G. REYES; JUDGE AMADO ROAN, Municipal Court of Manila;
JUDGE ROMAN CANSINO, Municipal Court of Manila; JUDGE HERMOGENES CALUAG, Court
of First Instance of Rizal-Quezon City Branch, and JUDGE DAMIAN JIMENEZ, Municipal Court
of Quezon City
Ponente: C.J. Concepcion
Digested by : Nicky Galang
___________________________________________________________________________
Facts of the case:
“In violation of Central Bank Laws, Tariff and Customs laws,
Internal Revenue (Code) and the Revised Penal Code, 42 warrants
were issued against Petitioners or the Corporation where they are
officers to search the persons above-named and/or the premises of
their offices, warehouses and/or residences, and to seize and take
possession of their book of accounts, financial records, vouchers,
correspondence, receipts, ledgers, journals, portfolios, credit
3A CORPORATION LAW 2019-2020 pg. 61
journals, typewriters, and other documents and/or papers showing
all business transactions including disbursement receipts, balance
sheets and profit and loss statements and Bobbins (cigarette
wrappers) which are the subject of the offense”
This is the questioned search warrant issued by the Court against Petitioner Corporation. The
Petitioners filed with the Supreme Court an original action for certiorari, prohibition, mandamus
and injuction and prayed that the pending final disposition of the present case a writ of preliminary
injunction be issued alleging the search warrants to be void since: (1) they do not describe with
particularity the documents, books and things to be seized; (2) cash money not mentioned in the
warrants were actually seized; (3) the warrants were issued to fish evidence against the
petitioners in deportation cases filed against them; (4) the searches and seizures were made in
an illegal manner and(5) the documents, paper and cash money seized were not delivered to the
courts that issued the warrants, to be disposed of in accordance with law.
Issue: WON the search warrant issued is valid
Held: No. The Search warrant is invalid.
The Supreme Court ruled in favor of petitioners, the constitution protects the people’s right against
unreasonable search and seizure. It provide:
(1)
That no warrant shall issue but upon probable cause, to be determined by the judge in the
manner set forth in said provision;
(2)
That the warrant shall be particularly describe the things to be seized.
In this case, none of the requisites were met. The warrant was issued based on mere allegations
that petitioners committed a violation fo Central Bank Laws, tariff and Customs Law, Internal
Revenue Code and Revised Penal Code.
In other words, no specific offense had been alleged in said applications. The averments thereof
with respect to the offense committed were abstract.
However, here the Supreme Court emphasized that petitioners cannot assail the validity of the
Search warrant issued against their corporation because petitioners are not the proper party. The
petitioners have no cause of action to assail the legality of the contested warrants and of the
seizures made in pursuance thereof, for the simple reason that said corporations have their
respective personalities, separate and distinct from the personality of herein petitioners,
regardless of the amount of shares of stock or of the interest of each of them in said corporations,
and whatever the offices they hold therein may be.8 Indeed, it is well settled that the legality of a
seizure can be contested only by the party whose rights have been impaired thereby and that the
objection to an unlawful search and seizure is purely personal and cannot be availed of by third
parties.
3A CORPORATION LAW 2019-2020 pg. 62
(27)
Boy Scouts of the Philippines v. COA, G. R. No. 177131, June
7, 2011 BERNALDO
Boy Scouts of the Philippines v. Commission on Audit
GR No. 177131
Date: June 7, 2011
Digested by: Michael Bernaldo
----------------------------------------------------------------------------------Petitioner: Boy Scouts of the Philippines
Respondent: Commission on Audit
Ponente: Justice Leonardo-De Castro
Topic: Classes of Corporations
----------------------------------------------------------------------------------Doctrine:
The Boy Scouts of the Philippines is considered as a public corporation. A Public Corporation is
an entity created by law for the purpose of serving the general good and welfare.
----------------------------------------------------------------------------------Facts:
On August 19,1999, the COA issued Resolution No. 99-011 pertaining to the audit of the Boys
Scout of the Philippines (BSP). The COA Resolution stated that the BSP was created as a
public corporation under Commonwealth Act No. 111, amended by PD No. 460 and RA No.
7278. The Supreme Court in the case BSP v. NLRC ruled that BSP, based on its charter,
was a government-controlled corporation within the meaning of Art. IX (B) (2) (1) of the
Constitution. BSP is an instrumentality under the 1987 Administrative Code.
The BSP shall be classified among the government corporations belonging to the Educational,
Social, Scientific, Civil and Research Sector under the Corporate Audit Office I.
On November 26, 1999, BSP sent a letter signed by its National President, Jejomar C. Binay to
COA asking for reconsideration with respect to said COA Resolution. The BSP represented
the argument that COA’s basis, Boy Scouts of the Philippines vs. National Labor Relations
Commission, et al. (G.R. No. 80767) relies on the fact that there exists substantial
Government participation in the National Executive Board of the BSP thus making it as
government-controlled corporation. With the enactment of Republic Act No. 7278, the
composition of the National Executive Board was amended by removing: (i) the President of
the Philippines and executive secretaries, with the exception of the Secretary of Education,
as members thereof; and (ii) the appointment and confirmation power of the President of the
Philippines, as Chief Scout, over the members of the said Board.
3A CORPORATION LAW 2019-2020 pg. 63
Also, the BSP believes that RA 7278 has superseded the ruling of G.R. No. 80767. It therefore
weakened the conclusion that it is government-controlled corporation.
Lastly, the government has not invested any fund into BSP. RA 7278 does provide the capability
of BSP to receive donations from Government or any of its subdivisions, branches,
offices, agencies and instrumentalities from to time to time.
The BSP also argued that it not "appropriately regarded as a government instrumentality under
the 1987 Administrative Code" as stated in the COA resolution using Section 2(10) of the
said code. It is not an entity administering special funds nor does it receive funds from the
annual budget of DECS.
Under the 1987 Administrative Code, it is considered as “attached agency” not an “agency.”
COA replied through a letter dated July 3, 2000 disagreeing to the raised agreements. In the
said letter the COA Memorandum dated June 20, 2000 was attached. The said
memorandum opined that RA 7278 did not superseded the case, (G.R. No. 80767), even
though it eliminated the substantial government participation in National Executive Board.
COA argued that the said case relied on three grounds to conclude that BSP is a governmentcontrolled corporation. Aside from substantial government participation, the character of
BSP’s purposes and function possessing public aspect and the statutory designation of BSP
as a “public corporation.” The said law did not amend the nature of BSP.
Other arguments raised in the memorandum stated the following points:
• The Supreme Court has elucidated this matter in the BSP case when it declared that
BSP is regarded as, both a "government-controlled corporation with an original charter" and as
an "instrumentality" of the Government.
•
BSP did not dispute its nature as an attached agency under the Administrative Code of 1987.
•
Section 2(1), Article IX-D of the Constitution provides that COA shall have the power,
authority, and duty to examine, audit and settle all accounts pertaining to the revenue and
receipts of, and expenditures or uses of funds and property, owned or held in trust by, or
pertaining to, the Government, or any of its subdivisions, agencies or instrumentalities,
including government owned or controlled corporations with original charters
On November 20, 2000, the preliminary survey of its organizational structure, operations and
accounting system/records to be conducted on November 21 to 22, 2000 was duly ordered.
BSP request for a deferral of the audit.
BSP filed for Petition for Review with Prayer for Preliminary Injunction and/or Temporary
Restraining Order before the COA. COA denied the petition and the succeeding motion for
reconsideration.
3A CORPORATION LAW 2019-2020 pg. 64
BSP filed a petition for prohibition with preliminary injunction and temporary restraining order
against the COA.
----------------------------------------------------------------------------------Issue:
Whether the BSP falls under the COA’s audit jurisdiction.
.
Ruling:
BSP is a public corporation and its funds are subject to the COA’s audit jurisdiction.
Supreme Court based its ruling on the following:
•
Legislative history
The BSP was created by CA No. 111 later amended by PD No. 460 and RA No. 7278. Based
on CA No. 111, it was created as a public corporation. Its purpose states:
Sec. 3.
The purpose of this corporation shall be to promote through organization and cooperation with
other agencies, the ability of boys to do useful things for themselves
and others, to train them in scoutcraft, and to inculcate in them patriotism, civic consciousness
and responsibility, courage, self-reliance, discipline and kindred virtues, and moral values,
using the method which are in common use by boy scouts.
Said purpose is states its nature as a public corporation. The amendments of RA 7278 did
reduce the involvement of the government to its National Executive Board. The SC raised
the point that the amendments of RA 7278 were adjustments from the amendments of PD
No. 460 to improve the organization structure of BSP.
•
Civil Code
The SC considers the BSP as a public corporation based on Art 44 of the Civil Code
Art. 44. The following are juridical persons:
(2) Other corporations, institutions and entities for public interest or
purpose created by law; their personality begins as soon as they have been
constituted according to law;
•
The 1987 Administrative Code (Chapter 8, Sec 20)
3A CORPORATION LAW 2019-2020 pg. 65
The SC considered it as an “Attached Agency.”
•
Art XII, Sec 16 1987 Constitution
The SC did consider the BSP not covered by the ban of the creation of private corporations
through special laws. Since it is considered as a public corporation.
•
Government funds are subject to COA audit
The SC considered the power of COA to audit the BSP with respect to the government funds it
receives.
WHEREFORE, premises considered, the instant petition for prohibition is DISMISSED.
(28)
Republic of the Philippines v. City of Paranaque, G.R. No.
191109, July 18, 2012
REPUBLIC OF THE PHILIPPINES, represented by the PHILIPPINE RECLAMATION
AUTHORITY (PRA) vs. CITY OF PARANAQUE
GR No. 191109
DATE: July 18, 2012
DIGESTED BY: BRAWNER, YVETTE
PETITIONER: REPUBLIC OF THE PHILIPPINES,
RECLAMATION AUTHORITY (PRA)
RESPONDENT: CITY OF PARANAQUE
PONENTE: JUSTICE MENDOZA
TOPIC: CLASSES OF CORPORATIONS
represented
by
the
PHILIPPINE
DOCTRINES: Many government instrumentalities are vested with corporate powers but they do
not become stock or non-stock corporations, which is a necessary condition before an agency or
instrumentality is deemed a GOCC; Two requisites must concur before one may be classified as
3A CORPORATION LAW 2019-2020 pg. 66
a stock corporation, namely: (1) that it has capital stock divided into shares; and (2) that it is
authorized to distribute dividends and allotments of surplus and profits to its stockholders. If only
one requisite is present, it cannot be properly classified as a stock corporation. As for non-stock
corporations, they must have members and must not distribute any part of their income to said
members. PRA is a government instrumentality vested with corporate powers and performing an
essential public service pursuant to Section 2(10) of the Introductory Provisions of the
Administrative Code. Being an incorporated government instrumentality, it is exempt from
payment of real property tax.
FACTS:
The Public Estates Authority (PEA) is a government corporation created by PD1084. It
provided a coordinated, economical and efficient reclamation of lands with the intention of
maximizing their development. By virtue of EO525 under the then Pres. Marcos, PEA was
designated as the agency primarily responsible for integrating, directing and coordinating all
reclamation projects for and on behalf of the National Government. EO380 by Pres. Arroyo
transformed PEA to Philippine Reclamation Authority (PRA), which shall perform all the powers
and functions of the PEA relating to reclamation activities. By virtue of its mandate, PRA reclaimed
several portions of foreshore and offshore areas of Manila Bay, including those in Paranaque
City.
In 2003, the Paranaque City Treasurer Liberato Carabeo issued Warrants of Levy on
PRA’s reclaimed properties. PRA filed a petition for prohibition with prayer for TRO and/or writ of
preliminary injuction against Carabeo before the RTC.
The RTC ruled that PRA was not exempt from payment of real property taxes since it was
a Government-owned or Controlled Corporation (GOCC) under Section 3 of PD1084. It was
organized as a stock corporation because it had an authorized capital stock divided into no par
value shares. Therefore as a GOCC, local tax exemption was withdrawn by virtue of the Local
Government Code (LGC) RA no. 7160. PRA filed a petition for certiorari before the SC.
ISSUE: WON PRA was a GOCC and therefore not exempt from real property taxes.
Ruling: No, PRA is a government instrumentality, not a GOCC, and therefore exempt from real
property taxes.
A GOCC is defined in the Administrative Code of 1987.
Section 2(13) of the Introductory Provisions of the Administrative Code of 1987 defines a GOCC
as “any agency organized as a stock or non-stock corporation, vested with functions relating to
public needs whether governmental or proprietary in nature, and owned by the Government
directly or through its instrumentalities either wholly or where applicable as in the case of stock
corporations, to the extent of at least fifty-one (51) percent of its capital stock. On the other hand,
Section 2(10) of the Introductory Provisions of the Administrative Code defines a government
“instrumentality” as referring to “any agency of the National Government, not integrated with the
department framework, vested with special functions or jurisdiction by law, endowed with some if
not all corporate powers, administering special funds, and enjoying operational autonomy, usually
through a charter.”
From the above definitions, it is clear that a GOCC must be “organized as a stock or non-stock
corporation”, while an instrumentality is vested by law with corporate powers. When the law vests
in a government instrumentality corporate powers, the instrumentality does not necessarily
become a corporation. Unless the government instrumentality is organized as a stock or non3A CORPORATION LAW 2019-2020 pg. 67
stock corporation, it remains a government instrumentality exercising not only governmental but
also corporate powers. Many governmental instrumentalities are vested with corporate powers
but they do not become stock or non-stock corporations, which is a necessary condition before
an agency or instrumentality is deemed a GOCC. Examples are the Mactan International Airport
Authority, the Philippine Ports Authority, the University of the Philippines and the Bangko Sentral
ng Pilipinas. All these government instrumentalities exercise corporate powers but they are not
organized as stock or non-stock corporations as required by Section 2(13) of the Introductory
Provisions of the Administrative Code. These government instrumentalities are sometimes
loosely called government corporate entities. They are not however GOCCs in the strict sense as
understood under the Administrative Code, which is the governing law defining the legal
relationship and status of government entities.
The 1987 Constitution also provides for the creation or establishment of a GOCC. Section 16,
Article XII of the 1987 Constitution provides as follows: Section 16. The Congress shall not,
except by general law, provide for the formation, organization, or regulation of private
corporations. Government-owned or controlled corporations may be created or established by
special charters in the interest of the common good and subject to the test of economic viability.
The fundamental provision above authorizes Congress to create GOCCs through special charters
on two conditions: 1) the GOCC must be established for the common good; and 2) the GOCC
must meet the test of economic viability. In this case, PRA may have passed the first condition of
common good but failed the second one - economic viability. The purpose behind the creation of
PRA was not for economic or commercial activities. Neither was it created to compete in the
market place considering that there were no other competing reclamation companies being
operated by the private sector. As mentioned earlier, PRA was created essentially to perform a
public service considering that it was primarily responsible for a coordinated, economical and
efficient reclamation, administration and operation of lands belonging to the government with the
object of maximizing their utilization and hastening their development consistent with the public
interest.
The Court is convinced that PRA is not a GOCC under Section 2(13) of the Introductory Provisions
of the Administrative Code or under Section 16, Article XII of the 1987 Constitution of the
Philippines. The facts, the evidence on record and jurisprudence on the issue support that PRA
was not organized either as a stock or non-stock corporation and neither was it created by
Congress to operated commercially and compete in the private market. Instead, PRA is a
government instrumentality vested with corporate powers, and performing an essential public
service pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code. Being
an incorporated government instrumentality, it is exempt from payment of real property tax
provided under Sections 234(a) and 133(o) of the LGC, as follows:
SEC. 234. Exemptions from Real Property Tax – The following are exempted from payment of
the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person.
xxxx
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:
xxxx
(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. [Emphasis supplied]
3A CORPORATION LAW 2019-2020 pg. 68
It is clear from Section 234 that real property owned by the Republic of the Philippines (the
Republic) is exempt from real property tax unless the beneficial use thereof has been granted to
a taxable person. In this case, there is no proof that PRA granted the beneficial use of the subject
reclaimed lands to a taxable entity. There is no showing on record either that PRA leased the
subject reclaimed properties to a private taxable entity.
This exemption should be read in relation to Section 133(o) of the same Code, which prohibits
local governments from imposing "taxes, fees or charges of any kind on the National Government,
its agencies and instrumentalities x x x." The Administrative Code allows real property owned by
the Republic to be titled in the name of agencies or instrumentalities of the national government.
Such real properties remain owned by the Republic and continue to be exempt from real estate
tax.
(29)
Collector of Internal Revenue v. Club Filipino, 5 SCRA 321
(1962)
THE COLLECTOR OF INTERNAL REVENUE, Vs. THE CLUB FILIPINO, INC. DE CEBU
G.R. No. L-12719
Date: May 31, 1962
Digested by: Gutierrez, Jr.
_______________________________________________
Petitioner: THE COLLECTOR OF INTERNAL REVENUE
Respondent: THE CLUB FILIPINO, INC. DE CEBU
Ponente: PAREDES, J.:
Topic: Classes of Corporation
_______________________________________________
Doctrine: for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital
stock divided into shares and (2) an authority to distribute to the holders of such shares, dividends
or allotments of the surplus profits on the basis of the shares held (sec. 3, Act No. 1459). In the
case at bar, nowhere in its articles of incorporation or by-laws could be found an authority for the
3A CORPORATION LAW 2019-2020 pg. 69
distribution of its dividends or surplus profits. Strictly speaking, it cannot, therefore, be considered
a stock corporation, within the contemplation of the corporation law.
_________________________________________________
Facts: The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased
from the government), and a bar-restaurant where it sells wines and liquors, soft drinks, meals
and short orders to its members and their guests. The bar-restaurant was a necessary incident to
the operation of the club and its golf-course. The club is operated mainly with funds derived from
membership fees and dues. Whatever profits it had, were used to defray its overhead expenses
and to improve its golf-course. In 1951. as a result of a capital surplus, arising from the revaluation of its real properties, the value or price of which increased, the Club declared stock
dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a BIR agent
discovered that the Club has never paid percentage tax on the gross receipts of its bar and
restaurant. CIR assessed against and demanded from the Club taxes allegedly due.
____________________________________________________________________________
Issue: Whether or not Club Filipino is liable for the taxes (Whether or not it is a stock
corporation)
____________________________________________________________________________
Ruling:
No.
The Club was organized to develop and cultivate sports of all class and denomination for the
healthful recreation and entertainment of its stockholders and members. There was in fact, no
cash dividend distribution to its stockholders and whatever was derived on retail from its bar and
restaurants used were to defray its overhead expenses and to improve its golf course.
For a stock corporation to exist, 2 requisites must be complied with:
(1) A capital stock divided into shares
(2) An authority to distribute to the holders of such shares, dividends or allotments of the surplus
profits on the basis of shares held.
In the case at bar, nowhere in the AOI or by-laws of Club Filipino could be found an authority for
the distribution of its dividends or surplus profits.Strictly speaking, it cannot, therefore, be
considered a stock corporation, within the contemplation of the corporation law.
The fact that the capital stock of the respondent Club is divided into shares, does not detract from
the finding of the trial court that it is not engaged in the business of operator of bar and restaurant.
What is determinative of whether or not the Club is engaged in such business is its object or
purpose, as stated in its articles and by-laws. It is a familiar rule that the actual purpose is not
controlled by the corporate form or by the commercial aspect of the business prosecuted, but may
be shown by extrinsic evidence, including the by-laws and the method of operation.
It is conceded that the Club derived profit from the operation of its bar and restaurant, but such
fact does not necessarily convert it into a profit-making enterprise. The bar and restaurant are
necessary adjuncts of the Club to foster its purposes and the profits derived therefrom are
3A CORPORATION LAW 2019-2020 pg. 70
necessarily incidental to the primary object of developing and cultivating sports for the healthful
recreation and entertainment of the stockholders and members. That a Club makes some profit,
does not make it a profit-making Club. As has been remarked a club should always strive,
whenever possible, to have surplus
(30)
Gala v. Ellice Agro-Industrial Corp., G.R. No. 156819,
December 11, 2003, 418 SCRA 431
Gala vs Ellice Agro-Industrial Corporation Margo Management and Development
Corporation
GR No. 156819
Date: December 11, 2003
Digested by: Therese Javier
________
Petitioner: Alicia Gala
Respondent: Ellice Agro-Industrial Corporation Margo Management and Development
Corporation
Ponente: J. Ynares- Santiago
Topic: Articles of Incorporation
3A CORPORATION LAW 2019-2020 pg. 71
________
Doctrine: The best proof of the purpose of a corporation is its articles of incorporation and bylaws. The articles of incorporation must state the primary and secondary purposes of the
corporation, while the by-laws outline the administrative
________
Facts: spouses Manuel and Alicia Gala, their children Guia Domingo, Ofelia Gala, Raul Gala, and
Rita Benson, and their encargados Virgilio Galeon and Julian Jader formed and organized the
Ellice Agro-Industrial Corporation. As payment for their subscriptions, the Gala spouses
transferred several parcels of land located in the provinces of Quezon and Laguna to Ellice. In
1982, Manuel Gala, Alicia Gala and Ofelia Gala subscribed to an additional 3,299 shares,
10,652.5 shares and 286.5 shares, respectively. On June 28, 1982, Manuel Gala and Alicia Gala
acquired an additional 550 shares and 281 shares, respectively. Subsequently, on September
16, 1982, Guia Domingo, Ofelia Gala, Raul Gala, Virgilio Galeon and Julian Jader incorporated
the Margo Management and Development Corporation (Margo).
On November 10, 1982, Manuel Gala sold 13,314 of his shares in Ellice to Margo. Alicia Gala
transferred 1,000 of her shares in Ellice to a certain Victor de Villa on March 2, 1983. That same
day, de Villa transferred said shares to Margo. A few months later, on August 28, 1983, Alicia
Gala transferred 854.3 of her shares to Ofelia Gala, 500 to Guia Domingo and 500 to Raul Gala.
Years later, on February 8, 1988, Manuel Gala transferred all of his remaining holdings in Ellice,
amounting to 2,164 shares, to Raul Gala. On July 20, 1988, Alicia Gala transferred 10,000 of her
shares to Margo. On June 23, 1990, a special stockholders' meeting of Margo was held, where a
new board of directors was elected. 15 That same day, the newly-elected board elected a new
set of officers. Raul Gala was elected as chairman, president and general manager. During the
meeting, the board approved several actions, including the commencement of proceedings to
annul certain dispositions of Margo's property made by Alicia Gala. The board also resolved to
change the name of the corporation to MRG Management and Development Corporation.
Similarly, a special stockholders' meeting of Ellice was held on August 24, 1990 to elect a new
board of directors. In the ensuing organizational meeting later that day, a new set of corporate
officers was elected. Likewise, Raul Gala was elected as chairman, president and general
manager.
On March 27, 1990, respondents filed against petitioners with the Securities and Exchange
Commission (SEC) a petition for the appointment of a management committee or receiver,
3A CORPORATION LAW 2019-2020 pg. 72
accounting and restitution by the directors and officers, and the dissolution of Ellice Agro-Industrial
Corporation for alleged mismanagement, diversion of funds, financial losses and the dissipation
of assets, docketed as SEC Case No. 3747. 17 The petition was amended to delete the prayer
for the appointment of a management committee or receiver and for the dissolution of Ellice.
Additionally, respondents prayed that they be allowed to inspect the corporate books and
documents of Ellice.
In turn, petitioners initiated a complaint against the respondents on June 26, 1991, docketed as
SEC Case No. 4027, praying for, among others, the nullification of the elections of directors and
officers of both Margo Management and Development Corporation and Ellice Industrial
Corporation; the nullification of all board resolutions issued by Margo from June 23, 1990 up to
the present and all board resolutions issued by Ellice from August 24, 1990 up to the present; and
the return of all titles to real property in the name of Margo and Ellice, as well as all corporate
papers and records of both Margo and Ellice which are in the possession and control of the
respondents.
Issue: WON Ellice and Margo were organied as illegal and contrary to public policy
Held: The best proof of the purpose of a corporation is its articles of incorporation and by-laws.
The articles of incorporation must state the primary and secondary purposes of the corporation,
while the by-laws outline the administrative organization of the corporation, which, in turn, is
supposed to insure or facilitate the accomplishment of said purpose.
In the case at bar, a perusal of the Articles of Incorporation of Ellice and Margo shows no sign of
the allegedly illegal purposes that petitioners are complaining of. It is well to note that, if a
corporation's purpose, as stated in the Articles of Incorporation, is lawful, then the SEC has no
authority to inquire whether the corporation has purposes other than those stated, and mandamus
will lie to compel it to issue the certificate of incorporation.
3A CORPORATION LAW 2019-2020 pg. 73
(31)
Marsman & Company, Inc. v. First Coconut Central Co., G.R.
No. L-39841, June 20, 1988
Marsman & Company vs. First Coconut Central Company
GR No. L-39841
Date: June 20, 1988
Digested by: Gillian Briones
---------------------------------------------------------------------Petitioner: Marsman & Company
Respondent: First Coconut Central Company
Ponente: Gancayco,J.
Topic: Nominees and Anti-Dummy Law
--------------------------------------------------------------------Doctrine: That the sales to industrial or commercial users do not fall within the scope of the Retail
Trade Nationalization Law is further confirmed by Presidential Decree No. 714 promulgated on
May 28, 1975 amending said law when the latter provided in its preamble that "Whereas, it is
believed to be not within the intendment of said nationalization law to include within its scope
sales made to industrial or commercial users or consumers.
3A CORPORATION LAW 2019-2020 pg. 74
---------------------------------------------------------------------Facts:
This is a case wherein, that on January 26, 1967, the First Coconut Central Co., purchased on
installment one diesel generation unit worth P21,000 from Madrid Trading. That as for the down
payment, the respondent company paid the amount of P4,000 to Madrid Trading, which issued
Official Receipt No. 02248 as shown by Invoice No. 214, where it also provided for the payment
of the balance P17,000 in three equal monthly installments to begin from the date of delivery with
usual clause on interests and attorney’s fees. As security for the satisfaction of the said obligation,
a chattel mortgage over the same diesel generating unit was constituted by the respondent First
Coconut Central Co., in favor of Madrid Trading.
That on January 26, 1967, Madrid Trading assigned all its rights under the chattel mortgage to
the herein petitioner, Marsman & Company, Inc. by virtue of Deed of Assignment. That on March
28, 1967, the respondent company paid Marsman & Company, Inc. the sum of P2,000, leaving a
balance of P15,000. That on September 13, 1967, the petitioner company notified the respondent
of its “long overdue and outstanding account” in the amount of P15,000, with this, respondent
wrote to Marsman & Company appealing that they be given thirty (30) days to settle the obligation.
However, on October 30, 1967, after repeated failure by the defendant company to meet its
obligation, petitioner Marsman & Company brought an action to recover the balance of the
respondent in the sum of P14,000. The Court of First Instance ruled in favor of Marsman, to which
the respondent appealed before the Court of Appeals. The Court of Appeals ruled in favor of First
Coconut rendered that, the sale in question violated Republic Act No. 1180, The Retail Trade
Nationalization Law and the Anti-Dummy Law, ruled the following:
1. The petitioner was illegally engaged in the retail business
2. The sale of a generating unit to respondent constituted retail business as defined
by RA 1180
Issue: W/N the sale of the industrial machinery violated the Anti-Dummy Law and the Retail Trade
Nationalization Law, NO
Ruling:
In the case at bar, the article in controversy is a piece of industrial machinery—a diesel generating
unit. The said unit was purchased by respondent to be used in its coconut central and as such
may be classified as "production or producer goods." Since the diesel generating unit is not a
consumer item, it necessarily does not come within the ambit of retail business as defined by
Republic Act No. 1180. Hence, herein petitioner Marsman & Company, Inc. may engage in the
business of selling producer goods. It necessarily follows that petitioner cannot be guilty of
violating the Anti- Dummy Law or of using a dummy since it is not prohibited by the Retail Trade
3A CORPORATION LAW 2019-2020 pg. 75
Nationalization Law from selling the diesel generating unit to herein respondent. From the
foregoing, there can be no basis in law for declaring the contract of sale as null and void.
For a sale to be considered as retail, the following elements should concur:
(1) The seller should be habitually engaged in selling;
(2) The sale must be direct to the general public; and
(3) The object of the sale is limited to merchandise, commodities or goods for consumption.
In this case, the first two elements are present. It is the presence of the third element that must
be determined. The last element refers to the subject of the retailer's activities or what he is selling,
i.e., consumption goods or consumer goods. Consumer goods may be defined as "goods which
are used or bought for use primarily for personal, family or household purposes. Such goods are
not intended for resale or further use in the production of other products." In other words,
consumer goods are goods which by their very nature are ready for consumption.
Producer goods have been defined as "goods (as tools and raw material) that are factors in the
production of other goods and that satisfy wants only indirectly- called also auxiliary goods,
instrumental goods, intermediate goods." They are by their very nature not sold to the public for
consumption. As such, the sale of producer goods used for industry or business is classified as a
wholesale transaction. Wholesaling has been defined as "selling to retailers or jobbers rather than
to consumers or a sale in large quantity to one who intends to resell."
That the sales to industrial or commercial users do not fall within the scope of the Retail Trade
Nationalization Law is further confirmed by Presidential Decree No. 714 promulgated on May 28,
1975 amending said law when the latter provided in its preamble that "Whereas, it is believed to
be not within the intendment of said nationalization law to include within its scope sales made to
industrial or commercial users or consumers; ...."
(32)
GSIS Family Bank-Thrift Bank v. BPI Family Bank, G.R. No.
175278, September 23, 2015 CARLOS
3A CORPORATION LAW 2019-2020 pg. 76
(33)
Indian Chamber of Commerce Phils., Inc. v. Filipino Indian
Chamber of Commerce in the Philippnes, Inc., G.R. No. 184008,
August 3, 2016. DE GUZMAN
3A CORPORATION LAW 2019-2020 pg. 77
(34)
De La Salle Montessori International of Malolos, Inc. v. De La
Salle Brothers, Inc., et. al., G.R. No. 205548, February 7, 2018
GALANG
3A CORPORATION LAW 2019-2020 pg. 78
(35)
Cagayan Fishing Development Co. Inc. v. Sandiko, G.R. No.
L-43350, December 23, 1937.
CAGAYAN FISHING DEVELOPMENT CO., INC., vs. TEODORO SANDIKO
December 23, 1937
Digested by: Gutierrez, Jr.
____________________________________________________________________________
Petitioner: CAGAYAN FISHING DEVELOPMENT CO., INC.
Respondent: TEODORO SANDIKO
Ponente: LAUREL, J.:
____________________________________________________________________________
Doctrine: A duly organized corporation has the power to purchase and hold such real property
as the purposes for which such corporation was formed may permit and for this purpose may
enter into such contracts as may be necessary. But before a corporation may be said to be
lawfully organized, many things have to be done. Among other things, the law requires the filing
of the articles of incorporation. Although there is a presumption that all the requirements of law
have been complied with, in the case before us it can not be denied that the plaintiff was not yet
incorporated when it entered into the contract of sale.
____________________________________________________________________________
Facts:
Manuel Tabora is the registered owner of four parcels of land and he wanted to build a
Fishery. He loaned from PNB P8,000 and to guarantee the payment of the loan, he mortgaged
3A CORPORATION LAW 2019-2020 pg. 79
the said parcels of land. Three subsequent mortgages were executed in favor of the same bank
and to Severina Buzon, whom Tabora is indebted to.
Tabora sold the four parcels of land to the plaintiff company, said to be under process of
incorporation, in consideration of one peso (P1) subject to the mortgages in favor of PNB and
Severina Buzon and, to the condition that the certificate of title to said lands shall not be
transferred to the name of the plaintiff company until the latter has fully and completely paid
Tabora’s indebtedness to PNB.
The articles of incorporation were filed and the company sold the parcels of land to Sandiko on
the reciprocal obligation that Sandiko will shoulder the three mortgages. A deed of sale
executed before a notary public by the terms of which the plaintiff sold, ceded and transferred to
the defendant all its rights, titles and interest in and to the four parcels of land.
He executed a promissory note that he shall be 25,300 after a year with interest and on the
promissory notes, the parcels were mortgage as security.
A promissory note for P25,300 was drawn by the defendant in favor of the plaintiff, payable after
one year from the date thereof. Further, a deed of mortgage executed before a notary public in
accordance with which the four parcels of land were given as security for the payment of the
said promissory note. All these three instruments were dated February 15, 1932.
Sandiko failed to pay, thus the action for payment. The lower court held that deed of sale was
invalid.
The corporation filed a motion for reconsideration.
____________________________________________________________________________
Issues:
1.Whether Cagayan Fishing Dev’t. has juridical capacity to enter into the contract.
2. Can promoters of a corporation act as agents of a corporation?
____________________________________________________________________________
RULING:
1.
The transfer made by Tabora to the Cagayan Fishing Development Co., Inc., plaintiff herein,
was effected on May 31, 1930 and the actual incorporation of said company was effected later
on October 22, 1930. In other words, the transfer was made almost five months before the
incorporation of the company.
A duly organized corporation has the power to purchase and hold such real property as the
purposes for which such corporation was formed may permit and for this purpose may enter into
such contracts as may be necessary. But before a corporation may be said to be lawfully
organized, many things have to be done. Among other things, the law requires the filing of
articles of incorporation. Although there is a presumption that all the requirements of law have
3A CORPORATION LAW 2019-2020 pg. 80
been complied with, in the case before us it can not be denied that the plaintiff was not yet
incorporated when it entered into the contract of sale.
The contract itself referred to the plaintiff as “una sociedad en vias de incorporacion.” It was not
even a de facto corporation at the time. Not being in legal existence then, it did not possess
juridical capacity to enter into the contract.
“Corporations are creatures of the law, and can only come into existence in the manner
prescribed by law. As has already been stated, general laws authorizing the formation of
corporations are general offers to any persons who may bring themselves within their
provisions; and if conditions precedent are prescribed in the statute, or certain acts are required
to be done, they are terms of the offer, and must be complied with substantially before legal
corporate existence can be acquired.”
“That a corporation should have a full and complete organization and existence as an entity
before it can enter into any kind of a contract or transact any business, would seem to be self
evident. . . . A corporation, until organized, has no being, franchises or faculties. Nor do those
engaged in bringing it into being have any power to bind it by contract, unless so authorized by
the charter. Until organized as authorized by the charter there is not a corporation, nor does it
possess franchises or faculties for it or others to exercise, until it acquires a complete
existence.”
2.
The contract here was entered into not only between Manuel Tabora and a non-existent
corporation but between Manuel Tabora as owner of four parcels of land on the one hand and
the same Manuel Tabora, his wife and others, as mere promoters of a corporation on the other
hand. For reasons that are self-evident, these promoters could not have acted as agents for a
projected corporation since that which had no legal existence could have no agent.
A corporation, until organized, has no life and therefore no faculties. It is, as it were, a child in
ventre sa mere. This is not saying that under no circumstances may the acts of promoters of a
corporation be ratified by the corporation if and when subsequently organized. There are, of
course, exceptions , but under the peculiar facts and circumstances of the present case we
decline to extend the doctrine of ratification which would result in the commission of injustice or
fraud to the candid and unwary.
The transfer by Manuel Tabora to the Cagayan Fishing Development Company, Inc. was null
because at the time it was effected the corporation was non-existent, we deem it unnecessary
to discuss this point.
3A CORPORATION LAW 2019-2020 pg. 81
(36)
Marc II Marketing, Inc. v. Alfredo Joson, G.R. No. 171993,
December 12, 2011
Marc II Marketing vs Joson
GR No. 171993
Date: December 12, 2011
Digested by: Therese Javier
________
Petitioner: Marc II Marketing, Inc.
Respondent: Alfredo Joson
Ponente: J. Perez
Topic: Commencement of Corporate Existence
_________
Doctrine: There is no corporation to speak of prior to an entity's incorporation. And no contract
entered into before incorporation can bind the corporation.
_________
Facts: Before petitioner corporation was officially incorporated, respondent has already been
engaged by petitioner Lucila, in her capacity as President of Marc Marketing, Inc., to work as the
General Manager of petitioner corporation. It was formalized through the execution of a
Management Contract dated 16 January 1994 under the letterhead of Marc Marketing, Inc. as
petitioner corporation is yet to be incorporated at the time of its execution. It was explicitly provided
therein that respondent shall be entitled to 30% of its net income for his work as General Manager.
Respondent will also be granted 30% of its net profit to compensate for the possible loss of
opportunity to work overseas. Pending incorporation of petitioner corporation, respondent was
designated as the General Manager of Marc Marketing, Inc., which was then in the process of
3A CORPORATION LAW 2019-2020 pg. 82
winding up its business. For occupying the said position, respondent was among its corporate
officers by the express provision of Section 1, Article IV 10 of its by-laws.
On 15 August 1994, petitioner corporation was officially incorporated and registered with the SEC.
Accordingly, Marc Marketing, Inc. was made non-operational. Respondent continued to discharge
his duties as General Manager but this time under petitioner corporation. Pursuant to Section 1,
Article IV of petitioner corporation's by-laws, its corporate officers are as follows: Chairman,
President, one or more Vice-President(s), Treasurer and Secretary. Its Board of Directors,
however, may, from time to time, appoint such other officers as it may determine to be necessary
or proper.
Per an undated Secretary's Certificate, petitioner corporation's Board of Directors conducted a
meeting on 29 August 1994 where respondent was appointed as one of its corporate officers with
the designation or title of General Manager to function as a managing director with other duties
and responsibilities that the Board of Directors may provide and authorized. Nevertheless, on 30
June 1997, petitioner corporation decided to stop and cease its operations due to poor sales
collection aggravated by the inefficient management of its affairs. It formally informed respondent
of the cessation of its business operation. Concomitantly, respondent was apprised of the
termination of his services as General Manager since his services as such would no longer be
necessary for the winding up of its affairs.
Issue: WON the Management Contract executed between Joson and Lucila has no binding effect
on petitioner corporation for having been executed way before its incorporation
Held: Section 19 of the Corporation Code expressly provides:
Sec. 19. Commencement 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 the Securities and Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon the incorporators, stockholders/members and
their successors shall constitute a body politic and corporate under the name stated in the articles
of incorporation for the period of time mentioned therein, unless said period is extended or the
corporation is sooner dissolved in accordance with law.
Logically, there is no corporation to speak of prior to an entity's incorporation. And no contract
entered into before incorporation can bind the corporation.
As can be gleaned from the records, the Management Contract dated 16 January 1994 was
executed between respondent and petitioner Lucila months before petitioner corporation's
incorporation on 15 August 1994. Similarly, it was done when petitioner Lucila was still the
President of Marc Marketing, Inc. Undeniably, it cannot have any binding and legal effect on
petitioner corporation. Also, there was no evidence presented to prove that petitioner corporation
adopted, ratified or confirmed the Management Contract. It is for the same reason that petitioner
corporation cannot be considered estopped from questioning its binding effect now that
respondent was invoking the same against it. In no way, then, can it be enforced against petitioner
corporation, much less, its provisions fixing respondent's compensation as General Manager to
30% of petitioner corporation's net profit. Consequently, such percentage cannot be the basis for
the computation of respondent's separation pay. This finding, however, will not affect the
undisputed fact that respondent was, indeed, the General Manager of petitioner corporation from
its incorporation up to the time of his dismissal.
3A CORPORATION LAW 2019-2020 pg. 83
(37)
Pioneer Insurance & Surety Corp. v. Court of Appeals, 175
SCRA 668 (1989)
) Pioneer Insurance & Surety Corporation vs. The Honorable Court of Appeals, Border
Machinery & Heavy Equipment, Inc., (BORMAHECO), Constancio M. Maglana and Jacob S.
Lim
G.R. No. 84197
Date: July 28, 1989
Digested by: Yui Recinto
Petitioner: Pioneer Insurance & Surety Corporation
Respondents: The Honorable Court of Appeals, Border Machinery & Heavy Equipment, Inc.,
(BORMAHECO), Constancio M. Maglana and Jacob S. Lim
Doctrine: Where persons associate themselves together under articles to purchase property to
carry on a business, and their organization is so defective as to come short of creating a
corporation within the statute, they become in legal effect partners inter se, and their rights as
members of the company to the property acquired by the company will be recognized. (Smith v.
Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369)
Facts:
Respondent Lim was engaged in the airline business as owner-operator of Southern Airlines
(SAL), a single proprietorship. On May 17, 1965, Japan Airlines (JDA) and Lim entered into and
executed one a contract of sale for the sale and purchase of two aircrafts and one set of necessary
3A CORPORATION LAW 2019-2020 pg. 84
spare parts for the total price of $109,000.00 to be paid in installments. On May 22, 1965,
Petitioner Pioneer Insurance and Surety Corporation executed and issued a Surety Bond in favor
of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare parts.
Respondent BORMAHECO, Francisco and Modesto Cervantes and Constancio Maglana
contributed funds used in the purchase of the aircrafts and spare parts. The funds were supposed
to be used to a new corporation proposed by Lim. However, Lim made an agreement with Pioneer
Insurance, without the knowledge of BORMAHECO, Francisco and Modesto Cervantes and
Constancio Maglana, to insure the two aircrafts which are bought in installment from JDA, using
the same as security.
Lim defaulted in payment, the two aircrafts were foreclosed by petitioner. It was established that
there was no corporation formally formed between Lim, BORMAHECO and Maglana.
Issue: Whether or not BORHAMECO and other contributors share the loss as general partners?
Ruling:
No. There was no de facto partnership. When co-investors agreed to do business through a
corporation but failed to incorporate, a de facto partnership would have been formed, and as such,
all must share in the losses and/or gains of the venture in proportion to their contribution. But by
taking out a surety from Pioneer Insurance and not using the funds as agreed upon by them (corespondents), it was shown that Lim did not have the intent to form a corporation with he’s corespondents. Lim was acting on his own in transacting the sale of aircrafts and spare parts.
No de facto partnership was created among the parties which would entitle the petitioner to a
reimbursement of the supposed losses of the proposed corporation. The record shows that the
petitioner was acting on his own and not on behalf of his other would-be incorporators in
transacting the sale of airplanes and spare parts.
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of
Appeals is AFFIRMED.
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of
Appeals is AFFIRMED.
3A CORPORATION LAW 2019-2020 pg. 85
(38)
Hall v. Piccio, G.R. No. L-2598, June 29, 1950
C. ARNOLD HALL AND BRADLEY P. HALL vs. EDMUNDO S. PICCIO, FRED BROWN, EMMA
BROWN, HIPOLITA CAPUCIONG
G.R. NO. L-2598
DATE: JUNE 29, 1950
DIGESTED BY: YUI RECINTO
PETITIONERS: C. ARNOLD HALL AND BRADLEY P. HALL
RESPONDENTS: EDMUNDO S. PICCIO, FRED BROWN, EMMA BROWN, HIPOLITA
CAPUCIONG
PONENTE: BENGZON, J.
DOCTRINE: It is the issuance of a certificate of incorporation which calls a corporation into being.
FACTS: On May 28, 1947, petitioners and respondents Fred Brown, Emma Brown, Hipolita D.
Chapman, and Ceferino S. Abella signed and acknowledged in Leyte, the articles of incorporation
of the Far Eastern Lumber and Commercial Co. Inc., organized to engage in a general lumber
business. After the execution of AOI, the corporation proceeded to do business. On December 2,
1947, the AOI were filed in the office of the SEC for the issuance of the certificate of incorporation.
On March 22, 1948, pending action on the AOI, the respondents filed before the Court of First
Instance of Leyte civil case no. 381 alleging that the Far Eastern Lumber and Commercial Co.
was an unregistered partnership and wished to have it dissolved due to conflict among the
3A CORPORATION LAW 2019-2020 pg. 86
members, mismanagement, fraud, and heavy financial losses. Herein petitioners filed a motion to
dismiss contesting the court’s jurisdiction as well as the cause of action. Hon. Edmundo S. Piccio,
however, ordered for the dissolution of the company. Hence, this petition.
ISSUE: Whether or not the court had jurisdiction in Civil Case No. 381 to decree the dissolution
of the company
RULING: The court had no jurisdiction to order the dissolution of the company because it being
a de facto corporation, its dissolution may only be ordered in a quo warranto proceeding as per
Section 19 of the Corporation Law. Also, it is the issuance of a certificate of incorporation which
calls a corporation into being. The immunity of collateral attack is granted to corporation’s
‘claiming in good faith to be a corporation under this act.’ Furthermore, this is a litigation between
stockholders of the corporation for the purpose of obtaining its dissolution. Even the existence of
a de jure corporation may be terminated in a private suit for its dissolution between stockholders,
without the intervention of the state.
(39)
Lim v. Philippine Fishing Gear Industries, Inc., G.R. No.
136448, November 3, 1999
(39) Lim v. Philippine Fishing Gear Industries, Inc.
GR No. 136448
November 3, 1999
Digested by: Jarah Relato
____________________________________
Petitioner: LIM TONG LIM
Respondent: PHILIPPINE FISHING GEAR INDUSTRIES
Ponente: Justice Panganiban
Doctrine: Corporation by estoppel. — All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided however, That when any such
ostensible corporation is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality
_____________________________________
FACTS:
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a
Contract for the purchase of fishing nets of various sizes from the Philippine Fishing Gear
Industries. They claimed that they were engaged in a business venture with Petitioner Lim Tong
3A CORPORATION LAW 2019-2020 pg. 87
Lim, who however was not a signatory to the agreement. The total price of the nets amounted to
P532,045. Four hundred pieces of floats worth P68,000 were also sold to the Corporation.
CHUA and YAO failed to pay for the fishing nets and the floats; hence the collection suit with a
prayer for a writ of preliminary attachment. The suit was brought against the three in their
capacities as general partners, on the allegation that "Ocean Quest Fishing Corporation" was a
nonexistent corporation as shown by a Certification from the SEC. The trial court maintained the
Writ, and upon motion Philippine Fishing Gear, ordered the sale of the fishing nets at a public
auction. Philippine Fishing Gear Industries won the bidding and deposited with the court the sales
proceeds of P900,000
The Trial court rendered its Decision, ruling that Philippine Fishing Gear Industries was entitled
to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to
pay respondent. It ruled that a partnership among Lim, Chua and Yao existed based on the
testimonies of the witnesses presented and on a Compromise Agreement executed by the three.
The trial court noted that the Compromise Agreement was silent as to the nature of their
obligations, but that joint liability could be presumed from the equal distribution of the profit and
loss. Lim appealed to the CA which affirmed the RTC. The CA held that petitioner was a partner
of Chua and Yao in a fishing business and may thus be held liable as a such for the fishing nets
and floats purchased by and for the use of the partnership
ISSUE/S: WON petitioner should be held jointly liable with Chua and Yao.
RULING: Petition denied, CA affirmed
Sec. 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. — All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred or arising as a result thereof:
Provided however, That when any such ostensible corporation is sued on any
transaction entered by it as a corporation or on any tort committed by it as such, it
shall not be allowed to use as a defense its lack of corporate personality. One who
assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be
estopped from denying its corporate existence. "The reason behind this doctrine is obvious — an
unincorporated association has no personality and would be incompetent to act and appropriate
for itself the power and attributes of a corporation as provided by law; it cannot create agents or
confer authority on another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk.
Petitioner contests such liability insisting that only those who dealt in the name of the ostensible
corporation should be held liable, since his name does not appear on any of the contracts and
since he never directly transacted with the respondent corporation, ergo, he cannot be held liable.
3A CORPORATION LAW 2019-2020 pg. 88
Petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which has earlier
been proven to be an asset of the partnership. He in fact questions the attachment of the nets,
because the Writ has effectively stopped his use of the fishing vessel.
Lim, Chua and Yao decided to form a corporation. Although it was never legally formed for
unknown reasons, this fact alone does not preclude the liabilities of the three as contracting
parties in representation of it. Clearly, under the law on estoppel, those acting on behalf of a
corporation and those benefited by it, knowing it to be without valid existence, are held liable as
general partners. Technically, it is true that petitioner did not directly act on behalf of the
corporation. However, having reaped the benefits of the contract entered into by persons with
whom he previously had an existing relationship, he is deemed to be part of said association and
is covered by the scope of the doctrine of corporation by estoppel
(40)
International Express Travel & Tours, Inc. v. Hon. Court of
Appeals, G.R. No. 119002, October 19, 2000
International Express Travel And Tour Services Inc. vs Court of Appeals
GR No. 119002
October 19, 2000
Digested by: James San Diego
Petitioner: INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC.
Respondent: HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL
FEDERATION
Ponente: KAPUNAN, J.
Topic: Unincorporated association
Facts: On June 30, 1989, petitioner International Express Travel and Tours Services Inc., through
its managing director, wrote a letter to the Philippine Football Federation through its President
Henri Kahn, wherein the former offered its services as a travel agency to the latter. The offer was
accepted. Petitioner secured the airline tickets for the trips of the athletes and officials of the
3A CORPORATION LAW 2019-2020 pg. 89
Federation to the South East Asian Games in Kuala Lumpur as well as various other trips to the
People’s Republic of China and Brisbane. The total cost of the tickets amounted to
Php449,654.83. For the tickets received, the Federation made two partial payments, both in
September of 1989 in the total amount of Php176,467.50. On October 4, 1989, petitioner wrote
the Federation, through the private respondent a demand letter requesting for the amount of
Php265,844.33. On October 30, 1989, the Federation, through the project gintong alay, paid the
amount of Php31,603. On December 27, 1989, Henri Kahn issued a personal check in the amount
of Php50,000 as partial payment for the outstanding balance of the Federation. Thereafter, no
further payments were made despite repeated demands. Hence, this petition.
ISSUE: Whether or not private respondent can be made personally liable for the liabilities
of the Philippines Football Federation.
RULING: Yes. A voluntary unincorporated association, like defendant Federation has no
power to enter into, or to ratify a contract. The contract entered into by its officers or agents
on behalf of such association is binding or, as enforceable against it. The officers or agents
are themselves personally liable.
In attempting to prove the juridical existence of the Federation, Henri Kahn attached to his
motion for reconsideration before the trial court a copy of the constitution and by-laws of
the Philippine Football Federation. Unfortunately, the same does not prove that said
Federation has indeed been recognized and accredited by either the Philippine Amateur
Athletic Federation or the Department of Youth and Sports Development. Accordingly, we
rule that the Philippine Football Federation is not a national sports association within the
purview of the aforementioned laws and does not have corporate existence of its own.Thus
being said, it follows that private respondent Henri Kahn should be liable for the unpaid
obligations of the unincorporated Philippine Football Federation. It is a settled principle in
corporation law that any person acting or purporting to act on behalf of the corporation which
has no valid existence assumed such privileges and becomes personally liable for contract
entered into or for other acts performed as such agent.
3A CORPORATION LAW 2019-2020 pg. 90
(41)
Paz v. New International Environmental Universality, Inc.,
G.R. No. 203993, April 20, 2015.
PRISCILO B. PAZ v. NEW INTERNATIONAL ENVIRONMENTAL UNIVERSALITY, INC.,
G.R. No. 203993
April 20, 2015
Digested by: Rosinie Suico
____________________________________________________________________________
Petitioner: PRISCILO B. PAZ
Respondent: NEW INTERNATIONAL ENVIRONMENTAL UNIVERSITY, INC.
Ponente: PERLAS-BERNABE, J.:
Topic: Articles of Incorporation
____________________________________________________________________________
Facts
On March 1, 2000, Priscilo Paz, as the officer-in-charge of the Aircraft Hangar at the Davao
International Airport, Davao City, entered into a Memorandum of Agreement5 (MOA) with Captain
Allan J. Clarke (Capt. Clarke), President of International Environmental University to allow the
latter to use the aircraft hangar space at the said Airport for a period of four (4) years. Pretermination is allowed provided six months notice must be served.
On August 19, 2000, Petitioner inform MR. ALLAN J. CLARKE to cancel the MOA if the "welding,
grinding, and fabrication jobs" were not stopped immediately.9
3A CORPORATION LAW 2019-2020 pg. 91
On January 16, 2001, another letter sent to "MR. ALLAN J. CLARKE reiterating that the hangar
space "must be for aircraft use only," and that he will terminate the MOA due to the safety of the
aircrafts parked nearby.
On July 19, 2002, petitioner sent a third letter, this time, addressed to "MR. ALLAN JOSEPH
CLARKE, CEO, New International Environmental University, Inc. demanding that the latter vacate
the premises.
On July 23, 2002, petitioner sent a final letter14 addressed to "MR. ALLAN J. CLARKE, Chairman,
CEO, New International Environmental University, Inc. strongly demanding the latter to
immediately vacate the hangar space.
Respondent’s complaint
(a) Petitioner had disconnected its electric and telephone lines
(b) Upon petitioner's instruction, security guards prevented its employees from entering the leased
premises by blocking the hangar space with barbed wire
(c) Petitioner violated the terms of the MOA when he took over the hangar space without giving
respondent the requisite six (6)-month advance notice of termination.19
Petitioner’s defense:
(a) Respondent had no cause of action against him as the MOA was executed between him and
Capt. Clarke in the latter's personal capacity
(b) There was no need to wait for the expiration of the MOA because Capt. Clarke performed
highly risky works in the leased premises that endangered other aircrafts within the vicinity
(c) The six (6)-month advance notice of termination was already given in the letters he sent to
Capt. Clarke.20
The RTC Ruling
(a) Petitioner guilty of indirect contempt for contumaciously disregarding its Order25 dated March
6, 2003, by not allowing respondent to possess occupy the leased premises pending final decision
in the main case
(b) liable for breach of contract for illegally terminating the MOA even before the expiration of the
term thereof.
On the challenge to respondent's juridical personality, the RTC quoted the Order28 dated April 11,
2005 of the SEC explaining that respondent was issued a Certificate of Incorporation on
September 3, 2001 as New International Environmental Universality, Inc. but that, subsequently,
when it amended its Articles of Incorporation on November 14, 2001 and July 11, 2002, the SEC
Extension Office in Davao City erroneously used the name New International Environmental
University, Inc.29 The latter name was used by respondent when it filed its amended complaint on
September 11, 2002 and the petition for indirect contempt against petitioner on October 24, 2003
3A CORPORATION LAW 2019-2020 pg. 92
believing that it was allowed to do so, as it was only on April 11, 2005 when the SEC directed it
to revert to its correct name.30
The RTC further declared that the MOA, which was "made and executed by and between CAPT.
[PRISCILO] B. PAZ, Officer-In-Charge of Aircraft Hangar at Davao International Airport, Davao
City, Philippines, hereinafter called as FIRST PARTY [a]nd CAPT. ALLAN J. CLARKE[,] President
of INTERNATIONAL ENVIRONMENTAL UNIVERSITY with office address at LIBERTY
AVIATION HANGAR, Davao International Airport, Davao City, Philippines, hereinafter called as
SECOND PARTY,"31 was executed by the parties not only in their personal capacities but also in
representation of their respective corporations or entities.32
Aggrieved, petitioner elevated his case on appeal before the CA, arguing that the trial court should
have dismissed outright the cases against him for failure of respondent to satisfy the essential
requisites of being a party to an action, i.e., legal personality, legal capacity to sue or be sued,
and real interest in the subject matter of the action.35
The CA Ruling
The CA ruled that, while there was no corporate entity at the time of the execution of the MOA on
March 1, 2000 when Capt. Clarke signed as "President of International Environmental University,"
petitioner is nonetheless estopped from denying that he had contracted with respondent as a
corporation, having recognized the latter as the "Second Party" in the MOA that "will use the
hangar space exclusively for company aircraft/helicopter."38 Petitioner was likewise found to have
issued checks to respondent from May 3, 2000 to October 13, 2000, which belied his claim of
contracting with Capt.
Clarke in the latter's personal capacity.39
____________________________________________________________________________
Issue
(a) the CA erred in not settling his appeal for both the breach of contract and indirect contempt
cases in a single proceeding and, consequently, the review of said cases before the Court should
be consolidated,
(b) the CA should have dismissed the cases against him for (1) lack of jurisdiction of the trial
court in view of the failure to implead Capt. Clarke as an indispensable party; 47 (2) lack of legal
capacity and personality on the part of respondent;48 and (3) lack of factual and legal bases for
the assailed RTC Decision.49
The Court's Ruling
The petition lacks merit.
First, on the matter of the consolidation50 of the instant case with G.R. No. 202826 entitled "Priscilo
B. Paz v. New International Environmental University,'' the petition for review of the portion of the
3A CORPORATION LAW 2019-2020 pg. 93
RTC Decision finding petitioner guilty of indirect contempt, the Court had earlier denied said
motion in a Resolution52 dated July 24, 2013 on the ground that G.R. No. 202826 had already
been denied53 with finality.
Second, whether or not Capt. Clarke should have been impleaded as an indispensable party was
correctly resolved by the CA which held that the former was merely an agent of respondent.
Therefore, he was not an indispensable party to the case at bar.56
The CA had correctly pointed out that, from the very language itself of the MOA entered into by
petitioner whereby he obligated himself to allow the use of the hangar space "for company
aircraft/helicopter," petitioner cannot deny that he contracted with respondent.59 Petitioner further
acknowledged this fact in his final letter dated July 23, 2002, where he reiterated and strongly
demanded the former to immediately vacate the hangar space his "company is
occupying/utilizing."60
Section 2161 of the Corporation Code62 explicitly provides that one who assumes an obligation to
an ostensible corporation, as such, cannot resist performance thereof on the ground that there
was in fact no corporation. Clearly, petitioner is bound by his obligation under the MOA not only
on estoppel but by express provision of law.
The lower courts, therefore, did not err in finding petitioner liable for breach of contract for
effectively evicting respondent from the leased premises even before the expiration of the term of
the lease. The Court reiterates with approval the ratiocination of the RTC that, if it were true that
respondent was violating the terms and conditions of the lease, "[petitioner] should have gone to
court to make the [former] refrain from its 'illegal' activities or seek rescission of the [MOA], rather
than taking the law into his own hands."70
WHEREFORE, the petition is DENIED. The Decision dated January 31, 2012 and the Resolution
dated October 2, 2012 of the Court of Appeals in CA-G.R. CV No. 00903-MIN are hereby
AFFIRMED.
SO ORDERED.
3A CORPORATION LAW 2019-2020 pg. 94
(42)
The Missionary Sisters of Our Lady of Fatima v. Alzona, G.R.
No. 224307, August 6, 2018
The Missionary Sisters of Our Lady of Fatima v. Alzona
G.R. No. 224307,
Date: August 6, 2018
Digested by: Jarah Relato
______________________________________________
Petitioner: The Missionary Sisters of Our Lady of Fatima
Respondent: Amando V. Alzona
Ponente: Justice Reyes, Jr.
Topic: Defectively Formed Corporations: De Facto Corporation and Corporation by Estoppel
_________________________________________________________________
Doctrine: It is the act of registration with the SEC through the issuance of a certificate of
incorporation that marks the beginning of an entity's corporate existence; The doctrine of
corporation by estoppel applies when a non-existent corporation enters into contracts or
dealings with third persons. In which case, the person who has contracted or otherwise dealt
with the non-existent corporation is estopped to deny the latter's legal existence in any action
leading out of or involving such contract or dealing.
___________________________________________________________________
Facts:
The Missionary Sisters of Our Lady of Fatima is a religious and charitable group headed by
Mother Concepcion as its Superior General. The respondents are the legal heirs of the late
Purificacion Alzona.
3A CORPORATION LAW 2019-2020 pg. 95
Purificacion is the registered owner of parcels of land in Laguna. She became a benefactor of
the petitioner by giving support to the community and its works. Accompanied by Mother
Concepcion, Purificacion discovered that she has lung cancer thus she requested MC to take
care of her. In October 1999, Purificacion stated that she is donating her house to the petitioner
through MC. MC went to see Atty. Arcillas, acting on the lawyer’s advice, MC went to SEC and
filed the registration application.
Purificacion executed a Deed of Donation Inter Vivos in favor of the petitioner. MC filed an
application before the BIR to be exempt from donor’s tax as a religious organization, the
application was granted. However, the Register of Deeds denied the registration on account of
an Affidavit of Adverse Claim filed by Purificacion’s brother, Amando. Purificacion died.Amando
died during the pendency of the case and was substituted by his legal heirs.
A complaint was filed before the RTC seeking to annul the Deed executed between Puirificacion
and the petitioner on the ground that at the time of the donation was made, the petitioner was
not registered with the SEC and therefore has no juridical personality and cannot legally accept
the donation. RTC ruled in favor of the petitioner and held that the petitioner was a DE FACTO
corporation. CA declared the Deed of Donation as VOID, it held that the petitioner cannot be
considered as a de facto corporation considering that at the time of the donation, there was no
bona fide attempt on its part to incorporate.
Issue: WON the petitioner is a de facto corporation or a corporation by estoppel
Ruling: Petition granted, CA reversed and set aside
Petitioner filed its Articles of Incorporation and by-laws on August 28, 2001. However, the SEC
issued the corresponding Certificate of Incorporation only on August 31, 2001, two (2) days after
Purificacion executed a Deed of Donation on August 29, 2001. Clearly, at the time the donation
was made, the Petitioner cannot be considered a corporation de facto. The Court applied the
doctrine of estoppel in this case.
Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it
to be without authority to do so shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of corporate
personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation
The doctrine of corporation by estoppel is founded on principles of equity and is designed to
prevent injustice and unfairness.It applies when a non-existent corporation enters into contracts
or dealings with third persons. In which case, the person who has contracted or otherwise dealt
with the non-existent corporation is estopped to deny the latter's legal existence in any action
leading out of or involving such contract or dealing. Jurisprudence dictates that the doctrine of
corporation by estoppel applies for as long as there is no fraud and when the existence of the
association is attacked for causes attendant at the time the contract or dealing sought to be
enforced was entered into, and not thereafter.
3A CORPORATION LAW 2019-2020 pg. 96
In this controversy, Purificacion dealt with the petitioner as if it were a corporation. This is
evident from the fact that Purificacion executed two (2) documents conveying her properties in
favor of the petitioner - first, on October 11, 1999 via handwritten letter, and second, on August
29, 2001 through a Deed; the latter having been executed the day after the petitioner filed its
application for registration with the SEC
(43)
PMI Colleges v. NLRC, G.R. No. 121466, August 15, 1997,
277 SCRA 462
PMI Colleges v. NLRC
G.R. No. 121466
August 15, 1997
Digested by: James San Diego
Petitioner: PMI COLLEGES
Respondent: THE NATIONAL LABOR RELATIONS COMMISSION and ALEJANDRO GALVAN
Ponente: ROMERO, J.
Topic: Company signatory as per by-laws.
Facts:
On July 7, 1991, petitioner, an educational institution offering courses on basic seaman's training
and other marine-related courses, hired private respondent as contractual instructor with an
3A CORPORATION LAW 2019-2020 pg. 97
agreement that the latter shall be paid at an hourly rate of P30.00 to P50.00, depending on the
description of load subjects and on the schedule for teaching the same. Pursuant to this
engagement, private respondent then organized classes in marine engineering.
Initially, private respondent and other instructors were compensated for services rendered during
the first three periods of the abovementioned contract. However, for reasons unknown to private
respondent, he stopped receiving payment for the succeeding rendition of services. This claim of
non-payment was embodied in a letter dated March 3, 1992, written by petitioner's Acting Director,
Casimiro A. Aguinaldo, addressed to its President, Atty. Santiago Pastor, calling attention to and
appealing for the early approval and release of the salaries of its instructors including that of
private respondent. It appeared further in said letter that the salary of private respondent
corresponding to the shipyard and plant visits and the ongoing on-the-job training of Class 41 on
board MV "Sweet Glory" of Sweet Lines, Inc. was not yet included. This request of the Acting
Director apparently went unheeded. Repeated demands having likewise failed, private
respondent was soon constrained to file a complaint 4 before the National Capital Region
Arbitration Branch on September 14, 1993 seeking payment for salaries earned from the
following: (1) basic seaman course Classes 41 and 42 for the period covering October 1991 to
September 1992; (2) shipyard and plant visits and on-the-job training of Classes 41 and 42 for
the period covering October 1991 to September 1992 on board M/V "Sweet Glory" vessel; and
(3) as Acting Director of Seaman Training Course for 3-1/2 months.
Private respondent's claims, as expected, were resisted by petitioner. It alleged that classes in
the courses offered which complainant claimed to have remained unpaid were not held or
conducted in the school premises of PMI Colleges. Only private respondent, it was argued, knew
whether classes were indeed conducted. In the same vein, petitioner maintained that it exercised
no appropriate and proper supervision of the said classes which activities allegedly violated
certain rules and regulations of the Department of Education, Culture and Sports (DECS).
Furthermore, the claims, according to petitioner, were all exaggerated and that, at any rate,
private respondent abandoned his work at the time he should have commenced the same.
Later in the proceedings below, petitioner manifested that Mr. Tomas G. Cloma, Jr., a member of
the petitioner's Board of Trustees wrote a letter 5 to the Chairman of the Board on May 23, 1994,
clarifying the case of private respondent and stating therein, inter alia, that under petitioner's bylaws only the Chairman is authorized to sign any contract and that private respondent, in any
event, failed to submit documents on the alleged shipyard and plant visits in Cavite Naval Base.
ISSUE:
Whether or not the contract (if there is any) be invalid just because the signatory thereon is not
the Chairman as mandated by the company by-laws?
RULING:
No, it does not invalidate the contract.
3A CORPORATION LAW 2019-2020 pg. 98
Neither can we concede that such contract would be invalid just because the signatory thereon
was not the Chairman of the Board which allegedly violated petitioner's by-laws. Since by-laws
operate merely as internal rules among the stockholders, they cannot affect or prejudice third
persons who deal with the corporation, unless they have knowledge of the same." No proof
appears on record that private respondent ever knew anything about the provisions of said bylaws. In fact, petitioner itself merely asserts the same without even bothering to attach a copy or
excerpt thereof to show that there is such a provision. How can it now expect the Labor Arbiter
and the NLRC to believe it? That this allegation has never been denied by private respondent
does not necessarily signify admission of its existence because technicalities of law and
procedure and the rules obtaining in the courts of law do not strictly apply to proceedings of this
nature.
(44)
Government of Philippine Islands v. El Hogar Filipino, 50 Phil.
399 (1927)
THE GOVERNMENT OF THE PHILIPPINE ISLANDS vs. EL HOGAR FILIPINO
G.R. No. L-26649
Date: July 13, 1927
Digested by: Rosinie Suico
__________________________________________________________________
Plaintiff: THE GOVERNMENT OF THE PHILIPPINE ISLANDS
Defendant: EL HOGAR FILIPINO
Ponente: STREET, J.:
TopicArticles of Inc. distinguished from By-laws
3.02. Binding Effect.
__________________________________________________________________
Doctrine
___________________________________________________________________
Facts
This is a quo warranto proceeding instituted originally in this court by the Government of the
Philippine Islands on the relation of the Attorney-General against the building and loan association
known as El Hogar Filipino, for the purpose of depriving it of its corporate franchise, excluding it
from all corporate rights and privileges, and effecting a final dissolution of said corporation. The
complaint enumerates seventeen distinct causes of action, to all of which the defendant has
answered upon the merits.
The Philippine Commission enacted what is known as the Corporation Law (Act No. 1459)
effective upon April 1 1906.
3A CORPORATION LAW 2019-2020 pg. 99
El Hogar Filipino, organize in 1911 under the laws of the Philippine Islands, was the first
corporation organized under
Section 171 to 190 Act No. 1459 devoted to the subject of building and loan associations their
organization and administration. Under the law the capital of the Association was not permitted to
exceed P3,000,000, but by Act No. 2092 the capitalization of building and loan associations to
the amount of ten millions.
El Hogar Filipino, took advantage of this enactment, the shares increases from
shareholders to 125,750 shares, with a total paid-up value of P8,703,602.25.
5,826
In the year 1920 El Hogar Filipino was the holder of a recorded mortgage upon a tract of land in
the municipality of San Clemente, Province of Tarlac, as security for a loan of P24,000 to the
shareholders of El Hogar Filipino who were the owners of said property. The borrowers defaulted
in their payments that resulted to foreclosure, auction and property ended up to El Hogar Filipino.
December 22, 1920 applied for Titling in the Registry of Deeds of Tarlac. Entry date: December
28, 1920 is annotated at the back of the Title.
Finally on May 7, 1921, El Hogar Filipino received the certificate of title from the register of deeds
of Tarlac after several request.
On March 10, 1921, El Hogar is trying to sell the property thru their agents Vicente Bengzon and
Jose Laguardia for P23,000.00 but no offers were received..
In January, 1926, El Hogar Filipino, advertise the property in El Debate, La Vanguardia and Taliba
then, On March 16, 1926, the first offer by one Alcantara for the sum of P4,000, downpayment
of P500 and the remainder within thirty days.
The Board accepted the offer but Alcantara back out. The Property was sold to Dona Felipa
Alberto for P6,000.00 on July 30, 1926.
Under section 75 of the Act of Congress of July 1, 1902, and the similar provision in section 13 of
the Corporation Law, allow the corporation "five years after receiving the title," within which to
dispose of the property.
The Government of the Philippine Island filed an action against El Hogar due to alleged illegal
holding title to real property for a period exceeding 5 years after the same was brought in a
foreclosure sale . Sec 13 (5) of the Corporation Law states that corporations to dispose of real
estate obtained within 5 years from receiving the Title. The Government prays that El Hogar be
excluded from all corporate rights and privileges and effecting a final dissolution of said
corporation.
___________________________________________________________________
Issue
Whether the acts of respondent corporation merit its dissolution or deprivation of its corporate
franchise and to exclude it from all corporate rights and privileges.
__________________________________________________________________
Ruling
Causes of action.
1.
— Alleged illegal holding by the respondent of the title – Cause of delay is not their
fault. Upon this point we do not hesitate to say that in our opinion the corporation has
3A CORPORATION LAW 2019-2020 pg. 100
not been shown to have offended against the law in a manner that should entail a
forfeiture of its charter. Certainly no court with any discretion to use in the matter would
visit upon the respondent and its thousands of shareholders the extreme penalty of
the law as a consequence of the delinquency here shown to have been committed.
The law applicable to the case is in our opinion found in section 212 of the Code of
Civil Procedure, as applied by this court in Government of the Philippine Islands vs.
Philippine Sugar Estates Development Co. (38 Phil., 15). This section (212), in
prescribing the judgment to be rendered against a corporation in an action of quo
warranto, among other things says:
. . . When it is found and adjudged that a corporation has offended in any matter or manner
which does not by law work as a surrender or forfeiture, or has misused a franchise or
exercised a power not conferred by law, but not of such a character as to work a surrender
or forfeiture of its franchise, judgment shall be rendered that it be outset from the
continuance of such offense or the exercise of such power.
— Charge that the respondent is owning and holding a business lot, with the structure
thereon, in the financial district of the City of Manila is excess of its reasonable
requirements and in contravention of subsection 5 of section 13 of the corporation
Law. – WITHOUT MERIT.
Every Corporation has the power to purchase, hold and lease such real property as the
transaction would of the lawful business may reasonably and necessarily require.
2.
— The respondent is charged with engaging in activities foreign to the purposes for
which the corporation was created and not reasonable necessary to its legitimate
ends. - VALID
The administration of property, payment of real estate taxes, causing necessary repairs,
managing real properties of non borrowing shareholders is more befitting to the business
of a real estate agent or a trust company than a building and loan association.
3.
.
— That the by laws of the association stating that “The board of directors of the
association, by the vote of an absolute majority of its members, is empowered to
cancel shares and to return to the owner thereof the balance resulting from the
liquidation thereof whenever, by reason of their conduct, or for any other motive, the
continuation as members of the owners of such shares is not desirable.” This by-law
is of course a patent nullity, since it is in direct conflict with the latter part of section
187 of the Corporation Law, which expressly declares that the board of directors shall
not have the power to force the surrender and withdrawal of unmatured stock except
in case of liquidation of the corporation or of forfeiture of the stock for delinquency.
In this view we are unable to concur. The obnoxious by-law, as it stands, is a mere nullity,
and could not be enforced even if the directors were to attempt to do so. There is no
provision of law making it a misdemeanor to incorporate an invalid provision in the by-laws
of a corporation; and if there were such, the hazards incident to corporate effort would
certainly be largely increased. There is no merit in this cause of action.
4.
5.
— Charge against respondent for section 31 of the Corporation Law it is declared
that, "at all elections of directors there must be present, either in person or by
representative authorized to act by written proxy, the owners of the majority of the
subscribed capital stock entitled to vote. . . ."
3A CORPORATION LAW 2019-2020 pg. 101
Owing to the failure of a quorum at most of the general meetings since the respondent
has been in existence, it has been the practice of the directors to fill vacancies in the
directorate by choosing suitable persons from among the stockholders. This custom finds
its sanction in article 71 of the by-laws, which reads as follows:
ART. 71. The directors shall elect from among the shareholders members to fill the
vacancies that may occur in the board of directors until the election at the general meeting.
Court is unable to see the slightest merit in the charge. No fault can be imputed to the
corporation on account of the failure of the shareholders to attend the annual meetings;
and their non-attendance at such meetings is doubtless to be interpreted in part as
expressing their satisfaction of the way in which things have been conducted.
— It is alleged that the directors of El Hogar Filipino, instead of serving without pay,
or receiving nominal pay or a fixed salary, have been receiving large compensation,
varying in amount from time to time, out of the profits of the respondent.
The Corporation Law does not undertake to prescribe the rate of compensation for the
directors of corporations. The power to fixed the compensation they shall receive, if any,
is left to the corporation, to be determined in its by-laws(Act No. 1459, sec. 21). Pursuant
to this authority the compensation for the directors of El Hogar Filipino has been fixed in
section 92 of its by-laws, as already stated. The remedy, if any, seems to lie rather in
publicity and competition, rather than in a court proceeding. The sixth cause of action is in
our opinion without merit.
6.
— It is alleged in the complaint that the royalty of the founder is "unconscionable,
excessive and out of all proportion to the services rendered, besides being contrary to
and incompatible with the spirit and purpose of building and loan associations." It is
our opinion that this contention is entirely without merit. Stated in its true simplicity, the
primary question here is whether the making of a (possibly) indiscreet contract is a
capital offense in a corporation, — a question which answers itself. No possible doubt
exists as to the power of a corporation to contract for services rendered and to be
rendered by a promoter in connection with organizing and maintaining the corporation.
It is true that contracts with promoters must be characterized by good faith; but could
it be said with certainty, in the light of facts existing at the time this contract was made,
that the compensation therein provided was excessive? If the amount of the
compensation now appears to be a subject of legitimate criticism, this must be due to
the extraordinary development of the association in recent years.
The seventh count is not sustainable.
7.
— The alleged that article 70 is objectionable in that, under the requirement for
security, a poor member, or wage-earner, cannot serve as director, irrespective of
other qualifications and that as a matter of fact only men of means actually sit on the
board.
Section 21 of the Corporation Law expressly gives the power to the corporation to provide
in its by-laws for the qualifications of directors; and the requirement of security from them
for the proper discharge of the duties of their office, in the manner prescribed in article 70,
is highly prudent and in conformity with good practice. Article 76, prohibiting directors from
making loans to themselves, is of course designed to prevent the possibility of the looting
of the corporation by unscrupulous directors. A more discreet provision to insert in the bylaws of a building and loan association would be hard to imagine. Clearly, the eighth cause
of action cannot be sustained.
8.
3A CORPORATION LAW 2019-2020 pg. 102
9. —The allege to be illegal and inconsistent with the plan and purposes of building and loan
associations; and in particular, it is alleged and inconsistent with the plan and purposes of building
and loan associations; and in particular, it is alleged that they are, in the main, held by well-towage-earners for accumulating their modest savings for the building of homes.
From what has been said it will be seen that there is express authority, even in the very letter of
the law, for the emission of advance-payment or "special" shares, and the argument that these
shares are invalid is seen to be baseless. In addition to this it is satisfactorily demonstrated in
Severino vs. El Hogar Filipino, supra, that even assuming that the statute has not expressly
authorized such shares, yet the association has implied authority to issue them. The complaint
consequently fails also as regards the stated in the ninth cause of action.
10. — It is alleged that the defendant is pursuing a policy of depreciating, at the rate of 10% per
annum, the value of the real properties acquired by it at its sales; and it is alleged that this rate is
excessive.
There is no positive provision of law prohibiting the association from writing off a reasonable
amount for depreciation on its assets for the purpose of determining its real profits; and article 74
of its by-laws expressly authorizes the board of directors to determine each year the amount to
be written down upon the expenses of installation and the property of the corporation.
This count for the complaint proceeds, in our opinion, upon an erroneous notion as to what a court
may do in determining the internal policy of a business corporation. If the criticism contained in
the brief of the Attorney-General upon the practice of the respondent association with respect to
depreciation be well founded, the Legislature should supply the remedy by defining the extent to
which depreciation may be allowed by building and loan associations. Certainly this court cannot
undertake to control the discretion of the board of directors of the association about an
administrative matter as to which they have legitimate power of action. The tenth cause of action
is therefore not well founded.
11 & 12. —Alleged that the respondent maintains excessive reserve funds, and that the board of
directors has settled upon the unlawful policy of paying a straight annual dividend of 10 per
centum, regardless of losses suffered and profits made by the corporation and in contravention
of the requirements of section 188 of the Corporation Law.
Our conclusion is that the respondent has the power to maintain the reserves criticized in the
eleventh and twelfth counts of the complaint; and at any rate, if it be supposed that the reserves
referred to have become excessive, the remedy is in the hands of the Legislature. It is no proper
function of the court to arrogate to itself the control of administrative matters which have been
confided to the discretion of the board of directors. The causes of action under discussion must
be pronounced to be without merit.
13. — That the respondent association has made loans which, to the knowledge of the
associations officers were intended to be used by the borrowers for other purposes than the
building of homes.
The conclusion of the court was that the loan was valid and could be lawfully enforced by a non
judicial foreclosure in conformity with the terms of the contract between the association and the
borrowing member. We now find no reason to depart from the conclusion reached in that case,
and it is unnecessary to repeat what was then said. The thirteenth cause of action must therefore
be pronounced unfounded
14. — That the loans made by the defendant for purposes other than building or acquiring homes
have been extended in extremely large amounts and to wealthy persons and large companies.
3A CORPORATION LAW 2019-2020 pg. 103
The law states no limit with respect to the size of the loans to be made by the association. That
matter is confided to the discretion of the board of directors; and this court cannot arrogate to
itself a control over the discretion of the chosen officials of the company. If it should be thought
wise in the future to put a limit upon the amount of loans to be made to a single person or entity,
resort should be had to the Legislature; it is not a matter amenable to judicial control. The
fourteenth cause of action is therefore obviously without merit.
15. —That upon the final liquidation of the corporation years hence there may be in existence a
reserve fund out of all proportion to the requirements that may then fall upon it in the liquidation
of the company. It seems to us that this is matter that may be left to the prevision of the directors
or to legislative action if it should be deemed expedient to require the gradual suppression of the
reserve funds as the time for dissolution approaches. It is no matter for judicial interference, and
much less could the resumption of the franchise on this ground be justified. There is no merit in
the fifteenth cause of action.
16. — Whether these loans and the attendant subscriptions were properly made involves a
consideration of the power of the subscribing corporations and partnerships to own the stock and
take the loans.
The result is that we find nothing in the allegations of the sixteenth cause of action, or in the facts
developed in connection therewith, that would justify us in granting the relief.
Seventeenth cause of action. — it is charged that in disposing of real estates purchased by it in
the collection of its loans. The central idea involved in the discussion is the provision of the
Corporation Law requiring loans to be stockholders only and on the security of real estate and
shares in the corporation, or of shares alone. The contention of the Government under this head
is untenable.
3A CORPORATION LAW 2019-2020 pg. 104
(45)
Sawadjaan v. Court of Appeals, G.R. No. 141735, June 8,
2005, 459 SCRA 516
Sawadjaan v. Court of Appeals,
G.R. No. 141735, 459 SCRA 516
Date: June 8, 2005
Digested by: Ray Mark Vallesteros
----------------------------------------------------------------------------------Petitioner: SAPPARI K. SAWADJAAN
Respondent: THE HONORABLE COURT OF APPEALS, THE CIVIL SERVICE COMMISSION
and AL-AMANAH INVESTMENT BANK OF THE PHILIPPINES
Ponente: CHICO-NAZARIO, J.
Topic: Effect of non-submission of By-laws
----------------------------------------------------------------------------------Doctrine: A corporation which has failed to file its by-laws within the prescribed period does not
ipso facto lose its powers as such.
----------------------------------------------------------------------------------Facts: Petitioner Sawadjaan was an appraiser/investigator in the Philippine Amanah Bank (PAB)
when on the basis of his report, a credit line was granted to Compressed Air Machineries and
Equipment Corporation (CAMEC) by virtue of the two parcels of land it offered as collaterals.
Meanwhile, Congress passed a law which created Al-Amanah Investment Bank of the Philippines
(AIIBP) and repealed the law creating PAB, transferring all its assets, liabilities and capital
accounts to AIIBP. Later, AIIBP discovered that the collaterals were spurious, thus conducted an
investigation and found petitioner Sawadjaan at fault. Petitioner appealed before the SC which
ruled against him. Petitioner moved for a new trial claiming he recently discovered that AIIBP had
not yet adopted its corporate by-laws and since it failed to file within 60 days from the passage of
its law, it had forfeited its franchise or charter and thus has no legal standing to initiate an
administrative case. The motion was denied.
3A CORPORATION LAW 2019-2020 pg. 105
----------------------------------------------------------------------------------Issue: Whether or not the failure of AIIBP to file its by-laws within the period prescribed results to
a nullity of all actions and proceedings it has initiated.
Ruling: No. The AIIBP was created by Rep. Act No. 6848. It has a main office where it conducts
business, has shareholders, corporate officers, a board of directors, assets, and personnel. It is,
in fact, here represented by the Office of the Government Corporate Counsel, “the principal law
office of government-owned corporations, one of which is respondent bank.” At the very least, by
its failure to submit its by-laws on time, the AIIBP may be considered a de facto corporation whose
right to exercise corporate powers may not be inquired into collaterally in any private suit to which
such corporations may be a party.
Moreover, a corporation which has failed to file its by-laws within the prescribed period does not
ipso facto lose its powers as such. The SEC Rules on Suspension/Revocation of the Certificate
of Registration of Corporations, details the procedures and remedies that may be availed of before
an order of revocation can be issued. There is no showing that such a procedure has been
initiated in this case.
3A CORPORATION LAW 2019-2020 pg. 106
(46)
Robern Development Corp. v. People’s Landless Association,
G.R. No. 173622, March 11, 2013
Robern Development Corporation vs People’s Landless Association
GR No. 173622
March 11, 2013
Digested by: Ivan Earl B. Zapanta
----------------------------------------------------------------------------------Petitioner: Robern Development Corporation and Rodolfo M. Bernardo, Jr.
Respondent: People’s Landless Association (PELA), Florida Ramos, and Nardo Labora
Ponente: Del Castillo, J.
Topic: Powers of the Board
----------------------------------------------------------------------------------Doctrine: The corporate nature of the bank and that the power to sell its real properties is lodged
within its higher authorities.
----------------------------------------------------------------------------------Facts:
·
Al-Amanah Islamic Development Bank of the Philippines (Al-Amanah) owned a 2000square meter land in Magtu-od, Davao City.
3A CORPORATION LAW 2019-2020 pg. 107
·
December 12, 1992: Al-Amanah, through its officer-in-charge, Febe Dalig, asked some
of the members of PELA to desist from building their houses in the lot and to vacate the same.
·
The informal settlers offered to buy the land for P100 per square meter which is far
below the asking price of P500 per square meter.
·
Al-Amanah turned down the offer.
·
March 18, 1993: The informal settlers, together with some members of PELA, sent a
letter to Al-Amanah offering to buy the lot for P300,000. Half of which will be paid as down
payment and hald will be paid within one year.
·
May 3, 1993: PELA has deposited P150,000 to Al-Amanah. The transaction was covered
with four bank receipts. The first three was labelled as “Partial Deposit on sale of TCT No.
138914,” while the fourth receipt was noted as “Partial/Full Payment on deposit on sale of
Asset TCT No. 138914.”
·
November 29, 1993: Al-Amanah, through the Davao Branch Manager Abraham
Ututalum-Al Haj, wrote to PELA that the head office disapproved the buying of PELA of the
land. Giving the reason that the offered price of PELA is way below the asking price of P500.
·
December 27, 1993: Acting on Robern’s written offer, Al-Amanah issued a
Recommendation Sheet to its Board Operators indicating that Robern is interested to buy the
said lot for P400,000. And that Robern is willing to shoulder the relocation of the informal
settlers.
·
However, Robern was informed by PELA members that PELA has already deposited a
P150,000 downpayment for the said land.
·
January 13, 1994: Robern sent a letter to Al-Amanah expressing its uncertainty on the
status of the land.
·
Robern was then convinced by Al-Amanah that the latter had no current involvement
with PELA.
·
March 4, 1994: Robern paid the balance of the purchase price.
·
PELA filed a suit for annulment and cancellation of void deed of sale. They insist that
there has been a perfected contract of sale with Al-Amanah as early as March 1993.
·
The RTC granted the restraining order. It was also affirmed by the CA.
·
RTC: Issued a decision dismissing PELA’s complaint.
·
CA: Reversed the ruling of the RTC. CA averred that Al-Amanah acted in bad faith when
it took seven months to reject PELA’s offer.
3A CORPORATION LAW 2019-2020 pg. 108
----------------------------------------------------------------------------------Issue: Whether or not there has been a perfected contract of sale between PELA and Al-Amanah?
Ruling: NO. PELA’s contention is untenable. The elements of a contract of sale are not complete.
The letter sent by PELA on March 18, 1993 was merely an offer to buy. It did not satisfy the
element of perfection of a contract.
The letter stated that: “xxx The group which is known as PELA… is offering the bank the amount
of THREE HUNDRED THOUSAND PESOS…”
Indeed, the acknowledgment if Al-Amanah of the letter does not mean that they are accepting the
offer. It merely means that Al-Amanah acknowledges the receipt of PELA’s letter-offer. It still has
to go through the decision and approval of the president, vice-president, and some other officers
of Al-Amanah before there can be a valid perfection of contract.
It was also affirmed from the testimony of both Dalig and even PELA’s secretary.
PELA’s secretary, Ramos, stated in her testimony during cross-examination that she knew that
the higher-ups of Al-Amanah needed to approve the sale before there can be a perfection of the
contract.
Hence, it is clear that the transaction between PELA and Al-Amanah remained in the negotiation
stage. It never reached the perfection stage, hence, there is no valid contract of sale between the
two.
3A CORPORATION LAW 2019-2020 pg. 109
(47) HEIRS OF FAUSTO C. IGNACIO vs. HOME BANKERS SAVINGS AND TRUST COMPANY
GR No. 123456
Date: January 23, 2013
Digested by: Ray Mark Vallesteros
----------------------------------------------------------------------------------Petitioner: HEIRS OF FAUSTO C. IGNACIO, MARFEL D. IGNACIO-MANALO, MILFA D.
IGNACIO-MANALO AND FAUSTINO D. IGNACIO
Respondent: HOME BANKERS SAVINGS AND TRUST COMPANY, SPOUSES PHILLIP AND
THELMA RODRIGUEZ, CATHERINE, REYNOLD & JEANETTE, all surnamed ZUNIGA,
Ponente: VILLARAMA, JR., J.
Topic: Powers of the Board
----------------------------------------------------------------------------------Doctrine: Section 23 of the Corporation Code expressly provides that the corporate powers of all
corporations shall be exercised by the board of directors. Just as a natural person may authorize
another to do certain acts in his behalf, so may the board of directors of a corporation validly
delegate some of its functions to individual officers or agents appointed by it.
----------------------------------------------------------------------------------Facts: The case sprang from a real estate mortgage of two parcels of land in August 1981. Fausto
C. Ignacio mortgaged the properties to Home Bankers Savings and Trust Company (Bank) as
security for a loan extended by the Bank. After Ignacio defaulted in the payment of the loan, the
property was foreclosed and subsequently sold to the Bank in a public auction. Ignacio offered to
repurchase the property.
Universal Properties Inc. (UPI), the bank’s collecting agent sent Ignacio a letter on March 22,
1984 which contained the terms of the repurchase. However, Ignacio annotated in the letter new
terms and conditions. He claimed that these were verbal agreements between himself and the
Bank’s collection agent, UPI. No repurchase agreement was finalized between Ignacio and the
Bank. Thereafter the Bank sold the property to third parties.
3A CORPORATION LAW 2019-2020 pg. 110
Ignacio then filed an action for specific performance against the Bank for the reconveyance of the
properties after payment of the balance of the purchase price. He argued that there was implied
acceptance of the counter-offer of the sale through the receipt of the terms by representatives of
UPI. The Bank denied that it gave its consent to the counter-offer of Ignacio. It countered that it
did not approve the unilateral amendments placed by Ignacio.
----------------------------------------------------------------------------------Issue: Whether or not the negotiations between Ignacio and UPI is binding on the Bank.
Ruling: A contract of sale is perfected only when there is consent validly given. There is no
consent when a party merely negotiates a qualified acceptance or a counter-offer. An acceptance
must reflect all aspects of the offer to amount to a meeting of the minds between the parties.In
this case, while it is apparent that Ignacio proposed new terms and conditions to the repurchase
agreement, there was no showing that the Bank approved the modified offer.
The negotiations between Ignacio and UPI, the collection agent, were merely preparatory to the
repurchase agreement and, therefore, was not binding on the Bank. Ignacio could not compel the
Bank to accede to the repurchase of the property.
A corporation may only give valid acceptance of an offer of sale through its authorized officers or
agents. Specifically, a counter-offer to repurchase a property will not bind a corporation by mere
acceptance of an agent in the absence of evidence of authority from the corporation’s board of
directors.
3A CORPORATION LAW 2019-2020 pg. 111
(48)
Tom v. Rodriguez, G.R. No. 215764, July 13, 2016.
Tom vs Rodriguez
GR No. 215764
July 13, 2016
Digested by: Ivan Earl Zapanta
----------------------------------------------------------------------------------Petitioner: Richard K. Tom
Respondent: Samuel N. Rodriguez
Ponente: Perlas-Bernabe, J.
Topic: Powers of the Board
----------------------------------------------------------------------------------Doctrine: Contracts or acts of a corporation must be made either by the board of directors or by
a corporate agent duly authorized by the board. Absent such valid delegation/authorization, the
rule is that the declarations of an individual director relating to the affairs of the corporation, but
not in the course of, or connected with, the performance of authorized duties of such director, are
held not binding on the corporation.
----------------------------------------------------------------------------------Facts:
•
The SC in a previous ruling, issued a writ of preliminary injunction against Samuel
Rodriguez, his agents, and all persons acting under his authority to refrain and desists from further
exercising any powers of management and control over Golden Dragon International Terminals,
Inc. (GDITI).
•
In the July 6, 2015 decision of the SC, the issuance of a TRO and a writ of preliminary
injunction was made in order to stop the RTC from implementing its orders of placing the
management of GDITI to Rodriguez.
•
In the MR of Rodriguez, he stated that the decision of the SC in July 6, 2015 has been
rendered moot and academic since Rodriguez, Tom, and Mancao signed a Memorandum of
Agreement.
3A CORPORATION LAW 2019-2020 pg. 112
•
The MoA states that there has been an agreement as to the operation, control, and
management of the ports operated by GDITI.
•
Rodriguez claims that with the execution of the MoA, the elements necessitating the
issuance of the writ of injunction no longer exists.
----------------------------------------------------------------------------------Issue: Whether or not the issuance of a subsequent MOA renders the decision of the SC moot
and academic?
Ruling: NO. To reiterate, the Court granted the writ of preliminary injunction on the ground that a
corporation can only exercise its powers and transact its business through its board of directors
and through its officers and agents when authorized by a board resolution or its by-laws.
As the provisions of the MOA are in direct contravention of the foregoing precepts, which the
Court had earlier espoused in the July 6, 2015 Decision, its execution cannot in any way affect,
change, or render the Court's previous disquisitions moot and academic. In fact, the MOA is,
clearly and in all respects, contrary to law. Therefore, the writ of preliminary injunction must stand.
Parenthetically, on October 29, 2015, Tom filed a Manifestation informing the Court that he is no
longer the President of GDITI. Nonetheless, on March 20, 2015, he was elected as Treasurer
during the Annual/Regular Stockholders Meeting conducted for the purpose of electing the
members of GDITI's Board of Directors.
As Tom's position in GDITI's Board of Directors neither affects nor alters the Court's stance in this
pending incident, the Court merely resolves to note the same.
3A CORPORATION LAW 2019-2020 pg. 113
(49)
Virata v. Wee, G.R. Nos. 220926, 221058, 221109, 221135
& 221218, March 21, 2018
VIRATA v. WEE
G.R. Nos. 220926, 221058, 221109,221135 & 221218
March 21, 2018
Digested by: Abrhiem Nico Angeles
----------------------------------------------------------------------------------Petitioner: LUIS JUAN L. VIRATA and UEMMARA PHILIPPINES CORPORATION (now known
as CAVITEXINFRASTRUCTURE CORPORATION)
Respondent: ALEJANDRO NG WEE, WESTMONT INVESTMENT CORP., ANTHONY T.
REYES, SIMEON CUA, VICENTE CUALOPING, HENRY CUALOPING, MARIZA SANTOSTAN,
and MANUEL ESTRELLA
Ponente: VELASCO, JR, J
Topic: POWERS OF THE BOARD
----------------------------------------------------------------------------------Doctrine: Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons.
----------------------------------------------------------------------------------Facts:
Ng Wee was a valued client of Westmont Bank. Sometime in 1998, he was enticed by the bank
manager to make money placements with Westmont Investment Corporation (Wincorp), a
domestic corporation organized and licensed to operate as an investment house, and one of the
bank's affiliates.
3A CORPORATION LAW 2019-2020 pg. 114
Lured by representations that the "sans recourse" transactions are safe, stable, high-yielding, and
involve little to no risk, Ng Wee, sometime in 1998, placed investments thereon under accounts
in his own name, or in those of his trustees: Angel Archangel, Elizabeth Ng Wee, Roberto Tabada
Tan, and Alex Lim Tan.[6] In exchange, Wincorp issued Ng Wee and his trustees Confirmation
Advices informing them of the identity of the borrower with whom they were matched, and the
terms under which the said borrower would repay them.
Ng Wee's initial investments were matched with Hottick Holdings Corporation (Hottick), one of
Wincorp's accredited borrowers who later defaulted.
----------------------------------------------------------------------------------Issue: Whether or not the Wincorp directors-specifically Cua, the Cualopings, Santos-Tan and
Estrella-should be jointly and solidarily liable with Virata, Wincorp, Ong, and Reyes to pay Ng
Wee the amount of his investment.
Ruling: YES.
Section 31 of the Corporation Code expressly states:
Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and
knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons.
When a director, trustee or officer attempts to acquire or acquire, in violation of his duty, any
interest adverse to the corporation in respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall
be liable as a trustee for the corporation and must account for the profits which otherwise would
have accrued to the corporation.
In the case at bar, it can be inferred from the attendant circumstances that the Wincorp board
ratified, if not approved, the Side Agreements. Guilty of reiteration, Virata’s prior transactions with
Wincorp is recorded in the latter's books. The Wincorp directors are chargeable with knowledge
of the surety agreement that Virata executed to secure the Hottick obligations to its investors.
However, instead of enforcing the surety agreement against Virata when Hottick defaulted, the
Wincorp board approved a resolution excluding Virata as a party respondent in the collection suit
to be filed against Hottick and its proprietors. What is more, this resolution was approved by the
movant-directors on February 9, 1999, the very same day Virata’s credit line application for Power
Merge in the maximum amount of ₱1,300,000,000.00 was given the green light.
3A CORPORATION LAW 2019-2020 pg. 115
(50)
Gamboa v. Victoriano, G.R. No. L-40620, May 5, 1979, 90
SCRA 40
———————————————————Gamboa v. Victoriano, G.R. No. L-40620,
May 5, 1979, 90 SCRA 40
Digested by: Sarah Bagis
Petitioner: Ricardo L. Gamboa, Lydia R. Gamboa, Honorio de la Rama, Eduardo de la Rama,
and the late Mercedes de la Rama-Borromeo, now represented by her heirs, as well as
Ramon de la Rama, Paz de la Rama-Battistuzzi, and Enzo Battistuzzi
Respondent: Hon. Judge Victoriano
Private Respondents: Benjamin Lopue, Sr., Benjamin Lopue, Jr., Leonito Lopue, and Luisa U.
Dacles
Topic: Board of Directors/Trustees/Officers - Powers Business Judgment Rule
Ponente: Conception, Jr
————————————————————Doctrine: The well-known rule is that courts cannot undertake to control the discretion of the
BOD about administrative matters as to which they have legitimate power of action, and
contracts intra vires entered into by the board of directors are binding upon the corporation
and courts will not interfere unless such contracts are so un-conscionable and oppressive
as to amount to a wanton destruction of the rights of the minority.
EXCEPTION: As in this case, when the defendants as BOD have concluded a transaction
among themselves as will result to serious injury to the personal interests of the private
respondents, and not to the injury of the corporate itself.
———————————————————————
FACTS:
Private respondents filed a complaint in the CFI against the petitioners to nullify the issuance of
823 shares of stock of the Inocentes de la Rama, Inc. in favor of the defendants (petitioners).
3A CORPORATION LAW 2019-2020 pg. 116
The complaint alleges that the plaintiffs are the owners of 1,328 shares of stock of the Inocentes
de la Rama, Inc., a domestic corpora-tion, with an authorized capital stock of 3,000 shares,
2,177 of which were subscribed and issued, thus leaving 823 shares unissued. That upon
the plaintiffs' acquisition of the shares of stock held the former President and Vice-President
of the corporation, the defendants Borromeo, de la Rama, and Gamboa, remaining
members of the board of directors (BOD) of the corporation, in order to forestall the takeover
by the plaintiffs of the corporation, surreptitiously met and elected Gamboa and de la Rama
as president and vice-president of the corporation, respectively. They thereafter passed a
resolution authorizing the sale of the 823 unissued shares among the defendants at par
value, after which the defendants were elected to the BOD of the corporation.
Private respondents claim that the sale of the unissued 823 shares of stock was in violation of
their pre-emptive rights and made without the approval of the BOD representing 2/3 of the
outstanding capital stock, and is in disregard of the strictest relation of trust existing between
the defendants, as stockholders thereof; and that the defendants were not legally elected to
the BOD and has unlawfully usurped the office to the prejudice of the private respondents.
Wherefore, private respondents prayed for a writ of pre-liminary injunction against the
defendants from further injuring, diminishing or prejudicing the plaintiffs' rights in the
corporate properties and funds, that a receiver be appointed to preserve and administer the
property and funds of the corporation; that defendants be ousted from the BOD, and that
the sale of 823 shares of stock be declared null and void.
Respondent Judge granted the Injunction and ordered the the deposit with COC the 823
certificates of stock.
Private respondents and petitioners entered into a compromise agreement, where both parties
withdrew their respective claims against each other and defendants waived and transferred
their rights and interests in the 823 shares of stock in favor of private respondents.
The compromise agreement was approved, causing defendants to file a MTD. On the grounds
of:
1. Cause of Action had been waived/abandoned,
2. Estoppel since they have acknowledged validity of the issuance of the 823 shares of
stock.
MTD was denied. MR was filed and denied. Consequently a petition for certiorari was filed by
the petitioners, claiming that respondent judge court has no jurisdiction to interfere with the
management of the corporation by the board of directors. That the enactment of a resolution
by the defendants as members of the BOD and allowing the sale of the shares of stock were
purely management concerns which the court cannot interfere with.
ISSUE
3A CORPORATION LAW 2019-2020 pg. 117
WON the court has jurisdiction to interfere with purely management concerns by the BOD of the
corporation?
HELD
Yes.
1. A MTD is merely interlocutory and cannot be the subject of a petition for certiorari. Neither
was the order denying the MTD done capriciously, arbitrarily, or whimsically to warrant a
petition for certiorari.
2. Petitioners did not waive COA in view of the express provision in the compromise
agree-ment that it "shall not in any way constitute or be considered a waiver or
abandonment of any claim or cause of action against the other defendants."
A. Neither is there estoppel. Nothing in the compromise agreement shows an
affirmative admission of the validity of the resolution of the defendants which is
now sought to be judicially declared null and void.
3. Court has jurisdiction. The well-known rule is that courts cannot undertake to control
the discretion of the BOD about administrative matters as to which they have
legitimate power of action, and contracts intra vires entered into by the board of
directors are binding upon the corporation and courts will not interfere unless such
contracts are so un-conscionable and oppressive as to amount to a wanton
destruction of the rights of the minority.
A. EXCEPTION: As in this case, when the defendants have concluded a
transaction among themselves as will result to serious injury to the personal
interests of the private respondents.
B. WHEN to file a derivative suit: It is not proper in this case.
-An individual stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holds stock in order to protect or
vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as a
nominal party, with the corporation as the real party in interest. In the
case at bar, however, the private respondents are alleging and
vindicating their own individual interests or prejudice, and not that of
the corporation
3A CORPORATION LAW 2019-2020 pg. 118
(51)
Philippine Association of Stock Transfer and Registry
Agencies, Inc. v. Court of Appeals, G.R. No. 137321, October 15,
2007
Philippine Association of Stock Transfer and Registry Agencies, Inc. v. Court of Appeals
G.R. No. 137321
October 15, 2007
Digested by: Abrhiem Nico Angeles
----------------------------------------------------------------------------------Petitioner: PHILIPPINE ASSOCIATION OF STOCK TRANSFER AND REGISTRY AGENCIES,
INC
Respondent: THE HONORABLE COURT OF APPEALS; THE HONORABLE SECURITIES AND
EXCHANGE COMMISSION; AND SEC CHAIRMAN PERFECTO R. YASAY, JR.,
Ponente: QUISUMBING, J.:
Topic: Regulatory and Supervisory powers of the SEC
----------------------------------------------------------------------------------Doctrine:
The regulatory and supervisory powers of the SEC under Section 40 of the then Revised
Securities Act, in our view, were broad enough to include the power to regulate petitioner’s fees.
Indeed, Section 47 gave the Commission the power to enjoin motu proprio any act or practice of
petitioner which could cause grave or irreparable injury or prejudice to the investing public. The
intentional omission in the law of any qualification as to what acts or practices are subject to the
control and supervision of the SEC under Section 47 confirms the broad extent of the SEC’s
regulatory powers over the operations of securities-related organizations like petitioner.
----------------------------------------------------------------------------------Facts:
Philippine Association of Stock Transfer and Registry Agencies, Inc. is an association of stock
transfer agents principally engaged in the registration of stock transfers in the stock-and-transfer
book of corporations.
3A CORPORATION LAW 2019-2020 pg. 119
On May 10, 1996, petitioner’s Board of Directors unanimously approved a resolution allowing its
members to increase the transfer processing fee they charge their clients from ₱45 per certificate
to ₱75 per certificate, effective July 1, 1996; and eventually to ₱100 per certificate, effective
October 1, 1996. The resolution also authorized the imposition of a processing fee for the
cancellation of stock certificates at ₱20 per certificate effective July 1, 1996. According to
petitioner, the rates had to be increased since it had been over five years since the old rates were
fixed and an increase of its fees was needed to sustain the financial viability of the association
and upgrade facilities and services.
Securities and Exchange Commission (SEC) allowed petitioner to impose the ₱75 per certificate
transfer fee and ₱20 per certificate cancellation fee effective July 1, 1996. But, approval of the
additional increase of the transfer fees to ₱100 per certificate effective October 1, 1996, was
withheld until after a public hearing. The SEC issued a letter-authorization to this effect on June
20, 1996.
Thereafter, on June 24, 1996, the Philippine Association of Securities Brokers and Dealers, Inc.
registered its objection to the measure advanced by petitioner and requested the SEC to defer its
implementation. On June 27, 1996, the SEC advised petitioner to hold in abeyance the
implementation of the increases until the matter was cleared with all the parties concerned. The
SEC stated that it was reconsidering its earlier approval in light of the opposition and required
petitioner to file comment. Petitioner nonetheless proceeded with the implementation of the
increased fees.
The SEC sent petitioner a second letter strongly urging petitioner to desist from implementing the
new rates in the interest of all participants in the security market.
Petitioner replied on July 3, 1996 that it had no intention of defying the orders but stated that it
could no longer hold in abeyance the implementation of the new fees because its members had
already put in place the procedures necessary for their implementation. Petitioner also argued
that the imposition of the processing fee was a management prerogative, which was beyond the
SEC’s authority to regulate absent an express rule or regulation.
On July 8, 1996, the SEC issued Order No. 104, series of 1996, enjoining petitioner from imposing
the new fees:
On June 17, 1998, CA ruled that the power to regulate petitioner’s fees was included in the general
power given to the SEC under Section 405 of The Revised Securities Act to regulate, supervise,
examine, suspend or otherwise discontinue, the operation of securities-related organizations like
petitioner.
Petitioner argues that the SEC cannot restrict petitioner’s members from increasing the transfer
and processing fees they charge their clients because there is no specific law, rule or regulation
authorizing it. Section 40 of the then Revised Securities Act, according to petitioner, only lays
3A CORPORATION LAW 2019-2020 pg. 120
down the general powers of the SEC to regulate and supervise the corporate activities of
organizations related to or connected with the securities market like petitioner. It could not be
interpreted to justify the SEC’s unjustified interference with petitioner’s decision to increase its
transfer fees and impose processing fees, especially since the decision involved a management
prerogative and was intended to protect the viability of petitioner’s members
----------------------------------------------------------------------------------Issue: whether or not the SEC acted with grave abuse of discretion or lack or excess of jurisdiction
in issuing the controverted Orders of July 8 and 11, 1996
Ruling: NO.
Petitioner failed to show that the SEC, which undoubtedly possessed the necessary expertise in
matters relating to the regulation of the securities market, gravely abused its discretion in finding
that there was a possibility that the increase in fees and imposition of cancellation fees will cause
grave or irreparable injury or prejudice to the investing public. Indeed, petitioner did not advance
any argument to counter the SEC’s finding. Thus, there appears to be no substantial reason to
nullify the July 8, 1996 Order. This is true, especially considering that, as pointed out by the OSG,
petitioner’s fee increases have far-reaching effects on the capital market. Charging exorbitant
processing fees could discourage many small prospective investors and curtail the infusion of
money into the capital market and hamper its growth.
The regulatory and supervisory powers of the Commission under Section 40 of the then Revised
Securities Act, in our view, were broad enough to include the power to regulate petitioner’s fees.
Indeed, Section 47 gave the Commission the power to enjoin motu proprio any act or practice of
petitioner which could cause grave or irreparable injury or prejudice to the investing public. The
intentional omission in the law of any qualification as to what acts or practices are subject to the
control and supervision of the SEC under Section 47 confirms the broad extent of the SEC’s
regulatory powers over the operations of securities-related organizations like petitioner.
(52)
Montelibano v. Bacolod-Murcia Milling, Co., G.R. No. L-15092,
May 18, 1962 BERNALDO
3A CORPORATION LAW 2019-2020 pg. 121
Montelibano v. Bacolod-Murcia Milling, Co.
GR No. L-15092
Date: May 18, 1962
Digested by: Michael Bernaldo
----------------------------------------------------------------------------------Petitioner: ALFREDO MONTELIBANO, ET AL.
Respondent: BACOLOD-MURCIA MILLING CO., INC.
Ponente: Justice REYES, J.B.L.,
Topic: Business Judgement Rule
----------------------------------------------------------------------------------Doctrine:
It is a well-known rule of law that questions of policy or of management are left solely to
the honest decision of officers and directors of a corporation, and the court is without
authority to substitute its judgment of the board of directors; the board is the business
manager of the corporation, and so long as it acts in good faith its orders are not
reviewable by the courts.
----------------------------------------------------------------------------------Facts:
In 1919, Alfredo Montelibano, Alejandro Montelibano, and the Limited co-partnership Gonzaga
and Company and Bacolod-Murcia Milling Co., Inc. entered into a milling contract covering a
period of 30 years starting with the 1920-21 crop, and provides a share ratio of 45% and 55%
(miller / planters).
In 1936, an amendment was proposed to increase the share of the planters to 60% of the
manufactured sugar and resulting molasses, besides other concessions and an extension of the
milling contract to 45 years. A printed amended milling contract was drawn up. The respondent
through its board adopted a resolution dated August 20, 1936 approving the amended milling
3A CORPORATION LAW 2019-2020 pg. 122
contract. The amended contract was signed on September 10, 1936 by the General Manager
without attaching the board resolution dated August 20, 1936. The said resolution was later
attached on April 17, 1937.
In 1953, the planters used the provision with respect to other concessions to increase their
participation level to 62.5% since the three major sugar millers have given such concession to
their planters. The respondent resisted claiming that such act would be considered as a donation
and should be treated as ultra vires.
The Court of First Instance dismissed the case in favor of the respondent. An appeal was filed
with the Supreme Court.
----------------------------------------------------------------------------------Issue:
Whether or not the corporation is bound by the resolution adopted on August 20, 1936 with
respect to the provision of the amended contract to provide other concessions.
Ruling:
The Court ruled that concession, asked by planters, should be considered covered by the
amended milling contract and must be provided by the respondent. The Court did not consider
the defense raised by the respondent that the board resolution was not attached during the signing
of the said contract. The Court deemed that there was already a meeting of the minds between
the parties when the contract was signed. The terms of the amended milling contract were the
subject matter of the said resolution. The adoption of the board resolution in August 1936 was
done in good faith and with the assumption for the benefit of the corporation whether or not it
would give profit or cause a loss in the future. The said board resolution should not be questioned
by the Court. The directors are presumed to have acted in their best judgement. The board is
the business manager of the corporation, and so long as it acts in good faith its orders are not
reviewable by the courts. The responded is bound by the approved resolution.
The Court verified that rates of increase of participation given by the major sugar milers. The said
increases should be treated as an industry practice at that time hence the same should be given
to the planters of the respondent.
WHEREFORE, the decision under appeal is reversed and set aside; and judgment is decreed
sentencing the defendant-appellee to pay plaintiffs-appellants the differential or increase of
participation in the milled sugar in accordance with paragraph 9 of the appellee Resolution of
3A CORPORATION LAW 2019-2020 pg. 123
August 20, 1936, over and in addition to the 60% expressed in the printed Amended Milling
Contract, or the value thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants having
received an additional 2% corresponding to said year in October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all appellants
thereafter —
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential during the time they were withheld;
and the right is reserved to plaintiffs-appellants to sue for such additional increases as they may
be entitled to for the crop years subsequent to those herein adjudged.
(53)
Filipinas Port Services, Inc. v. Go, G.R. No. 161886, March
16, 2007, 518 SCRA 453
FILIPINAS PORT SERVICES, INC., represented by stockholders, ELIODORO C. CRUZ and
MINDANAO TERMINAL AND BROKERAGE SERVICES, INC., vs. VICTORIANO S. GO,
ARSENIO LOPEZ CHUA, EDGAR C. TRINIDAD, HERMENEGILDO M. TRINIDAD, JESUS
SYBICO, MARY JEAN D. CO, HENRY CHUA, JOSELITO S. JAYME, ERNESTO S. JAYME, and
ELIEZER B. DE JESUS
3A CORPORATION LAW 2019-2020 pg. 124
GR No. 161886
DATE: March 16, 2007
DIGESTED BY: BRAWNER, YVETTE
PETITIONER: FILIPINAS PORT SERVICES, INC., represented by stockholders
RESPONDENT: VICTORIANO S. GO, ARSENIO LOPEZ CHUA, EDGAR C. TRINIDAD,
HERMENEGILDO M. TRINIDAD, JESUS SYBICO, MARY JEAN D. CO, HENRY CHUA,
JOSELITO S. JAYME, ERNESTO S. JAYME, and ELIEZER B. DE JESUS
PONENTE: JUSTICE GARCIA
TOPIC: BUSINESS JUDGMENT RULE
DOCTRINES: The governing body of a corporation is its board of directors. Section 23 of the
Corporation Code explicitly provides that unless otherwise provided therein, the corporate powers
of all corporations formed under the Code shall be exercised, all business conducted and all
property of the corporation shall be controlled and held by a board of directors.
Under the Corporation Code, 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 to
institute a derivative suit in behalf of the corporation in order to protect or vindicate corporate
rights whenever the officials of the corporation refuse to sue, or when a demand upon them to file
the necessary action would be futile because they are the ones to be sued, or because they hold
control of the corporation. In such actions, the corporation is the real party-in-interest while the
suing stockholder, in behalf of the corporation, is only a nominal party.
FACTS: In September 1992, petitioner Eliodoro Cruz, Filipinas Port Services Inc (Filport’s)
president from 1968 until he lost in 1991 wrote a letter to the corporation’s Board of Directors
questioning the board’s creation of an executive committee with compesation, and creation of
additional positions of Special Assistants with a monthly remuneration of Php13,050 each. He
requested that the Board take necessary actions to recover from those elected. When the board
met, whatever action they did did not sit well with Cruz. In 1993 Cruz, purportedly in
representation of Filport and its stockholders, filed with the Securities and Exchange Commission
(SEC) a derivative suit against the respondents who were the incumbent members of Filport’s
Board of Directors, for alleged acts of mismanagement detrimental to the interest of the
corporation and its shareholders. In their common answer with counterclaim, the respondents
denied the allegations of mismanagement and averred that Cruz and his co-petitioner Minterbro
have no authority or standing to bring the derivative suit and that Filport, as represented by Cruz
and Minterbro failed to exhaust remedies within the corporation before bringing the suit. The
derivative suit hibernated with the SEC until the enactment of RA8799. With its enactment the
case was turned over to the RTC Davao.
The RTC-Davao City rendered a decision, finding that though Filport’s Board of Directors
have the power to create positions not provided for in the bylaws, and that the increases in the
salaries are reasonable, it ordered the directors holding the new positions to refund the salaries
they have received, considering that Filport is not a big corporation and that said positions were
created for accommodation. Upon appeal, the CA reversed and set aside the decision and
dismissed Cruz’s derivative suit. Petitioners filed a petition for review on certiorari at the SC.
ISSUE: WON the creation of the board of directors of the new positions with corresponding
increases in emoluments was proper.
RULING: Yes
3A CORPORATION LAW 2019-2020 pg. 125
The governing body of a corporation is its board of directors. Section 23 of the Corporation
Code explicitly provides that unlss otherwise provided therein, the corporate powers of all
corporations formed under the Code shall be exercised, all business conducted and all property
of the corporation shall be controlled and held by a board of directors. Thus, with the exception
only of some powers expessly granted by law to stockholders, the board of directors has the sole
authority to determine policies, enter into contacts, and conduct the ordinary business of the
corporation within the scope of its charter, i.e. Its articles of incorporation, by-laws and relevant
provisions of law. The authority of the board of directors is restricted to the management of the
regular business affairs of the corporation, unless more extensive power is expressly conferred.
The reason behind the conferment of corporate powers on the board of directors is that
the powers of control of corporate business and managers is necessary for efficiency in any large
organization. Stockholders are too numerous, scattered and unfamiliar with the business or a
corporation and so the plan of the corporate organization is for the stockholders to choose the
directors who shall control and supervise the conduct of corporate business.
In the present case, the board´s creation of the positions was in accordance with the
regular business operations of Filport, and the election of officers of Filport was in the amended
by-laws. Likewise the fixing of the corresponding remuneration for the positions was provided.
The creation of an executive committee was not in Filport´s bylaws, but as testified and admitted
to by Cruz himself, it was during his incumbency as Filport´s president that the executive
committee was created, and that he was the one who moved for the creation of the new positions.
By his ratification of the creation of the ofices, he is precluded from suing to declare such acts of
the board as invalid or illegal. In addition, a perusal of the records reveal that Cruz´s testimony
on the matter of mismanagement is bereft of any foundation, since his testimony consists of
insinuations of wrongdoings, and therefore their petition must fall,
The Court noted, that even assuming that there was mismanagement resulting to
corporate damages and/or business losses, the respondents may not be held liable, in the
of bad faithin 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 and/or officers are not liable. For
them to be held accountable, the mismanagement and the resulting losses on account thereof
are not the only matters to be proven; it is likewise necessary to show that the directors and/or
officers acted in bad faith and with malice in doing the assailed acts. Bad faith does not simply
connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and
conscious doing of a wrong, a breach of a known duty through some motive or interest or ill-will
partaking of the nature of fraud. We have searched the records and nowhere do we find a
"dishonest purpose" or "some moral obliquity," or "conscious doing of a wrong" on the part of the
respondents that "partakes of the nature of fraud." It would also be an improper judicial intrustion
into Filport´s internal affairs if the Court were to determine the propriety or impropriety of the
creation of the offices and the grant of salary increases. Such are corporate and/or business
decisions which only the corporation´s Board of Directors can determine.
(54)
Ching v. Subic Bay Golf and Country Club, Inc., G.R. No.
174353, September 10, 2014
————————————————————————
Ching v. Subic Bay Golf and Country Club, Inc.,
G.R. No. 174353, September 10, 2014
Digested by: Sarah Bagis
3A CORPORATION LAW 2019-2020 pg. 126
Petitioner: Nestor Ching, Wellington and Subic Bay Golfers and Shareholders Incorporated
(SBGSI)
Respondent: Subic Bay Golf Country CLub Inc, its BOD and officers
Ponente: Leonardo-de Castro, J
Topic: Board of Directors/Trustees/Officers - Business Judgment and the Minority Stockholders.
————————————————————————Doctrine: Minority stockholders do not have any statutory right to override the business
judgments of officers and Board of Directors. The only possible cause of action as minority
stockholders against the actions of the Board of Directors is the common law right to file a
derivative suit.
The legal standing of minority stockholders to bring derivative suits is not a statutory right,
there being no provision in the Corporation Code or related statutes authorizing the same,
but is instead a product of jurisprudence based on equity.
————————————————————————
FACTS:
RTC OLONGAPO
PETITIONERS are minority stockholders of Subic Bay Golf and Country Club, Inc.
(SBGCCI). In behalf of the corporation, they filed a Complaint against SBGCI, its
Board of Directors (BOD) and officers under PD. 902-A in relation to Section 5.2 of
the Securities Regulation Code (SRC).
The complaint alleged that defendant SBGCCI did not disclose an amendment to the
Articles of Incorporation, as approved by the (SEC), which changed the shareholders
rights or interests in the properties of the Club to non-propriety. This takes away the
right of the shareholders to participate in the pro-rata distribution of the assets of the
corporation after its dissolution
They also allege multiple frauds committed by the BOD and officers, in violation of Secs
48, 50 and 75 of the Corporation Code and the By-Laws, resulting in the substrantial
decrease in value of the shares of stocks due to the fraudulent mismanagement of
the BOD and officers.
Petitioners pray for a TRO and writ of injunction against defendants from acting as
Officers and Board of Directors. And a receiver until a new BOD and officers are
qualified and elected.
RESPONDENTS prayed for a DISMISSAL on the ground that Petitioners failed:
(a) to show that it was authorized by SBGSI to file the Complaint on the said
corporation's behalf;
(b) to comply with the requisites for filing a derivative suit and an action for receivership;
and
(c) to justify their prayer for injunctive relief since the Complaint may be considered a
nuisance or harassment suit under Section 1(b), Rule 1 of the Interim Rules of
Procedure for Intra-Corporate Controversies.
RTC: DISMISSED Complaint. It ruled the action is a derivative suit and that there is failure to
exhaust all remedies with the Corporation itself.
3A CORPORATION LAW 2019-2020 pg. 127
Being a derivative suit in accordance with Rule 8 of the Interim Rules, the stockholders
and members may bring an action in the name of the corporation or association
provided that he (the minority stockholder) exerted all reasonable efforts and
allege[d] the same with particularity in the complaint to exhaust of (sic) all remedies
available under the articles of incorporation, by-laws or rules governing the
corporation or partnership to obtain the reliefs he desires.
Petitioners failed to allege in particularity that they exhausted their remedies within the
corporation itself. The petitioners were also unauthorized by their co-petitioner Subic
Bay Golfers and Shareholders Inc. to file the Complaint, and therefore had no
personality to file the same on behalf of the said shareholders' corporation.
CA: AFFIRMED RTC
SC under Petition for Review on Certiorari under Rule 45
PETITIONERS argue that the Complaint is not a derivative suit. That they filed the suit
in their own right as stockholders under Section 5(a) of PD. 902-A, which allows any
stockholder to file a complaint against the BOD for employing devices or schemes
amounting to fraud and misrepresentation which is detrimental to the interest of the
public and/or the stockholders.
In the alternative, EVEN if the Complaint is a derivative suit, it should nevertheless
reverse the dismissal thereof on the ground of failure to exhaust remedies within the
corporation. Citing Republic Bank v. Cuaderno, the Court allowed the derivative suit
even without the exhaustion of said remedies as it was futile to do so since the Board
of Directors were all members of the same family.
ISSUE
WON the complaint a derivative suit? NO
WON the petitioners have a right of standing as proper party in interest? NO
HELD
1. Petitioners did not attach any authorization from the corporation or its members to file the
Complaint. Thus, the Complaint is deemed filed only by petitioners and not by SBGSI.
- In cases of mismanagement where the wrongful acts are committed by the
directors or trustees themselves, a stockholder or member may find that he has no
redress because the former are vested by law with the right to decide whether or
not the corporation should sue, and they will never be willing to sue themselves.
The corporation would thus be helpless to seek remedy. Because of the frequent
occurrence of such a situation, the common law gradually recognized the right of
a stockholder to sue on behalf of a corporation in what eventually became known
as a "derivative suit." It has been proven to be an effective remedy of the minority
against the abuses of management. Thus, an individual stockholder is permitted
to institute a derivative suit on behalf of the corporation wherein he holds stock in
order to protect or vindicate corporate rights, whenever officials of the corporation
refuse to sue or are the ones to be sued or hold the control of the corporation. In
3A CORPORATION LAW 2019-2020 pg. 128
such actions, the suing stockholder is regarded as the nominal party, with the
corporation as the party in interest."
2. The reliefs sought in the Complaint, namely that of enjoining defendants from acting as
officers and Board of Directors of the corporation, the appointment of a receiver, and the
prayer for damages in the amount of the decrease in the value of the shares of stock, clearly
show that the Complaint was filed to curb the alleged mismanagement of SBGCCI. The
causes of action pleaded by petitioners do not accrue to a single shareholder or a class of
shareholders but to the corporation itself.
- However, as minority stockholders, petitioners do not have any statutory right to
override the business judgments of SBGCCI's officers and Board of Directors on
the ground of the latter's alleged lack of qualification to manage a golf course.
Contrary to the arguments of petitioners, PD 902-A, does not grant minority stockholders
a cause of action against waste and diversion by the Board of Directors, but merely
identifies the jurisdiction of the SEC over actions already authorized by law or
jurisprudence. It is settled that a stockholder's right to institute a derivative suit is
not based on any express provision, but is impliedly recognized when the said laws
make corporate directors or officers liable for damages suffered by the corporation
and its stockholders for violation of their fiduciary duties.
- Petitioners' only possible cause of action as minority stockholders against the actions of
the Board of Directors is the common law right to file a derivative suit. The legal standing
of minority stockholders to bring derivative suits is not a statutory right, but is instead a
product of jurisprudence based on equity. However, a derivative suit cannot prosper
without first complying with the legal requisites under Section 1, Rule 8 of the Interim Rules
of Procedure Governing Intra-Corporate Controversies imposes the following
requirements for derivative suits:
(1) He was a stockholder or member at the time the acts or transactions subject of the
action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, bylaws, laws or rules governing the corporation or partnership to obtain the relief he
desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
- THERE IS FAILURE TO COMPLY with the 2nd and 4th requisite:
- 2nd requisite, Petitioners failed to state with particularity in the Complaint that they
had exerted all reasonable efforts to exhaust all remedies available under the
articles of incorporation, by-laws, and laws or rules governing the corporation to
obtain the relief they desire. The Complaint contained no allegation whatsoever
of any effort to avail of intra-corporate remedies. Indeed, even if petitioners thought
it was futile to exhaust intra-corporate remedies, they should have stated the same
in the Complaint and specified the reasons for such opinion. Failure to do so allows
the RTC to dismiss the Complaint, even motu proprio, in accordance with the
Interim Rules. The requirement of this allegation in the Complaint is not a useless
formality which may be disregarded at will.
3A CORPORATION LAW 2019-2020 pg. 129
(55)
Valle Verde Country Club v. Africa, G.R. No. 151969,
September 4, 2009.
Valle Verde Country Club vs. Africa
GR No. 151969
Date: September 4, 2009
Digested by: Gillian Briones
-----------------------------------------------------------------------3A CORPORATION LAW 2019-2020 pg. 130
Petitioner: Valle Verde Country Club Inc., Ernesto Villaluna, Ray Gamboa, Amado Santiago,
Fortunato Dee, Augusto Sunico, Victor Salta, Francisco Ortigas III, Eric Roxas, in their capacities
as members of the Board of Directors of Valle Verde Country Club, Inc. and Jose Ramirez
Respondent: Victor Africa
Ponente: Brion, J.
Topic: Term of Directors; Hold-over Directors
---------------------------------------------------------------------Doctrine: The holdover period is not part of the term of office of a member of the board of
directors.
---------------------------------------------------------------------Facts:
That on February 27, 1996, Ernesto Villaluna, Jaime Dinglasan, Eduardo Makalintal, Francisco
Ortigas III, Victor Salta, Amado Santiago, Fortunato Dee, Augusto Sunico and Ray Gamboa were
elected as Board of Directors during the Annual Stockholders’ Meeting of Valle Verde Country
Club Inc. (VVCC). That in years 1997 to 2001, the requisite quorum could not be obtained so the
previously elected Board of Directors continued in a hold-over capacity.
That on September 1, 1998, Dinglasan resigned, the Board of Directors still constituting a quorum
elected Eric Roxas. That on November 10, 1998, Makalintal resigned and on March 6, 2001, Jose
Ramirez was elected by the remaining Board of Directors. Respondent Africa, a member of the
VVCC, questioned the election of Roxas and Ramirez as members of the VVCC board before the
Securities and Exchange Commission (SEC) and the Regional Trial Court. The basis of the
complaint are as follows:
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this Code,
the corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees to be elected from among the holders of stocks, or where there is no stock, from among
the members of the corporation, who shall hold office for one (1) year until their successors are
elected and qualified.
Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring in the board of
directors or trustees other than by removal by the stockholders or members or by expiration of
term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular
or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall
be elected only for the unexpired term of his predecessor in office.
Respondent claimed that a year after Makalintal’s election as member of the VVCC Board in 1996
his term as well as those of the other members of the VVCC Board – should be considered to
have already expired. That the resulting vacancy should have been filled by the stockholders in a
3A CORPORATION LAW 2019-2020 pg. 131
regular or special meeting called for that purpose, and not by the remaining members of the VVCC
Board.
The RTC ruled in favor of Africa, declared that Ramirez as Makalintal’s replacement was null and
void. The SEC declared that the election of Roxas as member of the VVCC Board, vice hold-over
director Dinglasan also null and void.
VVCC filed an appeal before the Court of Appeals posits that the power to fill in a vacancy created
by the resignation of a hold-over director is expressly granted to the remaining members of the
corporation’s board of directors.
Issue: Can the members of a corporation’s board of directors elect another director to fill
in a vacancy caused by the resignation of a hold-over director, NO
Ruling:
We are not persuaded by VVCC’s arguments and, thus, find its petition unmeritorious.
To repeat, the issue for the Court to resolve is whether the remaining directors of a corporation’s
Board, still constituting a quorum, can elect another director to fill in a vacancy caused by the
resignation of a hold-over director. The resolution of this legal issue is significantly hinged on the
determination of what constitutes a director’s term of office.
The holdover period is not part of the term of office of a member of the board of directors
The word "term" has acquired a definite meaning in jurisprudence. In several cases, we have
defined "term" as the time during which the officer may claim to hold the office as of right, and
fixes the interval after which the several incumbents shall succeed one another. The term of office
is not affected by the holdover. The term is fixed by statute and it does not change simply because
the office may have become vacant, nor because the incumbent holds over in office beyond the
end of the term due to the fact that a successor has not been elected and has failed to qualify.
Term is distinguished from tenure in that 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 of the incumbent.
Based on the above discussion, when Section 23 of the Corporation Code declares that "the board
of directors…shall hold office for one (1) year until their successors are elected and qualified," we
construe the provision to mean that the term of the members of the board of directors shall be
only for one year; their term expires one year after election to the office. The 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 qualification – is not part of the director’s original term of office, nor is it
a new term; the holdover period, however, constitutes part of his tenure. Corollary, when an
incumbent member of the board of directors continues to serve in a holdover capacity, it implies
3A CORPORATION LAW 2019-2020 pg. 132
that the office has a fixed term, which has expired, and the incumbent is holding the succeeding
term.
After the lapse of one year from his election as member of the VVCC Board in 1996, Makalintal’s
term of office is deemed to have already expired. That he continued to serve in the VVCC Board
in a holdover capacity cannot be considered as extending his term. To be precise, Makalintal’s
term of office began in 1996 and expired in 1997, but, by virtue of the holdover doctrine in Section
23 of the Corporation Code, he continued to hold office until his resignation on November 10,
1998. This holdover period, however, is not to be considered as part of his term, which, as
declared, had already expired.
With the expiration of Makalintal’s term of office, a vacancy resulted which, by the terms of Section
2911 of the Corporation Code, must be filled by the stockholders of VVCC in a regular or special
meeting called for the purpose. To assume – as VVCC does – that the vacancy is caused by
Makalintal’s resignation in 1998, not by the expiration of his term in 1997, is both illogical and
unreasonable. His resignation as a holdover director did not change the nature of the vacancy;
the vacancy due to the expiration of Makalintal’s term had been created long before his
resignation.
(56)
Barayuga v. Adventist University of the Phil., 655 SCRA 640
(2011) CARLOS
(57)
Tan v. Sycip, G.R. No. 153468, August 17, 2006, 499 SCRA
216 DE GUZMAN
3A CORPORATION LAW 2019-2020 pg. 133
(58)
Sanchez v. Republic, 603 SCRA 229 (2011)
Manuel Sanchez vs Republic of the Philippines
GR No. 172885
Date: October 9 2009
Digested by: Noel Melgar A. Galang
----------------------------------------------------------------------------------Petitioner: Manuel Sanchez
Respondent: Republic of the Philippines, represented by Department of Education, Culture and
Sports (DECS)
3A CORPORATION LAW 2019-2020 pg. 134
Ponente:
Topic: Duties of Directors
----------------------------------------------------------------------------------Facts: The complaint alleged that Kahn and petitioner Sanchez, as key University of Life
Foundation, Inc. (ULFI) officers, were not fit in safekeeping ULFIs corporate incomes and in
accounting for them. They neither placed the incomes derived from the Complex in ULFIs deposit
account nor submitted the required financial statements detailing their transactions. The
underlying theory of the case is that Kahn and Sanchez operated ULFI as if it were their own
property, handled the collections and spent the money as if it were their personal belonging. The
DECS asked the RTC to order Kahn and Sanchez personally to pay it the P22,559,215.14 in rents
due from ULFI with legal interest, exemplary damages of P1,000,000.00, attorneys fees of
P500,000.00, and costs
In his answer, petitioner Sanchez alleged that, being a mere officer of ULFI, he cannot be made
personally liable for its adjudged corporate liability. He took exception to the complaint,
characterizing it as an attempt to pierce the corporate veil that cloaked ULFI.
Both Kahn and petitioner Sanchez appealed to the Court of Appeals. The latter court gave due
course to Sanchez’s appeal but denied that of Kahn since it was filed out of time. On February
21, 2006 the Court of Appeals rendered judgment, wholly affirming the trial court’s decision,
hence, this petition.
----------------------------------------------------------------------------------Issue: WON Sanchez can be held liable
---------------------------------------------------------------------------Ruling: Yes. DECS filed a complaint under Section 31 of the Corporation Code, which is an
entirely different with Piercing the veil of Corporate Fiction. Under this Section, Directors of the
Corporations make them jointly and severally liable even to third parties for their gross negligence
or bad faith in directing their affairs in the Corporation. In invoking Section 31 of Corporation, the
petitioners need not to prove the doctrine of piercing the veil of corporate fiction. Section 31
expressly lays down petitioner Sanchez and Kahns liability for damages arising from their gross
negligence or bad faith in directing corporate affairs. The doctrine mentioned, on the other hand,
is an equitable remedy resorted to only when the corporote fiction is used, among others, to defeat
public convenience, justify wrong, protect fraud or to defend a crime.
Moreover, in a piercing case, the test is complete control or domination, not only of finances, but
of policy and business practice in respect of the transaction attacked. This is not the case here.
Section 31, under which this case was brought, makes a corporate director who may or may not
even be a stockholder or memberaccountable for his management of the affairs of the
corporation.
(59)
Marc II Marketing, Inc. v. Alfredo Joson, G.R. No. 171993,
December 12, 2011
Marc II Marketing vs Joson
GR No. 171993
3A CORPORATION LAW 2019-2020 pg. 135
Date: December 12, 2011
Digested by: Javier,
Therese Fatima V.
----------------------------------------------------------------------------------Petitioner: Marc II Marketing
Respondent: Alfredo Joson
Ponente: J. Perez
Topic: Commencement of Corporate Existence, Corporate Term and Promoters
----------------------------------------------------------------------------------DOCTRINE: Logically, there is no corporation to speak of prior to an entity's incorporation. And
no contract entered into before incorporation can bind the corporation.
---------------------------------------------------------------------------------Facts: Before petitioner corporation was officially incorporated, respondent has already been
engaged by petitioner Lucila, in her capacity as President of Marc Marketing, Inc., to work as the
General Manager of petitioner corporation. It was formalized through the execution of a
Management Contract dated 16 January 1994 under the letterhead of Marc Marketing, Inc. as
petitioner corporation is yet to be incorporated at the time of its execution. It was explicitly provided
therein that respondent shall be entitled to 30% of its net income for his work as General Manager.
Respondent will also be granted 30% of its net profit to compensate for the possible loss of
opportunity to work overseas. Pending incorporation of petitioner corporation, respondent was
designated as the General Manager of Marc Marketing, Inc., which was then in the process of
winding up its business. For occupying the said position, respondent was among its corporate
officers by the express provision of Section 1, Article IV 10 of its by-laws.
On 15 August 1994, petitioner corporation was officially incorporated and registered with the SEC.
Accordingly, Marc Marketing, Inc. was made non-operational. Respondent continued to discharge
his duties as General Manager but this time under petitioner corporation. Pursuant to Section 1,
Article IV of petitioner corporation's by-laws, its corporate officers are as follows: Chairman,
President, one or more Vice-President(s), Treasurer and Secretary. Its Board of Directors,
however, may, from time to time, appoint such other officers as it may determine to be necessary
or proper.
Per an undated Secretary's Certificate, petitioner corporation's Board of Directors conducted a
meeting on 29 August 1994 where respondent was appointed as one of its corporate officers with
the designation or title of General Manager to function as a managing director with other duties
and responsibilities that the Board of Directors may provide and authorized. Nevertheless, on 30
June 1997, petitioner corporation decided to stop and cease its operations due to poor sales
collection aggravated by the inefficient management of its affairs. It formally informed respondent
of the cessation of its business operation. Concomitantly, respondent was apprised of the
termination of his services as General Manager since his services as such would no longer be
necessary for the winding up of its affairs.
3A CORPORATION LAW 2019-2020 pg. 136
Issue: WON the Management Contract executed between Joson and Lucila has no binding effect
on petitioner corporation for having been executed way before its incorporation
Held: Section 19 of the Corporation Code expressly provides:
Sec. 19. Commencement 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 the Securities and Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon the incorporators, stockholders/members and
their successors shall constitute a body politic and corporate under the name stated in the articles
of incorporation for the period of time mentioned therein, unless said period is extended or the
corporation is sooner dissolved in accordance with law.
Logically, there is no corporation to speak of prior to an entity's incorporation. And no contract
entered into before incorporation can bind the corporation.
As can be gleaned from the records, the Management Contract dated 16 January 1994 was
executed between respondent and petitioner Lucila months before petitioner corporation's
incorporation on 15 August 1994. Similarly, it was done when petitioner Lucila was still the
President of Marc Marketing, Inc. Undeniably, it cannot have any binding and legal effect on
petitioner corporation. Also, there was no evidence presented to prove that petitioner corporation
adopted, ratified or confirmed the Management Contract. It is for the same reason that petitioner
corporation cannot be considered estopped from questioning its binding effect now that
respondent was invoking the same against it. In no way, then, can it be enforced against petitioner
corporation, much less, its provisions fixing respondent's compensation as General Manager to
30% of petitioner corporation's net profit. Consequently, such percentage cannot be the basis for
the computation of respondent's separation pay. This finding, however, will not affect the
undisputed fact that respondent was, indeed, the General Manager of petitioner corporation from
its incorporation up to the time of his dismissal.
(60)
Violeta Tudtud Banate v. Phil. Countryside Rural Bank, G.R.
No. 163825, July 13, 2010.
Violeta Tudtud Banate et al v. Phil. Countryside Rural Bank (PCRB)
G.R. 163825, July 13, 2010
Digested by: Brawner, Yvette
Petitioner: Violeta Tudtud Banate
Respondent: Philippine Countryside Rural Bank
Ponente:Justice Brion
Topic: Duties of Directors
----------------------------------------------------------------------------------3A CORPORATION LAW 2019-2020 pg. 137
Doctrine: Doctrine of Apparent Authority - acts and contracts of the agent,
as are within the scope of the authority conferred on him, although no
actual actual authority to do such acts or to make such contracts has
been conferred, bind the principal. The principal´s liability, however,
is limited only to third persons who have been led reasonably to
believe by the conduct of the principal that such actual authority
exists, although none was given. In other words, apparent authority
is determined only by the acts of the principal of an agent without acts
or conduct on the part of the principal; such acts or conduct must have
been known and relied upon in good faith as a result of the exercise
of reasonable prudence by a third party as claimant, and such acts or
conduct must have produced a change of position to the third party´s
detriment.
----------------------------------------------------------------------------------Facts: Petitioner Spouses Maglasang obtained a loan from Phil.
Countryside Rural Bank (PCRB) for Php1.07M. The subject loan was
evidenced by a promissory note. To secure the payment of the loan,
the spouses Maglasang executed, in favor of PCRB, a real estate
mortgage over their property, including the house thereon owned by
their daughter and son-in-law (the spouses Cortel), as well as other
properties. Before the loan was due, the spouses Maglasang and the
spouses Cortel asked PCRB´s permission to sell the subject
properties, and to release one of the properties from the mortgage
since the other loans were adequately secured. PCRB, acting
through its Branch Manager Pancrasio Mondigo, verbally agreed but
required the full payment of the subject loan. Spouses Maglasang
and Cortel then sold the subject properties to Violeta Banate for
Php1.75M and used the amount to pay PCRB. PCRB gave the
owner´s duplicate of title to Banate, who was able to secure a new
title in her name. The title carried a mortgage lien in favor of PCRB,
prompting the petitioners to request a Deed of Release of Mortgage.
PCRB refused to comply. Petitioners instituted an action for specific
performance, and sought payment of damages since PCRB caused
the publication of a news report stating that they caused the transfer
of ownership of the lot. PCRB countered the allegations by invoking
the cross-collateral stipulation in the mortgage deed which states that
before any of the mortgages could be released, full payment must be
effected. The RTC ruled in favor of petitioners, stating that since the
subject loan had been fully paid, the petitioners were rightfully entitled
to a deed of release of mortgage, pursuant to the verbal agreement
that the petitioners made with PCRB´s branch manager. On appeal,
the CA reversed the RTC´s decision since Mondigo cannot orally
amend the mortgage contract between PCRB and the spouses
3A CORPORATION LAW 2019-2020 pg. 138
Maglasang and Cortel. Since the cross-collateral stipulation is clear,
the parties must faithfully comply with its terms.
----------------------------------------------------------------------------------Issue: WON the verbal agreement between the petitioners and Mondigo
novated the mortgage contract over the subject properties and is thus
binding upon PCRB.
Ruling: No. Novation presupposes not only the extinguishment or
modification of an existing obligation but, more importantly, the
creation of a valid new obligation. For the consequent creation of a
new contractual obligation, consent of both parties is required. As a
general rule, no form of words or writing is necessary to give effect to
a novation. Nevertheless, where either or both parties involved are
juridical entities, proof that the second contract was executed by
persons with the proper authority to bind their respective principals is
necessary.
Section 23 of the Corporation Code expressly provides that the corporate
powers of all corporations shall be exercised by the board of directors.
The power and the responsibility to decide whether the corporation
should enter into a contract that will bind the corporation are lodged
in the board, subject to the articles of incorporation, by-laws, or
relevant provisions of law. In the absence of authority from the board
of directors, no person, not even its officers, can validly bind a
corporation. Just as a natural person may authorize another to do
certain acts for and on his behalf, the board of directors may validly
delegate some of its functions and powers to its officers, committees
or agents. The authority of these individuals to bind the corporation is
generally derived from law, corporate by-laws or authorization from
the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business. The authority of a
corporate officer or agent in dealing with third persons may be actual
or apparent. Actual authority is either express or implied. The
authority to act for and to bind a corporation may be presumed from
acts of recognition when the power was exercised without any
objection from its board or shareholders. Although a branch manager
is the general agent and is in general charge of the corporation, yet
the power to modify or nullify corporate contracts remains generally
in the board of directors. Being a mere branch manager alone is
insufficient to support the conclusion that Mondigo has been clothed
with "apparent authority" to verbally alter terms of written contracts,
especially when viewed against the circumstances in this case, i.e.
PCRB´s vigorous denial that any agreement to release the mortgage
was ever entered into by it. It is a settled rule that persons dealing
with an agent are bound at their peril, if they would hold the principal
liable, to ascertain not only the fact of agency but also the nature and
3A CORPORATION LAW 2019-2020 pg. 139
extent of agent´s authority. As parties to the mortgage contract, the
petitioners are expected to abide by its terms and the subsequent
agreement is of no moment, as it is beyond Mondigo´s actual or
apparent authority.
(61)
Cosare v. Broadcom Asia, Inc., G.R. No. 201298, February
5, 2014
Cosare vs. Broadcom Asia
GR No. 201298
Date: February 5, 2014
Digested by: Gillian Briones
-------------------------------------------------------------------------Petitioner: Raul Cosare
Respondent: Broadcom Asia, Dante Arevalo
Ponente: Reyes, J.
3A CORPORATION LAW 2019-2020 pg. 140
Topic: Jurisdiction of the Courts
-------------------------------------------------------------------------Doctrine:
An intra-corporate controversy, which falls within the jurisdiction of regular courts, has been
regarded in its broad sense to pertain to disputes that involve any of the following relationships:
(1) between the corporation, partnership or association and the public;
(2) between the corporation, partnership or association and the state in so far as its franchise,
permit or license to operate is concerned;
(3) between the corporation, partnership or association and its stockholders, partners, members
or officers; and
(4) among the stockholders, partners or associates, themselves.
-----------------------------------------------------------------------Facts:
In 1993, Cosare was employed as a salesman by Arevalo, who was then in the business of selling
broadcast equipment needed by television networks and production houses. In December 2000,
Arevalo set up the company Broadcom, still to continue the business of trading communication
and broadcast equipment. Cosare was named an incorporator of Broadcom, having been
assigned 100 shares of stock with par value of P1.00 per share. In October 2001, Cosare was
promoted to the position of Assistant Vice President for Sales (AVP for Sales) and Head of the
Technical Coordination.
Sometime in 2003, Alex F. Abiog (Abiog) was appointed as Broadcoms Vice President for Sales
and thus, became Cosares immediate superior. Cosare sent a confidential memo to Arevalo to
inform him of the anomalies which were allegedly being committed by Abiog against the company.
Cosare ended his memo by clarifying that he was not interested in Abiogs position, but only
wanted Arevalo to know of the irregularities for the corporations sake.
Apparently, Arevalo failed to act on Cosares accusations. Cosare claimed that he was instead
called for a meeting by Arevalo on March 25, 2009, wherein he was asked to tender his
resignation in exchange for "financial assistance" in the amount ofP300,000.00.Cosare refused
to comply with the directive, as signified in a letter which he sent to Arevalo.
Cosare received from Roselyn Villareal (Villareal), Broadcoms Manager for Finance and
Administration, a memosigned by Arevalo, charging him of serious misconduct and willful breach
of trust. He was given forty-eight (48) hours from the date of the memo within which to present
his explanation on the charges. He was also "suspended from having access to any and all
company files/records and use of company assets effective immediately."Thus, Cosare claimed
that he was precluded from reporting for work and was instead instructed to wait at the offices
receiving section. Upon the specific instructions of Arevalo, he was also prevented by Villareal
from retrieving even his personal belongings from the office until he was totally barred from
entering the company premises.
3A CORPORATION LAW 2019-2020 pg. 141
Cosare filed a labor complaint, claiming that he was constructively dismissed from employment
by the respondents. He further argued that he was illegally suspended, as he placed no serious
and imminent threat to the life or property of his employer and co-employees.
In refuting Cosares complaint, the respondents argued that Cosare was neither illegally
suspended nor dismissed from employment. They also contended that Cosare committed the
following acts inimical to the interests of Broadcom.Furthermore, they contended that Cosare
abandoned his job by continually failing to report for work beginning April 1, 2009, prompting them
to issue on April 14, 2009 a memorandumaccusing Cosare of absence without leave beginning
April 1, 2009.
The Labor Arbiter dismissed the complaint on the ground of Cosares failure to establish that he
was constructively dismissed.
Cosare appealed the LA decision to the NLRC. It reversed the LA decision.
The respondents motion for reconsideration was denied.Dissatisfied, they filed a petition for
certiorari with the CA on the issues of constructive dismissal and intra-corporate controversy
which was within the jurisdiction of the RTC, instead of the LA. They argued that the case involved
a complaint against a corporation filed by a stockholder, who, at the same time, was a corporate
officer.
The CAgranted the respondents petition. It agreed with the respondents contention that the case
involved an intra-corporate controversy which, pursuant to Presidential Decree No. 902-A, as
amended, was within the exclusive jurisdiction of the RTC. Hence, this petition filed by Cosare.
ISSUES:
Was the case instituted by Cosare an intra-corporate dispute that was within the original
jurisdiction of the RTC, and not of the LAs?
Was Cosare constructively and illegally dismissed from employment by the respondents?
Ruling: An intra-corporate controversy, which falls within the jurisdiction of regular courts, has
been regarded in its broad sense to pertain to disputes that involve any of the following
relationships: (1) between the corporation, partnership or association and the public; (2) between
the corporation, partnership or association and the state in so far as its franchise, permit or license
to operate is concerned; (3) between the corporation, partnership or association and its
stockholders, partners, members or officers; and (4) among the stockholders, partners or
associates, themselves.Settled jurisprudence, however, qualifies that when the dispute involves
a charge of illegal dismissal, the action may fall under the jurisdiction of the LAs upon whose
jurisdiction, as a rule, falls termination disputes and claims for damages arising from employeremployee relations as provided in Article 217 of the Labor Code. Consistent with this
jurisprudence, the mere fact that Cosare was a stockholder and an officer of Broadcom at the
3A CORPORATION LAW 2019-2020 pg. 142
time the subject controversy developed failed to necessarily make the case an intra-corporate
dispute.
In Matling Industrial and Commercial Corporation v. Coros,the Court distinguished between a
"regular employee" and a "corporate officer" for purposes of establishing the true nature of a
dispute or complaint for illegal dismissal and determining which body has jurisdiction over it.
Succinctly, it was explained that "[t]he determination of whether the dismissed officer was a
regular employee or corporate officer unravels the conundrum" of whether a complaint for illegal
dismissal is cognizable by the LA or by the RTC. "In case of the regular employee, the LA has
jurisdiction; otherwise, the RTC exercises the legal authority to adjudicate.
Applying the foregoing to the present case, the LA had the original jurisdiction over the complaint
for illegal dismissal because Cosare, although an officer of Broadcom for being its AVP for Sales,
was not a "corporate officer" as the term is defined by law.
There are three specific officers whom a corporation must have under Section 25 of the
Corporation Code. 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 be provided for
by its by-laws like, but not limited to, the vice-president, cashier, auditor or general manager. The
number of corporate officers is thus limited by law and by the corporations by-laws.
In Tabang v. NLRC, the Court also made the following pronouncement on the nature of corporate
offices: there are two circumstances which must concur in order for an individual to be considered
a corporate officer, as against an ordinary employee or officer, namely: (1) the creation of the
position is under the corporations charter or by-laws; and (2) the election of the officer is by the
directors or stockholders. It is only when the officer claiming to have been illegally dismissed is
classified as such corporate officer that the issue is deemed an intra-corporate dispute which falls
within the jurisdiction of the trial courts.
The Court disagrees with the respondents and the CA. The only officers who are specifically
listed, and thus with offices that are created under Broadcoms by-laws are the following: the
President, Vice-President, Treasurer and Secretary. Although a blanket authority provides for the
Boards appointment of such other officers as it may deem necessary and proper, the respondents
failed to sufficiently establish that the position of AVP for Sales was created by virtue of an act of
Broadcoms board, and that Cosare was specifically elected or appointed to such position by the
directors. No board resolutions to establish such facts form part of the case records.
The CAs heavy reliance on the contents of the General Information Sheets, which were submitted
by the respondents during the appeal proceedings and which plainly provided that Cosare was
an "officer" of Broadcom, was clearly misplaced. The said documents could neither govern nor
establish the nature of the office held by Cosare and his appointment thereto.
Finally, the mere fact that Cosare was a stockholder of Broadcom at the time of the cases filing
did not necessarily make the action an intra-corporate controversy. Not all conflicts between the
3A CORPORATION LAW 2019-2020 pg. 143
stockholders and the corporation are classified as intra-corporate. There are other facts to
consider in determining whether the dispute involves corporate matters as to consider them as
intra-corporate controversies.
Constructive dismissal occurs when there is cessation of work because continued employment is
rendered impossible, unreasonable, or unlikely as when there is a demotion in rank or diminution
in pay or when a clear discrimination, insensibility, or disdain by an employer becomes unbearable
to the employee leaving the latter with no other option but to quit.
The Court emphasized in King of Kings Transport, Inc. v. Mamac 553 Phil. 108 the standards to
be observed by employers in complying with the service of notices prior to termination:
The first written notice to be served on the employees should contain the specific causes or
grounds for termination against them, and a directive that the employees are given the opportunity
to submit their written explanation within a reasonable period. "Reasonable opportunity" under
the Omnibus Rules means every kind of assistance that management must accord to the
employees to enable them to prepare adequately for their defense. This should be construed as
a period of at least five (5) calendar days from receipt of the notice to give the employees an
opportunity to study the accusation against them, consult a union official or lawyer, gather data
and evidence, and decide on the defenses they will raise against the complaint. Moreover, in
order to enable the employees to intelligently prepare their explanation and defenses, the notice
should contain a detailed narration of the facts and circumstances that will serve as basis for the
charge against the employees. A general description of the charge will not suffice. Lastly, the
notice should specifically mention which company rules, if any, are violated and/or which among
the grounds under Art. 282 is being charged against the employees.
In sum, the respondents were already resolute on a severance of their working relationship with
Cosare, notwithstanding the facts which could have been established by his explanations and the
respondents full investigation on the matter. In addition to this, the fact that no further investigation
and final disposition appeared to have been made by the respondents on Cosares case only
negated the claim that they actually intended to first look into the matter before making a final
determination as to the guilt or innocence of their employee. This also manifested from the fact
that even before Cosare was required to present his side on the charges of serious misconduct
and willful breach of trust, he was summoned to Arevalos office and was asked to tender his
immediate resignation in exchange for financial assistance.
The charge of abandonment was inconsistent with this imposed suspension. "Abandonment is
the deliberate and unjustified refusal of an employee to resume his employment. To constitute
abandonment of work, two elements must concur: (1) the employee must have failed to report for
work or must have been absent without valid or justifiable reason; and (2) there must have been
a clear intention on the part of the employee to sever the employer-employee relationship
manifested by some overt act."Cosares failure to report to work beginning April 1, 2009 was
neither voluntary nor indicative of an intention to sever his employment with Broadcom. It was
illogical to be requiring him to report for work, and imputing fault when he failed to do so after he
3A CORPORATION LAW 2019-2020 pg. 144
was specifically denied access to all of the company's assets. Hence, the Court held Petitioner
was constructively dismissed by respondent.
Court reiterated that an illegally or constructively dismissed employee is entitled to: (1) either
reinstatement, if viable, or separation pay, if reinstatement is no longer viable; and (2) backwages.
The award of exemplary damages was also justified given the NLRC's finding that the
respondents acted in bad faith and in a wanton, oppressive and malevolent manner when they
dismissed Cosare. It is also by reason of such bad faith that Arevalo was correctly declared
solidarily liable for the monetary awards.
(62)
Wesleyan University-Philippines, v. Maglaya, Sr., G.R. No.
212774, January 23, 2017 GUTIERREZ
3A CORPORATION LAW 2019-2020 pg. 145
(63)
The Board of Liquidators v. Heirs of Maximo M. Kalaw, G.R.
No. L-18805, August 14, 1967
The Board of Liquidators vs Heirs of Maximo Kalaw
GR No. 18805
Date: August 14, 1964
Digested by: Javier, Therese Fatima V.
----------------------------------------------------------------------------------Petitioner: The Board of Liquidators
Respondent: Heirs of Maximo Kalaw
Ponente: J. Sanchez
Topic: Implied Authority
-----------------------------------------------------------------------------------
3A CORPORATION LAW 2019-2020 pg. 146
DOCTRINE: A rule that has gained acceptance through the years is that a corporate officer
"intrusted with the general management and control of its business, has implied authority to make
any contract or do any other act which is necessary or appropriate to the conduct of the ordinary
business of the corporation." As such officer, "he may, without any special authority from the
Board of Directors, perform all acts of an ordinary nature, which by usage or necessity are incident
to his office, and may bind the corporation by contracts in matters arising in the usual course of
business."
---------------------------------------------------------------------------------Facts: NACOCO was chartered as a non-profit governmental organization avowedly for the
protection, preservation, and development of the coconut industry in the Philippines. General
manager and board chairman was Maximo Kalaw. An unfortunate chain of events conspired to
deter NACOCO from fulfilling some contracts intered. Four devastating typhoons visited the
Philippines. Coconut trees throughout the country suffered extensive damage. Copra production
decreased. Prices spiralled. Warehouses were destroyed. Cash requirements doubled.
Deprivation of export facilities increased the time necessary to accumulate shiploads of copra.
Quick turnovers became impossible, financing a problem. Buyers threatened damaged suits.
NACOCO, represented by the Board of Liquidator, seeks to recover the above sum of
P1,343,274.52 from general manager and board chairman Maximo M. Kalaw, and directors Juan
Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with negligence under Article of the
old Civil Code and defendant board members, including Kalaw, with bad faith and/or breach trust
for having approved the contracts.
Issue: WON there is an implied authority of corporate officer to enter into contacts
Held: A rule that has gained acceptance through the years is that a corporate officer "intrusted
with the general management and control of its business, has implied authority to make any
contract or do any other act which is necessary or appropriate to the conduct of the ordinary
business of the corporation." As such officer, "he may, without any special authority from the
Board of Directors, perform all acts of an ordinary nature, which by usage or necessity are incident
to his office, and may bind the corporation by contracts in matters arising in the usual course of
business."
Settled jurisprudence has it that where similar acts have been approved by the directors as a
matter of general practice, custom, and policy, the general manager may bind the company
without formal authorization of the board of directors. 26 In varying language, existence of such
authority is established, by proof of the course of business, the usages and practices of the
company and by the knowledge which the board of directors has, or must be presumed to have,
of acts and doings of its subordinates in and about the affairs of the corporation. So also, ". . .
authority to act for and bind a corporation may be presumed from acts of recognition in other
instances where the power was in fact exercised." ". . . Thus, when, in the usual course of
business of a corporation, an officer has been allowed in his official capacity to manage its affairs,
his authority to represent the corporation may be implied from the manner in which he has been
permitted by the directors to manage its business."
In the case at bar, the practice of the corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading activities for and in NACOCO's behalf without
prior board approval. If the by-laws were to be literally followed, the board should give its stamp
3A CORPORATION LAW 2019-2020 pg. 147
of prior approval on all corporate contracts. But that board itself, by its acts and through
acquiescence practically laid aside the by-law requirement of prior approval.
(64)
Advance Paper Corp. v. Arma Traders Corp., G.R. No. 176879,
December 11, 2013.
Advance Paper Corporation and Gorge Haw vs. ARMA Traders Corporation, Manuel Ting,
Cheng Gui and Benjamin Ng
G.R. No. 176897
Date: December 11, 2013
Digested by: Yui Recinto
Petitioners: Advance Paper Corporation and Gorge Haw
Respondents: ARMA Traders Corporation, Manuel Ting, Cheng Gui and Benjamin Ng
Ponente: Justice Brion
Topic: Doctrine of Apparent Authority
Doctrine: A corporate officer or agent may represent and bind the corporation in transactions
with third persons to the extent that [the] authority to do so has been conferred upon him, and
this includes powers as, in the usual course of the particular business, are incidental to, or may
be implied from the powers intentionally conferred, powers added by custom and usage, as
usually pertaining to the particular officer or agent, and such apparent powers as the corporation
has caused person dealing with the officer or agent to believe that it has conferred.
Facts:
ARMA Traders purchased credit notebooks and other paper products as well as three loans
from Advance Paper. Arma Traders issued 82 postdated checks payable to Advance Paper. Tan
and Uy were Arma Traders’ authrozed bank signatories who singed and issued the aforesaid
checks.
However, the aforementioned checks were dishonored by the drawee bank for the reason of
drawn against insufficient funds or account closed. Despite repeated demands, Arma Traders
failed to pay the amount of the bounced checks to Advance Paper.
Petitioners filed a complaint for collection of sum of money with application for preliminary
attachment against Arma Traders, Tan, Uy, Ting, Gui and Ng.
Respondents’ claims that the loan transactions were ultra vires because the board of directors
of Arma Traders did not issue a board resolution authorizing Tan and Uy to obtain the loans from
Advance Paper. Hence, without the approval of the Board, the corporate officers are acting in
excess of their authority or ultra vires exempting the corporation from liability of whatever acts
that was committed in excess of their authority.
RTC held in favor of the petitioners for failure of the respondent to provide hard, admissible and
credible evidence to prove that the sale invoices were forged or fictitious and that the loan
transactions were personal obligations of Tan and Uy.
However, CA held that ARma Traders was not liable for the loan in the absence of board
resolution. However, further, CA explaind that this is not sufficient because the authority to sign
the checks is different from the required authority to contract a loan.
3A CORPORATION LAW 2019-2020 pg. 148
Issue: Whether Arma Traders is liable to pay the loans applying the doctrine of apparent
authority.
Ruling:
Yes.
Respondents, through Ng who is Arma Traders’ corporate secretary, incorporator, stockholder
and director, testified that the sole management of Arma Traders was left to Tan and Uy and
that he and the other officers never dealt with the business and management of Arma Traders
for 14 years. He also confirmed that since 1984 up to the filing of the complaint against Arma
Traders, its stockholders and board of directors never had its meeting.83
Thus, Arma Traders bestowed upon Tan and Uy broad powers by allowing them to transact with
third persons without the necessary written authority from its non-performing board of directors.
Arma Traders failed to take precautions to prevent its own corporate officers from abusing their
powers. Because of its own laxity in its business dealings, Arma Traders is now estopped from
denying Tan and Uy’s authority to obtain loan from Advance Paper.
WHEREFORE, premises considered, we GRANT the petition. The decision dated March 31,
2006 and the resolution dated March 7, 2007 of the Court of Appeals in CA-G.R. CV No. 71499
are REVERSED and SET ASIDE. The Regional Trial Court decision in Civil Case No. 94-72526
dated June 18, 2001 is REINSTATED. No costs.
(65)
Georg, et. al. v. Holy Trinity College, Inc., G.R. No. 190408,
July 20, 2016.
Georg, et. al. v. Holy Trinity College, Inc.,
G.R. No. 190408
Date: July 20, 2016
Digested by: Jarah Relato
________________________________________________________
Petitioner: Benjie B. Georg represented by Benjamin C. Belarmino, Jr.
Respondent: Holy Trinity College
Ponente: Justice Perez
Topic: Agency by Estoppel and Doctrine of Apparent Authority (Art. 1873 New Civil Code)
_______________________________________________________
3A CORPORATION LAW 2019-2020 pg. 149
Doctrine: The doctrine of apparent authority provides that a corporation will be estopped from
denying the agent's authority if it knowingly permits one of its officers or any other agent to act
within the scope of an apparent authority, and it holds him out to the public as possessing the
power to do those acts.
_________________________________________________________________
Facts:
The Holy Trinity College Grand Chorale and Dance Company was organized in 1987 by Sister
Teresita Medalle, the President of respondent Holy Trinity College in Puerto Princesa City. The
Grand Chorale and Dance Company were two separate groups but for the purpose of
performing locally or abroad, they were usually introduced as one entity.
In 2001, the Group was slated to perform in Greece, Italy, Spain and Germany. Edward
Enriquez, who allegedly represented Sr. Medalle, contacted petitioner to seek assistance for
payment of the Group's international airplane tickets. Petitioner is the Filipino wife of a German
national Heinz Georg. She owns a German travel agency named D'Travellers Reiseburo Georg.
Petitioner requested her brother, Atty. Belarmino, to represent her in the negotiation with
Enriquez. Enriquez was referred to petitioner by Leonora Dietz (Dietz), another Filipino-German
who has helped Philippine cultural groups obtain European engagements, including financial
assistance.
On 24 April 2001, a MOA was executed between petitioner the Group, represented by Sr.
Medalle, O.P. and/or its Attorney-in-Fact Enriquez, as second-party assignor and S.C. Roque
Group of Companies Holding Limited Corporation and S.C. Roque Foundation Incorporated,
represented by Violeta P. Buenaventura, as foundation-grantor. Under the said Agreement,
petitioner, through her travel agency, will advance the payment of international airplane tickets
amounting to P4,624,705.00 in favor of the Group on the assurance of the Group represented
by Sr. Medalle through Enriquez that there is a confirmed financial allocation of P4,624,705.00
from the foundation-grantor, S.C. Roque Foundation.
In an Amended Complaint for a Sum of Money with Damages filed before the RTC, petitioner
claimed that the second-party assignor/respondent and the foundation-grantor have not paid
and refused to pay their obligation under the MOA.
Respondent argued that the MOA on which petitioner based its cause of action does not state
that respondent is a party. Neither was respondent obligated to pay the amount of
P4,624,705.00 for the European Tour of the Group nor did it consent to complying with the
terms of the MOA. Respondent asserted that the thumbmark of Sr. Medalle was secured
without her consent. Respondent maintained that since it was not a party to the MOA, it is not
bound by the provisions stated therein.
The RTC ruled in favor of petitioner, it held that The Group was formed and organized by Sr.
Medalle, in her capacity as the President of the Holy Trinity College, Inc and said group is
subject to the full control and supervision of the school administration. The CA relieved
respondent of any liability for petitioner's monetary claims. The Court of Appeals held that the
record is bereft of any showing that Sr. Medalle participated in the negotiation, perfection and
partial consummation of the contract.
Issue: WON Sr. Medalle was authorized by the Holy Trinity College Board thus resulting to the
applicability of the doctrine of apparent authority in this case.
3A CORPORATION LAW 2019-2020 pg. 150
Ruling: Petition Granted, CA reversed and set aside, RTC reinstated
Sr. Medalle affixed her thumbmark as President of Holy Trinity College and therefore,
respondent is a party to the MOA and the act was done in her capacity as the President of the
Holy Trinity College and not that of the Holy Trinity College Grand Chorale and Dance
Company. The Court is convinced that indeed the Holy Trinity College Grand Chorale and
Dance Company do not have a life of its own and merely derive its creation, existence and
continued operation or performance at the hands of the school administration. Without the
decision of the school administration, the said Chorale and Dance Company is completely
inoperative.
Assuming arguendo that Sr. Medalle was not authorized by the Holy Trinity College Board, the
doctrine of apparent authority applies in this case.
The doctrine of apparent authority provides that a corporation will be estopped from denying the
agent's authority if it knowingly permits one of its officers or any other agent to act within the
scope of an apparent authority, and it holds him out to the public as possessing the power to do
those acts.
The existence of apparent authority may be ascertained through (1) the general manner in
which the corporation holds out an officer or agent as having the power to act or, in other words,
the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his
acts of a particular nature, with actual or constructive knowledge thereof, whether within or
beyond the scope of his ordinary powers.
In this case, Sr. Medalle formed and organized the Group. She had been giving financial
support to the Group, in her capacity as President of Holy Trinity College. Sr. Navarro admitted
that the Board of Trustees never questioned the existence and activities of the Group. Thus, any
agreement or contract entered into by Sr. Medalle as President of Holy Trinity College relating
to the Group bears the consent and approval of respondent. It is through these dynamics that
we cannot fault petitioner for relying on Sr. Medalle's authority to transact with petitioner.
(66)
Magaling, et. al. v. Ong, G.R. No. 173333, August 13, 2008
Magaling, et. al. v. Ong
G.R. No. 173333
August 13,2008
Digested by: James San Diego
3A CORPORATION LAW 2019-2020 pg. 151
Petitioner: LUCIA MAGALING, PARALUMAN R. MAGALING, MARCELINA MAGALINGTABLADA, and BENITO R. MAGALING (Heirs of the late Reynaldo Magaling)
Respondent: PETER ONG
Ponente: CHICO-NAZARIO, J.
Topic: Piercing of Corporate Veil
Facts:
On 30 September 1998, respondent Peter Ong (Ong) instituted with the RTC a Complaint7 for the
collection of the sum of P389,000.00, with interest, attorney’s fees and costs of suit, with prayer
for issuance of a writ of preliminary attachment against the spouses Reynaldo Magaling and
Lucila Magaling (Spouses Magaling) and Termo Loans & Credit Corporation (Termo Loans). The
Complaint alleged that:
3. Defendants Sps. Reynaldo Magaling and Lucila Magaling are the controlling
stockholders/owners of Thermo (sic) Loans and Credit Corp. and had used the corporation
as mere alter ego or adjunct to evade the payment of valid obligation;
4. On or about December 1994, defendant Reynaldo Magaling, (sic) approached plaintiff
in his store at Lipa City and induced him to lend him money and/or his company Thermo
(sic) Loans and Credit Corp. with undertaking to pay interest at the rate of two and a half
(2 ½%) percent per month. Defendant gave assurance that he and his company Thermo
(sic) Loans and Credit Corp. will be able to pay the loan. Without the assurance plaintiff
would not have lent the money;
5. Based on the assurance and representation of Reynaldo Magaling, Peter Ong extended
loan to defendants. As of September 1997, the principal loan extended to defendants
stands at P350,000.00. The interest thereon computed at 2 ½ % per month is P8,750.00
per month;
6. In acknowledgment of the loan, on or about September 1997, defendants issued and
tendered to plaintiff series of postdated checks more particularly described as follows:
Planters Bank
Check No.
Date
Amount
3A CORPORATION LAW 2019-2020 pg. 152
0473400
Sept. 22, 1997
P8,750.00
0473401
Oct. 22, 1997
8,750.00
0473402
Nov. 22, 1997
8,750.00
0473403
Dec. 22, 1997
8,750.00
0473404
Jan. 22, 1998
8,750.00
0473405
Feb. 22, 1998
8,750.00
0473406
Feb. 22, 1998
350,000.00
which were issued for payment of interest and principal loan of P350,000.00. However,
only check nos. 473400 and 473401 were cleared by the bank. Check no. 473402 was
likewise dishonored but it was subsequently replaced with cash x x x;
7. Despite demands, oral and written, defendants Sps. Reynaldo and Lucila Magaling
and/or Thermo (sic) Loans and Credit Corp. unjustifiably and illegally failed, refused and
neglected and still fail, refuse and neglect to pay to the prejudice and damage of plaintiff.
As of June 30, 1998, defendants’ obligation stands at P389,043.96 inclusive of interest;
It was alleged further that Reynaldo Magaling, as President of Termo Loans, together with the
corporation’s treasurer, a certain Mrs. L. Rosita, signed a Promissory Note8 in favor of Ong for
the amount of P300,000.00 plus a monthly interest of 2.5%.
In their defense, Magaling asserted that it was an investment made by the respondent with any
inducement and became interested because of high interest given on money placement by the
company. The alleged checks appear to have been issued by Termo Loans as a corporation and
answering defendants are not even signatories thereto. Furthermore, the Promissory Note x x x
was issued by Termo Loans and not by defendants in their individual capacity.
ISSUE: Whether or not Reynaldo Magaling be personally liable?
3A CORPORATION LAW 2019-2020 pg. 153
RULING: Yes, Reynaldo Magaling is equally liable.
It is basic that 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.40 The general rule
is that obligations incurred by the corporation, acting through its directors, officers and employees,
are its sole liabilities, and vice versa.
There are times, however, when solidary liabilities may be incurred and the veil of corporate fiction
may be pierced. Exceptional circumstances warranting such disregard of a separate personality
are summarized as follows:
1. When directors and trustees or, in appropriate case, the officers of a corporation:
(a) vote for or assent to patently unlawful acts of the corporation;
(b) act in bad faith or with gross negligence in directing the corporate affairs;
(c) are guilty of conflict of interest to the prejudice of the corporation, its
stockholders or members, and other persons;41
2. When a director or officer has consented to the issuance of watered down stocks or
who, having knowledge thereof, did not forthwith file with the corporate secretary his
written objection thereto;42
3. When a director, trustee or officer has contractually agreed or stipulated to hold himself
personally and solidarily liable with the corporation;43 or
4. When a director, trustee or officer is made, by specific provision of law, personally liable
for his corporate action.44
In making the Spouses Magaling co-defendants of Termo Loans, Ong alleged in his Complaint
for Sum of Money filed with the RTC that the spouses Reynaldo Magaling and Lucia Magaling
were the controlling stockholders and/or owners of Termo Loans, and that they had used the
corporation to evade the payment of a valid obligation. The appellate court eventually found the
Spouses Magaling equally liable with Termo Loans for the sum of money sought to be collected
by Ong.
As explained above, to hold a director, a trustee or an officer personally liable for the debts of the
corporation and, thus, pierce the veil of corporate fiction, bad faith or gross negligence by the
director, trustee or officer in directing the corporate affairs must be established clearly and
convincingly. Bad faith is a question of fact and is evidentiary. Bad faith does not connote bad
judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious
wrongdoing. It means breach of a known duty through some ill motive or interest. It partakes of
the nature of fraud.45
3A CORPORATION LAW 2019-2020 pg. 154
In the present case, there is nothing substantial on record to show that Reynaldo Magaling, as
President of Termo Loans, has, indeed, acted in bad faith in inviting Ong to invest in Termo Loans
and/or in obtaining a loan from Ong for said corporation in order to warrant his personal liability.
From all indications, the proceeds of the investment and/or loan were indeed utilized by Termo
Loans. Likewise, bad faith does not arise just because a corporation fails to pay its obligations,
because the inability to pay one’s obligation is not synonymous with fraudulent intent not to honor
the obligations.46
The foregoing discussion notwithstanding, this Court still cannot totally absolve Reynaldo
Magaling from any liability considering his gross negligence in directing the affairs of Termo
Loans; thus, he must be made personally liable for the debt of Termo Loans to Ong.
In order to pierce the veil of corporate fiction, for reasons of negligence by the director, trustee or
officer in the conduct of the transactions of the corporation, such negligence must be gross. Gross
negligence is one that is characterized by the want of even slight care, acting or omitting to act in
a situation where there is a duty to act, not inadvertently but willfully and intentionally with a
conscious indifference to consequences insofar as other persons may be affected;47 and must be
established by clear and convincing evidence. Parenthetically, gross or willful negligence could
amount to bad faith.
(67)
Heirs of Fe Tan Uy v. International Exhange Bank, G.R. Nos.
166282 & 166283, February 13, 2013. SUICO
3A CORPORATION LAW 2019-2020 pg. 155
(68) Domingo v. Domingo
G.R. No. L-30573
Date: October 29, 1971
Digested by: Ray Mark Vallesteros
----------------------------------------------------------------------------------Petitioner: VICENTE M. DOMINGO, represented by his heirs, ANTONINA RAYMUNDO VDA. DE
DOMINGO, RICARDO, CESAR, AMELIA, VICENTE JR., SALVADOR, IRENE and JOSELITO,
all surnamed DOMINGO
Respondent: GREGORIO M. DOMINGO, respondent-appellee, TEOFILO P. PURISIMA,
intervenor-respondent
Ponente: MAKASIAR, J.
Topic: Liabilities of Directors, Trustees and Officers
3A CORPORATION LAW 2019-2020 pg. 156
----------------------------------------------------------------------------------Doctrine: The duties and liabilities of a broker to his employer are essentially those which an agent
owes to his principal.
Civil Code, Art. 1891. Every agent is bound to render an account of his transactions and to deliver
to the principal whatever he may have received by virtue of the agency, even though it may not
be owing to the principal.
Every stipulation exempting the agent from the obligation to render an account shall be void.
Civil Code, Art. 1909. The agent is responsible not only for fraud but also for negligence, which
shall be judged with more less rigor by the courts, according to whether the agency was or was
not for a compensation.
----------------------------------------------------------------------------------Facts: Defendant-appellee Gregorio Domingo as the broker, received a gift or propina in the
amount of One Thousand Pesos (P1,000.00) from the prospective buyer Oscar de Leon, without
the knowledge and consent of his principal, herein petitioner-appellant Vicente Domingo. His
acceptance of said substantial monetary gift corrupted his duty to serve the interests only of his
principal and undermined his loyalty to his principal, who gave him partial advance of Three
Hundred Pesos (P300.00) on his commission. As a consequence, instead of exerting his best to
persuade his prospective buyer to purchase the property on the most advantageous terms desired
by his principal, the broker, herein defendant-appellee Gregorio Domingo, succeeded in
persuading his principal to accept the counter-offer of the prospective buyer to purchase the
property at P1.20 per square meter or One Hundred Nine Thousand Pesos (P109,000.00) in
round figure for the lot of 88,477 square meters, which is very much lower the the price of P2.00
per square meter or One Hundred Seventy-Six Thousand Nine Hundred Fifty-Four Pesos
(P176,954.00) for said lot originally offered by his principal.
----------------------------------------------------------------------------------Issue: Whether the failure on the part of Gregorio to disclose to Vicente the payment to him by
Oscar de Leon of the amount of One Thousand Pesos (P1,000.00) as gift or "propina" for having
persuaded Vicente to reduce the purchase price from P2.00 to P1.20 per square meter, so
constitutes fraud as to cause a forfeiture of his commission on the sale price;
Ruling: Yes. An agent who takes a secret profit in the nature of a bonus, gratuity or personal
benefit from the vendee, without revealing the same to his principal, the vendor, is guilty of a
breach of his loyalty to the principal and forfeits his right to collect the commission from his
principal, even if the principal does not suffer any injury by reason of such breach of fidelity, or
that he obtained better results or that the agency is a gratuitous one, or that usage or custom
allows it; because the rule is to prevent the possibility of any wrong, not to remedy or repair an
actual damage.
3A CORPORATION LAW 2019-2020 pg. 157
(69)
Lily Sy v. Hon. Sec. of Justice, G.R. No. 171579, November
14, 2012
Lily Sy vs Merceditas Gutierrez
GR No. 171579
November 14, 2012
Digested by: Ivan Earl Zapanta
----------------------------------------------------------------------------------Petitioner: Lily Sy
3A CORPORATION LAW 2019-2020 pg. 158
Respondent: Sec. of Justice Merceditas Gutierrez, Benito Fernandez Go, Berthold Lim, Jennifer
Sy, Glenn Ben Tiak Sy, and Merry Sy
Ponente: Peralta, J.
Topic: General Powers of a Corporation
----------------------------------------------------------------------------------Doctrine: As owners of a corporation unit, being armed with a board resolution is enough to enter
a property owned by the corporation without being accused of forcible entry.
----------------------------------------------------------------------------------Facts:
·
December 16, 1999: Benito, Glenn, and a security guard known as “Elmo” went to Lily
Sy’s residence at the 10th floor of Fortune Wealth in Binondo Manila and forcibly opened the
door. They likewise replaced the locks with a new one without Lily’s consent.
· Evening of same day, Lily supposedly saw Benito, Glenn, Jennifer, Merry, and Berthold
took from her residence numerous boxes containing her properties in the amount of P10,
244,196. It was also alleged that the boxes were loaded into a family owned truck.
·
It is also noted that the whole building is owned and registered in the name of the
corporation Fortune Wealth Mansion Corporation.
· September 28, 2001: Asst. City Prosec. Jovencio Tating (ACP Tating) recommended that
respondents be charged with robbery in an uninhabited place.
·
September 23, 2002: The Office of the City Prosecutor sustained the ACP’s
recommendation.
·
Upon appeal to the Secretary of Justice, the decision of the ACP was reversed.
·
CA: Set aside the Secretary of Justice’ resolutions.
·
Motion upon CA: Reinstated the DOJ’s decision.
----------------------------------------------------------------------------------Issue: Whether or not the subject property and the things within it are properties owned by the
Corporation?
Ruling: YES. Admittedly, the subject 10th floor unit is owned by the corporation and served as the
family residence prior to the death of the Sy siblings’ father. The 10th floor unit, including the
personal properties inside, is the subject of estate proceedings pending in another court and is,
3A CORPORATION LAW 2019-2020 pg. 159
therefore, involved in the disputed claims among the siblings. The Sy siblings admitted that armed
with a Board Resolution authorizing them to break open the door lock system of said unit and to
install a new door lock system, they went up to the unit with the said resolution. The said corporate
action was arrived at because Lily allegedly prevented the prospective buyers from conducting
ocular inspection of the unit.
The contention of robbery can not stand as well. Given the fact that respondents believed in good
faith that they and the corporation own not only the subject unit, but also the properties found
inside.
Wherefore, the petition of Lily Sy is denied for lack of merit.
(70)
Violeta Tudtud Banate v. Phil. Countryside Rural Bank, G.R.
No. 163825, July 13, 2010.
Violeta Tudtud Banate vs Phil. Countryside Rural Bank
G.R. No. 163825
July 13, 2010
Digested by: Carlos, Kaira Marie Bernardino
---------------------------------------------------------------------------Petitioners:VIOLETA TUDTUD BANATE, MARY MELGRID M CORTEL, BONIFACIO
CORTEL RODENDO MAASANG and PATROCINIA MONILAR,
Respondents:PHILIPPINE COUNTRYSIDE RURAL BANK (LILOAN, CEBU) INC., and
TEOFILO SOON JR.,
----------------------------------------------------------------------------DOCTRINE:
3A CORPORATION LAW 2019-2020 pg. 160
Doctrine of apparent authority, acts and contracts of the agent, as are within the apparent scope
of the authority conferred on him, although no actual authority to do such acts or to make such
contracts has been conferred, bind the principal
FACTS:
On July 22, 1997, petitioner spouses Rosendo Maglasang and Patrocinia Monilar (spouses
Maglasang) obtained a loan from PCRB for P1,070,000.00. The spouses Maglasang executed,
in favor of PCRB a real estate mortgage over their property, Lot 12868-H-3-C, including the house
constructed thereon owned by petitioners Mary Melgrid and Bonifacio Cortel (spouses Cortel)
Aside from the subject loan, the spouses Maglasang obtained two other loans from PCRB which
were covered by separate promissory notes and secured by mortgages on their other properties.
Sometime in November 1997 (before the subject loan became due), the spouses Maglasang and
the spouses Cortel asked PCRBs permission to sell the subject properties. They likewise
requested that the subject properties be released from the mortgage since the two other loans
were adequately secured by the other mortgages.
The spouses Maglasang and the spouses Cortel claimed that the PCRB, acting through its Branch
Manager, Pancrasio Mondigo, verbally agreed to their request but required first the full payment
of the subject loan. The spouses Maglasang and the spouses Cortel thereafter sold to petitioner
Violeta Banate the subject properties for P1,750,000.00. The spouses Magsalang and the
spouses Cortel used the amount to pay the subject loan with PCRB. After settling the subject
loan, PCRB gave the owners duplicate certificate of title of Lot 12868-H-3-C to Banate, who was
able to secure a new title in her name. The title, however, carried the mortgage lien in favor of
PCRB, prompting the petitioners to request from PCRB a Deed of Release of Mortgage. As PCRB
refused to comply with the petitioners request, the petitioners instituted an action for specific
performance before the RTC to compel PCRB to execute the release deed.
RTC ruled in favor of the petitioners but was subsequently reversed by the CA as it did not
consider as valid the petitioners new agreement with Mondigo. It ruled that Mondigo cannot orally
amend the mortgage contract between PCRB, and the spouses Maglasang and the spouses
Cortel; therefore, the claimed commitment allowing the release of the mortgage on the subject
properties cannot bind PCRB.
ISSUE: Can the Bank be held liable for agreements entered into by it’s Branch Manager without
express authority by the Board?
HELD: NO. Under the doctrine of apparent authority, acts and contracts of the agent, as are within
the apparent scope of the authority conferred on him, although no actual authority to do such acts
or to make such contracts has been conferred, bind the principal. The principals liability, however,
is limited only to third persons who have been led reasonably to believe by the conduct of the
principal that such actual authority exists, although none was given. In other words, apparent
authority is determined only by the acts of the principal and not by the acts of the agent. There
can be no apparent authority of an agent without acts or conduct on the part of the principal; such
3A CORPORATION LAW 2019-2020 pg. 161
acts or conduct must have been known and relied upon in good faith as a result of the exercise
of reasonable prudence by a third party as claimant, and such acts or conduct must have
produced a change of position to the third partys detriment.
In the present case, the decision of the trial court was utterly silent on the manner by which PCRB,
as supposed principal, has clothed or held out its branch manager as having the power to enter
into an agreement, as claimed by petitioners. No proof of the course of business, usages and
practices of the bank about, or knowledge that the board had or is presumed to have of, its
responsible officers acts regarding bank branch affairs, was ever adduced to establish the branch
managers apparent authority to verbally alter the terms of mortgage contracts. Neither was there
any allegation, much less proof, that PCRB ratified Mondigos act or is estopped to make a
contrary claim.
Further, we would be unduly stretching the doctrine of apparent authority were we to consider the
power to undo or nullify solemn agreements validly entered into as within the doctrines ambit.
Although a branch manager, within his field and as to third persons, is the general agent and is
in general charge of the corporation, with apparent authority commensurate with the ordinary
business entrusted him and the usual course and conduct thereof, yet the power to modify or
nullify corporate contracts remains generally in the board of directors. Being a mere branch
manager alone is insufficient to support the conclusion that Mondigo has been clothed with
apparent authority to verbally alter terms of written contracts, especially when viewed against the
telling circumstances of this case: the unequivocal provision in the mortgage contract; PCRBs
vigorous denial that any agreement to release the mortgage was ever entered into by it; and, the
fact that the purported agreement was not even reduced into writing considering its legal effects
on the parties interests. To put it simply, the burden of proving the authority of Mondigo to alter or
novate the mortgage contract has not been established.
It is a settled rule that persons dealing with an agent are bound at their peril, if they would hold
the principal liable, to ascertain not only the fact of agency but also the nature and extent of the
agents authority, and in case either is controverted, the burden of proof is upon them to establish
it. As parties to the mortgage contract, the petitioners are expected to abide by its terms. The
subsequent purported agreement is of no moment, and cannot prejudice PCRB, as it is beyond
Mondigos actual or apparent authority, as above discussed.
3A CORPORATION LAW 2019-2020 pg. 162
(71)
Antonio P. Salenga v. Court of Appeals, G.R. No. 174941, February 1, 2012
GR No. 174941
Date: February 1, 2012
Digested by: De Guzman, Aldrin John Joseph E.
----------------------------------------------------------------------------------Petitioner: Antonio P. Salenga and National Labor Relations
Commission
Respondent: Court Of Appeals And Clark Development Corporation
Ponente: C.J. Sereno
Topic: Doctrine of Apparent Authority
----------------------------------------------------------------------------------DOCTRINE: Veil-piercing in fraud cases requires
3A CORPORATION LAW 2019-2020 pg. 163
that the legal fiction of separate juridical personality is used for fraudulent
or wrongful ends. The totality of which strongly indicate that MPEI was a sham
corporation formed merely for the purpose of perpetrating a fraudulent scheme.
---------------------------------------------------------------------------------FACTS:
On 22 September 1998, President/Chief Executive Officer (CEO) Rufo Colayco issued an Order
informing petitioner that, pursuant to the decision of the board of directors of respondent CDC,
the position of head executive assistant – the position held by petitioner – was declared
redundant. Petitioner received a copy of the Order on the same day and immediately went to see
Colayco. The latter informed him that the Order had been issued as part of the reorganization
scheme approved by the board of directors. Thus, petitioner’s employment was to be terminated
thirty (30) days from notice of the Order.
On 17 September 1999, petitioner filed a Complaint for illegal dismissal with a claim for
reinstatement and payment of back wages, benefits, and moral and exemplary damages against
respondent CDC and Colayco. The Complaint was filed with the National Labor Relations
Commission
In defense, respondents, represented by the Office of the Government Corporate Counsel
(OGCC), alleged that the NLRC had no jurisdiction to entertain the case on the ground that
petitioner was a corporate officer and, thus, his dismissal was an intra-corporate matter falling
properly within the jurisdiction of the Securities and Exchange Commission (SEC).
LA held that the NLRC had jurisdiction over the Complaint, considering that petitioner was not a
corporate officer but a managerial employee.
Decision was rendered, respondent CDC was already under the leadership of Sergio T. Naguiat.
he subsequently instructed Atty. Monina C. Pineda, manager of the Corporate and Legal Services
Department and concurrent corporate board secretary, not to appeal the Decision and to so inform
the OGCC. Despite these instructions, two separate appeals were filed .
ISSUE: whether The NLRC had jurisdiction to entertain the appeal filed by Timbol-Roman and
former CDC CEO Colayco.
HELD:
SC: No. This Office is also of the view that complainant was not accorded his right to due process
prior to his termination. The law requires that the employer must furnish the worker sought to be
dismissed with two (2) written notices before termination may be validly effected: first, a notice
apprising the employee of the particular acts or omissions for which his dismissal is sought and,
second, a subsequent notice informing the employee of the decision to dismiss him. In the case
at bar, complainant was not apprised of the grounds of his termination. He was not given the
opportunity to be heard and defend himselfxxx40
3A CORPORATION LAW 2019-2020 pg. 164
The OGCC, representing respondent CDC and former CEO Colayco separately appealed from
the above Decision. Both alleged that they had filed the proper bond to cover the award granted
by LA Darlucio.
It is clear from the NLRC Rules of Procedure that appeals must be verified and certified against
forum-shopping by the parties-in-interest themselves. In the case at bar, the parties-in-interest
are petitioner Salenga, as the employee, and respondent Clark Development Corporation as the
employer.
A corporation can only exercise its powers and transact its business through its board of directors
and through its officers and agents when authorized by a board resolution or its bylaws. The
power of a corporation to sue and be sued is exercised by the board of directors. The physical
acts of the corporation, like the signing of documents, can be performed only by natural persons
duly authorized for the purpose by corporate bylaws or by a specific act of the board. The purpose
of verification is to secure an assurance that the allegations in the pleading are true and correct
and have been filed in good faith.41
Thus, we agree with petitioner that, absent the requisite board resolution, neither Timbol-Roman
nor Atty. Mallari, who signed the Memorandum of Appeal and Joint Affidavit of Declaration
allegedly on behalf of respondent corporation, may be considered as the "appellant" and
"employer" referred to by Rule VI, Sections 4 to 6 of the NLRC Rules of Procedure.
(72)
Advance Paper Corp. v. Arma Traders Corp., G.R. No. 176897,
December 11, 2013
ADVANCE PAPER CORPORATION vs ARMA TRADERS CORPORATION
GR. NO. 176897, December 11, 2017
Digested by : Nicky Galang
____________________________________________________________________________
Petitioner: ADVANCE PAPER CORPORATION
Respondent: ARMA TRADERS CORPORATION, TAN AND UY (Board of Directors)
Ponente: Justice Brion
Topic: Doctrine of Apparent Authority
____________________________________________________________________________
Facts of the case:
3A CORPORATION LAW 2019-2020 pg. 165
Arma Traders (Arma) purchased on credit notebooks and other paper products amounting to
Php7,533,001.49 from Advance Paper (Advance) upon representation of Tan and Uy. Arma also
obtained three loans from Advance. Having the need to settle its obligation to Advance and other
suppliers because its collectibles did not arrive on time, Arma issued 82 Postdated checks
payable to Arma or Cash of which Tan and UY are the authorized bank signatories which
amounted to Php15,130,636.87.
Upon presentment of the checks, drawee bank dishonored said checks for the reason
“insufficiency of funds” or “Account Closed”.
Advance filed a complaint against the Corporation and impleaded Tan and Uy. RTC ruled that
Arma should pay for the obligation and dismissed the complaint against Tan and Uy.
Issue: Whether Arma is liable to pay the loans applying the doctrine of apparent authority
Ruling:
Arma Traders is liable to pay the loans on the basis of the doctrine of apparent authority.
The doctrine of apparent authority provides that a corporation will be estopped from denying the
agent's authority if it knowingly permits one of its officers or any other agent to act within the scope
of an apparent authority, and it holds him out to the public as possessing... the power to do those
acts.[76] The doctrine of apparent authority does not apply if the principal did not commit any acts
or conduct which a third party knew and relied upon in good faith as a result of the exercise of
reasonable prudence. Moreover, the... agent's acts or conduct must have produced a change of
position to the third party's detriment
In the present petition, we do not agree with the CA's findings that Arma Traders is not liable to
pay the loans due to the lack of board resolution authorizing Tan and Uy to obtain the loans.
To begin with, Arma Traders' Articles of Incorporation... provides that the corporation may borrow
or raise money to meet the financial requirements of its business by the issuance of bonds,
promissory notes and other evidence of indebtedness. Likewise, it states that Tan and Uy are not
just ordinary corporate... officers and authorized bank signatories because they are also Arma
Traders' incorporators along with respondents Ng and Ting, and Pedro Chao. Furthermore, the
respondents, through Ng who is Arma Traders' corporate secretary, incorporator, stockholder and
director testified that the sole management of Arma Traders was left to Tan and Uy and that he
and the other officers never dealt with the business and management of Arma Traders for 14
years. He also confirmed that since 1984 up to the filing of the complaint against Arma Traders
its stockholders and board of directors never had its meeting. Thus, Arma Traders bestowed upon
Tan and Uy broad powers by allowing them to transact with third persons without the necessary
written authority from its non-performing board of directors. Arma Traders failed to take
precautions to prevent its own corporate officers from abusing... their powers. Because of its own
laxity in its business dealings, Arma Traders is now estopped from denying Tan and Uy's authority
to obtain loan from Advance Paper.
3A CORPORATION LAW 2019-2020 pg. 166
We also reject the respondents' claim that Advance Paper, through Haw, connived with Tan and
Uy. The records do not contain any evidence to prove that the loan transactions were personal to
Tan and Uy. A different conclusion might have been inferred had the cashier's checks been...
issued in favor of Tan and Uy, and had the postdated checks in favor of Advance Paper been
either Tan and/or Uy's, or had the respondents presented convincing evidence to show how Tan
and Uy conspired with the petitioners to defraud Arma Traders. We note that the respondents
initially intended to present Sharow Ong, the secretary of Tan and Uy, to testify on how Advance
Paper connived with Tan and Uy. As mentioned, the respondents failed to present her on the
witness stand.
(73)
Riosa v. Tabaco La Suerte Corp., G.R. No. 203786, October
23, 2013
AQUILES RIOSA, ,
vs.
TABACO LA SUERTE CORPORATION, G.R. No. 203786
October 23, 2013
Digested by: Gutierrez, Jr.
____________________________________________________________________________
__
Petitioner: AQUILES RIOSA
3A CORPORATION LAW 2019-2020 pg. 167
Respondent: TABACO LA SUERTE CORPORATION,
Ponente: MENDOZA, J.:
Doctrine: Section 23 of the Corporation Code expressly provides that the corporate powers of all
corporations shall be exercised by the board of directors. Just as a natural person may authorize
another to do certain acts in his behalf, so may the board of directors of a corporation validly
delegate some of its functions to individual officers or agents appointed by it. Thus, contracts or
acts of a corporation must be made either by the board of directors or by a corporate agent duly
authorized by the board. Absent such valid delegation/authorization, the rule is that the
declarations of an individual director relating to the affairs of the corporation, but not in
the course of, or connected with, the performance of authorized duties of such director,
are held not binding on the corporation.
Facts:
Petitioner Aquiles Riosa (Aquiles) filed his Complaint for Annulment/Declaration of Nullity of Deed
of Absolute Sale and Transfer Certificate of Title, Reconveyance and Damages against
respondent Tabaco La Suerte Corporation (La Suerte) before the RTC.
In his complaint, Aquiles alleged that he was the owner and in actual possession of a 52-square
meter commercial lot situated in Barangay Quinale, Tabaco City, Albay; that he acquired the said
property through a deed of cession and quitclaim executed by his parents, Pablo Riosa, Sr. and
Sabiniana Biron; that he declared the property in his name and had been religiously paying the
realty tax on the said property; that thereafter, his daughter, Annie Lyn Riosa Zampelis, renovated
the commercial building on the lot and introduced improvements costing no less than
₱300,000.00; that subsequently, on three (3) occasions, he obtained loans from Sia Ko Pio (then
CEO of La Suerte) in the total amount of ₱50,000.00; that as a security for the payment of loans,
Sia Ko Pio requested from him a photocopy of the deed of cession and quitclaim; that Sia Ko Pio
presented to him a document purportedly a receipt for the ₱50,000.00 loan with an undertaking
to pay the total amount of ₱52,000.00 including the ₱2,000.00 attorney’s fees; that without reading
the document, he affixed his signature thereon; and that in September 2001, to his surprise, he
received a letter from La Suerte informing him that the subject lot was already registered in its
name.
In its Answer, La Suerte averred that it was the actual and lawful owner of the commercial
property, after purchasing it from Aquiles on December 7, 1990; that it allowed Aquiles to remain
in possession of the property to avoid the ire of his father from whom he had acquired property
inter vivos, subject to his obligation to vacate the premises anytime upon demand; that on
February 13, 1991, the Register of Deeds of Albay issued Transfer Certificate of Title (TCT) No.
3A CORPORATION LAW 2019-2020 pg. 168
T-80054 covering the subject property in its name; that Aquiles necessarily undertook the cost of
repairs and did not pay rent for using the premises; that Aquiles transacted with it, through Sia Ko
Pio, now deceased, who was then its Chief Executive Officer; that his opinion that only the land
was sold was absurd because the sale of the principal included its accessories, not to mention
that he did not make any reservation at the time the deed was executed; that it repeatedly asked
Aquiles to vacate the premises but to no avail; that, instead, he tried to renovate the building in
2001 which prompted it to lodge a complaint with the Office of the Mayor on the ground that the
renovation work was without a building permit; and that Aquiles’ complaint was barred by
prescription, laches, estoppel and indefeasibility of La Suerte’s title.
Issue: Whether or not Sia Ko Po has the authority to enter into a contract of sale with Aquiles in
behalf of La Suerte.
Ruling:
No.
It is the board of directors or trustees which exercises almost all the corporate powers in a
corporation. Thus, the Corporation Code provides:
SEC. 23. The board of directors or trustees. — Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees to be elected from among the holders of stock, or where there is no stock, from among
the members of the corporation, who shall hold office for one (1) year and until their successors
are elected and qualified. x x x
SEC. 36. Corporate powers and capacity. — Every corporation incorporated under this Code has
the power and capacity:
xxxx
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise
deal with such real and personal property, including securities and bonds of other corporations,
as the transaction of a lawful business of the corporation may reasonably and necessarily require,
subject to the limitations prescribed by the law and the Constitution.
3A CORPORATION LAW 2019-2020 pg. 169
xxxx
In the case at bench, Sia Ko Pio, although an officer of La Suerte, had no authority from its Board
of Directors to enter into a contract of sale of Aquiles’ property. It is, thus, clear that the loan
obtained by Aquiles from Sia Ko Pio was a personal loan from the latter, not a transaction between
Aquiles and La Suerte. There was no evidence to show that Sia Ko Pio was clothed with authority
to use his personal fund for the benefit of La Suerte. Evidently, La Suerte was never in the picture.
(74)
2014
Lanuza, Jr. v. BF Corporation, G.R. No. 174938, October 1,
Lanuza, Jr. v. BF Corporation
G.R. No. 174938
October 1, 2014
Digested by: Abrhiem Nico Angeles
----------------------------------------------------------------------------------Petitioner: GERARDO LANUZA JR AND ANTONIO O. OLBES
Respondent: BF CORPORATION, SHANGRI-LA PROPERTIES INC, ALFREDO C. RAMOS,
RUFO B. COLAYCO,MAXIMO G. LICAUCO III, AND BENJAMIN C. RAMOS
Ponente: LEONEN, J.
Topic: Piercing the Corporate Veil
----------------------------------------------------------------------------------Doctrine:
Piercing the corporate veil happens when the separate personality of a corporation is used as a
means to perpetuate fraud or an illegal act or as a vehicle for the evasion of an existing obligation,
the circumvention of statues or to confuse legitimate issues. When the corporate veil is pierced,
the corporation and persons who are treated as distinct from the corporation are treated as one
3A CORPORATION LAW 2019-2020 pg. 170
person such that when the corporation is found to be liable, these persons become liable as well
as if they were the corporation.
---------------------------------------------------------------------------------Facts:
BF Corporation entered into agreements with Shangri-La wherein it undertook to construct for
Shangri-La a mall and a parking structure along EDSA. Shangri-La had been consistent from the
start in paying BF Corporation until it started defaulting in payment.
Despite repeated demands by BF Corporation, Shangri-La still refused to pay. BF Corporation
then filed a complaint against Shangri-La and its board of directors including Lanuza & Olbes who
alleged that they already resigned as board of directors. BF Corporation in its complaint alleged
that the Board of Directors was in bad faith and that they should be solidarily liable with ShangriLa for damages that BF Corporation incurred. Shangrila filed a motion to oppose to suspend the
proceedings which the RTC denied but the CA granted which ordered the submission of the
dispute to arbitration proceedings in accordance with the arbitration clause in their contract.
Lanuza & Olbes then filed a comment praying that they should not be included in the arbitration
proceedings as they are not parties to the agreement between BF Corporation and Shangrila. CA
denied and ruled that they are parties to the said proceedings. Petitioners point out that our
arbitration laws were enacted to promote the autonomy of parties in resolving their disputes.
Compelling them to submit to arbitration is against this purpose and may be tantamount to
stipulating for the parties.
----------------------------------------------------------------------------------Issue: Whether or not Lanuza & Olbes should be made parties to the arbitration proceedings in
accordance with the arbitration clause?
Ruling: Yes.
As a general rule, therefore, a corporation’s representative who did not personally bind himself or
herself to an arbitration agreement cannot be forced to participate in arbitration proceedings made
pursuant to an agreement entered into by the corporation. He or she is generally not considered
a party to that agreement.
However, there are instances when the distinction between personalities of directors, officers,and
representatives, and of the corporation, are disregarded. We call this piercing the veil of corporate
fiction.
Piercing the corporate veil happens when the separate personality of a corporation is used as a
means to perpetuate fraud or an illegal act or as a vehicle for the evasion of an existing obligation,
the circumvention of statues or to confuse legitimate issues. When the corporate veil is pierced,
the corporation and persons who are treated as distinct from the corporation are treated as one
person such that when the corporation is found to be liable, these persons become liable as well
as if they were the corporation.
3A CORPORATION LAW 2019-2020 pg. 171
The basic arbitration principle that only parties to an arbitration agreement may be compelled to
submit to arbitration. In the case at bar, the Arbitral Tribunal rendered a decision finding that BF
Corporation failed to prove the existence of circumstances to render petitioners and the other
directors solidarily liable. It ruled that petitioners and the other directors were not liable for
contractual obligations of Shangri-La to BF Corporation. Since the petitioner’s participated in the
said arbitration proceedings, the petitioners are bound by such decision.
WHEREFORE THE PETITION IS DENIED. THE COURT OF APPEAL’S DECISION AND
RESOLUTION ARE AFFIRMED
(75)
Estate of Dr. Juvencio Ortanez v. Lee, G.R. No. 184251,
March 9. 2016.
————————————————————————
Estate of Dr. Juvencio Ortanez v. Lee, G.R. No. 184251,
March 9. 2016
Digested by: Sarah Bagis
Petitioner: Estate of Dr. Juvencio P. Ortañez (Dr. Ortañez), Ligaya Novicio, Divina
Ortañez-Enderes, and Cesar Ortañez
Respondent: Jose Lee
Ponente: Perez, J
Topic: Kinds of Corporate Powers - Specific Powers- Power to Increase or Decrease Capital or
Incur Bonded Indebtedness
——————————————————————————————————
Doctrine: Respondents were validly elected as Board of Directors during the annual
stockholders’ meeting of Phi linter life held on 15 March 2006. We agree with the courts that
in the absence of evidence to the contrary, the presumption is that the respondents were
duly elected as directors/officers of Philinterlife during the aforesaid annual stockholders’
3A CORPORATION LAW 2019-2020 pg. 172
meeting. Petitioners cannot, in the instant election contest case, question the increases in
the capital stocks of the corporation which were mandated by law and validly voted upon.”
———————————————————————————————
FACTS:
In 1956, deceased Dr. Ortañez organized and founded the Philippine International Life
Insurance Company, Inc. (Philinterlife). At the time of its incorporation, Dr. Ortañez owned
90% of its subscribed capital stock.
Upon his death on July 21 1980, he left 2,029 shares of stock, representing 50.725% of the
outstanding capital stock which was at 4,000 shares valued at 4M.
RTC, QC: On March 30 2006, petitioners filed a complaint for Election Contest. It challenged
the validity of the meeting and election conducted by the group of Lee (respondents) on 15
March 2006. During the assailed meeting, Lee among others were elected as members of
the Board of Directors (BOD) of Philinterlife.
Petitioners claimed that before the contested election, they formally informed respondents that
the participation of the Estate was needed to constitute a quorum in the scheduled annual
stockholders' meeting. Despite notice, the illegal meeting continued in bad faith,
respondents having elected themselves as directors, proceeded to elect their own officers.
Petitioners, insisted they represented 51% of the outstanding capital stock of shares, conducted
on the same day and venue, in a different room, their own annual stockholders' meeting and
proceeded to elect their own set of directors.
That despite being the lawful directors, respondents prevented their entrance into the premises
of Philinterlife's corporate records and assets.
BACKGROUND:
G.R. No. 146006 Decision.
Petitioners narrate that In 1989 and 1991, the 2,029 shares of stock of the Estate were sold
to the group of Lee, through Filipino Loan Assistance Group (FLAG). Because of the sale,
respondents took control of the management of the corporation. By voting on the shares
that they had illegally acquired through the sale, respondents increased the authorized
capital stock of Philinterlife to 5,000 shares in Feb 23 2004
The sale was declared null and void ab initio. The Court ruled that all increases in the authorized
capital stock of Philinterlife made and effected by the respondents using the shares that
they illegally acquired were null and void as well.
Petitioners submit that as a consequence, majority ownership over Philinterlife was restored to
the Estate, which was the controlling stockholder prior to the unlawful sale of the shares.
3A CORPORATION LAW 2019-2020 pg. 173
.
That in the G.R. No. 146006 decision, the valid and lawful capital stock of Philinterlife remained
at 5,000 shares of stock. From this 5,000 shares, petitioner Estate owns 2,029 shares, plus
510 shares which also legally belongs to it by reason of its pre-emptive right, or a total of
2,539 shares. Therefore they still represent majority of the outstanding capital stock of
Philinterlife.
That despite the decision respondents unlawfully held on to the management and control of
Philinterlife.
Respondents’ defense that the stockholders' meeting they conducted was valid as it was
allegedly attended by stockholders representing 98.76% of the 50,000 shares representing
the authorized and issued capital stock of Philinterlife.
RTC dismissed the Election Contest complaint on the ground of petitioner’s failure to adduce
preponderance of evidence that they were the owners of at least 51% of the outstanding
capital stock of Philinterlife.
CA dismissed on the ground:
1) petitioners are guilty of forum shopping; 2) the decision of this Court in G.R. No.
146006 was in favor of the respondents, when a writ of preliminary injunction was
issued against petitioners and; 3) petitioners are not even stockholders even if the
basis for filing of the complaint in Civil Case No. Q-06-143 is the 5,000 shares
existing on the books of Philinterlife as of 1982.
Hence, this Petition for Review on Certiorari under Rule 45
ISSUE
1. WON Petitioner Estate is the owner of majority of the capital stock of Philinterlife
2. WON the election meeting of respondents as directors of Philinterlife was in accordance
if the Corporation Code
3. WON the respondents, as BOD, power to increase the authorized capital stock was valid
HELD
1. NO. Petitioners argue that G.R. No. 146006 serves as their "best evidence of the fact that
petitioners have always been the true and lawful owners of at least 51% of'Philinterlife."
A. The particular decision in G.R. No. 146006 that was declared void was the 1982
MOA and consequently, the subsequent sales pursuant thereto, the increased
authorized capital stocks approved on the vote of petitioners' non-existent
shares. Not all increases of capital stock were declared void. The increases
in the capital stock made before the illegal sales were not declared void by G.R.
No. 146006. These previous increases, were valid and mandated by law.
B. There is more weight to the Capital Structure of Philinterlife in 1998., In view of
the increase of the capital structure of Philinterlife from 4,000 shares to 5,000
3A CORPORATION LAW 2019-2020 pg. 174
shares, the percentage of shareholdings owned by the Estate was naturally
reduced from 50.73% (2,029 shares out of 4,000 shares) to 40.58% (2,029 shares
out of 5,000 shares). In other words, the Estate's 2,029 shares became a minority
shareholder from 1980 to 1983. The Capital Structure shows that they have NOT
always been the true and lawful owners of at least 51% of Philinterlife.
C. It should be noted that the last valid uncontested outstanding capital stock before
the illegal sales was 10,000 shares. Prior to the sales made to FLAG in 1989 and
1991, the outstanding capital stock as reflected in the General Information Sheet
in 1988, is 10,000 shares at 10M and NOT 5,000 shares as advanced by the
petitioners. Therefore, the total number of outstanding shares during the 15 March
2006 annual stockholders' meeting was definitely not 5,000 shares as petitioners
posit. Even before the illegal sale, the Estate only owned 2,029 shares, not even
close to majority of the total outstanding capital stock of 10,000 shares.
D. This Court recognizes the significant weight of the Certification issued by the
Insurance Commission, which required domestic insurance companies to
increase their minimum paid-up capital to 10M by the end of 1987.
E. From the foregoing facts and evidence, Petitioners failed to present the required
preponderance of evidence to prove their allegation in the complaint that they
represented more than 51% of the outstanding capital stock of Philinterlife during
the annual stockholders' meeting held on 15 March 2006.
2. YES. The 15 March 2006 annual stockholders' meeting presided over by Lee was attended
by stockholders representing 98.76% of the 50,000 authorized and fully subscribed capital
stock.
A. In the absence of evidence to the contrary, the presumption is that the respondents
were duly elected as directors/officers of Philinterlife during the aforesaid annual
stockholders' meeting. Petitioners cannot, in the instant election contest case,
question the increases in the capital stocks of the corporation.
3. YES. It was mandated by laws.
A. We quote with approval the following pertinent disquisitions of the RTC, Branch
93, Quezon City in Civil Case No. 05-115:
- From July 21, 1980 up to April 15, 1989, there were changes in the capital
structure of Philinterlife. There were increases in the capital stock [pursuant
to law]. These changes took place before the sale of the 2,029 shares of
the Estate x x x in 1989 and 1991 to FLAG. Prior to 1995, Rafael and Jose
Ortañez were the joint special administrators of the Estate x x x and their
administration covered the 2,029 shares, x x x Under the joint special
administration x x x, the 2,029 shares remained static. As respondents
correctly pointed out, to give premium to petitioners' story that the quorum
in the annual stockholders' meeting should be based on 5,000 shares is to
grossly violate and disregard corporate acts and powers done by the
corporation, which were validly voted upon by the stockholders including
3A CORPORATION LAW 2019-2020 pg. 175
the Estate, through its then Special Administrators Rafael Ortañez and
Jose Ortañez, from 1983 to 1988. Furthermore, the same increases of
capital stock to 10,000 were also voted upon and approved after due notice
to petitioners who were present/allowed to be present, during the
stockholders' meetings from 1983 to 1988
(76)
Islamic Directorate of the Phils. V. CA, 274 SCRA 454 (1997)
Islamic Directorate of the Phils vs CA
GR No. 117897
Date: May 14, 1997
Digested by: Therese Javier
________
Petitioner: Islamic Directorate of the Philippines
Respondent: Iglesia ni Cristo
Ponente: J. Hermosisima
Topic: Power to Sell All or Substantially all of the assets
________
Doctrine: For the sale to be valid, the majority vote of the legitimate Board of Trustees, concurred
in by the vote of at least 2/3 of the bona fide members of the corporation should have been
obtained
3A CORPORATION LAW 2019-2020 pg. 176
_______
Facts: Petitioner IDP-Tamano Group alleges that sometime in 1971, Islamic leaders of all Muslim
major tribal groups in the Philippines headed by Dean Cesar Adib Majul organized and
incorporated the ISLAMIC DIRECTORATE OF THE PHILIPPINES (IDP), the primary purpose of
which is to establish an Islamic Center in Quezon City for, the construction of a "Mosque (prayer
place, Madrasah (Arabic School), and other religious infrastructures" so as to facilitate the
effective practice of Islamic faith in the area.
Towards this end, that is, in the same year, the Libyan government donated money to the IDP to
purchase land at Culiat, Tandang Sora, Quezon City, to be used as a Center for the Islamic
populace. The land, with an area of 49,652 square meters, was covered by two titles: Transfer
Certificate of Titles, both registered in the name of IDP. It appears that in 1971, the Board of
Trustees of the IDP was composed of the following per Article 6 of its Articles of Incorporation:
Senator Mamintal Tamano, Congressman Ali Dimaporo, Congressman Salipada Pendatun, Dean
Cesar Adib Majul, Sultan Harun Al, Rashid Lucman, Delegate Ahmad Alonto, Commissioner Datu
Mama Sinsuat, and Mayor Aminkadra Abubakar
According to the petitioner, in 1972, after the purchase of the land by the Libyan government in
the name of IDP, Martial Law was declared by the late President Ferdinand Marcos. Most of the
members of the 1971 Board of Trustees like Senators Mamintal Tamano, Salipada Pendatun,
Ahmad Alonto, and Congressman Al-Rashid Lucman flew to the Middle East to escape political
persecution. Thereafter, two Muslim groups sprung, the Carpizo Group, headed by Engineer
Farouk Carpizo, and the Abbas Group, led by Mrs. Zorayda Tamano and Atty. Firdaussi Abbas.
Both groups claimed to be the legitimate IDP. Significantly, on October 3, 1986, the SEC, in a suit
between these two contending groups, came out with a Decision in SEC Case No. 2687 declaring
the election of both the Carpizo Group and the Abbas Group as IDP board members to be null
and void.
Neither group, however, took the necessary steps prescribed by the SEC in its October 3, 1986
Decision, and, thus, no valid election of the members of the Board of Trustees of IDP was ever
called. Although the Carpizo Group attempted to submit a set of by-laws, the SEC found that,
aside from that Engineer Farouk Carpizo and Atty. Musib Buat, those who prepared and adopted
the by-laws were not bona fide members of the IDP, thus rendering the adoption of the by-laws
likewise null and void.
On April 20, 1989, without having been properly elected as new members of the Board of Trustees
of IDP, the Carpizo Group caused to be signed an alleged Board Resolution of the IDP,
authorizing the sale of the subject two parcels of land to the private respondent INC for a
consideration of P22,343,400.00, which sale was evidenced by a Deed of Absolute Sale dated
April 20, 1989. On May 30, 1991, the petitioner 1971 IDP Board of Trustees headed by former
Senator Mamintal Tamano, or the Tamano Group, filed a petition before the SEC, docketed as
SEC Case No 4012, seeking to declare null and void the Deed of Absolute Sale signed by the
3A CORPORATION LAW 2019-2020 pg. 177
Carpizo Group and the INC since the group of Engineer Carpizo was not the legitimate Board of
Trustees of the IDP.
Issue: WON the sale was valid
Held: The Tandang Sora property, it appears from the records, constitutes the only property of
the IDP. Hence, its sale to a third-party is a sale or disposition of all the corporate property and
assets of IDP falling squarely within the contemplation of the foregoing section. For the sale to be
valid, the majority vote of the legitimate Board of Trustees, concurred in by the vote of at least 2/3
of the bona fide members of the corporation should have been obtained. These twin requirements
were no met as the Carpizo Group which voted to sell the Tandang Sora property was a fake
Board of Trustees, and those whose names and signatures were affixed by the Carpizo Group
together with the sham Board Resolution authorizing the negotiation for the sale were, from all
indications, not bona fide members of the IDP as they were made to appear to be. Apparently,
there are only fifteen (15) official members of the petitioner corporation including the eight (8)
members of the Board of Trustees.
All told, the disputed Deed of Absolute Sale executed by the fake Carpizo Board and private
respondent INC was intrinsically void ab initio.
(77)
Caltex (Phils.), Inc. v. PNOC Shipping and Transport Corp.,
G.R. No. 150711, August 10, 2006 BERNALDO
CALTEX (PHILIPPINES), INC. , petitioner, vs . PNOC SHIPPING AND
TRANSPORT CORPORATION, respondent
GR No. 150711
Date: August 10, 2006
Digested by: Michael Bernaldo
----------------------------------------------------------------------------------Petitioner: CALTEX (PHILIPPINES), INC.
Respondent: . PNOC SHIPPING AND TRANSPORT CORPORATION
3A CORPORATION LAW 2019-2020 pg. 178
Ponente: Justice Carpio
Topic: Power to Sell All or Substantially all of the assets
----------------------------------------------------------------------------------Doctrine:
The rights of creditors are protected whenever there is a sale of corporate assets whether in its
entirety or substantial portions.
----------------------------------------------------------------------------------Facts:
In July 1979, PSTC and LUSTEVECO entered into an agreement to assume obligations. PSTC
agreed to assume all the obligations of LUSTEVECO in exchange of the transfer of business,
assets and properties with respect to its tanker and bulk all departments including the pending
case with Caltex docketed as AC-G.R. CV No. 62613.
In November 1985, the IAC confirmed with modification the decision of CFI in favor of Caltex.
LUSTEVECO was liable to pay Caltex. The decision became final and executory. Caltex was
not able to collect from LUSTEVECO despite the writ of execution. The remaining assets of the
LUSTEVECO were already foreclosed by the bank creditors.
Caltex was informed of the agreement between PSTC and LUSTEVECO. Caltex send demand
letters to PSTC to collect the award from the case. PSTC did not respond since it claims that it
was not a party to the case between LUSTEVECO and Caltex. Caltex filed a complaint for a
sum of money against PSTC. The trial court ruled in favor of Caltex. PSTC filed an appeal to
the CA and got a favorable decision. The CA ruled that Caltex is not a party in the agreement
between PSTC and LUSTEVECO. The Court of Appeals further ruled that Caltex is not a
beneficiary of a stipulation pour autrui because there is no stipulation in the Agreement which
clearly and deliberately favors Caltex.
Caltex filed for a motion for reconsideration and was denied.
----------------------------------------------------------------------------------Issue:
Whether or not PSTC is liable to pay the obligations of LUSTEVECO to Caltex
Ruling:
3A CORPORATION LAW 2019-2020 pg. 179
The Court ruled that PSTC is liable to pay the liabilities of LUSTEVECO to Caltex. The Court
used the agreement executed by PSTC and LUSTEVECO to determine the extent of the liability
of PSTC. The document clearly states that PSTC assumes the obligations of LUSTEVECO as
stated in annex A and B which includes the pending case with Caltex in exchange of all the
business, properties and assets of LUSTEVECO. The Court supported its ruling by citing Art 40
of the Corporation Code (BP No. 68). The Court discussed that said provision also protects the
interest of the creditors of the corporation. Any sale that prejudice the interest of the creditors
may be rescinded by the creditors who did not give their consent. The Court also cited a number
of provisions from the Civil Code (1313, 138, 1291 and 1293) which protects the interest of the
creditors should the debtor tries to defraud them through the sale of properties. In the case at
bar, Caltex would be defrauded if PSTC was allowed not honor the obligation stated in the
agreement between it and LUSTEVECO.
WHEREFORE, we REVERSE and SET ASIDE the 31 May 2001 Decision and 9 November 2001
Resolution of the Court of Appeals in CA-G.R. CV No. 46097. We AFFIRM the 1 June 1994
Decision of the Regional Trial Court of Manila, Branch 51, in Civil Case No. 91-59512. Costs
against respondent.
(78)
Metropolitan Bank & Trust Co., v. Centro Development Corp.,
G.R. No. 180974, June 13, 2012
METROPOLITAN BANK and TRUST COMPANY vs. CENTRO DEVELOPMENT
CORPORATION, CHONGKING KEHYENG, MANUEL CO KEHYENG and Quirino Kehyeng
GR No. 180974
DATE: June 12, 2012
DIGESTED BY: BRAWNER, YVETTE
PETITIONER: METROPOLITAN BANK and TRUST COMPANY
RESPONDENT: CENTRO DEVELOPMENT CORPORATION, CHONGKING KEHYENG,
MANUEL CO KEHYENG and Quirino Kehyeng,
PONENTE: JUSTICE SERENO
TOPIC: SPECIFIC POWERS; POWER TO SELL ALL OR SUBSTANTIALLY ALL OF THE
ASSETS
DOCTRINES: Since the mortgaged properties constituted all or substantially all of the corporate
assets, the requirements on notice and voting under Section 40 of the Corporation Code has to
be met.
FACTS: In March 1990, in a special meeting of the board of directors of Centro, its president Go
Eng Uy was authorized and approved to mortgage its properties and assets to secure a loan of
Php84M of Lucky Two Corp. and Lucky Two Repacking. The properties and assets consisted of
a parcel of land with improvements at Salcedo St., Makati and covered by a TCT. Maria Jacinto
Go, the corporate secretary, issued a Secretary´s Certificate to that effect. Thus Centro,
3A CORPORATION LAW 2019-2020 pg. 180
represented by its president, executed a Mortgage Trust Indenture (MTI) with the Bank of the
Philippine Islands (BPI). Under the MTI, Centro and its affiliates Lucky Two Corp. and Lucky Two
Repacking expressed its desire to obtain from time to time loans and other credit accommodations
from certain creditors for corporate and other business purposes. To secure these obligations
from different creditors, Centro constituted a continuing mortgage on all or substantially all of its
properties and assets in favor of BPI. Should Centro or any of the Lucky Two fail to pay, the
trustee shall cause the foreclosure of the mortgaged property. The mortgage was duly recorded.
Later Centro and BPI amended the MTI to include an additional loan of Php36M and to
include San Carlos Milling Company as borrower. The next year Centro and BPI amended the
MTI for another loan of Php24M, the total amount loaned was now Php144M.
Meanwhile Centro approached Metrobank and proposed that it assume the role of
successor-trustee of the existing MTI. Metrobank agreed, and the assailed MTI was executed,
amending the previous agreements by appointing Metrobank as the successor-trustee of BPI with
no change in amount.
It was only in 1998 when member of the board of directors Chiongking Kehyeng and
stockholders Manuel Kehyeng and Quirino Keyheng questioned the mortgaged of the properties
through letters addressed to the president and Jacinta Go.
In that year, San Carlos obtained loans in the amount of Php812.7M from Metrobank and
failed to pay. Thus, Metrobank enforced the conditions in the MTI and initiated foreclosure
proceedings. It filed a Petition for Extrajudicial Foreclosure of Mortgage at RTC Makati based on
the Promissory Notes that San Carlos executed. The total amount, inclusive of interests and
penalties was Php1.1B. There were no documents in the records though to accommodate these
additional obligations.
Before the foreclosure date, the Kehyengs filed a complaint for the annulment of the MTI
executed in 1994 (assailed MTI) with a prayer for a temporary restraining order (TRO) and
preliminary injunction. The contention was that since the mortgaged properties constituted all or
substantially all of the corporate assets, the amendment of the MTI failed to meet the requirements
of Section 40 of the Corporation Code on notice and voting requirements. Under this provision,
in order for a corporation to mortgage all or substantially all of its properties and assets, it should
be authorized by the vote of its stockholders representing at least 2/3 of the outstanding capital
stock in a meeting held for that purpose, including written notice of the time and the place,
therefore the representation of Go Eng Uy that he was authorized was allegedly false.
The RTC dismissed the complaint, noting that the Go family owned the majority 70% which
represented more than 2/3 required while the Kehyengs owned 30%. It also noted that Chongking
sat in the board of directors and should have done periodic inquiries and verifications of
documents pertaining to corporate properties. In addition, laches had attached, since eight (8)
years had lapsed before the respondents questioned the mortgage in 1990. Respondents filed an
appeal with the CA and also an urgent motion for the Issuance of a TRO and writ of preliminary
injunction (denied).
Centro and San Carlos filed a complaint praying for the nullification of the foreclosure
proceedings and prayed for the issuance of a TRO/injunction. Both allege that the total obligation
due was only Php657M and not Php812.7M, and that the sale of the San Carlos properties found
in Negros Occidendal fully satisfied their outstanding obligations.
While the case was pending, the auction sale was held and Metrobank was the highest
bidder at Php344M. A Certificate of Sale was issued. Centro and San Carlos amended their
complaint to the issuance of a writ of injunction to prevent the registration and subsequent
transfer, which was denied.
In 2007 the CA promulgated the decision where it found that only a quorum was present
during the stockholders´ meeting in 1994 (during which Metrobank was made succesor-trustee of
BPI) and therefore the 2/3 vote required by Section 40 was not met. It ruled that minority
stockholders were deprived of their right to dissent from or to approve the proposed mortgage,
3A CORPORATION LAW 2019-2020 pg. 181
considering that they had not been notified in writing, therefore the Trust Indenture Agreement is
declared null and void, and the certificates of title in the name of Metrobank are cancelled.
ISSUE: WON the requirements of Section 40 of the Corporation Code was complied with in the
execution of the MTI, and WON the assailed MTI was valid, and WON Metrobank was entitled to
the proceeds.
Ruling: Yes, Yes and No.
The SC, upon perusing the Secretary´s Certificate and the original and revised MTI´s
found no substantial amendments to the provisions of the contract that would invalidate it. There
was no new mortgage and Go was duly authorized. The Court noted that Section 40 is not
applicable to the case because there is no new mortgage to speak of.
The Supreme Court held that Metrobank, as creditor or as trustee, had no cause of action
to move for the extrajudicial foreclosure of the subject properties under the MTI. What was evident
was that Metrobank failed to comply with the MTI’s conditions for granting additional loans to San
Carlos - additions that brought the total to Php1.178B - when it did not amend the MTI to
accommodate the additional loans in excess of Php144M. So Metrobank could only apply for the
foreclosure of the property corresponding to 144M. Centro’s properties may not be liable for San
Carlos’ debts beyond Php144M pursuant to the MTI executed.
(79)
SME Bank, Inc. vs. De Guzman, Nos. 184517 & 186641, Oct.
8, 2013
SME BANK INC., ABELARDO P. SAMSON, OLGA SAMSON and AURELIO VILLAFLOR, JR.,
Petitioners vs. PEREGRIN T. DE GUZMAN,EDUARDO M. AGUSTIN, JR., ELICERIO GASPAR,
, RICARDO GASPAR JR., EUFEMIA ROSETE, FIDEL ESPIRITU, SIMEON ESPIRITU, JR., and
LIBERATO MANGOBA, Respondents.
x-----------------------x
SME BANK INC., ABELARDO P. SAMSON, OLGA SAMSON and AURELIO VILLAFLOR, JR.,
Petitioners, vs. ELICERIO GASPAR, RICARDO GASPAR, JR., EUFEMIA ROSETE, FIDEL
ESPIRITU, SIMEON ESPIRITU, JR., and LIBERATO MANGOBA, Respondents.
G.R. NO. 184517 & G.R. NO. 186641
DATE: OCTOBER 8, 2013
DIGESTED BY: YUI RECINTO
PETITIONER: SME BANK INC., ABELARDO P. SAMSON, OLGA SAMSON and AURELIO
VILLAFLOR, JR.
RESPONDENT: PEREGRIN T. DE GUZMAN, EDUARDO M. AGUSTIN, JR., ELICERIO
GASPAR, RICARDO GASPAR JR., EUFEMIA ROSETE, FIDEL ESPIRITU, SIMEON
ESPIRITU, JR., and LIBERATO MANGOBA
3A CORPORATION LAW 2019-2020 pg. 182
PONENTE: CJ SERENO
TOPIC: A change in the equity composition of the corporate shareholders should not result in the
automatic termination of the employment of the corporation’s employees.
FACTS: Respondents are employees of Small and Medium Enterprise Bank, Inc. (SME). SME’s
principal shareholders and directors were Agustin and De Guzman. In June 2001, SME
experienced financial difficulties. To remedy the situation, the bank officials propsed its sale to
Samson. Agustin, De Guzman and Samson agreed to the terms and conditions of sale and
executed and signed Letter Agreements and sold 86.365% of the shares of stock of SME Bank
to Spouses Samson who later became the principal shareholders of SME while Villaflor, Jr. was
appointed as bank president.
Simeon Espiritu (Espiritu), then the general manager of SME Bank, held a meeting with all the
employees of the head office and of the Talavera and Muñoz branches of SME Bank and
persuaded them to tender their resignations, with the promise that they would be rehired upon
reapplication.
Ricardo, Simeon, Jr. and Liberato tendered their resignations and thereafter submitted their
application letters.
All respondent employees were not rehired except for Simeon, Jr. who later resigned on October
2001.
Respondents demanded payment of their respective separation pays, but their requests were
denied, which caused them to file a case against SME before the Labor Arbiter. The labor arbiter
ruled that the buyer of an enterprise is not bound to absorb its employees, unless there is an
express stipulation to the contrary. However, he also found that respondent employees were
illegally dismissed, because they had involuntarily executed their resignation letters after relying
on representations that they would be given their separation benefits and rehired by the new
management.
Dissatisfied with the Decision of the labor arbiter, respondent employees, Agustin and De
Guzman brought separate appeals to the NLRC. The NLRC found that there was only a mere
transfer of shares – and therefore, a mere change of management – from Agustin and De Guzman
to the Samson Group. As the change of management was not a valid ground to terminate
respondent bank employees, the NLRC ruled that they had indeed been illegally dismissed. It
further ruled that Agustin, De Guzman and the Samson Group should be held jointly and severally
liable for the employees’ separation pay and backwages.
The Court of Appeals affirmed the decision of NLRC.
ISSUE:
Whether or not after the sale of stock of a corporation, the latter continues to be the employer of
its people and is liable for the payment of their claims?
3A CORPORATION LAW 2019-2020 pg. 183
RULING:
There are two types of corporate acquisitions: asset sales and stock sales. In asset sales, the
corporate entity sells all or substantially all of its assets to another entity.
In stock sales, the individual or corporate shareholders sell a controlling block of stock to new or
existing shareholders. In asset sales, the rule is that the seller in good faith is authorized to
dismiss the affected employees, but is liable for the payment of separation pay under the law.
The buyer in good faith, on the other hand, is not obliged to absorb the employees affected by
the sale, nor is it liable for the payment of their claims. The most that it may do, for reasons of
public policy and social justice, is to give preference to the qualified separated personnel of the
selling firm. In contrast with asset sales, in which the assets of the selling corporation are
transferred to another entity, the transaction in stock sales takes place at the shareholder level.
Because the corporation possesses a personality separate and distinct from that of its
shareholders, a shift in the composition of its shareholders will not affect its existence and
continuity.
Thus, notwithstanding the stock sale, the corporation continues to be the employer of its people
and continues to be liable for the payment of their just claims.
Furthermore, the corporation or its new majority shareholders are not entitled to lawfully dismiss
corporate employees absent a just or authorized cause.
The transfer only involved a change in the equity composition of the corporation. To reiterate, the
employees are not transferred to a new employer, but remain with the original corporate employer,
notwithstanding an equity shift in its majority shareholders. This being so, the employment status
of the employees should not have been affected by the stock sale. A change in the equity
composition of the corporate shareholders should not result in the automatic termination
of the employment of the corporation’s employees. Neither should it give the new majority
shareholders the right to legally dismiss the corporation’s employees, absent a just or authorized
cause.
3A CORPORATION LAW 2019-2020 pg. 184
(80)
Y-I Leisure Philippines Inc. v. Yu, G.R. No. 207161, September
8, 2015
Y-I Leisure Phils. vs. Yu
GR No. 207161
Date: September 8, 2015
Digested by: Gillian Briones
-------------------------------------------------------------------------------Petitioner: Y-I Leisure Philippines Inc., Yats International Ltd. and Y-I Clubs and Resorts
Inc.
Respondent: James Yu
Ponente: Mendoza, J.
Topic: Power to Sell All or Substantially all of the Assets
-------------------------------------------------------------------------------Doctrine: While the Corporation Code allows the transfer of all or substantially all of the assets
of a corporation, the transfer should not prejudice the creditors of the assignor corporation. The
protection of the creditors of the transferor corporation, and does not depend on any deceit
committed by the transferee -corporation, fraud is certainly not an element of the business
enterprise doctrine.
-------------------------------------------------------------------------------Facts:
This is a case wherein Respondent Yu is a businessman interested in purchasing gold and
country club shares bought 500 golf and 150 country club shares from Mt. Arayat Development
Co. Inc. (MADCI) a real estate development corporation.
3A CORPORATION LAW 2019-2020 pg. 185
However, upon full payment of the shares to MADCI, Yu visited the supposed site of the golf and
country club and discovered that it was non-existent. He filed with the RTC a complaint for
collection of sum of money and damages with prayer for preliminary attachment against MADCI
and its president Rogelio Sangil to recover his payment for the purchase of gold and country club
shares.
In its Answer, MADCI claimed that it was Sangil who defrauded Yu. It invoked the Memorandum
of Agreement entered into by MADCI, Sangil and petitioner YATS International. Under the MOA,
Sangil undertook to redeem MADCI proprietary shares sold to third persons or settle in full all
their claims for refund of payments. Thus, it was MADCIS’s position that Sangil should be
ultimately liable to refund the payment for shares purchased.
After the pre-trial, Yu filed an amended complaint, wherein he also impleaded petitioner Yats
Internation, Y-I Leisure and Y-I Club & Resorts, Inc. According to YU, he discovered in the
Registry of Deeds of Pampanga that, substantially, all the assets of MADCI, consisting of one
hundred twenty (120) hectares of land located in Mangalang, Pampanga, were sold to Yats
International, Y-I Leisure and Y-I Club & Resort. The transfer was done in fraud of MADCI’s
cerditors, and without the required approval of its stockholders and board of directors under
Section 40 of the Corporation Code.
RTC ruled that because MADCI did not deny its contractual obligation with YU, it must be liable
for the return of his payments. However, it exonerated Yats International, Y-I Leisure and Y-I
Clubs and Resort from liability because they were not part of the transactions between MADCI
and Sangil, on one hand and Yu, on the other hand.
CA partly granted the appeal and modified the RTC decision by holding Yats International and its
companies, Y-I Leisure and Y-I Clubs and Resort, jointly and severally liable for the satisfaction
of Yu’s claim.
Petitioners counter that they did not assume such liabilities because the transfer of assets was
not committed in fraud of the MADCI’s creditors.
Issue:
W/N the transfer of all or substantially all the assets of a corporation under Section 40 of the
Corporation Code carries with it the assumption of corporate liabilities and;
W/N the petitioner indeed became a continuation of MADCI’s business, YES
Ruling:
3A CORPORATION LAW 2019-2020 pg. 186
While the Corporation Code allows the transfer of all or substantially all of the assets of a
corporation, the transfer should not prejudice the creditors of the assignor corporation.
Under the business-enterprise transfer, the petitioners have consequently inherited the liabilities
of MADCI because they acquired all the assets of the latter corporation. The continuity of MADCI's
land developments is now in the hands of the petitioners, with all its assets and liabilities. There
is absolutely no certainty that Yu can still claim its refund from MADCI with the latter losing all its
assets. To allow an assignor to transfer all its business, properties and assets without the consent
of its creditors will place the assignor's assets beyond the reach of its creditors. Thus, the only
way for Yu to recover his money would be to assert his claim against the petitioners as transferees
of the assets.
The protection of the creditors of the transferor corporation, and does not depend on any deceit
committed by the transferee -corporation, fraud is certainly not an element of the business
enterprise doctrine.
Section 40 refers to the sale, lease, exchange or disposition of all or substantially all of the
corporation's assets, including its goodwill. The sale under this provision does not contemplate
an ordinary sale of all corporate assets; the transfer must be of such degree that the transferor
corporation is rendered incapable of continuing its business or its corporate purpose.
It must be clarified, however, that not every transfer of the entire corporate assets would qualify
under Section 40. It does not apply (1) if the sale of the entire property and assets is necessary
in the usual and regular course of business of corporation, or (2) if the proceeds of the sale or
other disposition of such property and assets will be appropriated for the conduct of its remaining
business. Thus, the litmus test to determine the applicability of Section 40 would be the capacity
of the corporation to continue its business after the sale of all or substantially all its assets.
Based on these factual findings, the Court is convinced that MADCI indeed had assets consisting
of 120 hectares of landholdings in Magalang, Pampanga, to be developed into a golf course,
pursuant to its primary purpose. Because of its alleged violation of the MOA, however, MADCI
was made to transfer all its assets to the petitioners. No evidence existed that MADCI
subsequently acquired other lands for its development projects. Thus, MADCI, as a real estate
development corporation, was left without any property to develop eventually rendering it
incapable of continuing the business or accomplishing the purpose for which it was incorporated.
Section 40 must apply.
3A CORPORATION LAW 2019-2020 pg. 187
(81)
Republic v. Sun Life, October 14, 2005.
Petitioner: Republicof the Philippines
Respondent: Sunlife Assurance Company of Canada
G.R. No. 158085
FACTS:
Respondent is a mutual life insurance company organized and existing under the laws of Canada.
It is registered and authorized by the SEC and the Insurance Commission to engage in business
in the Philippines as mutual life insurance company. Sun Life filed with the CIR its insurance
premium tax return for the third quarter of 1997 in the amount of 31,485, 834. 51 and paid its DST
for
the
amount
of
30,000,000.00.
On December 20, 1997, CA, as affirmed by the Supreme Court, rendered in Insular Life
Assurance Co. Ltd. vs CIR a decision that mutual life insurance companies are purely cooperative
companies and are exempt from the payment of premium tax and DST. Sun Life surmised that
being a mutual life insurance it is exempt from the payment of premium tax and DST and hence
filed an administrative case against the CIR for tax credit for its erroneously paid premium tax and
DST. CIR raised as special and affirmative defences that petitioner’s claim for refund is subject
to administrative routinary investigation by the CIR, Petitioner must prove that it falls under the
exception provided for under Section 121 (now 123) of the Tax Code to be exempted from
premium tax and be entitled to the refund sought and It is incumbent upon petitioner to show that
it has complied with the provisions of Section 204[,] in relation to Section 229, both in the 1997
Tax Code.
ISSUE:
3A CORPORATION LAW 2019-2020 pg. 188
Whether or not respondent is a cooperative and whether or not it needs to be registered under
CDA
RULING:
For the first issue, the court ruled that respondent is a cooperative. The tax code defines
cooperative as an association conducted by the members thereof with the money collected from
among themselves and solely for their own protection and not for profit. Respondent is without
doubt a cooperative because of the following reasons:
First, it is managed by its members. Both CA and CTA found that the management and affairs
of respondent were conducted by its policyholders. A stock insurance company doing business
in the Philippines may alter its organization and transform itself into a mutual insurance
company. Respondent has been mutualized or converted from a stock life insurance company
to a nonstock mutual life insurance corporation pursuant to Section 266 of the Insurance Code
of 1978.
Second, it operated with money collected from its members. Since respondent is composed
entirely of members who are also it policyholders, all premiums obviously comes only from
them. The member-policyholders constitute both insurer and insured who contribute, by a
system of premiums or assessments, to the creation of a fund from which all losses and
liabilities are paid. The premiums pooled into this fund are earmarked for the payment of their
indemnity and benefit claims.
Third, it is licensed for the mutual protection of its members, not for the profit of anyone. A
mutual life insurance company is conducted for the benefit of its member-policyholders, who
pay into its capital by way of premiums. To that extent, they are responsible for the payment of
all its losses. The cash paid in for premiums and the premium notes constitute their assets x x x.
In the event that the company itself fails before the terms of the policies expire, the memberpolicyholders do not acquire the status of creditors. Rather, they simply become debtors for
whatever premiums that they have originally agreed to pay the company, if they have not yet
paid those amounts in full, for [m]utual companies x x x depend solely upon x x x premiums.
Only when the premiums will have accumulated to a sum larger than that required to pay for
company losses will the member-policyholders be entitled to a pro rata division thereof as
profits.
For the second issue, the court ruled that under the Tax Code although respondent is a
cooperative, registration with the Cooperative Development Authority (CDA) is not necessary in
order for it to be exempt from the payment of both percentage taxes on insurance premiums,
under Section 121; and documentary stamp taxes on policies of insurance or annuities it grants,
under Section 199.
First, the Tax Code does not require registration with the CDA. No tax provision requires a
mutual life insurance company to register with that agency in order to enjoy exemption from
both percentage and documentary stamp taxes.
Second, the provisions of the Cooperative Code of the Philippines do not apply. only
cooperatives to be formed or organized under the Cooperative Code needed registration with
the CDA. Respondent already existed before the passage of the new law on cooperatives. It
was not even required to organize under the Cooperative Code, not only because it performed a
different set of functions, but also because it did not operate to serve the same objectives under
the new law — particularly on productivity, marketing and credit extension.
The insurance against losses of the members of a cooperative referred to in Article 6(7) of the
Cooperative Code is not the same as the life insurance provided by respondent to memberpolicyholders. The former is a function of a service cooperative, the latter is not. Cooperative
insurance under the Code is limited in scope and local in character. It is not the same as mutual
3A CORPORATION LAW 2019-2020 pg. 189
life insurance.
Consequently, the court held that respondent is exempt from insurance premium tax and DST.
(82)
Zomer Development Corp. v. International Exchange Bank,
581 SCRA 115 CARLOS
3A CORPORATION LAW 2019-2020 pg. 190
(83)
University of Mindanao v. Bangko Sentral ng Pilipinas, G.R.
Nos. 194964-65, January 11, 2016 DE GUZMAN
3A CORPORATION LAW 2019-2020 pg. 191
(84)
Magallanes Watercraft Association, Inc. v. Auguis, 791 SCRA
445 [2016]
MAGALLANES WATERCRAFT ASSOCIATION, INC. vs MARGARITO AGUIS
GR No. 211485
Date: MAY 30, 2016
Digested by: NOEL MELGAR A. GALANG
----------------------------------------------------------------------------------Petitioner: MAGALLANES WATERCRAFT ASSOCIATION, INC.
Respondent: MARGARITO AGUIS
Topic: ULTRA VIRES ACTS
----------------------------------------------------------------------------------Facts: Petitioner ÍÏMagallanes Watercraft Association, Inc. (MWAI) is a local association of
motorized banca owners and operators ferrying cargoes and passengers from Magallanes,
Agusan del Norte, to Butuan City and back. Respondents Margarito C. Auguis (Auguis) and
Dioscoro C. Basnig (Basnig) were members and officers of MWAI — vice-president and secretary,
respectively.
The Board issued Resolution No.1 Series of 2003 and thereafter Memorandum No. 001 which
suspends the rights and privileges of Augis and Basnig as members of the association for their
refusal to pay their membership dues and other fees because of a pendin complaint and demand
for financial audit by of the association funds.
Despite the suspension, respondents still failed to settle their obligation which led MWAI to issue
Memorandum NO. 002, which extended their suspension for another 30 days.
On this note, the Respondents filed an action for damages and attorney’s fees with a prayer for
the issuance of a writ of preliminary injunction before the RTC. In its January 11, 2007 decision,
the trial court ordered Auguis and Basnig to pay their unpaid accounts. It, nonetheless, required
MWAI to pay them actual damages and attorney’s fees.
----------------------------------------------------------------------------------3A CORPORATION LAW 2019-2020 pg. 192
Issue: WON the petitioner committed an ultra vires act
---------------------------------------------------------------------------Ruling: NO. Under Section 3 (a) and Section 3 (c) Article V of MWAI’s By-Laws, its members are
bound “[t]o obey and comply with the by-laws, rules and regulations that may be promulgated by
the association from time to time” and “[t]o pay membership dues and other assessments of the
association.” Thus, the respondents were obligated to pay the membership dues of which they
were delinquent. MWAI could not be faulted in suspending the rights and privileges of its
delinquent members. includes practical application of the rule by preparing different related
corporate documents like the notice of meeting, minutes of meetings and resolutions.
(85)
Querubin v. COMELEC, G.R. No. 218787, December 8, 2015
(85) Querubin v. COMELEC
GR No. 218787
December 8, 2015
Digested by: Jarah Relato
______________________
Petitioner: LEO QUERUBIN, Maria Akol, Augusto Lagman
Respondent: COMELEC, Joint Venture of Smartmatic Corp, Total Management Corp,
Smartmatic International Holding and Jarltech International Corp
Ponente: Justice Velasco, Jr.
Doctrine: Section 45. Ultra vires acts of corporations. - No corporation under this Code
shall possess or exercise any corporate powers except those conferred by this Code or
by its articles of incorporation and except such as are necessary or incidental to the
exercise of the powers so conferred
______________________
FACTS:
The COMELEC issued a resolution releasing the bidding documents for the "Two-Stage
Competitive Bidding for the Lease of Election Management System (EMS) and PrecinctBased Optical Mark Reader (OMR) or Optical Scan (OP-SCAN) System, specified in the
published Invitation to Bid are the details for the lease with option to purchase, through
(23,000) new units of precinct-based OMRs or OP-SCAN Systems to be used in the 2016
National and Local Elections.
The joint venture of Smartmatic-TIM Corporation (SMTC), Smartmatic International
Holding and Jarltech International Corporation (collectively referred to as "Smartmatic
JV") responded to the call and submitted bid for the project on the scheduled date. Indra
3A CORPORATION LAW 2019-2020 pg. 193
Sistemas (Indra) and MIRU Systems Co. Ltd. likewise signified their interest in the project,
but only Indra, aside from Smartmatic JV, submitted its bid.
Smartmatic JV in a sworn certification informed the BAC tha't one of its partner
corporations, SMTC, has a pending application with SEC to amend its AOI. The
amendments adopted as early as November 12, 2014 were approved by the SEC on
December 10, 2014. .
Upon evaluation of the submittals, the BAC (COMELEC Bids and Awards Committee),
through its Resolution No. 1 declared Smartmatic JV and Indra eligible to participate in the
second stage of the bidding process. Later on, Indra was disqualified for submitting a nonresponsive bid
After the conduct of post-qualification, the BAC, through a Resolution, disqualified
Smartmatic JV on two grounds:
1.
Failure to submit valid AOI
2.
The demo unit failed to meet the technical requirement that the system shall be
capable of writing all data/files, audit log, statistics and ballot images simultaneously in at
least two (2) data storages
The ruling prompted Smartmatic JV to move for reconsideration but was denied. It
declared that Smartmatic JV complied with the requirements of Sec. 23.1(b) of the
Revised Implementing Rules and Regulations of RA 9184 (GPRA IRR), including the
submission of a valid AOI, but was nevertheless disqualified as it still failed to comply
with the technical requirements of the project.
Aggrieved, Smartmatic JV filed a Protest, seeking permission to conduct another technical
demonstration. The OMR Smartmatic JV presented during the public bidding before the
COMELEC en banc. The COMELEC en banc granted Smartmatic JV's protest.
Notwithstanding Smartmatic JV's compliance with the technical requirements in the TOR,
Commissioner Luie Tito F. Guia dissent in part, questioning the sufficiency of the
documents submitted by the Smartmatic JV.
Taking their cue from Commissioner Guia's dissent, petitioners assail the COMELEC’s
decision with the following arguments: eligibility of SMTC and if didn’t have a valid
corporate purpose thus it couldn’t have submitted a valid AOI and SMTC was created
solely for the automation of 2010 Elections not for any election thus if SMTC would be
allowed to have in a hand in the succeeding elections would be tolerating its performance
of a ultra vires act.
Public respondent COMELEC, through the OSG, refuted the arguments of petitioners the
main postulation that the sole issue raised before the COMELEC en banc was limited to
the technical aspect of the project. It countered that the BAC has thoroughly explained
and laid down the factual and legal basis behind its finding on Smartmatic JV's legal
3A CORPORATION LAW 2019-2020 pg. 194
capacity to participate as bidder in the project procurement; that the issue on SMTC's AOI
has been rendered moot by the SEC's subsequent approval on December 10, 2014 of the
AOFs amendment broadening the company’s primary purpose.
ISSUE: WON SMTC’s had a valid corporate purpose, is an eligible bidder and if its participation
in the bidding is an ultra vires act
RULING: Petition Dismissed
1.
Submission of AOI/API as a criterion:
a.
the BAC's function in determining the eligibility of a bidder during prequalification is ministerial in the sense that it only needs to countercheck the
completeness and sufficiency of the documents submitted by a bidder against a
checklist of requirements. It cannot, therefore, declare a bidder ineligible for failure
to submit a document which, in the first place, is not even required in the bid
documents.
2.
GPRA IRR:
a.
Valid joint venture agreement (JVA), in case the joint venture is already in
existence. In the absence of a JVA, duly notarized statements from all the potential
joint venture partners stating that they will enter into and abide by the provisions
of the JVA in the instance that the bid is successful shall be included in the bid xxx
Each partner of the joint venture shall submit the legal eligibility documents. The
requirement that bears the most resemblance is the submission by each partner
to the venture of a registration certificate issued by the Securities and Exchange
Commission, but compliance therewith was never disputed by the petitioners.
Moreover, it was never alleged that Smartmatic JV was remiss in submitting
a copy of its joint venture agreement pursuant to Sec. 23.1(b), which
petitioners specifically invoked
Verily, based on GPRA IRR, the Instruction to Bidders, the BDS, and the Checklist of
Requirements, the non-submission of an AOI is not fatal to a bidder's eligibility to contract the
project at hand.
3.
Corporate Purpose
a. Based on Our ruling in Capalla, the cessation of SMTC's business cannot be
assumed just because the May 10, 2010 polls have already concluded. For clearly,
SMTC's purpose—the "automation of the 2010 national and local elections"—is
not limited to the conduct of the election proper, but extends further to the fulfillment
of SMTC's contractual obligations that spring forth from the AES Contract during
the lifetime of the agreement (i.e. until the release of the performance security),
and even thereafter insofar as the surviving provisions of the contract are
concerned. In other words, regardless of whether or not SMTC's performance
3A CORPORATION LAW 2019-2020 pg. 195
security has already been released, establishing even just one surviving
provision of the AES Contract would be sufficient to prove that SMTC has
not yet completed its purpose under its AOI
b.
In Pabillo, the Court cited Art. 8.8 of the AES Contract, which significantly
reads:
8.8 If COMELEC opts to purchase the PCOS and Consolidation and Canvassing
System (CCS), the following warranty provisions indicated in the RFP shall form
part of the purchase contract. Article 8.8 skews from the ordinary concept of
warranty since it is a mere warranty on availability, which entails a subsequent
purchase contract, founded upon a new consideration, the costs of which (unlike
in the first warranty) are still to be paid. With Article 8.8 in place, the COMELEC is
assured that it would always have access to a capable parts/service provider
in Smartmatic-TIM, during the 10-year warranty period therefor, on account of
the peculiar nature of the purchased goods.
4. Ultra Vires Act
To elucidate, an ultra vires act is defined under BP 68 in the following wise:
Section 45. Ultra vires acts of corporations. - No corporation under this Code shall possess or
exercise any corporate powers except those conferred by this Code or by its articles of
incorporation and except such as are necessary or incidental to the exercise of the powers
so conferred.
The language of the Code appears to confine the term ultra vires to an act outside or beyond
express, implied and incidental corporate powers. Nevertheless, the concept can also include
those acts that may ostensibly be within such powers but are, by general or special laws, either
proscribed or declared illegal. Ultra vires acts or acts which are clearly beyond the scope of one's
authority are null and void and cannot be given any effect.
In determining whether or not a corporation may perform an act, one considers the logical and
necessary relation between the act assailed and the corporate purpose expressed by the law or
in the charter, for if the act were one which is lawful in itself or not otherwise prohibited and done
for the purpose of serving corporate ends or reasonably contributes to the promotion of those
ends in a substantial and not merely in a remote and fanciful sense, it may be fairly considered
within corporate powers.The test to be applied is whether the act in question is in direct and
immediate furtherance of the corporation's business, fairly incident to the express powers
and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise,
not
In the case at bar, notwithstanding the specific mention of the 2010 National and Local Elections
in SMTC's primary purpose, it is not, as earlier discussed, precluded from entering into contracts
over succeeding ones. Here, SMTC cannot be deemed to be overstepping its limits by
participating in the bidding for the 23,000 new optical mark readers for the 2016 polls since
3A CORPORATION LAW 2019-2020 pg. 196
upgrading the machines that the company supplied the COMELEC for the automation of the 2010
elections and offering them for subsequent elections is but a logical consequence of SMTC's
course of business, and should, therefore, be considered included in, if not incidental to, its
corporate purpose. A restricted interpretation of its purpose would mean limiting SMTC's activity
to that of waiting for the expiration of its warranties in 2020. How then can the company be
expected to subsist and sustain itself until then if it cannot engage in any other project, even in
those similar to what the company already performed?
In the final analysis, We see no defect in the AOI that needed to be cured before SMTC could
have participated in the bidding as a partner in Smartmatic JV, the automation of the 2016
National and Local Elections being a logical inclusion of SMTC's corporate purpose.
(86)
Ricafort v. Hon. Isaias Dicdican, G.R. No. 202647-50, March
9, 2016. GUTIERREZ
3A CORPORATION LAW 2019-2020 pg. 197
(87)
Guy v. Guy, 790 SCRA 288 [2016]
Guy vs Guy
GR No. 189486 & 189699
Date: September 5, 2005
Digested by: Javier, Therese Fatima V.
----------------------------------------------------------------------------------Petitioner: Simny Guy
Respondent: Gilbert Guy
Ponente: J. Perez
Topic: Notice of Meetings
----------------------------------------------------------------------------------DOCTRINE: The Corporation Code itself permits the shortening (or lengthening) of the period
within which to send the notice to call a special (or regular) meeting. Thus, no irregularity exists
in the mailing of the notice sent by respondent Gilbert G. Guy on 2 September 2004 calling for
the special stockholders' meeting to be held on 7 September 2004, since it abides by what is
stated in GCI's by-laws as quoted above. The provisions only require the sending/mailing of the
notice of a stockholders' meeting to the stockholders of the corporation. Sending/mailing is
different from filing or service under the Rules of Court. Had the lawmakers intended to include
the stockholder's receipt of the notice, they would have clearly reflected such requirement in the
law. Clearly, respondents are only mandated to notify petitioner by depositing in the mail the
notice of the stockholders' special meeting, with postage or cost of transmission provided and the
name and address of the stockholder properly specified. With respect to the latter part of the
definition of "send" under Black's Law Dictionary, the term "receipt" only has the effect of proper
sending when a mail matter is received in the usual course of transmission.
----------------------------------------------------------------------------------
3A CORPORATION LAW 2019-2020 pg. 198
Facts: GCI is a family-owned corporation of the Guy family duly organized and existing under
Philippine laws. Simny Guy is a stockholder of record and member of the BOD of the corporation.
Gilbert Guy, et al. are also GCI stockholders of record who were allegedly elected as new directors
by virtue of the assailed stockholders' meeting held on 7 September 2004. On 10 September
2004, Paulino Delfin Pe and Benjamin Lim (stockholders of record of GCI) informed Simny that
they had received a notice dated 31 August 2004 calling for the holding of a special stockholders'
meeting on 7 September 2004 at the Manila Diamond Hotel. The said meeting is for the purpose
of the election of the BOD for the year 2004-2005. 15 days after the stockholders' meeting, Simny
received the said notice.
On 30 September 2004, Simny, for himself and on behalf of GCI and Grace Guy Cheu, filed a
Complaint against respondents before the RTC for the "Nullification of Stockholders' Meeting and
Election of Directors, Nullification of Acts and Resolutions, Injunction and Damages with Prayer
for TRO and/or Writ of Preliminary Injunction." It was assailed on the following grounds: (1) there
was no previous notice to Simny and Cheu; (2) the meeting was not called by the proper person;
and (3) the notices were not issued by the person who had the legal authority to do so.Gilbert
argued that the meeting on was legally called and held; that the notice of meeting was signed by
the authorized officer of GCI and sent in accordance with the by-laws of the corporation; and that
Cheu was not a stockholder of record of the corporation, a status that would have entitled her to
receive a notice of the meeting.
Issue: WON the notice of the stockholder’s meeting was properly sent in compliance with law and
the by-laws of the corporation
Held: Section 50 of Batas Pambansa Blg. 68 (B.P. 68) or the Corporation Code of the Philippines
reads as follows:
SECTION 50. Regular and Special Meetings of Stockholders or Members. — Regular meetings
of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed,
on any date in April of every year as determined by the board of directors or trustees: Provided,
That written notice of regular meetings shall be sent to all stockholders or members of record at
least two (2) weeks prior to the meeting, unless a different period is required by the by-laws.
Special meetings of stockholders or members shall be held at any time deemed necessary or as
provided in the by-laws: Provided, however, That at least one (1) week written notice shall be
sent to all stockholders or members, unless otherwise provided in the by-laws. Notice of
any meeting may be waived, expressly or impliedly, by any stockholder or member.
For a stockholders' special meeting to be valid, certain requirements must be met with respect to
notice, quorum and place. In relation to the above provision of B.P. 68, one of the requirements
is a previous written notice sent to all stockholders at least one (1) week prior to the scheduled
meeting, unless otherwise provided in the by-laws. Under the by-laws of GCI, the notice of
meeting shall be mailed not less than five (5) days prior to the date set for the special meeting.
The pertinent provision reads:
3A CORPORATION LAW 2019-2020 pg. 199
Section 3. Notice of meeting written or printed for every regular or special meeting of the
stockholders shall be prepared and mailed to the registered post office address of each
stockholder not less than five (5) days prior to the date set for such meeting, and if for
a special meeting, such notice shall state the object or objects of the same. No failure or
irregularity of notice of any meeting shall invalidate such meeting at which all the
stockholders are present and voting without protest.
The Corporation Code itself permits the shortening (or lengthening) of the period within which to
send the notice to call a special (or regular) meeting. Thus, no irregularity exists in the mailing of
the notice sent by respondent Gilbert G. Guy on 2 September 2004 calling for the special
stockholders' meeting to be held on 7 September 2004, since it abides by what is stated in GCI's
by-laws as quoted above.
Petitioner avers that although the notice was sent by registered mail on 2 September 2004, the
registry return card shows that he received it only on 22 September 2004 or fifteen (15) days after
the stockholders' meeting was held. He insists that actual receipt of the notice of the stockholders'
meeting prior to the date of the meeting is mandatory. Petitioner persists in his view that to achieve
the intent of the law, the notice must be actually received, and not just sent, prior to the date of
the meeting. Petitioner cites the provision on "completeness of service" under the Rules of Court,
which states that service by registered mail is deemed complete upon actual receipt by the
addressee or after five (5) days from the date of receipt of the first notice of the postmaster,
whichever date is earlier. The Supreme Court is not persuaded.
The first and fundamental duty of the Court is to apply the law. Where the law speaks in clear and
categorical language, there is no room for interpretation; there is only room for application. Only
when the law is ambiguous or of doubtful meaning may the court interpret or construe its true
intent.
The provisions only require the sending/mailing of the notice of a stockholders' meeting to the
stockholders of the corporation. Sending/mailing is different from filing or service under the Rules
of Court. Had the lawmakers intended to include the stockholder's receipt of the notice, they would
have clearly reflected such requirement in the law. Absent that requirement, the word "send"
should be understood in its plain meaning:
"Send" means to deposit in the mail or deliver for transmission by any other usual means
of communication with postage or cost of transmission provided for and properly
addressed and in the case of an instrument to an address specified thereon or otherwise
agreed, or if there be none, to any address reasonable under the circumstances. The
receipt of any writing or notice within the time at which it would have arrived if properly
sent has the effect of a proper sending.
Clearly, respondents are only mandated to notify petitioner by depositing in the mail the notice of
the stockholders' special meeting, with postage or cost of transmission provided and the name
and address of the stockholder properly specified. With respect to the latter part of the definition
3A CORPORATION LAW 2019-2020 pg. 200
of "send" under Black's Law Dictionary, the term "receipt" only has the effect of proper sending
when a mail matter is received in the usual course of transmission.
(88)
2018
Villongco v. Yabut, G.R. Nos. 225022 & 225024, February 5,
Carolina Que Villongco, et al. vs. Cecilia Que Yabut, et al. & Cecilia Que Yabut, et. Al. vs.
Carolina Que Villongco, et. al.
G.R. No. 225022 & 225024
Date: February 5, 2018
Digested: Yui Recinto
Petitioner: Carolina Que Villongco, et al.
Respondent: Cecilia Que Yabut, et al.
Ponente: Justice Tijam
Topic: Quorum
Doctrine: The right to vote is inherent in and incidental to the ownership of corporate stocks. It is
settled that unissued stocks may not be voted or considered in determining whether a quorum is
present in a stockholders' meeting. Only stocks actually issued and outstanding may be voted.
Thus, for stock corporations, the quorum is based on the number of outstanding voting stocks.
Facts:
Phil-Ville Development and Housing Corporation (Phil-Ville) is a family corporation founded by
Geronima Gallego Que that is engaged in the real estate business. Geronima owned 3,140
shares of stock while the remaining 196,860 shares were equally distributed among her six
children. Geronima died on August 31, 2007 and by virtue of the Sale of Shares of Stocks
purportedly executed by Cecila as the atty-in-fact of Geronima allegedly effected an inequitable
distribution of the 3,140 shares. The distribution of the shares was reflected in the GIS filed by
Phil-Ville in 2010 and 2011.
3A CORPORATION LAW 2019-2020 pg. 201
On January 21, 2013, several letters were sent to Phil-Ville’s stockholders containing a document
captioned “Notice of Annual Stockholders’ Meeting” signed by Cecila and Ma. Corazon as
directors.
Despite the majority of the Board of Directors during an emergency meeting to postpone the
annual stockholders’ meeting Cecilia Que proceeded with the meeting participated only by a few
stockholders at Max’s Restaurant, Tugatog, Malabon City. During the said meeting Cecilia, Ma.
Corazon and Eumir Carlo were elected as directors and later elected themselves as, Cecilia:
Chairperson/Vice President/Treasurer; Ma. Corazon as Vice Chairperson/President/General
Manager; and Eumir Carlo as Corporate Secretary/ Secretary.
Petitioners filed an election contest against Cecilia, et al and prayed that the elction of the
respondents be declared void considering the invalidity of the holding of the meeting at Max’s
Restaurant for lack of quorum.
RTC and CA declared the election as void and of no effect considering the lack of quorum during
the annual stockholders’ meeting conducted by the latter.
Issue: Whether the annual stockholders’ meeting held at Max’s Restaurant is void and of no effect.
Ruling:
Section 52 of the Corporation Code states that:
Section 52. Quorum in meetings. - Unless otherwise provided for in this Code or in the by-laws,
a quorum shall consist of the stockholders representing a majority of the outstanding capital stock
or a majority of the members in the case of non-stock corporations.
While Section 137 of the same Code defines "outstanding capital stock", thus:
Section 137. Outstanding capital stock defined. - The term "outstanding capital stock", as used in
this Code, means the total shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid, except treasury shares.
The right to vote is inherent in and incidental to the ownership of corporate stocks. It is settled
that unissued stocks may not be voted or considered in determining whether a quorum is present
in a stockholders' meeting. Only stocks actually issued and outstanding may be voted. Thus, for
stock corporations, the quorum is based on the number of outstanding voting stocks. The
distinction of undisputed or disputed shares of stocks is not provided for in the law or the
jurisprudence. Ubi lex non distinguit nec nos distinguere debemus — when the law does not
distinguish we should not distinguish. Thus, the 200,000 outstanding capital stocks of Phil-Ville
should be the basis for determining the presence of a quorum, without any distinction.
Therefore, to constitute a quorum, the presence of 100,001 shares of stocks in Phil-Ville is
necessary.
We agree with the CA when it held that only 98,430 shares of stocks. were present during the
January 25, 2014 stockholders meeting at Max's Restaurant, therefore, no quorum had been
established.
3A CORPORATION LAW 2019-2020 pg. 202
WHEREFORE, premises considered, the instant Petitions for Review on Certiorari are DENIED.
The Decision dated September 4, 2015 and Amended Decision dated June 8, 2016 of the Court
of Appeals in CA-G.R. SP No. 134666 are hereby AFFIRMED in toto.
(89)
Philippine National Bank v. Merelo B. Aznar, et. al., G.R. No.
171805, May 30, 2011
Philippine National Bank v. Merelo B. Aznar, et. al.,
G.R. No. 171805,
May 30,2011
Digested by: James San Diego
Petitioner: PHILIPPINE NATIONAL BANK
Respondent: MERELO B. AZNAR; MATIAS B. AZNAR III; JOSE L. AZNAR (deceased),
represented by his heirs; RAMON A. BARCENILLA; ROSARIO T. BARCENILLA; JOSE B.
ENAD (deceased), represented by his heirs; and RICARDO GABUYA (deceased), represented
by his heirs,
Ponente: LEONARDO-DE CASTRO, J.
Topic: Prescriptive period for the claim of profit
Facts:
In 1958, RISCO ceased operation due to business reverses. In plaintiffs' desire to rehabilitate
RISCO, they contributed a total amount of P212,720.00 which was used in the purchase of the
three (3) parcels of land described as follows
:
3A CORPORATION LAW 2019-2020 pg. 203
A parcel of land (Lot No. 3597 of the Talisay-Minglanilla Estate, G.L.R.O. Record No. 3732)
situated in the Municipality of Talisay, Province of Cebu, Island of Cebu. xxx containing an area
of SEVENTY[-]
A parcel of land (Lot 7380 of the Talisay Minglanilla Estate, G.L.R.O. Record No. 3732
A parcel of land (Lot 1323 of the subdivision plan Psd-No. 5988
After the purchase of the above lots, titles were issued in the name of RISCO. The amount
contributed by plaintiffs constituted as liens and encumbrances on the aforementioned
properties as annotated in the titles of said lots. Such annotation was made pursuant to the
Minutes... of the Special Meeting of the Board of Directors of RISCO
(hereinafter referred to as the "Minutes") on March 14, 1961,... . The President then explained
that in a special meeting of the stockholders previously called for the purpose of putting up
certain amount of P212,720.00 for the rehabilitation of the Company
Thereafter, various subsequent annotations were made on the same titles, including the Notice
of Attachment and Writ of Execution both dated August 3, 1962 in favor of herein defendant
PNB, to w
On TCT No. 8921 for Lot 3597:
Entry No. 7416-V-4-D.B. - Notice of Attachment - By the Provincial Sheriff of Cebu, Civil Case
No. 47725, Court of First Instance of Manila, entitled "Philippine National Bank, Plaintiff, versus
Iluminada Gonzales, et al., Defendants", attaching all rights, interest and... participation of the
defendant Iluminada Gonzales and Rural Insurance & Surety Co., Inc. of the two parcels of land
covered by T.C.T. Nos. 8921, Attachment No. 330 and 185.
Entry No. 7416-V-4-D.B. - Notice of Attachment - By the Provincial Sheriff of Cebu, Civil Case
No. 47725, Court of First Instance of Manila, entitled "Philippine National Bank, Plaintiff, versus
Iluminada Gonzales, et al., Defendants", attaching all rights, interest and... participation of the
defendant Iluminada Gonzales and Rural Insurance & Surety Co., Inc. of the two parcels of land
covered by T.C.T. Nos. 8921, Attachment No. 330 and 185... ntry No. 7416-V-4-D.B. - Notice of
Attachment - By the Provincial Sheriff of Cebu, Civil Case No. 47725, Court of First Instance of
Manila, entitled "Philippine National Bank, Plaintiff, versus Iluminada Gonzales, et al.,
Defendants", attaching all rights, interest and... participation of the defendant Iluminada
Gonzales and Rural Insurance & Surety Co., Inc. of the two parcels of land covered by T.C.T.
Nos. 8921, Attachment No. 330 and 185.
Entry No. 7417-V-4-D.B.
Entry No. 7512-V-4-D.B.
Entry No. 7513-V-4-D.B.
O
On TCT No. 8922 for Lot 7380:
(Same as the annotations on TCT 8921)
3A CORPORATION LAW 2019-2020 pg. 204
On TCT No. 24576 for Lot 1328
Entry No. 1660-V-7-D.B.
Entry No. 1661-V-7-D.B.
Entry No. 1861-V-7-D.B.
Entry No. 1862-V-7-D.B
●
Writ of Execution - by the Municipal Court of Manila, commanding the Provincial Sheriff
of Cebu, of
As a result, a Certificate of Sale was issued in favor of Philippine National Bank, being the lone
and highest bidder of the three (3) parcels of land known as Lot Nos. 3597 and 7380, covered
by T.C.T. Nos. 8921 and 8922, respectively, both situated at Talisay, Cebu, and Lot No.
1328-C covered by T.C.T. No. 24576 situated at Cebu City, for the amount of Thirty-One
Thousand Four Hundred Thirty Pesos (P31,430.00). Thereafter, a Final Deed of Sale dated May
27, 1991 in favor of the Philippine National Bank was also issued and Transfer Certificate of
Title
No. 24576 for Lot 1328-C (corrected to 1323-C) was cancelled and a new certificate of title, TCT
119848 was issued in the name of PNB on August 26, 1991.
Issue:
What is essential only, to repeat, is that the facts demonstrating the lapse of the prescriptive
period be otherwise sufficiently and satisfactorily apparent on the record; either in the averments
of the plaintiffs complaint, or... otherwise established by the evidence.
Ruling:
Coming now to the question of prescription raised by defendant Lepanto, it is contended by the
latter that the period to be considered for the prescription of the claim regarding participation in
the profits is only four years, because the modification of the sharing... embodied in the
management contract is merely verbal, no written document to that effect having been
presented. This contention is untenable. The modification appears in the minutes of the special
meeting of the Board of Directors of Lepanto held on August 21, 1940, it having... been made
upon the authority of its President, and in said minutes the terms of modification had been
specified. This is sufficient to have the agreement considered, for the purpose of applying the
statute of limitations, as a written contract even if the minutes were not signed... by the parties
(3 A.L.R., 2d, p. 831). It has been held that a writing containing the terms of a contract if
adopted by two persons may constitute a contract in writing even if the same is not signed by
either of the parties (3 A.L.R., 2d, pp. 812-813). Another authority says... that an unsigned
agreement the terms of which are embodied in a document unconditionally accepted by both
parties is a written contract (Corbin on Contracts, Vol. I, p. 85).[31]
Applied to the case at bar, the Minutes which was approved on March 14, 1961 is considered as
a written contract between Aznar, et al., and RISCO for the reimbursement of the contributions
of the former. As such, the former had a period of ten (10) years from 1961... within which to
3A CORPORATION LAW 2019-2020 pg. 205
enforce the said written contract. However, it does not appear that Aznar, et al., filed any action
for reimbursement or refund of their contributions against RISCO or even against PNB. Instead
the suit that Aznar, et al., brought before... the trial court only on January 28, 1998 was one to
quiet title over the properties purchased by RISCO with their contributions. It is unmistakable
that their right of action to claim for refund or payment of their contributions had long prescribed.
Thus, it was... reversible error for the Court of Appeals to order PNB to pay Aznar, et al., the
amount of their liens based on the Minutes with legal interests from the time of PNB's
acquisition of the subject properties.
In view of the foregoing, it is unnecessary for the Court to pass upon the other issues raised by
the parties.
WHEREFORE, the petition of Aznar, et al., in G.R. No. 172021 is DENIED for lack of merit
(90)
Turner v. Lorenzo Shipping, 636 SCRA 13 (2010)
Turner v. Lorenzo Shipping Corp.
G.R. No. 157479
November 24, 2010
Digested by: James San Diego
Petitioner: PHILIP TURNER and ELNORA TURNER
Respondent: LORENZO SHIPPING CORPORATION
Ponente: BERSAMIN, J.
Topic: The right of dissenting stockholders to demand payment of the value of their shareholdings
Facts:
The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation engaged
primarily in cargo shipping activities. In June 1999, the respondent decided to amend its articles
3A CORPORATION LAW 2019-2020 pg. 206
of incorporation to remove the stockholders’ pre-emptive rights to newly issued shares of stock.
Feeling that the corporate move would be prejudicial to their interest as stockholders, the
petitioners voted against the amendment and demanded payment of their shares at the rate of
₱2.276/share based on the book value of the shares, or a total of ₱2,298,760.00.
The respondent found the fair value of the shares demanded by the petitioners unacceptable. It
insisted that the market value on the date before the action to remove the pre-emptive right was
taken should be the value, or ₱0.41/share (or a total of ₱414,100.00), considering that its shares
were listed in the Philippine Stock Exchange, and that the payment could be made only if the
respondent had unrestricted retained earnings in its books to cover the value of the shares, which
was not the case.
The disagreement on the valuation of the shares led the parties to constitute an appraisal
committee pursuant to Section 82 of the Corporation Code, each of them nominating a
representative, who together then nominated the third member who would be chairman of the
appraisal committee. Thus, the appraisal committee came to be made up of Reynaldo Yatco, the
petitioners’ nominee; Atty. Antonio Acyatan, the respondent’s nominee; and Leo Anoche of the
Asian Appraisal Company, Inc., the third member/chairman.
On October 27, 2000, the appraisal committee reported its valuation of ₱2.54/share, for an
aggregate value of ₱2,565,400.00 for the petitioners. Subsequently, the petitioners demanded
payment based on the valuation of the appraisal committee, plus 2%/month penalty from the date
of their original demand for payment, as well as the reimbursement of the amounts advanced as
professional fees to the appraisers
ISSUE: Whether or not the right of dissenting stockholders to demand payment of the value of
their shareholdings is absolute and without any condition?
RULING: No, there are certain conditions that must be occur.
A stockholder who dissents from certain corporate actions has the right to demand payment of
the fair value of his or her shares. This right, known as the right of appraisal, is expressly
recognized in Section 81 of the Corporation Code, to wit:
Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or
restricting the rights of any stockholder or class of shares, or of authorizing preferences in
any respect superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence;
3A CORPORATION LAW 2019-2020 pg. 207
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all
or substantially all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
Clearly, the right of appraisal may be exercised when there is a fundamental change in the charter
or articles of incorporation substantially prejudicing the rights of the stockholders. It does not vest
unless objectionable corporate action is taken. It serves the purpose of enabling the dissenting
stockholder to have his interests purchased and to retire from the corporation.vvp
A corporation can purchase its own shares, provided payment is made out of surplus profits and
the acquisition is for a legitimate corporate purpose. In the Philippines, this new rule is embodied
in Section 41 of the Corporation Code, to wit:
Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited
to the following cases: Provided, That the corporation has unrestricted retained earnings in its
books to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during said
sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under
the provisions of this Code. (n)
The Corporation Code defines how the right of appraisal is exercised, as well as the implications
of the right of appraisal, as follows:
1. The appraisal right is exercised by any stockholder who has voted against the proposed
corporate action by making a written demand on the corporation within 30 days after the date on
which the vote was taken for the payment of the fair value of his shares. The failure to make the
demand within the period is deemed a waiver of the appraisal right.
2. If the withdrawing stockholder and the corporation cannot agree on the fair value of the shares
within a period of 60 days from the date the stockholders approved the corporate action, the fair
value shall be determined and appraised by three disinterested persons, one of whom shall be
named by the stockholder, another by the corporation, and the third by the two thus chosen. The
findings and award of the majority of the appraisers shall be final, and the corporation shall pay
their award within 30 days after the award is made. Upon payment by the corporation of the
agreed or awarded price, the stockholder shall forthwith transfer his or her shares to the
corporation.
3A CORPORATION LAW 2019-2020 pg. 208
3. All rights accruing to the withdrawing stockholder’s shares, including voting and dividend rights,
shall be suspended from the time of demand for the payment of the fair value of the shares until
either the abandonment of the corporate action involved or the purchase of the shares by the
corporation, except the right of such stockholder to receive payment of the fair value of the shares.
4. Within 10 days after demanding payment for his or her shares, a dissenting stockholder shall
submit to the corporation the certificates of stock representing his shares for notation thereon that
such shares are dissenting shares. A failure to do so shall, at the option of the corporation,
terminate his rights under this Title X of the Corporation Code. If shares represented by the
certificates bearing such notation are transferred, and the certificates are consequently canceled,
the rights of the transferor as a dissenting stockholder under this Title shall cease and the
transferee shall have all the rights of a regular stockholder; and all dividend distributions that
would have accrued on such shares shall be paid to the transferee.
5. If the proposed corporate action is implemented or effected, the corporation shall pay to such
stockholder, upon the surrender of the certificates of stock representing his shares, the fair value
thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.
Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless
the corporation has unrestricted retained earnings in its books to cover the payment. In case the
corporation has no available unrestricted retained earnings in its books, Section 83 of the
Corporation Code provides that if the dissenting stockholder is not paid the value of his shares
within 30 days after the award, his voting and dividend rights shall immediately be restored.
The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the
payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital
stock, property, and other assets of a corporation are regarded as equity in trust for the payment
of corporate creditors, who are preferred in the distribution of corporate assets. The creditors of
a corporation have the right to assume that the board of directors will not use the assets of the
corporation to purchase its own stock for as long as the corporation has outstanding debts and
liabilities. There can be no distribution of assets among the stockholders without first paying
corporate debts. Thus, any disposition of corporate funds and assets to the prejudice of creditors
is null and void.
3A CORPORATION LAW 2019-2020 pg. 209
(91)
Lu v. Lu Ym Sr., 643 SCRA 23 (2011)
DAVID LU, v. PATERNO LU YM, SR., PATERNO LU YM, JR., VICTOR LU YM, JOHN LU YM,
KELLY LU YM, and LUDO & LUYM DEVELOPMENT CORPORATION
G.R. No. 153690, G.R. No. 157381, G.R. No. 170889
Date: February 15, 2011
Digested by: Rosinie Suico
______________________________________________________________________
Petitioner: DAVID LU
Respondent: PATERNO LU YM, SR., PATERNO LU YM, JR., VICTOR LU YM, ET. AL. & LUYM
DEVELOPMENT COR
Petitioner: PATERNO LU YM, SR., PATERNO LU YM, JR., VICTOR LU YM, JOHN LU YM,
KELLY LU YM, and LUDO & LUYM DEVELOPMENT CORP.
Respondent: DAVID LU
Petitioner: JOHN LU YM and LUDO & LUYM DEVELOPMENT CORPORATION
Respondent: THE HON. COURT OF APPEALS OF CEBU CITY (former Twentieth Division),
DAVID LU, ROSA GO, SILVANO LUDO & CL CORPORATION
Ponente: NACHURA, J.:
Topic: Declaration of Nullity of Share Issue, Receivership and Dissolution
____________________________________________________________________________
___________________________
3A CORPORATION LAW 2019-2020 pg. 210
FACTS:
The three consolidated cases stemmed from the complaint for “Declaration of Nullity of Share
Issue, Receivership and Dissolution” filed on August 14, 2000 before the Regional Trial Court
(RTC) of Cebu City by David Lu, et al. against Paterno Lu Ym, Sr. and sons (Lu Ym father and
sons) and LLDC.
LLDC is a family corporation founded by Paterno Sr. and his brothers (the fathers of Rosa, Silvano
and David), primarily to hold real estate for the family. 8 In 1997, LLDC’s Board of Directors
authorized the issuance of its 600,000 unsubscribed and unissued shares at par value of P100.00
per share. The Lu Ym father and sons subscribed to and paid most of such shares. David, et al.,
however, claimed that the 600,000 LLDC stocks were issued in favor of the Lu Ym father and
sons for less than their real values. Hence, the complaint9 filed on August 14, 2000, by David,
Rosa Go (Rosa), Silvano Ludo (Silvano) and CL Corporation (CL Corp.) against the Lu Ym father
and sons, namely: Paterno Sr., Paterno Jr., Victor Lu Ym (Victor), John, Kelly, and LLDC, for
Declaration of Nullity of Share Issue, Receivership and Dissolution, before the RTC of Cebu City.
In G.R. No. 153690 wherein David, et al. assailed the appellate court’s resolutions dismissing
their complaint for its incomplete signatory in the certificate of non-forum shopping and
consequently annulling the placing of the subject corporation under receivership pendente lite,
the Court, by Decision of August 26, 2008, found the issue to have been mooted by the admission
by the trial court of David et al.’s Amended Complaint, filed by them pursuant to the trial court’s
order to conform to the requirements of the Interim Rules of Procedure Governing Intra-Corporate
Controversies.
The Court noted in G.R. No. 153690 that both parties admitted the mootness of the issue and that
the trial court had already rendered a decision on the merits of the case. It added that the
Amended Complaint stands since Lu Ym father and sons availed of an improper mode (via an
Urgent Motion filed with this Court) to assail the admission of the Amended Complaint.
In G.R. No. 157381 wherein Lu Ym father and sons challenged the appellate court’s resolution
restraining the trial court from proceeding with their motion to lift the receivership order which was
filed during the pendency of G.R. No. 153690, the Court, by Decision of August 26, 2008 resolved
that the issue was mooted by the amendment of the complaint and by the trial court’s decision on
the merits. The motion having been filed ancillary to the main action, which main action was
already decided on the merits by the trial court, the Court held that there was nothing more to
enjoin.
G.R. No. 170889 involved the denial by the appellate court of Lu Ym father and sons’ application
in CA-G.R. CV No. 81163 for a writ of preliminary injunction. By August 26, 2008 Decision, the
Court dismissed the petition after finding no merit on their argument – which they raised for the
first time in their motion for reconsideration before the appellate court – of lack of jurisdiction for
non-payment of the correct RTC docket fees.
____________________________________________________________________________
_____________________________
Issue:
3A CORPORATION LAW 2019-2020 pg. 211
1. Whether or not the issuance of 600,000 unsubscribed and unissued shares to Lu Ym
father and sons, et al. for a price of 1/18 of their real value in violation of the minority
stockholders’ rights, and with unjust enrichment.
2.
What would be the docket fees for filing "[a]ctions where the value of the subject
matter cannot be estimated" and "all other actions not involving property.
Held
1.
By Decision of March 1, 2004, Branch 12 of the RTC ruled in favor of David et al. by
annulling the issuance of the shares of stock subscribed and paid by Lu Ym father and
sons at less than par value, and ordering the dissolution and asset liquidation of LLDC.
The appeal of the trial court’s Decision remains pending with the appellate court in CAG.R. CV No. 81163.
2. The nature of the cases should first be ascertained. Section 3(a), Rule 1 of the 1997
Rules of Civil Procedure defines civil action as one by which a party sues another for
the enforcement or protection of a right, or the prevention or redress of a wrong. It
further states that a civil action may either be ordinary or special, both being governed
by the rules for ordinary civil actions subject to the special rules prescribed for special
civil actions. Section 3(c) of the same Rule, defines a special proceeding as a remedy
by which a party seeks to establish a status, a right, or a particular fact.
Applying these definitions, the cases covered by the Interim Rules for Intra-Corporate
Controversies should be considered as ordinary civil actions. These cases either seek the
recovery of damages/property or specific performance of an act against a party for the
violation or protection of a right.
These cases are:
(1) Devices or schemes employed by, or any act of, the board of directors, business
associates, officers or partners, amounting to fraud or misrepresentation which may be
detrimental to the interest of the public and/or of the stockholders, partners, or members
of any corporation, partnership, or association;
(2) Controversies arising out of intra-corporate, partnership, or association relations,
between and among stockholders, members or associates; and between, any or all of
them and the corporation, partnership, or association of which they are stockholders,
members or associates, respectively;
(3) Controversies in the election or appointment of directors, trustees, officers, or
managers of corporations, partnerships, or associations;
(4) Derivative suits; and
(5) Inspection of corporate books.
For rehabilitation, the procedure for which is provided in the Interim Rules of Procedure
on Corporate Recovery, should be considered as a special proceeding. It is one that seeks
to establish the status of a party or a particular fact. As provided in section 1, Rule 4 of the
Interim Rules on Corporate Recovery, the status or fact sought to be established is the
inability of the corporate debtor to pay its debts when they fall due so that a rehabilitation
plan, containing the formula for the successful recovery of the corporation, may be
approved in the end. It does not seek a relief from an injury caused by another party.
3A CORPORATION LAW 2019-2020 pg. 212
Section 7 of Rule 141 (Legal Fees) of the Revised Rules of Court lays the amount of filing
fees to be assessed for actions or proceedings filed with the Regional Trial Court. Section
7(a) and (b) apply to ordinary civil actionswhile 7(d) and (g) apply to special proceedings.
In fine, the basis for computing the filing fees in intra-corporate cases shall be section 7(a)
and (b) l & 3 of Rule 141. For petitions for rehabilitation, section 7(d) shall be applied.
(emphasis and underscoring supplied)
The new Section 21(k) of Rule 141 of the Rules of Court, as amended by A.M. No. 04-204-SC33 (July 20, 2004), expressly provides that "[f]or petitions for insolvency or other
cases involving intra-corporate controversies, the fees prescribed under Section 7(a) shall
apply." Notatu dignum is that paragraph (b) 1 & 3 of Section 7 thereof was omitted from
the reference. Said paragraph34 refers to docket fees for filing "[a]ctions where the value
of the subject matter cannot be estimated" and "all other actions not involving property."
If the complaint were filed today, one could safely find refuge in the express phraseology
of Section 21 (k) of Rule 141 that paragraph (a) alone applies.
In the present case, the applicable rule expressed that paragraphs (a) and (b) l & 3 shall
be the basis for computing the filing fees in intra-corporate cases, recognizing that there
could be an intra-corporate controversy where the value of the subject matter cannot be
estimated, such as an action for inspection of corporate books.
3A CORPORATION LAW 2019-2020 pg. 213
(92) DONNINA C. HALLEY vs. PRINTWELL, INC.
GR No. 123456
Date: May 30, 2011
Digested by: Ray Mark Vallesteros
----------------------------------------------------------------------------------Petitioner: DONNINA C. HALLEY
Respondent: PRINTWELL, INC.
Ponente: BERSAMIN, J
Topic: Stocks and Stockholders - Trust Fund Doctrine
Doctrine: Trust Fund Doctrine-- It is established doctrine that subscriptions to the capital of a
corporation constitute a fund to which creditors have a right to look for satisfaction of their claims
and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in
order to realize assets for the payment of its debts
Facts:
BMPI (Business Media Philippines Inc.) is a corporation under the control of its
stockholders, including Donnina Halley. In the course of its business, BMPI commissioned
PRINTWELL to print Philippines, Inc. (a magazine published and distributed by BMPI).
PRINTWELL extended 30-day credit accommodation in favor of BMPI and in a period of 9 mos.
BMPI placed several orders amounting to Php 316,000. However, only 25,000 was paid hence
a balance of 291,000
PRINTWELL sued BMPI for collection of the unpaid balance and later on impleaded BMPI’s
original stockholders and incorporators to recover on their unpaid subscriptions. It appears that
BMPI has an authorized capital stock of 3M divided into 300,000 shares with P10 par value. Only
75,000 shares worth P750,000 were originally subscribed of which P187,500 were paid up capital.
Halley subscribed to 35,000 shares worth P350,000 but only paid P87,500.
3A CORPORATION LAW 2019-2020 pg. 214
Arguing that she already paid her subscription to the stocks of the corporation, the petitioner said
that she should not be held personally liable as she and the corporation have separate and distinct
personality.
----------------------------------------------------------------------------------Issue: WON THE HONORABLE COURT OF APPEALS ERRED IN APPLYING THE TRUST
FUND DOCTRINE WHEN THE GROUNDS THEREFOR HAVE NOT BEEN SATISFIED
Ruling: No. Unpaid creditor may satisfy its claim from unpaid subscriptions; stockholders must
prove full payment of their subscription. The trust fund doctrine is not limited to reaching the
stockholder's unpaid subscriptions. The scope of the doctrine when the corporation is insolvent
encompasses not only the capital stock, but also other property and assets generally regarded in
equity as a trust fund for the payment of corporate debts. All assets and property belonging to the
corporation held in trust for the benefit of creditors that were distributed or in the possession of
the stockholders, regardless of full payment of their subscriptions, may be reached by the creditor
in satisfaction of its claim.
(93)
Yamamoto v. Nishino Leaher Industries, 551 SCRA 447 (2008);
Yamamoto vs Nishino Leather Industries, Inc.
GR No. 150283
April 16, 2018
Digested by: Ivan Earl Zapanta
----------------------------------------------------------------------------------Petitioner: Ryuichi Yamamoto
Respondent: Nishino Leather Industries, Inc. and Ikuo Nishino
Ponente: Carpio-Morales, J.
Topic: Trust Fund Doctrine
----------------------------------------------------------------------------------Doctrine: The capital stock, property, and other assets of a corporation are regarded as equity in
trust for the payment of corporate creditors which are preferred over the stockholders in the
distribution of corporate assets. The distribution of corporate assets and property cannot be made
to depend on the whims and caprices of the stockholders, officers, or directors of the corporation
unless the indispensable conditions and procedures for the protection of corporate creditors are
followed.
----------------------------------------------------------------------------------Facts:
•
1983: Ryuichi Yamamoto, a Japanese, organized in the Philippines the Wako Enterprises
Manila, Inc. (WAKO) that engages in leather tanning. WAKO is now known as Nishino Leather
Industries, Inc. (NLII).
•
1987: Yamamoto and Ikuo Nishino made a Memorandum of Agreement where they
agreed to enter into a joint venture wherein Nishino would acquire shares of stocks equivalent to
70% of the authorized capital stock of WAKO.
3A CORPORATION LAW 2019-2020 pg. 215
•
Nishino and his brother, Yoshinobu Nishino, acquired more than 70% of the authorized
capital stock of WAKO.
•
This reduced Yamamoto’s investment to 10%.
•
WAKO was later renamed to NLII.
•
Negotiations were ensued in light of a takeover of NLII who would buy out all the remaining
stocks owned by Yamamoto.
•
Atty. Emmanuel Doce, the lawyer of the Nishino brothers, sent a letter to Yamamoto that
states that with regard to the machines, Yamamoto has the option to take them with him, but on
the consequence of having the price of the machineries deducted from his contributions.
•
January 15, 1992: Yamamoto filed a case for replevin at the RTC.
•
Nishino answered that the machineries should be treated as corporate properties, and
thus, were part of Yamamoto’s capital contributions in consideration of his equity in NLII. And that
the letter sent by Atty. Doce is just a mere proposal.
•
June 9, 1995: The RTC ruled in favor of Yamamoto.
•
The RTC ruled that Yamamoto is the rightful owner of the machineries.
•
The CA ruled by reversing the decision of the RTC.
----------------------------------------------------------------------------------Issue: Whether or not the machineries in question are owned by Yamamoto in his personal
capacity?
Ruling: NO. One of the elements determinative of the applicability of the doctrine of piercing the
veil of corporate fiction is that control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of the plaintiff’s legal rights. To disregard the separate juridical
personality of a corporation, the wrongdoing or unjust act in contravention of a plaintiff’s legal
rights must be clearly and convincingly established; it cannot be presumed.
Without a demonstration that any of the evils sought to be prevented by the doctrine is present, it
does not apply. Estoppel may arise from the making of a promise.
However, it bears noting that the letter was followed by a request for Yamamoto to give his
“comments on all the above, soonest.” What was thus proffered to Yamamoto was not a promise,
but a mere offer, subject to his acceptance. Without acceptance, a mere offer produces no
obligation. Thus, the machineries and equipment, which comprised Yamamoto’s investment,
remained part of the capital property of the corporation.
The capital stock, property, and other assets of a corporation are regarded as equity in trust for
the payment of corporate creditors which are preferred over the stockholders in the distribution of
corporate assets. The distribution of corporate assets and property cannot be made to depend on
the whims and caprices of the stockholders, officers, or directors of the corporation unless the
indispensable conditions and procedures for the protection of corporate creditors are followed.
3A CORPORATION LAW 2019-2020 pg. 216
(94)
(95)
Ong Yong v. Tiu, G.R. No. 144476, April 8, 2003
Ong Yong v. Tiu, G.R. No. 144476, April 8, 2003;
Ong Yong v. Tiu
G.R. No. 144476
April 8, 2003
Digested by: Abrhiem Nico Angeles
----------------------------------------------------------------------------------Petitioner: ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T.
ONG, WILLIE T. ONG, and JULIE ONG ALONZO
Respondent: DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y.
TIU, JOHN YU, LOURDES C. TIU, INTRALAND RESOURCES DEVELOPMENT CORP.,
MASAGANA TELAMART, INC., REGISTER OF DEEDS OF PASAY CITY, and the SECURITIES
AND EXCHANGE COMMISSION,
Ponente: CORONA, J.:
Topic: Trust Fund Doctrine and Subscription Contracts
----------------------------------------------------------------------------------Doctrine:
The Trust Fund Doctrine provides that subscriptions to the capital stock of a corporation constitute
a fund to which the creditors have a right to look for the satisfaction of their claims. This doctrine
is the underlying principle in the procedure for the distribution of capital assets, embodied in the
Corporation Code, which allows the distribution of corporate capital only in three instances: (1)
amendment of the Articles of Incorporation to reduce the authorized capital stocks (2) purchase
of redeemable shares by the corporation, regardless of the existence of unrestricted retained
3A CORPORATION LAW 2019-2020 pg. 217
earnings, and (3) dissolution and eventual liquidation of the corporation. Furthermore, the doctrine
is articulated in Section 41 on the power of a corporation to acquire its own shares and in Section
122 on the prohibition against the distribution of corporate assets and property unless the
stringent requirements therefor are complied with.
----------------------------------------------------------------------------------Facts:
In 1994, the construction of the Masagana Citimall in Pasay City was threatened with stoppage
and incompletion when its owner, the First Landlink Asia Development Corporation (FLADC),
which was owned by the Tius, encountered dire financial difficulties. It was heavily indebted to
the Philippine National Bank (PNB) for P190 million.
To stave off foreclosure of the mortgage on the two lots where the mall was being built from
foreclosure, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William
T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC.
Pre-Subscription Agreement: Ongs and the Tius agreed to maintain equal shareholdings in
FLADC.
The Ongs were to subscribe to 1,000,000 shares at a par value of P100.00 each while the Tius
were to subscribe to an additional 549,800 shares at P100.00 each in addition to their already
existing subscription of 450,200 shares. Furthermore, they agreed that the Tius were entitled to
nominate the Vice-President and the Treasurer plus five directors while the Ongs were entitled to
nominate the President, the Secretary and six directors (including the chairman) to the board of
directors of FLADC. Moreover, the Ongs were given the right to manage and operate the mall.
Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of stock
while the Tius committed to contribute to FLADC a four-storey building and two parcels of land
respectively valued at P20 million (for 200,000 shares), P30 million (for 300,000 shares) and
P49.8 million (for 49,800 shares) to cover their additional 549,800 stock subscription therein. The
Ongs paid in another P70 million3 to FLADC and P20 million to the Tius over and above their
P100 million investment, the total sum of which (P190 million) was used to settle the P190 million
mortgage indebtedness of FLADC to PNB.
The business harmony between the Ongs and the Tius in FLADC, however, was shortlived
because the Tius, on February 23, 1996, rescinded the Pre-Subscription Agreement. The Tius
accused the Ongs of (1) refusing to credit to them the FLADC shares covering their real property
contributions; (2) preventing David S. Tiu and Cely Y. Tiu from assuming the positions of and
performing their duties as Vice-President and Treasurer, respectively, and (3) refusing to give
them the office spaces agreed upon.
SEC: confirmed recission of Tius; Ongs filed reconsideration that their P70M was not a premium
on capital stock but an advance loan
3A CORPORATION LAW 2019-2020 pg. 218
CA: Ongs and the Tius were in pari delicto (which would not have legally entitled them to
rescission) but, "for practical considerations," that is, their inability to work together, it was best to
separate the two groups by rescinding the Pre-Subscription Agreement, returning the original
investment of the Ongs and awarding practically everything else to the Tius.
----------------------------------------------------------------------------------Issue: Whether or not the Tiu’s could legally rescind the Pre-Subscription Agreement.
Ruling: NO. It is Null and Void.
Any contract for the acquisition of unissued stock in an existing corporation or a corporation still
to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the
fact that the parties refer to it as a purchase or some other contract.
A subscription contract necessarily involves the corporation as one of the contracting parties since
the subject matter of the transaction is property owned by the corporation its shares of stock.
Thus, the subscription contract (denominated by the parties as a Pre-Subscription Agreement)
whereby the Ongs invested P100 million for 1,000,000 shares of stock was, from the viewpoint of
the law, one between the Ongs and FLADC, not between the Ongs and the Tius. Otherwise
stated, the Tius did not contract in their personal capacities with the Ongs since they were not
selling any of their own shares to them. It was FLADC that did.
All this notwithstanding, granting but not conceding that the Tius possess the legal standing to
sue for rescission based on breach of contract, said action will nevertheless still not prosper since
rescission will violate the Trust Fund Doctrine and the procedures for the valid distribution of
assets and property under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co.
vs. Rivera provides that subscriptions to the capital stock of a corporation constitute a fund to
which the creditors have a right to look for the satisfaction of their claims. This doctrine is the
underlying principle in the procedure for the distribution of capital assets, embodied in the
Corporation Code, which allows the distribution of corporate capital only in three instances: (1)
amendment of the Articles of Incorporation to reduce the authorized capital stocks (2) purchase
of redeemable shares by the corporation, regardless of the existence of unrestricted retained
earnings, and (3) dissolution and eventual liquidation of the corporation. Furthermore, the doctrine
is articulated in Section 41 on the power of a corporation to acquire its own shares and in Section
122 on the prohibition against the distribution of corporate assets and property unless the
stringent requirements therefor are complied with.
In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in the
unauthorized distribution of the capital assets and property of the corporation, thereby violating
the Trust Fund Doctrine and the Corporation Code, since rescission of a subscription agreement
3A CORPORATION LAW 2019-2020 pg. 219
is not one of the instances when distribution of capital assets and property of the corporation is
allowed.
Without the Ongs, the Tius would have lost everything they originally invested in said mall. If only
for this and the fact that this Resolution can truly pave the way for both groups to enjoy the fruits
of their investments — assuming good faith and honest intentions — we cannot allow the
rescission of the subject subscription agreement. The Ongs' shortcomings were far from serious
and certainly less than substantial; they were in fact remediable and correctable under the law. It
would be totally against all rules of justice, fairness and equity to deprive the Ongs of their interests
on petty and tenuous grounds.
WHEREFORE, the motion for reconsideration, dated March 15, 2002, of petitioners Ong Yong,
Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie Ong Alonzo and the
motion for partial reconsideration, dated March 15, 2002, of petitioner Willie Ong are hereby
GRANTED. The Petition for Confirmation of the Rescission of the Pre-Subscription Agreement
docketed as SEC Case No. 02-96-5269 is hereby DISMISSED for lack of merit. The unilateral
rescission by the Tius of the subject Pre-Subscription Agreement, dated August 15, 1994, is
hereby declared as null and void.
The motion for the issuance of a writ of execution, dated March 15, 2002, of petitioners David S.
Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu is
hereby DENIED for being moot.
Accordingly, the Decision of this Court, dated February 1, 2002, affirming with modification the
decision of the Court of Appeals, dated October 5, 1999, and the SEC en banc, dated September
11, 1998, is hereby REVERSED.
Costs against the petitioner Tius.
SO ORDERED.
3A CORPORATION LAW 2019-2020 pg. 220
(96)G.R. No. 177066
Date: Sept. 11, 2009
Digested by: Ray Mark Vallesteros
----------------------------------------------------------------------------------Petitioner: JOSELITO MUSNI PUNO (as heir of the late Carlos Puno)
Respondent: PUNO ENTERPRISES, INC., represented by JESUSA PUNO
Ponente: NACHURA, J.
Topic: Certificate of Stocks and Transfer of Shares
----------------------------------------------------------------------------------Doctrine: Upon the death of a stockholder, the heirs do not automatically become stockholders of
the corporation; neither are they mandatorily entitled to the rights and privileges of a stockholder.
----------------------------------------------------------------------------------Facts: Carlos L. Puno, who died on June 25, 1963, was an incorporator of respondent Puno
Enterprises, Inc. On March 14, 2003, petitioner Joselito Musni Puno, claiming to be an heir of
Carlos L. Puno, initiated a complaint for specific performance against respondent. Petitioner
averred that he is the son of the deceased with the latter’s common-law wife, Amelia Puno. As
surviving heir, he claimed entitlement to the rights and privileges of his late father as stockholder
of respondent. The complaint thus prayed that respondent allow petitioner to inspect its corporate
book, render an accounting of all the transactions it entered into from 1962, and give petitioner all
the profits, earnings, dividends, or income pertaining to the shares of Carlos L. Puno.
----------------------------------------------------------------------------------Issue: Whether or not Joselito as an heir automatically became stockholder of the corporation
and acquire the rights and privileges of the deceased as shareholder of the corporation
3A CORPORATION LAW 2019-2020 pg. 221
Ruling: No. Upon the death of a shareholder, the heirs do not automatically become stockholders
of the corporation and acquire the rights and privileges of the deceased as shareholder of the
corporation. The stocks must be distributed first to the heirs in estate proceedings, and the transfer
of the stocks must be recorded in the books of the corporation. Section 63 of the Corporation
Code provides that no transfer shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation.
(97)
Reyes v. RTC of Makati, G.R. No. 165744, August 11, 2008;
Reyes vs RTC of Makati
GR No. 165744
August 11, 2008
Digested by: Ivan Earl Zapanta
----------------------------------------------------------------------------------Petitioner: Oscar C. Reyes
Respondent: Regional Trial Court of Makati, Branch 142, Zenith Insurance Corporation, and
Rodrigo Reyes.
Ponente: Brion, J.
Topic: Certificate of Stocks and Transfer of Shares
----------------------------------------------------------------------------------Doctrine: Successional rights are transmitted from the moment of death of decedent. Accordingly,
upon the decedent’s death, the heirs will acquire legal title to the estate, and they are, prior to the
estate’s partition, deemed co-owners thereof. This status, however, does not immediately and
necessarily make them stockholders of the corporation. Unless until there is compliance with Sec.
3A CORPORATION LAW 2019-2020 pg. 222
63 of the Corporation Code on the manner of transferring shares, the heirs do not become
registered stockholders of the corporation.
----------------------------------------------------------------------------------Facts:
· Oscar and Rodrigo Reyes are two of the four children of the spouses Pedro and Anastacia
Reyes.
· All four siblings owned shares of stock of Zenith Insurance Corporation (Zenith) established
by their family.
·
Pedro died in 1964, while Anastacia died in 1993.
·
Pedro’s estate was judicially partitioned, while that of Anastacia’s was not.
·
Anastacia died with 136,598 shares of Zenith.
·
Oscar has 8,715,637 shares, while Rodrigo has 4,250.
·
May 9, 2000: Zenith and Rodrigo filed a complaint with the Securities and Exchange
Commission (SEC) against Oscar for allegedly obtaining the shares of their late mother
without first, being judicially partitioned. And that Oscar made fraudulent and other schemes.
· When R.A. No. 8799 took effect, the SEC’s exclusive and original jurisdiction over cases
enumerated in Sec. 5 of P.D. No. 902-A was transferred to the RTC designated as a special
commercial court.
·
October 22, 2002: Oscar filed a motion to declare complaint as nuisance.
·
RTC: Denied the motion.
·
CA: Affirmed the RTC decision.
· Oscar is now contesting that the RTC is not the proper court to file the case since it does
not involve Zenith, but that of partition of the estate of Anastacia.
----------------------------------------------------------------------------------Issue: Whether or not the RTC Special Commercial Court is the proper venue for filing the case?
Ruling: NO. The SC held that it cannot declare that an intra-corporate relationship exist that would
serve as basis to bring this case within the special commercial court’s jurisdiction under Sec. 5(b)
of P.D. 902-A.
3A CORPORATION LAW 2019-2020 pg. 223
Also, in the issue of transfer of shares, Rodrigo cannot be deemed as stockholder, in relation to
the shares of Anastacia.
Art. 777 of the Civil Code declares that the successional rights are transmitted from the moment
of death of decedent. Accordingly, upon Anastacia’s death, her children acquired legal title to her
estate, and they are, prior to the estate’s partition, deemed co-owners thereof. This status,
however, does not immediately and necessarily make them stockholders of the corporation.
Unless until there is compliance with Sec. 63 of the Corporation Code on the manner of
transferring shares, the heirs do not become registered stockholders of the corporation.
The transfer of title by means of succession does not bind the corporation and third parties. The
transfer must be registered in the books of the corporation to make the transferee-heir a
stockholder entitled to recognition as such both by the corporation and third parties.
Hence, Rodrigo must hurdle two obstacles. One, is to prove that there are shareholdings that will
be left to him and his co-heirs. And two, is that he must register the transfer of the shares allotted
to him to make it binding against the corporation.
Without the settlement of Anastacia’s estate, there can be no definite partition and distribution of
the estate to the heirs. And without it, there can be no registration of the transfer. And without the
partition, the SC can not consider the transferee-heir a stockholder who may invoke the existence
of an inta-corporate relationship as premise for intra-corporate controversy within the jurisdiction
of the special commercial court.
3A CORPORATION LAW 2019-2020 pg. 224
(98)
Ponce v. Alsons Cement Corp., G.R. No. 139802, December
10, 2002;
Ponce v. Alsons Cement Corp
G.R. NO. 139802
December 10, 2002
Digested by: Abrhiem Nico Angeles
----------------------------------------------------------------------------------Petitioner: VICENTE C. PONCE
Respondent: ALSONS CEMENT CORPORATION, and FRANCISCO M. GIRON, JR.
Ponente: QUISUMBING, J.
Topic: Certificate of Stocks and Transfer of Shares
----------------------------------------------------------------------------------Doctrine: SEC. 63. Certificate of stock and transfer of shares.–The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president or vicepresident, countersigned by the secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates indorsed by
the owner or his attorney-in-fact or other person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between the parties, until the transfer is recorded in
the books of the corporation so as to show the names of the parties to the transaction, the date
of the transfer, the number of the certificate or certificates and the number of shares transferred.
----------------------------------------------------------------------------------Facts: On 25 January 1996, Vicente C. Ponce, filed a complaint with the SEC for mandamus and
damages against Alsons Cement Corporation and its corporate secretary Francisco M. Giron, Jr.
3A CORPORATION LAW 2019-2020 pg. 225
In his complaint, Ponce alleged, among others, that "the late Fausto G. Gaid was an incorporator
of Victory Cement Corporation (VCC), having subscribed to and fully paid 239,500 shares of said
corporation; that on 8 February 1968, Ponce and Fausto Gaid executed a "Deed of Undertaking"
and "Indorsement" whereby the latter acknowledges that the former is the owner of said shares
and he was therefore assigning/endorsing the same to Ponce; that on 10 April 1968, VCC was
renamed Floro Cement Corporation (FCC); that on 22 October 1990, FCC was renamed Alsons
Cement Corporation (ACC); that from the time of incorporation of VCC up to the present, no
certificates of stock corresponding to the 239,500 subscribed and fully paid shares of Gaid were
issued in the name of Fausto G. Gaid and/or Ponce; and that despite repeated demands, ACC
and Giron refused and continue to refuse without any justifiable reason to issue to Ponce the
certificates of stocks corresponding to the 239,500 shares of Gaid, in violation of Ponce's right to
secure the corresponding certificate of stock in his name. ACC and Giron moved to dismiss. SEC
Hearing Officer Enrique L. Flores, Jr. granted the motion to dismiss in an Order dated 29 February
1996. Ponce appealed the Order of dismissal.
On 6 January 1997, the Commission En Banc reversed the appealed Order and directed the
Hearing Officer to proceed with the case. In ruling that a transfer or assignment of stocks need
not be registered first before it can take cognizance of the case to enforce Ponce's rights as a
stockholder, the Commission En Banc cited the Supreme Court's ruling in Abejo vs. De la Cruz,
149 SCRA 654 (1987). Their motion for reconsideration having been denied, ACC and Giron
appealed the decision of the SEC En Banc and the resolution denying their motion for
reconsideration to the Court of Appeals. In its decision, the Court of Appeals held that in the
absence of any allegation that the transfer of the shares between Gaid and Ponce was registered
in the stock and transfer book of ACC, Ponce failed to state a cause of action. Thus, said the
appellate court, "the complaint for mandamus should be dismissed for failure to state a cause of
action." Ponce's motion for reconsideration was denied in a resolution dated 10 August 1999.
Ponce filed the petition for review on certiorari.
----------------------------------------------------------------------------------ISSUE: Whether or not PONCE can order respondents (a) to issue in his name certificates of
stocks covering the 239,500 shares of stocks and its legal increments
RULING: NO.
Fausto Gaid was an original subscriber of ACC's 239,500 shares. From the Amended Articles of
Incorporation approved on 9 April 1995, each share had a par value of P1.00 per share. Ponce
had not made a previous request upon the corporate secretary of ACC, Francisco M. Giron Jr.,
to record the alleged transfer of stocks. Pursuant to Section 63 of the Corporation Code, a transfer
of shares of stock not recorded in the stock and transfer book of the corporation is non-existent
as far as the corporation is concerned. As between the corporation on the one hand, and its
shareholders and third persons on the other, the corporation looks only to its books for the
purpose of determining who its shareholders are. It is only when the transfer has been recorded
in the stock and transfer book that a corporation may rightfully regard the transferee as one of its
stockholders. From this time, the consequent obligation on the part of the corporation to recognize
3A CORPORATION LAW 2019-2020 pg. 226
such rights as it is mandated by law to recognize arises. Hence, without such recording, the
transferee may not be regarded by the corporation as one among its stockholders and the
corporation may legally refuse the issuance of stock certificates in the name of the transferee
even when there has been compliance with the requirements of Section 64 of the Corporation
Code.
The stock and transfer book is the basis for ascertaining the persons entitled to the rights and
subject to the liabilities of a stockholder. Where a transferee is not yet recognized as a
stockholder, the corporation is under no specific legal duty to issue stock certificates in the
transferee's name. A petition for mandamus fails to state a cause of action where it appears that
the petitioner is not the registered stockholder and there is no allegation that he holds any power
of attorney from the registered stockholder, from whom he obtained the stocks, to make the
transfer.
The deed of undertaking with indorsement presented by Ponce does not establish, on its face,
his right to demand for the registration of the transfer and the issuance of certificates of stocks.
Under the provisions of our statute touching the transfer of stock, the mere indorsement of stock
certificates does not in itself give to the indorsee such a right to have a transfer of the shares of
stock on the books of the company as will entitle him to the writ of mandamus to compel the
company and its officers to make such transfer at his demand, because, under such
circumstances the duty, the legal obligation, is not so clear and indisputable as to justify the
issuance of the writ. As a general rule, as between the corporation on the one hand, and its
shareholders and third persons on the other, the corporation looks only to its books for the
purpose of determining who its shareholders are, so that a mere indorsee of a stock certificate,
claiming to be the owner, will not necessarily be recognized as such by the corporation and its
officers, in the absence of express instructions of the registered owner to make such transfer to
the indorsee, or a power of attorney authorizing such transfer. Thus, absent an allegation that the
transfer of shares is recorded in the stock and transfer book of ACC, there appears no basis for
a clear and indisputable duty or clear legal obligation that can be imposed upon the corporate
secretary, so as to justify the issuance of the writ of mandamus to compel him to perform the
transfer of the shares to Ponce.
WHEREFORE, the petition is DENIED for lack of merit. The decision of the Court of Appeals, in
CA-G.R. SP No. 46692, which set aside that of the Securities and Exchange Commission En
Banc in SEC-AC No. 545 and reinstated the order of the Hearing Officer, is hereby AFFIRMED.
•
Mere indorsee of a stock certificate, claiming to be the owner, will not necessarily be
recognized as such by the corporation and its officers, in the absence of express instructions of
the registered owner to make such transfer to the indorsee, or a power of attorney authorizing
such transfer.
•
Mandamus - proper remedy to make him the rightful owner and holder of a stock certificate
to be issued in his name.
3A CORPORATION LAW 2019-2020 pg. 227
(99)
Makati Sports Club, Inc. v. Cheng, G.R. No. 178523, June 16,
2010;
——————————————————————Makati Sports Club, Inc. v. Cheng, G.R. No. 178523,
June16, 2010;
Digested by: Sarah Bagis
Petitioners: Makati Sports Club Inc
Respondents: Cecille Cheng and Ramon Sabarre
Ponente: Nachura, J
Topic: Stocks and Stockholders - Certificate of Stocks and Transfer of Shares
——————————————————————————
Doctrine:
• A certificate of stock is the paper representative or tangible evidence of the stock itself and
of the various interests therein. The certificate is not a stock in the corporation but is merely
evidence of the holder’s interest and status in the corporation, his ownership of the share
represented thereby. It is not in law the equivalent of such ownership. It expresses the
contract between the corporation and the stockholder, but is not essential to the
existence of a share of stock or the nature of the relation of shareholder to the corporation.
——————————————————————————
FACTS
On October of 1994, Makati Sports Club, Inc. (MSCI) Board of Directors adopted a
resolution authorizing the sale of 19 unissued shares at a floor price of P400,000 and
P450,000 per share for Class A and Class B shares, respectively. Michelle Cheng was a
3A CORPORATION LAW 2019-2020 pg. 228
treasurer and director of MSCI. In June of 1995, Joseph Hodreal (Hodreal) with wife Lolita
expressed in a letter his interest to buy a share and requested therein that he be included
in the waiting list. In November of 1995, Mc Foods expressed interest in buying a share of
MSCI, and one was acquired with the payment by Mc Foods of P1,800,000 through Urban
Bank. On December 15, 1995, the Deed of Absolute Sale was executed by MSCI. On
December 27, 1995, Mc Foods sent a letter to MSCI giving advice of its offer to resell the
share. Mc Foods Stock Certificate No. A 2243 was issued to Mc Foods on January 5, 1996.
It appears that while the sale between the MSCI and Mc Foods was still under
negotiations, there were negotiations between Mc Foods and Hodreal for the
purchase by the latter of a share of the MSCI. On November 24, 1995, Hodreal paid
Mc Foods P1,400,000. Another payment of P1,400,000 was made by Hodreal to Mc
Foods on December 27, 1995, to complete the purchase price of P2,800,000. On February
7, 1996, MSCI was advised of the sale by Mc Foods to Hodreal of the share evidenced by
Certificate No. 2243 for P2.8 Million. Upon request, a new certificate was issued. In 1997,
an investigation was conducted and the committee held that there is prima facie
evidence to show that defendant Cheng profited from the transaction because of her
knowledge.
Evidence of fraud presented by MSCI, among others, are — [a] letter of Hodreal where
he expressed interest in buying one share from MSCI with the request that he be
included in the waiting list of buyers; [b] declaration of Lolita Hodreal in her Affidavit
that in October 1995, she talked to Cheng who assured her that there was one available
Class A share at the price of P2,800,000. The purchase to be validated by paying
50% immediately and the balance after thirty days; [c] Head of the Membership
Section of MSCI, Punzalan, declared that she informed Cheng of the intention of
Hodreal to purchase one share and that Cheng asked if there was a quoted price
and for Hodreal’s telephone number, which the Punzalan gave to Cheng; and [d]
Cheng claimed Certificate A-2243 on behalf of Mc Foods, per letter of authority dated
January 26, 1996, executed by Mc Foods through its President Ramon Sabarre in favor of
Cheng.
MSCI asserts that Mc Foods never intended to become a legitimate holder of its
purchased Class “A” share but did so only for the purpose of realizing a profit in the
amount of P1,000,000.00 at the expense of the former. MSCI further claims that Cheng
confabulated [this means ‘talked’] with Mc Foods by providing it with an insider’s
information as to the status of the shares of stock of MSCI and even, allegedly with unusual
interest, facilitated the transfer of ownership of the subject share of stock from Mc Foods to
Hodreal, instead of an original, unissued share of stock.
ISSUE
1. WON Cheng, MC Foods, and Ramon Sabarre should pay the sum of P 1,000,000
representing the amount allegedly defrauded, together with interest and damages, to
MSCI.
3A CORPORATION LAW 2019-2020 pg. 229
Held/Ratio:
1. NO. MSCI, having the burden on proof, failed to prove with clear and convincing
evidence the existence of fraud. The mere fact that she performed acts upon authority
of Mc Foods, i.e., receiving the payments of Hodreal in her office and claiming the stock
certificate on behalf of Mc Foods, do not by themselves, individually or taken together,
show badges of fraud, since Mc Foods did acts well within its rights and there is
no proof that Cheng personally profited from the assailed transaction.
First, as a procedural infirmity, the issue is a question of facts, as it is a question on
the probative value of the evidence presented. Section 1 of Rule 45 provides that a
petition for review on certiorari shall raise only questions of law. Furthermore, it does
not fall under the exemptions under Rule 45.
Second, although established by Punzalan’s affidavit that she informed Cheng about Hodreal’s
desire to purchase a Class “A” share and that Cheng asked for Hodreal’s contact number,
it is not clear when Punzalan relayed the information to Cheng or if Cheng indeed
initiated contact with Hodreal to peddle Mc Foods’ purchased share. [Yun lang talaga
sabi ng case.]
Third, charged with ascertaining the compliance of all the requirements for the purchase
of MSCI’s shares of stock under Section 29 of MSCI’s amended by-laws, the
Membership Committee failed to question the alleged irregularities attending Mc Foods’
purchase of one Class “A” share at P1,800,000.00. If there was really any irregularity
in the transaction, this inaction of the Management Committee belies MSCI’s cry of foul play
on Mc Foods’ purchase of the subject share of stock.
Fourth, considering that Mc Foods tendered its payment of P1,800,000.00 to MSCI on
November 28, 1995, even assuming arguendo that it was driven solely by the intent to
speculate on the price of the share of stock, it had all the right to negotiate and
transact, at least on the anticipated and expected ownership of the share, with
Hodreal. In other words, there is nothing wrong with the fact that the first installment
paid by Hodreal preceded the payment of Mc Foods for the same share of stock
to MSCI because eventually Mc Foods became the owner of a Class “A” share
covered by Certificate A 2243.
Fifth, MSCI’s stance that Mc Foods violated Section 30(e) of MSCI’s Amended By-Laws
on its pre-emptive rights, which provides that “...the club shall have thirty days from receipt
of written offer to purchase such share if the club has unrestricted revenue and with
approval of 2/3 vote of the Board…” , is untenable. When Mc Foods offered for sale one
Class “A” share of stock to MSCI for the price of P 2,800,000.00 for the latter to exercise its
pre-emptive right, MSCI failed to repurchase Mc Foods’ Class “A” share within the thirtyday
pre-emptive period. Therefore Mc Foods complied with the requirement. Neither can
MSCI argue that Mc Foods was not yet a registered owner of the share of
stock when the latter offered it for resale, in order to void the transfer from
3A CORPORATION LAW 2019-2020 pg. 230
Mc Foods to Hodreal. The corporation’s obligation to register is ministerial
upon the buyer’s acquisition of ownership of the share of stock. The corporation,
either by its board, its by-laws, or the act of its officers, cannot create restrictions in
stock transfers
MSCI’s petition is denied.
(100)
Fontana Resort and Country Club. Inc. v. Spouses Tan, G.R.
No. 154670, June 30, 2012
——————————————————Fontana Resort and Country Club. Inc. v. Spouses Tan,
G.R 154670, June 30, 2012
Petitioner: Fontana Resort and RN Development Corp.
Respondent: Sps. Roy Tan and Susan Tan
Ponente: Leonard- de Castro, J.
Topic: STOCKS AND STOCKHOLDERS -Certificate of Stocks and Transfer of Shares
Digest by: Sarah Bagis
———————————————————
Doctrine: The sale of shares of stock by partakes the nature of a forbearance of money, since
the amount paid for the shares was used to defray the construction of FLP; hence, the
interest rate of 12% per annum should be imposed on said amount from the date of
extrajudicial demand until its return to respondents.
———————————————————
FACTS
● RESPONDENTS Sps Tan bought from petitioner RN Development Corporation (RNDC)
two class "D" shares of stock in petitioner Fontana Resort and Country Club, Inc. (FRCCI),
with promises from RNDC (petitioner’s sales agent) that they would construct and finish
by 1998, a park with first-class leisure facilities to be called Fontana Leisure Park (FLP),
and that FRCCI class "D" shareholders would be admitted to one membership in the
country club with free accommodations for "one week annually, consisting of five (5)
ordinary days, one (1) Saturday and one (1) Sunday.
3A CORPORATION LAW 2019-2020 pg. 231
○
Two years later, respondents filed a Complaint for refund of the purchase price of
the FRCCI D shares of stock. They allege that they had been deceived by
petitioners' fraudulent misrepresentations in buying the D shares of stock; that
petitioners failed to finish the FLP within the time frame promised; that the policies,
rules, and regulations of the country club were obscure; that petitioners
failure/refusal to accommodate respondents’ request for reservations on 17
October 1998 and 1 April 1999, constitute gross misrepresentation and a form of
deception, not only to them, but also to the general public.
Respondents narrated that they requested a reservation booking of FLP villa on October
17, 1998, a Saturday, for their daughter's 18th birthday, but were refused by petitioners.
Petitioners clarified that respondents had already exhausted their free Saturday pass for
the year. According to respondents, they were not informed of said rule regarding their
free accommodations at FLP, and had they known about it, they would not have booked
and used their previous Saturday accommodation. In January 1999, respondents again
attempted to book and reserve an FLP villa for on April 1, a Thursday. Their reservation
was confirmed by Murphy Magtoto. However, their reservation was later cancelled
because the FLP was already fully booked during that Holy Week.
●
PETITIONERS filed their Answer, asserting that respondents had been duly informed of
the privileges given to them as shareholders of FRCCI class "D" shares of stock since
these were all explicitly provided in the promotional materials/brochures for the country
club, the Articles of Incorporation, and the By-Laws of FRCCI.
○ Petitioners deny that they unjustly cancelled respondents' reservation for an FLP
villa on April 1, 1999, explaining that there was no reservation to cancel since there
was no confirmation number for the reservation to speak of, that they were merely
“wait-listed” in a prioritized reservation list made since the start of the current year.
○ Lastly, petitioners averred only minor or finishing construction works were left to
be done and that facilities of the country club were already operational.
●
SEC -SCID ordered petitioners to jointly and severally pay respondents for gross
misrepresentation detrimental not only to the [respondents] but also to the general public.
SEC en banc affirmed.
●
●
CA Petition for Review under Rule 43. Decision: Modified.
○ CA set aside the SEC finding that petitioners are guilty of fraudulent
misrepreseantion, and agreed with the SEC that the sale of the two FRCCI class
"D" shares of stock should be rescinded because petitioners defaulted on their
promises that FLP would be fully developed and operational by the first quarter of
1998.
○ CA ordered respondents to return their certificates of shares of stock to petitioners
upon the latter's refund of the price since.
○ It also clarified that the sale of the FRCCI shares of stock is in the nature of a
forbearance of money, since the amount paid by respondents was used by
petitioners to defray the construction of FLP; hence, the interest rate of 12% per
3A CORPORATION LAW 2019-2020 pg. 232
annum should be imposed on said amount from the date of extrajudicial demand
until its return to respondents.
ISSUE
WON whether or not petitioners committed fraud or defaulted on their promises as would justify
the annulment or rescission of their contract of sale
HELD
A. No. Respondents sufficiently alleged a cause of action for the annulment or rescission of the
contract of sale of FRCCI class "D" shares by petitioners to respondents; however, were
unable to establish by preponderance of evidence that they are entitled to said annulment
or rescission.
There is fraud when one party is induced by the other to enter into a contract, through and
solely because of the latter's insidious words or machinations. But not all forms of fraud can
vitiate consent. Under Article 1330, the fraud must be the determining cause of the contract,
or must have caused the consent to be given."
It can only be expected that petitioners presented the FLP and the country club in the
most positive light in order to attract investor-members. There is no showing that in
their sales talk to respondents, petitioners actually used insidious words or
machinations, without which, respondents would not have bought the FRCCI shares.
Respondents appear to be literate and of above-average means, who may not be
so easily deceived into parting with a substantial amount of money.
B. On the alleged arbitrary and unreasonable denial of their request for reservation at FLP and
the obscure and ever-changing rules of the country club as regards free accommodations
for FRCCI class "D" shareholders.
● Petitioners were able to explain, based on clear policies, rules, and regulations governing
FLP club memberships, why they rejected respondents' request for reservation on.
Respondents do not dispute that the Articles of Incorporation and the By-Laws of FRCCI,
as well as the promotional materials distributed by petitioners to the public (copies of which
respondents admitted receiving), expressly stated that the subscribers of FRCCI class "D"
shares of stock are entitled free accommodation at an FLP two-bedroom villa only for "one
week annually consisting of five (5) ordinary days, one (1) Saturday and one (1) Sunday."
Thus, respondents cannot claim that they were totally ignorant of such rule or that
petitioners have been changing the rules as they go along.
C. Neither can we rescind the contract because construction of FLP facilities were still
unfinished by 1998. Respondents themselves were not able to present competent proof of
the extent of such incompleteness. Without any idea of how much of FLP and which
particular FLP facilities remain unfinished, there is no way for us to determine whether
petitioners were actually unable to deliver on their promise.
3A CORPORATION LAW 2019-2020 pg. 233
D. Respondents additionally alleged the unreasonable cancellation of their confirmed
reservation. According to respondents, their reservation was confirmed by a Mr. Murphy
Magtoto, only to be cancelled later on by a certain Shaye. The absence of any confirmation
number issued to respondents does not also discount the possibility that the latter's
reservation was mistakenly confirmed by Murphy Magtoto despite FLP being fully-booked.
At most, we perceive a mix-up in the reservation process of petitioners. This demonstrates
a mere negligence on the part of petitioners, but not willful intention to deprive respondents
of their membership benefits.
(101)
Forest Hills Golf & Country Club v. Vertex Sales and Trading,
Inc., G.R. No. 202205, March 6, 2013 BERNALDO
3A CORPORATION LAW 2019-2020 pg. 234
(102)
Teng v. Securities and Exchange Commission, G.R. No.
184332, February 17, 2016.
TENG, Petitioner,
ANNA
vs.
SECURITIES AND EXCHANGE COMMISSION (SEC) and TING PING LAY, Respondents.
GR No. 184332
DATE: Feb. 17, 2016
DIGESTED BY: BRAWNER, YVETTE
PETITIONER: ANNA TENG
RESPONDENT: SECURITIES AND EXCHANGE COMMISSION (SEC) and TING PING LAY
PONENTE: JUSTICE REYES
TOPIC: CERTIFICATE OF STOCKS AND TRANSFER OF SHARES
DOCTRINES: Section 63 of the Corporatio Code prescribes the manner by which a share of
stock may be transferred. As owner of personal property, shareholder is at liberty to dispose of
them in favor of whomsoever he pleases, without any other limitation in this respect, than the
general provisions of law.
It is the delivery of the certificate, coupled with the endorsement by the owner or his duly
authorized representative that is the operative act of transfer of shares from the original owner to
the transferee.
A corporation, either by its board, its bylaws, or the act of its officers, cannot create
restrictions in stock transfers. In transferring stock, the secretary of a corporation acts in purely
ministerial capacity and does not try to decide the question of ownership.
The surrender of the original certificate of stock is necessary before the issuance of a new
one so that the old certificate may be cancelled. It serves to protect not only the corporation but
the legitimate shareholder and the public as well, as it ensures that there is only one document
covering a particular share of stock.
3A CORPORATION LAW 2019-2020 pg. 235
FACTS: Ting Ping purchased 480 shares of TCL Sales Corporation (TCL) from Peter Chiu (Chiu);
1,400 shares from Teng Ching Lay (Teng Ching) who was also the president of TCL and 1,440
shares from Ismaelita Maluto (Maluto).
Upon Teng Ching´s death, his son Henry Teng took over the management of TCL. Ting
Ping requested TCL´s Corporate Secretary Anna Teng (Teng) to enter the transfer in the Stock
and Transfer Book of TCL for the proper recording of the acquisition, and demanded new
certificates of stock in his favor. TCL and Teng refused. Ting Ping filed a petition for mandamus
with the SEC, which granted it and ordered TCL and Teng to record the transfers in the Books of
the Corporation, plus damages. TCL and Teng appealed to the SEC which affirmed the order but
that Teng was held solely liable for the payment of moral damages and attorney´s fees. TCL and
Teng filed a petition for review with the CA, dismissed, and upon a petition for review at the SC,
denied the petition.
After the finality of the Court´s decision, the SEC issued a writ of execution. Teng however
filed a complaint for interpleader at RTC Manila where Teng sought to compel Henry and Ting
Ping to interplead and settle the issue of ownership over the 1,400 shares. The RTC Manila found
Henry to have a better right to the shares of stock formerly owned by Teng Ching, excepting 262.5
shares. Thereafter a motion for the issuanc of Alias Writ of Execution was filed by Ting Ping
where he sought partial satisfaction of SEC order ordering TCL and Teng to record the 480 shares
acquired from Chiu and the 1,440 shares he acquired from Maluto and for Teng´s payment in his
favor.
SEC acted upon the motion and issued an alias writ of execution. TCL and Teng filed their
respective motions to quash at SEC, denied. Teng filed a petition for certiorari and prohibition
before the CA, which it dismissed. Teng filed a petition for review on certiorari at the SC.
ISSUE: WON the surrender of the certificates of stock is a requisite before registration of the
transfer may be made and for the issuance of new certificates.
SC: Under Section 63, certain minimum requisites must be complied with for there to be a valid
transfer of stocks, i.e., (a) there must be delivery of the stock certificate; (b) the certificate must
be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the
transfer; and (c) to be valid against third parties, the transfer must be recorded in the books of the
corporation. It is the delivery of the certificate, coupled with the endorsement by the owner or his
duly authorized representative that is the operative act of transfer of shares from the original
owner to the transferee. The delivery contemplated in Section 63 pertains to the delivery of the
certificate of shares by the transferor to the transferee, that is from the original stockholder named
in the certificate to the person or entity the stockholder was transferring shares to, whether by
sale or some other valid form of absolute conveyance of ownership. Shares of stock may be
transferred by delivery to the transferee of the certificate properly indorsed. Title may be vested
in the transferee by the delivery of the duly indorsed certificate of stock.
It is thus clear that Ting Ping need not deliver or surrender the certificates to TCL before
the conveyance may be recorded in its books. To compel Ting Ping to deliver to the corporation
the certificates as a condition for the registration would amount to a restriction on the right of Ting
Ping. The only limitation imposed by Section 63 is when the corporation holds any unpaid claim
against the shares intended to be transferred.
(103)
Interport Resources Corporation, v. Securities Specialist, Inc.,
G.R. No. 154069, June 6, 2016. BERNALDO
3A CORPORATION LAW 2019-2020 pg. 236
(104)
Andaya v. Rural Bank of Cabadbaran, Inc.. G.R. No. 188769,
August 3, 2016.
Andaya vs. Rural Bank of Cabadbaran
GR No. 188769
Date: August 3, 2016
Digested by: Gillian Briones
---------------------------------------------------------------------------Petitioner: Joseph Omar O. Andaya
Respondent: Rural Bank of Cabadbaran
Ponente: Sereno, J.
Topic: Certificate of Stocks and Transfer of Shares
----------------------------------------------------------------------------Doctrine: A bona fide transferee, who is able to establish a clear and legal right to the registration
of the transfer, may resort to the remedy of mandamus to compel corporations that wrongfully or
unjustifiably refuse to record the transfer or to issue new certificates of stock.
----------------------------------------------------------------------------Facts:
This is a case wherein Petitioner Andaya bought from Concepcion Chute 2,200 shares of stock
in the Rural Bank of Cabadbaran for P220,000 evidenced by a notarized document denominated
as Sale of Shares of Stocks. Chute endorsed and delivered the certificates of stock to Andaya
and requested the bank to register the transfer in the bank’s stock and transfer book and to issue
new stock certificates in favor of the latter.
However, the bank’s corporate secretary Demosthenese Oraiz denied the request, stating that
under a stockholder’s Resolution, existing stockholders have a right of first refusal in the event
3A CORPORATION LAW 2019-2020 pg. 237
shares of other stockholders are offered for sale. Andaya opposed the denial and claimed that
the restriction did not appear in the bank’s Article of Incorporation, by-laws, or certificates of stock.
The bank eventually denied to register the transfer to Andaya due to conflict of interest. It claimed
that Andaya was then president and CEO of the Green Bank of Caraga, a competitor bank, and
that the purchase “could be the beginning of a hostile bid to take-over control’ of the bank. It also
maintained that stockholders have a right of first refusal.
Petitioner Andaya then instituted an action for mandamus and damages against the bank, its
corporate secretary, Oraiz and its legal counsel, Ricardo Gonzales to compel them to record the
transfer and to issue new certificates in his name.
The RTC dismissed the complant on the ground that Andaya had no standing to show that he
was authorized by Chute to make the transfer. Andaya filed a petition for review to the Supreme
Court on pure questions of law.
Issue: W/N Andaya, as a transferee of shares of stock, may initiatae an action for
mandamus compelling the Rural Bank Cabdbaran to record the transfer of shares in is
stock and transfer book, as well as issue new stock certificates in his name, YES
Ruling:
A bona fide transferee, who is able to establish a clear and legal right to the registration of the
transfer, may resort to the remedy of mandamus to compel corporations that wrongfully or
unjustifiably refuse to record the transfer or to issue new certificates of stock.
Andaya has been able to establish that he is a bona fide transferee of Chute’ shares of stock. He
presented to the RTC the notarized Sale of Shares of Stocks, a Documentary Stamp Tax
Declaration/Return, a Capital Gains Tax Return and stock certificates covering the subject shares
duly endorsed by Chute. There is no doubt that Andaya had the standing to initiate an action for
mandamus to compel the bank to record the transfer of shares in its stock and transfer book and
to issue new stock certificates in his name.
Moreover, the Section 98 of the Corporation Code, upon which the bank relies, applied only to
close corporations.
SECTION 98. Validity of restrictions on transfer of shares. — Restrictions on the right to
transfer shares must appear in the articles of incorporation and in the by-laws as well as
in the certificate of stock; otherwise, the same shall not be binding on any purchaser
thereof in good faith. Said restrictions shall not be more than onerous than granting the existing
stockholders or the corporation the option to purchase the shares of the transferring stockholder
with such reasonable terms, conditions or period stated therein. If upon the expiration of said
period, the existing stockholders or the corporation fails to exercise the option to purchase, the
transferring stockholder may sell his shares to any third person.
3A CORPORATION LAW 2019-2020 pg. 238
There must first be a factual determination that the bank is indeed a close corporation before the
abovementioned section can be applied in the instant case.
(105)
Villongco v. Yabut, G.R. Nos. 225022 & 225024, February 5,
2018 CARLOS
3A CORPORATION LAW 2019-2020 pg. 239
(106)
Lisam Enterprises v. Banco De Oro Unibank, G.R. No. 143264,
April 23, 2012
LISAM ENTERPRISES v. BANCO DE ORO
G.R. No. 143264, April 23, 2012
DOCTRINE:
Rule 10, Section 3. Amendments by leave of court. – Interestingly, Section 3, Rule 10 of the 1997
Rules of Civil Procedure amended the former rule in such manner that the phrase "or that the
cause of action or defense is substantially altered" was stricken-off and not retained in the new
rules. The clear import of such amendment in Section 3, Rule 10 is that under the new rules, "the
amendment may (now) substantially alter the cause of action or defense." This should only be
true, however, when despite a substantial change or alteration in the cause of action or defense,
the amendments sought to be made shall serve the higher interests of substantial justice, and
prevent delay and equally promote the laudable objective of the rules which is to secure a "just,
speedy and inexpensive disposition of every action and proceeding.
FACTS:
Petitioners filed a Complaint against respondents for Annulment of Mortgage with Prayer for
Temporary Restraining Order & Preliminary Injunction with Damages with the RTC of Legaspi
City. Petitioner Lolita A. Soriano alleged that she is a stockholder of petitioner Lisam Enterprises,
Inc. (LEI) and a member of its Board of Directors, designated as its Corporate Secretary.
Sometime in 1993, plaintiff LEI, in the course of its business operation, acquired by purchase a
parcel of residential land with improvement situated at Legaspi City, covered by Transfer
Certificate of Title No. 37866. On or about 28 March 1996, defendant Lilian S. Soriano and the
late Leandro A. Soriano, Jr., (Spouses Soriano), in their personal capacity and for their own use
and benefit, obtained a loan from defendant PCIB (now BDO) the amount of P20 Million.
As security for the payment of the aforesaid credit accommodation, Spouses Soriano, as
president and treasurer, respectively of plaintiff LEI, without authority and consent of the board of
said plaintiff and with the use of a falsified board resolution, executed a real estate mortgage over
3A CORPORATION LAW 2019-2020 pg. 240
the above-described property of plaintiff LEI in favor of defendant PCIB, and had the same
registered with the Office of the Registry of Deeds, Legaspi City.
Plaintiff Lolita A. Soriano as Corporate Secretary of plaintiff LEI, had never signed a board
resolution nor issued a Secretary's Certificate to the effect that a resolution was passed and
approved by plaintiff LEI, neither did she appear personally before a notary public to acknowledge
or attest to the issuance of a supposed board resolution issued by plaintiff LEI.
Defendant PCIB, knowing fully well that the property being mortgaged by the Spouses Soriano
belongs to plaintiff LEI, a corporation, negligently and miserably failed to exercise due care and
prudence required of a banking institution. It disregarded or failed to notice that the questioned
board resolution with a Secretary's Certificate was notarized only on 28 March 1996 or after the
lapse of more than four (4) months from its purported date of issue on 6 November 1995. That
these circumstances should have put defendant PCIB on notice of the flaws and infirmities of the
questioned board resolution.
That said irregular transactions, were discovered by plaintiff Lolita A. Soriano sometime in April
1999. That immediately upon discovery, said plaintiff, for herself and on behalf and for the benefit
of plaintiff LEI, made demands upon defendants Lilian S. Soriano and the Estate of Leandro A.
Soriano, Jr., to free subject property of plaintiff LEI from such mortgage lien, by paying in full their
personal indebtedness to defendant PCIB in the principal sum of P20 Million.
That plaintiffs, in order to seek complete relief from the unauthorized mortgage transaction
between the Spouses Soriano and defendant PCIB, were further compelled to institute this instant
case to seek the nullification of the real estate mortgage dated 28 March 1999. Consequently,
plaintiffs were forced to retain the services of a lawyer with whom they contracted to
pay P100,000.00 as and for attorney's fee;
That unfortunately, the plaintiffs learned that on 30 July 1999, defendant Sarte, in his capacity as
Notary Public of Daraga, Albay and upon application of defendant PCIB, issued a notice of
Auction/Foreclosure Sale of the property subject of the mortgage in question. After service of
summons on all defendants, the RTC, after hearing, went on to issue a writ of preliminary
injunction enjoining respondent PCIB from proceeding with the auction sale of the subject
property.
Respondents Lilian S. Soriano and the Estate of Leandro A. Soriano, Jr. filed an Answer dated
September 25, 1999, stating that the Spouses Lilian and Leandro Soriano, Jr. were duly
authorized by LEI to mortgage the subject property; that proceeds of the loan from respondent
PCIB were for the use and benefit of LEI; that all notarized documents submitted to PCIB by the
Spouses Soriano bore the genuine signature of Lolita Soriano.
On September 28, 1999, respondent PCIB filed a Motion to Dismiss the Complaint on grounds of
lack of legal capacity to sue, failure to state cause of action, and litis pendencia. Petitioners filed
an Opposition thereto, while PCIB's co-defendants filed a Motion to Suspend Action.
On November 11, 1999, the RTC issued the first assailed Resolution dismissing petitioners'
Complaint. Petitioners then filed a Motion for Reconsideration of said Resolution. While awaiting
resolution of the motion for reconsideration, petitioners also filed, on January 4, 2000, a Motion
to Admit Amended Complaint, amending paragraph 13 of the original complaint to read as follows:
“ xxx that plaintiff Lolita A. Soriano likewise made demands upon the Board of Directors of Lisam
Enterprises, Inc., to make legal steps to protect the interest of the corporation from said fraudulent
3A CORPORATION LAW 2019-2020 pg. 241
transaction, but unfortunately, until now, no such legal step was ever taken by the Board, hence,
this action for the benefit and in behalf of the corporation.”
On May 15, 2000, the trial court issued the questioned Order denying both the Motion for
Reconsideration and the Motion to Admit Amended Complaint.The trial court further ruled that the
Amended Complaint can no longer be admitted, because the same absolutely changed
petitioners' cause of action.
ISSUE:
Whether or not the trial court committed a reversible error when it denied the admission of the
petitioners’ amended complaint, after the order of dismissal was issued but before its finality?
HELD:
Yes. As enunciated in Valenzuela v. CA, even if the amendment substantially alters the cause of
action or defense, such amendment could still be allowed when it is sought to serve the higher
interest of substantial justice, prevent delay, and secure a just, speedy and inexpensive
disposition of actions and proceedings. The courts should be liberal in allowing amendments to
pleadings to avoid a multiplicity of suits and in order that the real controversies between the parties
are presented, their rights determined, and the case decided on the merits without unnecessary
delay.
Amendments are generally favored, it would have been more fitting for the trial court to extend
such liberality towards petitioners by admitting the amended complaint which was filed before the
order dismissing the original complaint became final and executory. It is quite apparent that since
trial proper had not yet even begun, allowing the amendment would not have caused any
delay. Hence, the Court overrules the trial court's denial of the motion to admit the amended
complaint, and orders the admission of the same.
With the amendment stating that plaintiff Lolita A. Soriano likewise made demands upon the
Board of Directors of Lisam Enterprises, Inc., to make legal steps to protect the interest of the
corporation from said fraudulent transaction, but unfortunately, until now, no such legal step was
ever taken by the Board, hence, this action for the benefit and in behalf of the corporation, does
the amended complaint now sufficiently state a cause of action? In Hi-Yield Realty, Incorporated
v. Court of Appeals, the Court enumerated the requisites for filing a derivative suit, as follows:
(a) the party bringing the suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material; (b) he has tried to exhaust intracorporate remedies, i.e., has made a demand on the board of directors for the appropriate relief
but the latter has failed or refused to heed his plea; and (c) the cause of action actually devolves
on the corporation, the wrongdoing or harm having been, or being caused to the corporation and
not to the particular stockholder bringing the suit.
A reading of the amended complaint will reveal that all the foregoing requisites had been alleged
therein. Hence, the amended complaint remedied the defect in the original complaint and now
sufficiently states a cause of action. The Resolution of the RTC of Legaspi City denying
petitioners’ Motion for Reconsideration and Motion to Admit Amended Complaint, are
hereby REVERSED and SET ASIDE. It is hereby DIRECTED to ADMIT the Amended
Complaint.
3A CORPORATION LAW 2019-2020 pg. 242
(107)
Legaspi Towers 300, Inc. v. Amelia P. Muer, G.R. No. 170783,
June 18, 2012
Petitioner: LEGASPI TOWERS 300, INC., LILIA MARQUINEZ PALANCA, ROSANNA D. IMAI,
GLORIADOMINGO and RAY VINCENT, Petitioners, vs.
Respondent: AMELIA P. MUER, SAMUEL M. TANCHOCO, ROMEO TANKIANG, RUDEL
PANGANIBAN,DOLORES AGBAYANI, ARLENEDAL A. YASUMA, GODOFREDO M.
CAGUIOA and EDGARDO M.SALANDANAN, Respondents.
FACTS: Pursuant to the by-laws of Legaspi Towers 300, Inc., petitioners, the incumbent Board
of Directors, set the annual meeting of the members of the condominium corporation and the
election of the new Board of Directors at the lobby of Legaspi Towers 300, Inc. The Committee
on Elections of Legaspi Towers 300, Inc., however, found most of the proxy votes, at its face
value, irregular, thus, questionable; and for lack of time to authenticate the same, petitioners
adjourned the meeting for lack of quorum. However, the group of respondents challenged the
adjournment of the meeting. Despite petitioners’ insistence that no quorum was obtained during
the annual meeting held on April 2, 2004, respondents pushed through with the scheduled
election and were elected as the new Board of Directors and officers of Legaspi Towers 300,
Inc. and subsequently submitted a General Information Sheet to the Securities and Exchange
Commission (SEC). On plaintiffs’ motion to admit amended complaint to include Legaspi
Towers 300, Inc. as plaintiff),the RTC ruled denying the motion for being improper. Then,
petitioners filed with the Court of Appeals and held that Judge Antonio I. De Castro of the
Regional Trial Court (RTC) of Manila, did not commit grave abuse of discretion in issuing the
Orders denying petitioners’ Motion to Admit Second Amended Complaint and that petitioners
the justified the inclusion of Legaspi Towers 300, Inc. as plaintiff by invoking the doctrine of
derivative suit. Petitioners’ motion for reconsideration was denied by the Court of Appeals
thereafter. Hence this petition.
ISSUE: Whether or not Derivative Suit proper in this case?
RULING: The Supreme Court DENIED the petition and AFFIRMED the Decision of the Court of
Appeals. Derivative Suit is not applicable. Since it is the corporation that is the real party-ininterest in a derivative suit, then 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
3A CORPORATION LAW 2019-2020 pg. 243
derivative suit. The requisites for a derivative suit are as follows:
5.
a) the party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material;
6.
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to heed his plea;
and
7.
c) the cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular stockholder bringing
the suit.
As stated by the Court of Appeals, petitioners’ complaint seek to nullify the said election, and to
protect and enforce their individual right to vote. The cause of action devolves on petitioners, not
the condominium corporation, which did not have the right to vote. Hence, the complaint for
nullification of the election is a direct action by petitioners, who were the members of the Board
of Directors of the corporation before the election, against respondents, who are the newlyelected Board of Directors. Under the circumstances, the derivative suit filed by petitioners in
behalf of the condominium corporation in the Second Amended Complaint is improper.
(108)
Ching v. Subic Bay Golf and Country Club, Inc., G.R. No.
174353, September 10, 2014
Petitioner: Nestor Ching and Andrew Wellington
Respondent: Subic Bay Country Club
Facts:
On June 27, 1996, Securities and Exchange Commission (SEC) approved amendments to SBGCCI Articles
of Incorporation which the petitioners alleged made their shares non-proprietary. Petitioners alleged that
this change was made without the appropriate disclosure of SBGCCI to its shareholders. According to
petitioners, this is in fraud of the stockholders who only discovered the amendment when they filed a case
for injunction to restrain the corporation from suspending their rights to use all the facilities of the club.
On February 26, 2003, petitioners filed a Complaint with the RTC of Olongapo City on behalf of the
members of Subic Bay Golf and Country Club, Inc. (SBGCCI) against the said country club and its Board
of Directors and officers under the provisions of Presidential Decree No. 902-A in relation to Section 5.2
of the Securities Regulation Code.
Respondents claimed by way of defense that petitioners failed to show that it was authorized by SBGSI to
file the Complaint on the said corporation’s behalf and that they failed to comply with the requisites for
filing a derivative suit. Thus, they prayed for the dismissal of the Complaint. The RTC and the CA dismissed
the complaint because petitioners Ching and Wellington were not authorized by their co-petitioner Subic
Bay Golfers and Shareholders, Inc. to file the Complaint, and therefore had no personality to file the same
on behalf of the said shareholders’ corporation.
Issue:
3A CORPORATION LAW 2019-2020 pg. 244
Whether the petitioners as minority stockholders had the legal standing to file a derivative suit
against their corporation’s officers and board of directors.
Held:
YES
Ruling:
It is settled that a stockholder’s right to institute a derivative suit is not based on any express provision of
the Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said
laws make corporate directors or officers liable for damages suffered by the corporation and its stockholders
for violation of their fiduciary duties.
As minority stockholders, petitioners do not have any statutory right to override the business judgments of
SBGCCI’s officers and Board of Directors on the ground of the latter’s alleged lack of qualification to
manage a golf course. Petitioners’ only possible cause of action as minority stockholders against the actions
of the Board of Directors is the common law right to file a derivative suit. The legal standing of minority
stockholders to bring derivative suits is not a statutory right, there being no provision in the Corporation
Code or related statutes authorizing the same, but is instead a product of jurisprudence based on equity.
However, a derivative suit cannot prosper without first complying with the legal requisites for its institution.
3A CORPORATION LAW 2019-2020 pg. 245
(109)
Florete, Jr. v. Florete, GR. No. 174909, January 20, 2016
3A CORPORATION LAW 2019-2020 pg. 246
(110)
Bangko Sentral ng Pilipinas v. Campa, Jr., 787 SCRA 476
(2016) DE GUZMAN
3A CORPORATION LAW 2019-2020 pg. 247
(111)
Forest Hills Golf and Country Club, Inv. v. Fil-estate Properties,
797 SCRA 655 [2016]
FOREST HILLS GOLF & COUNTRY CLUB vs VERTEX SALES AND TRADING, INC.
GR No. 202205
Date: March 6, 2013
Digested by: Noel Melgar A. Galang
----------------------------------------------------------------------------------Petitioner: Forest Hills Golf and Country Club
Respondent: Vertex Sales and Trading, Inc.
Topic: Derivative actions and other actions of Stockholders
----------------------------------------------------------------------------------Facts: Petitioner Forest Hills Golf & Country Club operates and maintains a golf and country club
facility in Antipolo City, created as a result of a joint venture agreement between Kings Properties
Corporation (Kings) and Fil-Estate Golf and Development, Inc. (FEGDI). Accordingly, Kings and
FEGDI owned the shares of stock of Forest Hills, holding 40% and 60% of the shares,
respectively.
FEGDI sold to 1 Class "C" common share of Forest. Prior to the full payment of the purchase
price, RSACC transferred its interests over FEGDI's Class "C" common share to respondent
Vertex. RSACC advised FEGDI of the transfer and FEGDI, in turn, requested Forest Hills to
recognize Vertex as a shareholder. Forest Hills acceded to the request, and Vertex was able to
enjoy membership privileges in the golf and country club.
Despite the sale of share to Vertex, the share remained in the name of FEGDI, prompting Vertex
to demand for the issuance of a stock certificate in its name.
As its demand went unheeded, Vertex filed a complaint for rescission with damages against
defendants Forest Hills, FEGDI, and Fil-Estate Land. The RTC dismissed the complaint, which
was reversed by the CA.
----------------------------------------------------------------------------------Issue: WON Forest Hills was properly impleaded in the case
----------------------------------------------------------------------------------ÏRuling: No. Forest hills was not a party to the sale even though the subject of the sale was its
share of stock. The Corporation whose shares of stock are the subject of a transfer transaction
need not be a party to the transaction, as may be inferred from the terms of Section 63 of the
Corporation Code. However, to bind the corporation as well as third parties, it is necessary that
the transfer is recorded in the books for the corporation.
3A CORPORATION LAW 2019-2020 pg. 248
(112)
Agdao Landless Residents Association, Inc. v. Maramion, G.R.
Nos. 188642 & 189425, October 17, 2016 GUTTIEREZ
3A CORPORATION LAW 2019-2020 pg. 249
(113)
Ang-Abaya v. Ang, G.R. No. 178511, December 4, 2008;
Ang- Abaya vs Ang
GR No. 178511
Date: December 4, 2008
Digested by: Therese Javier
________
Petitioner: Ma. Belen Flordeliza Ang-Abaya
Respondent: Eduardo Ang
Ponente: J. Ynares-Santiago
Topic: Right to inspect books and records
_________
Doctrine: The stockholder's right to inspect corporate books is not without limitations. While the
right of inspection was enlarged under the Corporation Code as opposed to the old Corporation
Law (Act No. 1459, as amended), It is now expressly required as a condition for such examination
that the one requesting it must not have been guilty of using improperly any information secured
through a prior examination, or that the person asking for such examination must be acting in
good faith and for a legitimate purpose in making his demand
_________
Facts: Vibelle Manufacturing Corporation (VMC) and Genato Investments, Inc. (Genato) are
family-owned corporations, where petitioners and private respondent Eduardo Ang are
shareholders, officers and members of the board of directors. Prior to the instant controversy,
VMC, Genato, and Oriano Manufacturing Corp. filed a Civil case against Eduardo, together with
Michael, and some other persons for allegedly conniving to fraudulently wrest
control/management of the corporations. During the pendency of the Civil Case, Eduardo sought
permission to inspect the corporate books of VMC and Genato on account of petitioners alleged
failure to update him on the financial and business activities of these family corporations.
Petitioners denied the request claiming that Eduardo would use the information obtained from
said inspection for purposes inimical to the corporations’ interests. Because of petitioners’ refusal
to grant Eduardo’s request, the latter filed a complaint for violating his right to inspect under
Sec.74 of the Corporation Code. Petitioners denied violating Sec. 74 and reiterated the allegations
contained in their complaint in Civil Case. They alleged that Eduardo consistently pressured
petitioner Flordeliza, his daughter, to improperly transfer ownership of the corporations’ V.A.G
building to him. When the proposed transfer of the V.A.G. building did not materialize, petitioners
claim that Eduardo instituted an action to compel donation of said property to him. Moreover, they
claim that Eduardo attempted to forcibly evict petitioner Jason from his office at VMC so he can
occupy the same; that Eduardo and his cohorts constantly created trouble by intervening in the
daily operations of the corporations without the knowledge or consent of the board of directors.
Issue: WON petitioners violated defendant’s right to inspect books and records
3A CORPORATION LAW 2019-2020 pg. 250
Held: In Gokongwei, Jr. v. Securities and Exchange Commission, 29 this Court explained the
rationale behind a stockholder's right to inspect corporate books, to wit:
“The stockholder's right of inspection of the corporation's books and records is based
upon their ownership of the assets and property of the corporation. It is, therefore, an
incident of ownership of the corporate property, whether this ownership or interest be
termed an equitable ownership, a beneficial ownership, or a quasi-ownership. This right
is predicated upon the necessity of self-protection. It is generally held by majority of the
courts that where the right is granted by statute to the stockholder, it is given to him as
such and must be exercised by him with respect to his interest as a stockholder and for
some purpose germane thereto or in the interest of the corporation. In other words, the
inspection has to be germane to the petitioner's interest as a stockholder, and has to be
proper and lawful in character and not inimical to the interest of the corporation.”
In Republic v. Sandiganbayan, the Court declared that the right to inspect and/or examine the
records of a corporation under Section 74 of the Corporation Code is circumscribed by the express
limitation contained in the succeeding proviso, which states that:
[I]t shall be a defense to any action under this section that the person demanding to
examine and copy excerpts from the corporation's records and minutes has improperly
used any information secured through any prior examination of the records or minutes of
such corporation or of any other corporation, or was not acting in good faith or for a
legitimate purpose in making his demand.
Thus, contrary to Eduardo's insistence, the stockholder's right to inspect corporate books is not
without limitations. While the right of inspection was enlarged under the Corporation Code as
opposed to the old Corporation Law (Act No. 1459, as amended), It is now expressly required as
a condition for such examination that the one requesting it must not have been guilty of using
improperly any information secured through a prior examination, or that the person asking for
such examination must be acting in good faith and for a legitimate purpose in making his demand.
In order therefore for the penal provision under Section 144 of the Corporation Code to apply in
a case of violation of a stockholder or member's right to inspect the corporate books/records as
provided for under Section 74 of the Corporation Code, the following elements must be present:
First. A director, trustee, stockholder or member has made a prior demand in writing
for a copy of excerpts from the corporation's records or minutes;
Second. Any officer or agent of the concerned corporation shall refuse to allow the
said director, trustee, stockholder or member of the corporation to examine and
copy said excerpts;
Third. If such refusal is made pursuant to a resolution or order of the board of directors
or trustees, the liability under this section for such action shall be imposed upon
the directors or trustees who voted for such refusal; and,
Fourth. Where the officer or agent of the corporation sets up the defense that the
person demanding to examine and copy excerpts from the corporation's records
and minutes has improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other
3A CORPORATION LAW 2019-2020 pg. 251
corporation, or was not acting in good faith or for a legitimate purpose in making
his demand, the contrary must be shown or proved.
Thus, in a criminal complaint for violation of Section 74 of the Corporation Code, the defense of
improper use or motive is in the nature of a justifying circumstance that would exonerate those
who raise and are able to prove the same. Accordingly, where the corporation denies inspection
on the ground of improper motive or purpose, the burden of proof is taken from the shareholder
and placed on the corporation. This being the case, it would be improper for the prosecutor, during
preliminary investigation, to refuse or fail to address the defense of improper use or motive, given
its express statutory recognition. In the past the Supreme Court have declared that if justifying
circumstances are claimed as a defense, they should have at least been raised during preliminary
investigation; which settles the view that the consideration and determination of justifying
circumstances as a defense is a relevant subject of preliminary investigation.
3A CORPORATION LAW 2019-2020 pg. 252
(114)
Dee Ping Wee v. Lee Hiong Wee, 629 SCRA 145 (2010)
G.R. No. 169345
Date: August 25, 2010
Digested by: Yui Recinto
Petitioners: Dee Ping Wee, Araceli Wee and Marina U. Tan
Respondents: Lee Hiong Wee and Rosalind Wee
Ponente: Justice Leonardo-De Castro
Topic: Right to inspect books and records
Doctrine: In the absence of evidence, a corporation cannot unilaterally deny a stockholder from
exercising his statutory right of inspection based on an unsupported and naked assertion that
private respondent's motive is improper or merely for curiosity or on the ground that the
stockholder is not in friendly terms with the corporation's officers.
Facts:
Petitioners were the majority stockholders of the following: (1) Marcel Trading Corp; (2) Marine
Resources Development Corp and (3) First Marcel Properties, Inc. Respondents through their
counsel, sent a letter to Dee Ping Wee, demanding the inspection of the corporate records of the
above corporations. Petitioner Wee through its counsel replied with condition that the respondents
will furnished complete and true financial reports of Rico Philippines, its Balance Sheet, Income
Statement and Cash Flow Statements for year 2003, Detailed Statement on how he disbursed
the deposits he withdrew from the PBCOM, METROBANK and other depositary banks, pay
Marcel Trading Corporation, the cash advances he obtained in 2003 and Account for the export
sales made by Hiong of all RPIC’s finished products.
Respondents filed before the RTC of QC three separate Complaints against Petitioners for the
inspection of the corporate books of the above-mentioned corporations. Respondents claimed
that petitioners violated their rights to gain access to and inspect the corporate books, records
and financial statements of the above corporations, which rights are guaranteed by Sections 74
and 75 of the Corporation Code. Petitioners countered that, the obvious purpose of respondents
in demanding inspection of the corporate records was, allegedly, to fish for evidence that they
could use against petitioners to regain management control of the aforementioned corporations
or to find technical defects in the corporate transactions so that they can file harassment suits
against petitioners.
3A CORPORATION LAW 2019-2020 pg. 253
RTC ruled in favor of respondents directed petitioners to allow the former to exercise their right to
inspect corporate books and records during business hours of any working day subject to
conditions.
On August 23, 2004, petitioners filed before the CA a petition for certiorari under Rule 65 alleging
that there was no plain, speedy and adequate remedy in the ordinary course of law and that a
decision rendered in an intra-corporate controversy was immediately executory. In CA-GR SP
No. 85878, the Court of Appeals ruled in favor of the respondent and dismissed the petition. In
SP No. 85879 and 85870, the Court of Appeals ruled in favor of petitioners ratiocination that
respondents failed to allege their motive, purpose, and reason for inspection. Meanwhile, after
the RTC decision, respondents filed a motion for execution on 3 CA resolutions but only one which
dismisses the petition was granted. Petitioners filed an omnibus motion to dismiss but was denied
by the RTC.
Issue: Whether the respondents have the right to inspect corporate records.
Ruling:
Yes.
The instant petition is devoid of merit.
The burden of proof lies with the corporation who refuses to grant to the stockholder the right to
inspect corporate records.
Citing the Case of Republic vs. Sandiganbayan, “Being a stockholder beyond doubt, there is
therefore no reason why [Cojuangco] may not exercise his statutory right of inspection in
accordance with Sec. 74 of the Corporation Code, the only express limitation being that the right
of inspection should be exercised at reasonable hours on business days; 2) the person
demanding to examine and copy excerpts from the corporation's records and minutes has not
improperly used any information secured through any previous examination of the records of such
corporation; and 3) the demand is made in good faith or for a legitimate purpose.
As such, and in the absence of evidence, the PCGG cannot unilaterally deny a stockholder from
exercising his statutory right of inspection based on an unsupported and naked assertion that
private respondent's motive is improper or merely for curiosity or on the ground that the
stockholder is not in friendly terms with the corporation's officers.”
3A CORPORATION LAW 2019-2020 pg. 254
(115)
Sy Tiong Shion v. Sy Chim, 582 SCRA 517 (2009)
(116)Puno v. Puno Enterprises, Inc. RELATO
3A CORPORATION LAW 2019-2020 pg. 255
(117)
Loreli Lim Po v. DOJ, G.R. No. 195198, February 11, 2013
Loreli Lim Po v. DOJ,
G.R. No. 195198,
February 11, 2013
Digested by: James San Diego
Petitioner: LORELI LIM PO
Respondent: DEPARTMENT OF JUSTICE and JASPER T. TAN
Ponente: REYES, J.
Topic: Right of stockholder to inspect corporate books
FACTS: Herein private respondent, Jasper T. Tan (Tan), is a stockholder of Coastal Highpoint
Ventures, Inc. (CHVI), a real estate development company. Antonio Ng Chiu1 (Chiu) is its
President. Tan claimed that Loreli Lim Po2 (Po) is Chiu’s personal accountant. Po asserted
otherwise and instead alleged that she is merely a consultant for CHVI.
Tan lamented that pertinent information relative to CHVIs operations were withheld from him. His
repeated requests for copies of financial statements and allowance to inspect corporate books
proved futile. Consequently, he filed before the Office of the City Prosecutor of Cebu a complaint
against Chiu and Po for violation of Section 74(2),3 in relation to Section 1444 of the Corporation
Code of the Philippines, the origin of the two consolidated petitions now before us.
ISSUE: Whether or not a stockholder may demand to inspect the corporate books of a
corporation?
3A CORPORATION LAW 2019-2020 pg. 256
RULING: Yes.
Here, the petitioner was criminally charged for violating Section 74 of the Corporation Code in
relation to Section 144 of the same Code. The requisites in order for the penal provision under
Section 144 of the Corporation Code to apply in a case of violation of a stockholder or members
right to inspect the corporate books/records as provided for under Section 74 of the Corporation
Code, are enumerated in the recent case of Sy Tiong Shiou, et al. v[.] Sy Chim, et al., citing AngBaya, et al. v[.] Ang:cralawlibrary
First. A director, trustee, stockholder or member has made a prior demand in writing for a copy of
excerpts from the corporations records or minutes;
Second. Any officer or agent of the concerned corporation shall refuse to allow the said director,
trustee, stockholder or member of the corporation to examine and copy said excerpts;?r?l??
xxx
The Court has reviewed the records and the pleadings of the parties and found that the requisites
mentioned above are present. It is noted that private respondent on several occasions had
expressed in writing his request to inspect CHVIs corporate books and records but his written
requests were turned down on the pretext that the petitioner needed more time to prepare the
documents requested by the private respondent. The initial written demand was made on October
10, 2007 but it was only on April 24, 2008 that the audit team sent by the private respondent was
able to inspect some of the documents of CHVI. However, it appears that the inspection was
ineffective since the petitioner and Loreli Lim Po refused to present the other documents
demanded by the inspection team. PO even prevented the team from copying the corporate books
and records.
Petitioner repeatedly insists that private respondents representatives were not refused inspection
of the corporate book or records and the latter were even allowed to make copies of the
documents during the meeting on April 24, 2008. These are defenses which could be properly
threshed out in a full-blown trial. x x x [T]he purpose of determining probable cause is to ascertain
that the person accused of the crime is probably guilty thereof and should be held for trial. A
finding of probable cause needs only to rest on evidence showing that more likely than not[,] a
crime has been committed and was committed by the suspect. Probable cause need not be based
on clear and convincing evidence of guilt, neither on evidence establishing guilt beyond
reasonable doubt, and definitely, not on evidence establishing absolute certainty of guilt.
3A CORPORATION LAW 2019-2020 pg. 257
(118)Yuico v. Quiambao
G.R. No. 180416
Date: June 2, 2014
Digested by: Ray Mark Vallesteros
----------------------------------------------------------------------------------Petitioner: ADERITO Z. YUJUICO and BONIFACIO C. SUMBILLA
Respondent: CEZAR T. QUIAMBAO and ERIC C. PILAPIL
Ponente: PEREZ, J.
Topic: Rights to Inspect Books and Records
----------------------------------------------------------------------------------Doctrine: The records of all business transactions of the corporation and the minutes of any
meetings shall be open to inspection by any director, trustee, stockholder or member of the
corporation at reasonable hours on business days and he may demand, in writing, for a copy of
excerpts from said records or minutes, at his expense.
----------------------------------------------------------------------------------Facts: On 1 March 2004, during the annual stockholder's meeting of STRADEC, petitioner Aderito
Z. Yujuico (Yujuico) replaced respondent Cezar T. Quiambao (Quiambao) as president and
chairman of the company. Yujuico-as newly elected president and chairman of STRADECdemanded Quiambao for the turnover of the corporate records of the company, particularly the
accounting files, ledgers, journals and other records of the corporation's business. Quiambao
refused.
Quiambao and Pilapil refused to turnover the stock and transfer book, Blando again acceded to
have the book deposited in a safety deposit box, this time, with the Export and Industry Bank in
San Miguel A venue, Pasig City.
Petitioners theorize that the refusal by the respondents and Casanova to turnover STRADEC's
corporate records and stock and transfer book violates their right, as stockholders, directors and
officers of the corporation, to inspect such records and book under Section 7 4 of the Corporation
Code. For such violation, petitioners conclude, respondents may be held criminally liable pursuant
to Section 144 of the Corporation Code.
----------------------------------------------------------------------------------Issue: Whether or not petitioners properly invoked the right to inspect the records
3A CORPORATION LAW 2019-2020 pg. 258
Ruling: No. Petitioners are not actually invoking their right to inspect the records and the stock
and transfer book of STRADEC under the second and fourth paragraphs of Section 74. What they
seek to enforce is the proprietary right of STRADEC to be in possession of such records and
book. Such right, though certainly legally enforceable by other means, cannot be enforced by a
criminal prosecution based on a violation of the second and fourth paragraphs of Section 74. That
is simply not the situation contemplated by the second and fourth paragraphs of Section 74 of the
Corporation Code. STRADEC is actually merely trying to recover custody of the withheld records.
(119)
Chua v. People of the Philippines, G.R. No. 216146, August
24, 2016
Chua vs People of the Philippines
GR No. 216146
August 24, 2016
Digested by: Ivan Earl Zapanta
----------------------------------------------------------------------------------Petitioner: Alfredo Chua, Tomas Chua, Mercedes Diaz
Respondent: People of the Philippines
Ponente: Reyes, J.
Topic: Rights to Inspect Books and Records
----------------------------------------------------------------------------------Doctrine: Rights to Inspect Books and Records by a stockholder is still valid within three years
after the dissolution of the Corporation.
----------------------------------------------------------------------------------Facts:
·
Joselyn Chua was a stockholder of Chua Tee Corporation of Manila (CTCM).
· Alfredo was the president and chairman of the board, Tomas was the corporate secretary
and also a member of the board, and Mercedes was the accountant/bookkeeper tasked with
the physical custody of the corporate records.
3A CORPORATION LAW 2019-2020 pg. 259
·
August 24, 2000: Joselyn invoked her right as stockholder, pursuant to Sec. 74 of the
Corporation Code, to inspect the records of the books of the business transactions of the
CTCM. However, she was denied of such right to inspect.
· Upon repeated demands coupled with a letter of request, the books of accounts were not
formally presented to her and there was no list of schedules which would allow them to pursue
their inspection.
·
MeTC: Convicted the petitioners with a penalty of 30 days of imprisonment for violating
Sec. 74 of the Corporation Code.
·
RTC: Upheld the decision of the MeTC.
·
CA: Dismissed the petition. Also denied the Motion for Reconsideration.
·
Hence, this petition.
----------------------------------------------------------------------------------Issue: Whether or not the petitioners violated Sec. 74 of the Corporation Code?
Ruling: YES. The Court affirms the conviction but directs the payment of fine instead of
imprisonment.
Despite the expiration of CTCM’s corporate term in 1999, its duties as corporate officers still
pertained to the petitioners when Joselyn’s complaint was filed in 2000.
As held in Yu, et. al, vs Yukayguan, “the corporation continues to be a body corporate for three
years after its dissolution for purposes of prosecuting and defending suits by and against it and
for enabling it to settle and close its affairs, culminating in the disposition and distribution of its
remaining assets…”
Hence, petitioners are still liable to the complaint of Joselyn.
However, the SC finds it more just to impose a fine of P10,000 per person rather than
imprisonment of 30 days.
3A CORPORATION LAW 2019-2020 pg. 260
(120)
Philippine Associated Smelting and Refining Corp. v. Lim, 804
SCRA 600 [2016]
Philippine Associated Smelting and Refining Corp. v. Lim, 804 SCRA 600 [2016]
G.R. No. 172948
October 05, 2016
Digested by: Abrhiem Nico Angeles
----------------------------------------------------------------------------------Petitioner: PHILIPPINE ASSOCIATED SMELTING AND REFINING CORPORATION
Respondent: PABLITO O. LIM, MANUEL A. AGCAOILI, AND CONSUELO M. PADILLA
Ponente: LEONEN, J.
Topic: Rights to Inspect Books and Records
----------------------------------------------------------------------------------Doctrine: Good faith and a legitimate purpose are presumed. It is the duty of the corporation to
allege and prove with sufficient evidence the facts that give rise to a claim of bad faith as to the
existence of an illegitimate purpose.
The confidentiality of business transactions is not a magical incantation that will defeat the request
of a stockholder to inspect the records. Although it is true that the business is entitled to the
protection of its trade secrets and other intellectual property rights, facts must be pleaded to
convince the court that a specific stockholder's request for inspection, under certain conditions,
would violate the corporation's own legal right.
----------------------------------------------------------------------------------Facts:
Philippine Associated Smelting and Refining Corporation (hereafter PASAR) is a corporation duly
organized and existing under the laws of the Philippines and is engaged in copper smelting and
refining. On the other hand, Pablito Lim, Manuel Agcaoili and Consuelo Padilla (collectively
referred to as petitioners) were former senior officers and presently shareholders of PASAR
holding 500 shares each.
3A CORPORATION LAW 2019-2020 pg. 261
An Amended Petition for Injunction and Damages with prayer for Preliminary Injunction and/or
Temporary Restraining Order, dated February 4, 2004 was filed by PASAR seeking to restrain
petitioners from demanding inspection of its confidential and inexistent records.
RTC granted PASAR's prayer for a writ of preliminary injunction. The RTC held that the right to
inspect book should not be denied to the stockholders, however, the same may be restricted. The
right to inspect should be limited to the ordinary records as identified and classified by PASAR.
Aggrieved, Lim, Agcaoili, and Padilla filed before the Court of Appeals a Petition for Certiorari8
questioning the propriety of the writ of preliminary injunction. The Court of Appeals held that there
was no basis to issue an injunctive writ.
Petitioner argues that the right of a stockholder to inspect corporate books and records is limited
in that any demand must be made in good faith or for a legitimate purpose. Respondents,
however, have no legitimate purpose in this case. If respondents gain access to petitioner's
confidential records, petitioner's trade secrets and other confidential information will be used by
its former officers to give undue commercial advantage to third parties.
----------------------------------------------------------------------------------Issue: Whether or not the injunction properly lies to prevent respondents from invoking their right
to inspect.
Ruling: NO.
The clear provision in Section 74 of the Corporation Code is sufficient authority to conclude that
an action for injunction and, consequently, a writ of preliminary injunction filed by a corporation is
generally unavailable to prevent stockholders from exercising their right to inspection. Specifically,
stockholders cannot be prevented from gaining access to the (a) records of all business
transactions of the corporation; and (b) minutes of any meeting of stockholders or the board of
directors, including their various committees and subcommittees.
The grant of legal personality to a corporation is conditioned on its compliance with certain
obligations. Among these are its fiduciary responsibilities to its stockholders. Providing
stockholders with access to information is a fundamental basis for their intelligent participation in
the governance of the corporation as a business organization that they partially own. The law is
agnostic with respect to the amount of shares required. Generally, each individual stockholder
should be given reasonable access so that he or she can assess or share his or her assessment
of the management of the corporation with other stockholders. The separate legal personality of
a corporation is not so absolutely separate that it divorces itself from its responsibility to its
constituent owners.
Good faith and a legitimate purpose are presumed. It is the duty of the corporation to allege and
prove with sufficient evidence the facts that give rise to a claim of bad faith as to the existence of
an illegitimate purpose.
3A CORPORATION LAW 2019-2020 pg. 262
The confidentiality of business transactions is not a magical incantation that will defeat the request
of a stockholder to inspect the records. Although it is true that the business is entitled to the
protection of its trade secrets and other intellectual property rights, facts must be pleaded to
convince the court that a specific stockholder's request for inspection, under certain conditions,
would violate the corporation's own legal right.
Furthermore, the discomfort caused to the management of a corporation when a request for
inspection is claimed is part of the regular matters that a business wanting to ensure good
governance must endure. The range between discomfort and vexation is a broad one, which may
tend to be located in the personalities of those involved.
Certainly, by themselves, these are not sufficient factual basis to conclude bad faith on the part
of the requesting stockholder. Courts must be convinced that the scope or manner of the request
and the conditions under which it was made are so frivolous that the huge cost to the business
will, in equity, be unfair to the other stockholders. There is no iota of evidence that this happened
here. WHEREFORE, the Petition is DENIED.
3A CORPORATION LAW 2019-2020 pg. 263
(121)
Roque v. People of the Philippines, G.R. No. 211108, June 7,
2017.
—————————————————————————
Roque v. People of the Philippines, G.R. No. 211108,
June 7, 2017
Digested by: Sarah Bagis
Petitioner: ALEJANDRO D.C. ROQUE
Resopndent: PEOPLE OF THE PHILIPPINES
Ponente: Tijam, J
Topic: Rights of shareholders - Rights to Inspect Books and Records
——————————————————————————
Doctrine: Section 74 of the Corporation Code provides for the liability for damages of any
officer or agent of the corporation for refusing to allow any director, trustee, stockholder or member
of the corporation to examine and copy excerpts from its records or minutes. Section 144 of the
same Code further provides for other applicable penalties in case of violation of any provision of
the Corporation Code.
——————————————————————————
FACTS
Barangay Mulawin Tricycle Operators and Drivers Association, Inc. (BMTODA) is a
corporation duly registered with the Securities and Exchange Commission (SEC).
Ongjoco, a member of BMTODA, learned that some funds were missing. In a letter,
Ongjoco requested copies of the Association's documents pursuant to his right to examine
records under Section 74 of the Corporation Code. However, Singson, the Secretary of BMTODA,
denied his request.
Ongjoco also learned that the incumbent officers were holding office for 3 years, in
violation of the 1-year period provided for in BMTODA's by-laws. He then requested from Roque,
the President of BMTODA, a copy of the list of its members with the corresponding franchise
numbers of their respective tricycle fees and the franchise fees paid by each member, but Roque
denied the request.
3A CORPORATION LAW 2019-2020 pg. 264
Ongjoco filed an Affidavit-Complaint against Roque and Singson for violation of Section
74 in relation to Section 144 of the Corporation Code because of their refusal to furnish him copies
of records pertaining to BMTODA.
The Office of the City Prosecutor Bulacan found probable cause to indict Roque and
Singson. An Information was filed against them for unlawfully and feloniously failing and
neglecting to keep official records of all business transactions, minutes of all meetings or
stockholders or members, or of the board of directors or trustees and refusing to allow
stockholders, members, directors or trustees to examine and copy excerpt from the records
or minutes of the association after demand in writing.
After the prosecution rested its case, Roque and Singson filed a Motion for Leave of Court
to File Demurrer to Evidence with Motion to Dismiss by way of Demurrer to Evidence.
RTC granted the motion. It ruled that said association failed to prove its existence as a
corporation. Hence, a violation under the Corporation Code cannot be made applicable against
its officers.
CA reversed and set aside the RTC order and remanded to the court a quo. It ruled that
BMTODA is a duly registered corporation. That a Petition to Lift Order of Revocation and the SEC
Order Lifting the Revocation were presented in evidence;
Roque filed the present Petition. He that when the letters were received by them,
BMTODA's registration was already revoked. Hence, BMTODA ceased to exist as a corporation.
ISSUE
WON there is want of evidence to prove that BMTODA is a corporation duly established
and organized under the Corporation Code; thus, petitioner cannot be prosecuted under the penal
provisions of the said code.
HELD
NO. Section 74 of the Corporation Code provides for the liability for damages of any officer
or agent of the corporation for refusing to allow any director, trustee, stockholder or member of
the corporation to examine and copy excerpts from its records or minutes. Section 144 of the
same Code further provides for other applicable penalties in case of violation of any provision of
the Corporation Code.
Hence, to prove any violation under the aforementioned provisions, it is necessary that:
1. a director, trustee, stockholder or member has made a prior demand in writing for
a copy of excerpts from the corporations records or minutes;
2. any officer or agent of the concerned corporation shall refuse to allow the said
director, trustee, stockholder or member of the corporation to examine and copy
said excerpts;
3A CORPORATION LAW 2019-2020 pg. 265
3. if such refusal is made pursuant to a resolution or order of the board of directors
or trustees, the liability under this section for such action shall be imposed upon
the directors or trustees who voted for such refusal; and
4. where the officer or agent of the corporation sets up the defense that the person
demanding to examine and copy excerpts from the corporation's records and
minutes has improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in making
his demand, the contrary must be shown or proved.
Ongjoco, as a member of BMTODA, had a right to examine documents and records. To
recall, Ongjoco made a prior demand in writing (letter) for copy of pertinent records of BMTODA
from Roque and Singson dated December 13, 2003 and August 29, 2004 to Roque and Singson,
respectively. However, both denied his requests.
The registration of BMTODA as a corporation with the SEC was revoked on September
30, 2003 and was lifted on Aug 30, 2004. The letter-request was actually received by Singson
after the revocation was lifted on Sept 23, 2004.
In any case, the revocation of a Certificate of Registration does not automatically warrant
the extinction of the corporation itself. In the case of Clemente v. Court of Appeals, the Court
explained that the termination of the life of a juridical entity does not, by itself, cause the extinction
or diminution of the rights and liabilities of such entity nor those of its owners and creditors.
Ongjoco still had his right to examine pertinent documents and records relating to such
association.
3A CORPORATION LAW 2019-2020 pg. 266
(122)
Turner v. Lorenzo Shipping Corp., G.R. No. 157479, November
24, 2010, 636 SCRA 13
Philip and Elnora Turner v. Lorenzo Shipping Corp.
GR No. 157479
Date: Nov. 24, 2010
Digested by: Brawner, Yvette
----------------------------------------------------------------------------------Petitioner: Philip and Elnora Turner
Respondent: Lorenzo Shipping Corporation
Ponente: Justice Bersamin
Topic: Appraisal Right
----------------------------------------------------------------------------------Doctrine: The right of appraisal may be exercised when there is a
fundamental change in the charter or articles of incorporation
substantially prejudicing the rights of the stockholders. It does not
vest unless objectionable corporate action is taken. It serves the
purpose of enabling the dissenting stockholder to have his interests
purchased and to retire from the corporation.
----------------------------------------------------------------------------------Facts: Petitioners held 1,010,000 shares of stock of the Lorenzo Shipping
Corp. In June 1999, respondent decided to amend its articles of
incorporation to remove the stockholders´ pre-emptive rights to newly
issued shares of stock. Feeling that the corporate move would be
prejudicial to their interest as stockholders, the petitioners voted
against the amendment and demanded payment of their shares at
the rate of Php2.276/share based on the book value of the shares, or
a total of Php2,298,760.00. Lorenzo Shipping found the fair value
unacceptable and insisted that the market value on the date before
the action should be the value, or Php0.41/share or a total of
Php414,100.00 considering that its shares were listed in the Phil.
Stock Exchange, and that the payment could be made only if the
respondent had unrestricted retained earnings in its books to cover
the value of the shares, which was not the case. The disagreement
led the parties to constitute an appraisal committee pursuant to
Section 82 of the Corporation Code, each of them nominating a
representative, who together would nominate a third member who
3A CORPORATION LAW 2019-2020 pg. 267
would be chairman. The appraisal committee reported its valuation
of Php2.54/share, for an aggregate value of Php2,565,400.00 for
petitioners. The petitioners demanded payment, but the respondent
refused the demand, explaining that pursuant to the Corporation
Code, the dissenting stockholders exercising their appraisal rights
could be paid only when the corporation had unrestricted retained
earnings to cover the fair value of the shares, but that it had no
retained earnings as shown by its Financial Statement. Petitioners
sued the respondents at the RTC Makati, transferred to RTC Manila
in a motion for partial summary judgment. RTC granted summary
judgment, and later a writ of execution. The respondents commenced
a special civil action for certiorari in the CA. The CA found that there
were no unrestricted retained earnings when the Turners filed their
complaint. It dismissed the civil case without prejudice to refiling.
----------------------------------------------------------------------------------Issue: WON the petitioners Turners are entitled to the payment of the
value of the shares.
Ruling:. No. A stockholder who dissents from certain corporate actions
has the right to demand payment of the fair value of his or her shares.
This right, known as the right of appraisal, is expressly recognized in
Section 81 of the Corporation Code. This means that the corporation
can purchase its own shares, provided payment is made out of
surplus profits and the acquisition is for a legitimate corporate
purpose, which is embodied in Section 41. Notwithstanding, no
payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its books to cover
the payment. In this case, Lorenzo Shipping had no unrestricted
retained earnings at the time when the Turners commenced the case,
and therefore the respondents' legal obligation to pay the value of the
petitioners´ share did not yet arise. In case the corporation has no
available unrestricted retained earnings in its books, Section 83 of the
Corporation Code provides that if the dissenting stockholder is not
paid the value of his shares within 30 days after the award, his voting
and dividend rights shall immediately be restored. There can be no
distribution of assets among the stockholders without first paying
corporate debts. Thus, any disposition of corporate funds and assets
to the prejudice of creditors is null and void.
3A CORPORATION LAW 2019-2020 pg. 268
(123)
Ferro Chemicals v. Garcia, G.R. Nos. 168134 & 168183,
October 5, 2016
(124)
Bank of Philippine Islands v. BPI Employees Union, G.R. No.
164301, August 10, 2010 and October 19, 2011
BPI vs. BPI Employees Union
GR No. 164301
Date: October 19, 2011
Digested by: Gillian Briones
-----------------------------------------------------------------------------Petitioner: BPI
Respondent: BPI Employees Union-Davao Chapter-Federation of Unions in BPI Unibank
Ponente: Leonardo-De Castro
Topic: Corporation Merger
----------------------------------------------------------------------------Doctrine:
By upholding the automatic assumption of the non-surviving corporation’s existing employment
contracts by the surviving corporation in a merger, the Court strengthens judicial protection of the
right to security of tenure of employees affected by a merger
---------------------------------------------------------------------------Facts:
In 2000, Far East Bank and trust Company (FEBTC) merged with Bank of the Philippine Islands.
Petitioner had a Union Shop agreement with respondent BPI Employees Union-Davao ChapterFederation of Unions in BPI Unibank (the Union).Pursuant to the merger, respondent requested
BPI to terminate the employment of those new employees from FEBTC who did not join the union.
BPI refused to undertake such action and brought the controversy before a voluntary arbitrator.
Although BPI won the initial battle at the Voluntary Arbitrator level, BPIs position was rejected by
the Court of Appeals which ruled that the Voluntary Arbitrators interpretation of the Union Shop
Clause was at war with the spirit and rationale why the Labor Code allows the existence of such
provision.
3A CORPORATION LAW 2019-2020 pg. 269
This was followed and affirmation by the Supreme Court of the CA decision holding that former
employees of the Far East Bank and Trust Company (FEBTC) "absorbed" by BPI pursuant to the
two banks merger. The absorbed employees were covered by the Union Shop Clause in the then
existing collective bargaining agreement (CBA)of BPI with respondent BPI Employees UnionDavao Chapter-Federation of Unions in BPI Unibank (the Union). Petitioners, despite the August
2010 decision moved for a Motion for reconsideration of the decision.
ISSUE: May the "absorbed" FEBTC employees fell within the definition of "new
employees," under the Union Shop Clause, such that they be required to join respondent
union or suffer termination upon request by the union?
Ruling: The court agreed with Justice Brion's view that it is more in keeping with the dictates of
social justice and the State policy of according full protection to labor to deem employment
contracts as automatically assumed by the surviving corporation in a merger, without break in the
continuity of their employment, and even in the absence of an express stipulation in the articles
of merger or the merger plan.
By upholding the automatic assumption of the non-surviving corporations existing employment
contracts by the surviving corporation in a merger, the Court strengthens judicial protection of the
right to security of tenure of employees affected by a merger and avoid confusion regarding the
status of their various benefits. However, it shall be noted that nothing in the Resolution shall
impair the right of an employer to terminate the employment of the absorbed employees for a
lawful or authorized cause or the right of such an employee to resign, retire or otherwise sever
his employment, whether before or after the merger, subject to existing contractual obligations.
Although by virtue of the merger BPI steps into the shoes of FEBTC as a successor employer as
if the former had been the employer of the latters employees from the beginning it must be
emphasized that, in reality, the legal consequences of the merger only occur at a specific
date,i.e.,upon its effectivity which is the date of approval of the merger by the SEC.Thus, the court
observed in the Decision that BPI and FEBTC stipulated in the Articles of Merger that they will
both continue their respective business operations until the SEC issues the certificate of merger
and in the event no such certificate is issued, they shall hold each other blameless for the nonconsummation of the merger.
In other words, the obligation of BPI to pay the salaries and benefits of the former FEBTC
employees and its right of discipline and control over them only arose with the effectivity of the
merger. Concomitantly, the obligation of former FEBTC employees to render service to BPI and
their right to receive benefits from the latter also arose upon the effectivity of the merger. What is
material is that all of these legal consequences of the merger took place during the life of an
existing and valid CBA between BPI and the Union wherein they have mutually consented to
include a Union Shop Clause.
3A CORPORATION LAW 2019-2020 pg. 270
(125)
Mindanao Savings & Loan Association, Inc. v. Wilkom, 634
SCRA 291 (2010)
Mindanao Savings & Loan Association, Inc vs Wilkom
G.R No. 178618
October 20, 2010
Digested by: Carlos, Kaira Marie Bernardino
------------------------------------------------------------------------Petitiioners:MINDANAO SAVINGS AND LOAN ASSOCIATION, INC., represented by its
Liquidator, THE PHILIPPINE DEPOSIT INSURANCE CORPORATION
Respondents: EDWARD WILLKOM; GILDA GO; REMEDIOS UY; MALAYO BANTUAS, in
his capacity as the Deputy Sheriff of RTC, Branch 3, 20Iligan City; and the REGISTER OF
DEEDS of Cagayan de Oro City
Ponente: Justice Nachura
-------------------------------------------------------------------------DOCTRINE:
By operation of law, upon the effectivity of the merger, the absorbed corporation ceases
to exist but its rights and properties, as well as liabilities, shall be taken and deemed transferred
to and vested in the surviving corporation. There being no merger between FISLAI and DSLAI
(now MSLAI), for third parties such as respondents, the two corporations shall not be considered
as one but two separate corporations. Being separate entities, the property of one cannot be
considered the property of the other.
FACTS:
First Iligan Savings and Loan Association, Inc. (FISLAI) and Davao Savings and Loan
Association, Inc. (DSLAI) are entities duly registered with the SEC primarily engaged in the
business of granting loans and receiving deposits from the general public, and treated as banks.
In 1985, FISLAI and DSLAI entered into a merger, with DSLAI as the surviving corporation but
their articles of merger were not registered with the SEC due to incomplete documentation. DSLAI
changed its corporate name to MSLAI by way of an amendment to its Articles of Incorporation
which was approved by the SEC. In 1986, the Board of Directors of FISLAI passed and approved
Board Resolution assigning its assets in favor of DSLAI which in turn assumed the former’s
liabilities. The business of MSLAI, however, failed. Hence, the Monetary Board of the Central
Bank of the Philippines ordered its liquidation with PDIC as its liquidator.
Prior to the closure of MSLAI, Uy filed with the RTC of Iligan City, an action for collection
of sum of money against FISLAI. The RTC issued a summary decision in favor of Uy, directing
3A CORPORATION LAW 2019-2020 pg. 271
FISLAI to pay. As a consequence, 6 parcels of land owned by FISLAI were levied and sold to
Willkom. In 1995, MSLAI, represented by PDIC, filed before the RTC a complaint for the
annulment of the Sheriff’s Sale alleging that the sale on execution of the subject properties was
conducted without notice to it and PDIC. Respondents, in its answer, averred that MSLAI had no
cause of action because MSLAI is a separate and distinct entity from FISLAI on the ground that
the “unofficial merger” between FISLAI and DSLAI (now MSLAI) did not take effect considering
that the merging companies did not comply with the formalities and procedure for merger or
consolidation as prescribed by the Corporation Code of the Philippines. RTC dismissed the case
for lack of jurisdiction. CA affirmed but ruled that there was no merger between FISLAI and MSLAI
(formerly DSLAI) for their failure to follow the procedure laid down by the Corporation Code for a
valid merger or consolidation.
ISSUE
Whether or not the merger between FISLAI and DSLAI is valid and effective?
HELD
NO. In merger, one of the corporations survives while the rest are dissolved and all their
rights, properties, and liabilities are acquired by the surviving corporation. Although there is a
dissolution of the absorbed or merged corporations, there is no winding up of their affairs or
liquidation of their assets because the surviving corporation automatically acquires all their rights,
privileges, and powers, as well as their liabilities.
The merger, however, does not become effective upon the mere agreement of the
constituent corporations. Since a merger or consolidation involves fundamental changes in the
corporation, as well as in the rights of stockholders and creditors, there must be an express
provision of law authorizing them. The steps necessary to accomplish a merger or consolidation,
as provided for in Sections 76,[24] 77,[25] 78,[26] and 79[27] of the Corporation Code, are:
(1) The board of each corporation draws up a plan of merger or consolidation. Such plan
must include any amendment, if necessary, to the articles of incorporation of the surviving
corporation, or in case of consolidation, all the statements required in the articles of
incorporation of a corporation;
(2) Submission of plan to stockholders or members of each corporation for approval. A
meeting must be called and at least two (2) weeks’ notice must be sent to all stockholders
or members, personally or by registered mail. A summary of the plan must be attached to
the notice. Vote of two-thirds of the members or of stockholders representing two-thirds of
the outstanding capital stock will be needed. Appraisal rights, when proper, must be
respected;
(3) Execution of the formal agreement, referred to as the articles of merger or
consolidation, by the corporate officers of each constituent corporation. These take the
place of the articles of incorporation of the consolidated corporation, or amend the articles
of incorporation of the surviving corporation;
(4) Submission of said articles of merger or consolidation to the SEC for approval;
(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least
two weeks before;
3A CORPORATION LAW 2019-2020 pg. 272
(6) Issuance of certificate of merger or consolidation.
Clearly, the merger shall only be effective upon the issuance of a certificate of merger by
the SEC, subject to its prior determination that the merger is not inconsistent with the Corporation
Code or existing laws. In this case, it is undisputed that the articles of merger between FISLAI
and DSLAI were not registered with the SEC due to incomplete documentation. Consequently,
the SEC did not issue the required certificate of merger. Even if it is true that the Monetary Board
of the Central Bank of the Philippines recognized such merger, the fact remains that no certificate
was issued by the SEC. Such merger is still incomplete without the certification. The issuance of
the certificate of merger is crucial because not only does it bear out SEC’s approval but it also
marks the moment when the consequences of a merger take place.
Thus, in the instant case, as far as third parties are concerned, the assets of FISLAI remain
as its assets and cannot be considered as belonging to DSLAI and MSLAI, notwithstanding the
Deed of Assignment wherein FISLAI assigned its assets and properties to DSLAI, and the latter
assumed all the liabilities of the former. As provided in Article 1625 of the Civil Code, “an
assignment of credit, right or action shall produce no effect as against third persons, unless it
appears in a public instrument, or the instrument is recorded in the Registry of Property in case
the assignment involves real property.” The certificates of title of the subject properties were clean
and contained no annotation of the fact of assignment. Respondents cannot, therefore, be faulted
for enforcing their claim against FISLAI on the properties registered under its name. Accordingly,
MSLAI, as the successor-in-interest of DSLAI, has no legal standing to annul the execution sale
over the properties of FISLAI. With more reason can it not cause the cancellation of the title to
the subject properties of Willkom and Go.
(126)
Bank of Phillippine Islands v. Lee, G.R. No. 190144, August 1,
2012
BANK OF THE PHILIPPINE ISLANDS vs. CARLITO LEE
GR No. 190144
DATE: Aug. 1, 2012
DIGESTED BY: BRAWNER, YVETTE
PETITIONER: BANK OF THE PHILIPPINE ISLANDS
RESPONDENT: CARLITO LEE
PONENTE: JUSTICE PERLAS-BERNABE
TOPIC: MERGER AND CONSOLIDATION
DOCTRINES: A merger of two corporations produces, among others, the following effects:
1. The constituent corporations shall become a single corporation which, in case of merger, shall
be the surviving corporation designated in the plan of merger; and in case of consolidation, shall
be the consolidated corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporation shall cease, except that of the surviving
or the consolidated corporation;
3A CORPORATION LAW 2019-2020 pg. 273
3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities
and powers and shall be subject to all the duties and liabilities of a corporation organized under
this Code;
4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the
rights, privileges, immunities and franchises of each of the constituent corporations; and all
property, real or personal, and all receivables due on whatever account, including subscriptions
to shares and other choses in action, and all and every other interest of, or belonging to, or due
to each constituent corporation, shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed; and
5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities
and obligations of each of the constituent corporations in the same manner as if such surviving
or consolidated corporation had itself incurred such liabilities or obligations; and any pending
claim, action or proceeding brought by or against any of such constituent corporations may be
prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens
upon the property of any of such constituent corporations shall not be impaired by such merger
or consolidation.
FACTS: In 1988 Carlito Lee filed a complaint for sum of money with damages and application for
the issuance of a writ of attachment against Trendline and Buelva (defendants) before the RTC,
seeking to recover his investment of Php5.8M. The RTC issued a writ of preliminary attachment
whereby the Check-O-Matic Savings Accounts of Trendline with Citytrust Banking Corporation,
Ayala Branch, in the total amount of Php700K were garnished, and subsequently the RTC found
defendants liable to Lee for the full amount of his investment. Citytrust filed an urgent motion to
release the amount garnished to pay Trendline’s tax obligation and a similar motion was also filed
by Trendline with the CA. the motion was denied. In 1996 Citytrust and BPI merged, with BPI as
the surviving corporation. The Articles of Merger provide that “all liabilities and obligations shall
be transferred to BPI…”. Lee filed a Motion for Execution to release the garnished deposits of
Trendline. However BPI’s Manager Samuel Mendoza denied having possession, control and
custody of any deposits or properties belonging to defendants prompting Lee to seek the
production of their records of accounts with BPI. BPI said that it cannot locate the defendant’s
bank records with Citytrust. Lee filed again a motion for execution and/or enforcement of
garnishment to enforce against BPI the garnishment of Trendline’s deposit and other deposits it
may have had with Citytrust. The motion was denied. The CA then annulled RTC’s orders finding
grave abuse of discretion on the part of RTC in denying Lee’s motion to enforce garnishment
against Trendline’s attached bank deposits with Citytrust, which have been transferred to BPI by
virtue of their merger.
ISSUE: WON BPI may be held liable because of its merger with Citytrust.
RULING: Yes, BPI is liable to deliver the fund subject of the writ of garnishment.
Through the service of the writ of garnishment, the garnishee becomes a "virtual party" to, or a
"forced intervenor" in, the case and the trial court thereby acquires jurisdiction to bind him to
compliance with all orders and processes of the trial court with a view to the complete satisfaction
of the judgment of the court.
Citytrust, therefore, upon service of the notice of garnishment and its acknowledgment that it was
in possession of defendants' deposit accounts in its letter-reply dated June 28, 1988, became a
"virtual party" to or a "forced intervenor" in the civil case. As such, it became bound by the orders
3A CORPORATION LAW 2019-2020 pg. 274
and processes issued by the trial court despite not having been properly impleaded therein.
Consequently, by virtue of its merger with BPI on October 4, 1996, BPI, as the surviving
corporation, effectively became the garnishee, thus the "virtual party" to the civil case.
Merger of two corporations produces the following effects:
1. The constituent corporations shall become a single corporation which, in case of merger, shall
be the surviving corporation designated in the plan of merger; and in case of consolidation, shall
be the consolidated corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporation shall cease, except that of the surviving
or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities
and powers and shall be subject to all the duties and liabilities of a corporation organized under
this Code;
4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the
rights, privileges, immunities and franchises of each of the constituent corporations; and all
property, real or personal, and all receivables due on whatever account, including subscriptions
to shares and other choses in action, and all and every other interest of, or belonging to, or due
to each constituent corporation, shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed; and
5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities
and obligations of each of the constituent corporations in the same manner as if such surviving
or consolidated corporation had itself incurred such liabilities or obligations; and any pending
claim, action or proceeding brought by or against any of such constituent corporations may be
prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens
upon the property of any of such constituent corporations shall not be impaired by such merger
or consolidation.
Although Citytrust was dissolved, no winding up of its affairs or liquidation of its assets, privileges,
powers and liabilities took place. As the surviving corporation, BPI simply continued the combined
businesses of the two banks and absorbed all the rights, privileges, assets, liabilities and
obligations of Citytrust, including the latter’s obligation over the garnished deposits of the
defendants. BPI’s liability for the garnished deposits of the defendants has been clearly
established. By virtue of the writ of garnishment, the deposits of the defendants with Citytrust
were placed in custodia legis of the court. From that time onwards, their deposits were under the
sole control of the RTC and Citytrust holds them subject to its orders until such time that the
attachment or garnishment is discharged, or the judgment in favor of Lee is satisfied or the credit
or deposit is delivered to the proper officer of the court. Thus, Citytrust, and thereafter BPI, which
automatically assumed the former’s liabilities and obligations upon the approval of their Articles
of Merger, is obliged to keep the deposit intact and to deliver the same to the proper officer upon
order of the court.
The loss of bank records of a garnished deposit is not a ground for the dissolution of garnishment.
BPI cannot avoid the obligation attached to the writ of garnishment by claiming that the fund was
not transferred to it, in light of the Articles of Merger which provides that "all liabilities and
obligations of Citytrust shall be transferred to and become the liabilities and obligations of BPI in
the same manner as if the BPI had itself incurred such liabilities or obligations, and in order that
the rights and interest of creditors of Citytrust or liens upon the property of Citytrust shall not be
impaired by merger.
BPI is liable to deliver the fund subject of the writ of garnishment.
(127)
Bank of Commerce v. Radio Philippines Network, Inc., G.R. No. 195615, April 21, 2014.
3A CORPORATION LAW 2019-2020 pg. 275
Traders Royal Bank (TRB) proposed to sell to petitioner Bank of Commerce (Bancommerce) for
its banking business consisting of specified assets and liabilities. Bancommerce agreed subject
to prior BSP’s approval of their Purchase and Assumption (P & A) Agreement.
The BSP approved that agreement subject to the condition that Bancommerce and TRB would
set up an escrow fund of P5O million with another bank to cover TRB liabilities for contingent
claims that may subsequently be adjudged against it, which liabilities were excluded from the
purchase.
Bancommerce acquired TRB’s specified assets and liabilities, excluding liabilities arising from
judicial actions which were to be covered by the BSP-mandated escrow of ₱50 million, which shall
be kept for 15 years in the trust department of any other bank acceptable to the BSP.
The BSP finally approved such agreement.
Shortly after, in Traders Royal Bank v. Radio Philippines Network (TRB v. RPN), this Court
ordered TRB to pay respondents RPN, et al. actual damages plus 12% legal interest and some
amounts.
RPN, et al.fied a motion for execution against TRB before the RTC, and a Supplemental Motion
for Execution where they described TRB as “now Bank of Commerce” based on the assumption
tht TRB had been merged into Bancommerce.
Bancommerce questioned the jurisdiction of the RTC over it and denied that there was a merger
between TRB and Bancommerce.
The RTC issued an Order granting and issuing the writ of execution to cover any and all assets
of TRB, “including those subject of the merger/consolidation in the guise of a Purchase and Sale
Agreement with Bank of Commerce, and/or against the Escrow Fund established by TRB and
Bank of Commerce with the MetroBank.”
This prompted Bancommerce to file a petition for certiorari with the CA assailing the RTC’s Order.
The CA denied the petition. The CA pointed out that the Decision of the RTC was clear in that
Bancommerce was not being made to answer for the liabilities of TRB, but rather the assets or
properties of TRB under its possession and custody.
The RTC granted RPN’s motion for alias writ of execution against Bancommerce based on the
CA Decision.
The RTC issued the alias writ, hence, Bancommerce filed on a motion to quash the same.
3A CORPORATION LAW 2019-2020 pg. 276
The RTC issued the assailed Order denying Bancommerce’s pleas. It ordered the release to the
Sheriff of Bancommerce’s “garnished monies and shares of stock or their monetary equivalent”
and for the sheriff to pay to the respondents’ attorney’s fees, appearance fees and litigation
expenses.
Aggrieved, Bancommerce immediately assailed the RTC Orders to the CA via a petition for
certiorari under Rule 65. The CA dismissed the petition outright and denied Bancommerce’s
motion for reconsideration prompting it to come to this Court.
ISSUE:
Whether or not the CA gravely erred in failing to rule that the RTC’s Order of execution against
Bancommerce was a nullity because TRB v. RPN held that TRB had not been merged into
Bancommerce as to make the latter liable for TRB’s judgment debts.
RULING:
Merger is a re-organization of two or more corporations that results in their consolidating into a
single corporation, which is one of the constituent corporations, one disappearing or dissolving
and the other surviving.
To put it another way, merger is the absorption of one or more corporations by another existing
corporation, which retains its identity and takes over the rights, privileges, franchises, properties,
claims, liabilities and obligations of the absorbed corporation(s). The absorbing corporation
continues its existence while the life or lives of the other corporation(s) is or are terminated.
The Corporation Code requires the following steps for merger or consolidation:
(1) The board of each corporation draws up a plan of merger or consolidation. Such plan must
include any amendment, if necessary, to the articles of incorporation of the surviving corporation,
or in case of consolidation, all the statements required in the articles of incorporation of a
corporation.
(2) Submission of plan to stockholders or members of each corporation for approval. A meeting
must be called and at least two (2) weeks’ notice must be sent to all stockholders or members,
personally or by registered mail. A summary of the plan must be attached to the notice. Vote of
two-thirds of the members or of stockholders representing two thirds of the outstanding capital
stock will be needed. Appraisal rights, when proper, must be respected.
(3) Execution of the formal agreement, referred to as the articles of merger o[r] consolidation, by
the corporate officers of each constituent corporation. These take the place of the articles of
incorporation of the consolidated corporation, or amend the articles of incorporation of the
surviving corporation.
3A CORPORATION LAW 2019-2020 pg. 277
(4) Submission of said articles of merger or consolidation to the SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two
weeks before.
(6) Issuance of certificate of merger or consolidation.
Indubitably, it is clear that no merger took place between Bancommerce and TRB as the
requirements and procedures for a merger were absent. A merger does not become effective
upon the mere agreement of the constituent corporations. All the requirements specified in the
law must be complied with in order for merger to take effect. Section 79 of the Corporation Code
further provides that the merger shall be effective only upon the issuance by the Securities and
Exchange Commission (SEC) of a certificate of merger.
Here, Bancommerce and TRB remained separate corporations with distinct corporate
personalities. What happened is that TRB sold and Bancommerce purchased identified recorded
assets of TRB in consideration of Bancommerce’s assumption of identified recorded liabilities of
TRB including booked contingent accounts. There is no law that prohibits this kind of transaction
especially when it is done openly and with appropriate government approval.
In strict sense, no merger or consolidation took place as the records do not show any plan or
articles of merger or consolidation. More importantly, the SEC did not issue any certificate of
merger or consolidation.
On the other hand, the idea of a de facto merger came about because, prior to the present
Corporation Code, no law authorized the merger or consolidation of Philippine Corporations,
except insurance companies, railway corporations, and public utilities. And, except in the case of
insurance corporations, no procedure existed for bringing about a merger.
In his book, Philippine Corporate Law, Dean Cesar Villanueva explained that under the
Corporation Code, “a de facto merger can be pursued by one corporation acquiring all or
substantially all of the properties of another corporation in exchange of shares of stock of the
acquiring corporation. The acquiring corporation would end up with the business enterprise of the
target corporation; whereas, the target corporation would end up with basically its only remaining
assets being the shares of stock of the acquiring corporation.”
No de facto merger took place in the present case simply because the TRB owners did not get in
exchange for the bank’s assets and liabilities an equivalent value in Bancommerce shares of
stock. Bancommerce and TRB agreed with BSP approval to exclude from the sale the TRB’s
contingent judicial liabilities, including those owing to RPN, et al.
Herein petition is granted.
3A CORPORATION LAW 2019-2020 pg. 278
The enforcement, therefore, of the decision in the main case should not include the assets and
properties that Bancommerce acquired from TRB. These have ceased to be assets and properties
of TRB under the terms of the BSP-approved P & A Agreement between them. They are not TRB
assets and properties in the possession of Bancommerce.
(128)
The Philippine Geothermal, Inc. Employees Union v. Unocal Philippines, Inc., G.R. No.
190187, September 28, 2016
Philippine Geothermal Inc. Employees Union vs. Unocal Philippines
GR No. 190187
Date: September 28, 2016
Digested by: Gillian Briones
-----------------------------------------------------------------------------------------------Petitioner: The Philippine Geothermal Inc. Employees Union
Respondent: Unocal Philippines Inc. (now known as Chevron Geothermal Philippines Holdings
Inc)
Ponente: Leonen, J.
Topic: Merger and Consolidation
----------------------------------------------------------------------------------------------Doctrine: The merger of a corporation with another does not operate to dismiss the employees
of the corporation absorbed by the surviving corporation. This is in keeping with the nature and
effects of a merger as provided under the law and the constitutional policy protecting the rights of
labor. The employment of the absorbed employees subsists. Necessarily, these absorbed
employees are not entitled to separation pay on account of such merger in the absence of any
other ground for its award.
----------------------------------------------------------------------------------------------Facts:
This is a case wherein Unocal Philippines, formerly known as Philippine Geothermal, Inc., is a
foreign corporation incorporated under the law od the State of California, licensed to do business
in the Philippines for the “exploration and development of geothermal resources as alternative
sources of energy.” It is wholly owned subsidiary of Union Oil Company of California (Unocal
California), which, in turn, is a wholly owned subsidiary of Union Oil Corporation (Unocal
Corporation). Unocal Philippines operates two geothermal steam fields in Tiwi, Albay and
Makiling, Banahaw, Laguna owned by the National Power Corporation (NPC).
That on April 4, 2005, Unocal Corporation executed an Agreement and Plan of Merger (Merger
Agreement) with Chevron Texaco Corporation (Chevron) and Blue Merger Sub, Inc. Blue Merger
is a wholly owned subsidiary of Chevron. Under the Merger Agreement, Unocal Corporation
merged with Blur Merger, and Blur Merger became the surviving corporation. Chevron then
became the parent corporation of the merged corporations. After the merger, Blue Merger, as the
surviving corporation changed its name to Unocal Corporation.
3A CORPORATION LAW 2019-2020 pg. 279
Unocal Philippines executed a Collective Bargaining Agreement with the Union. The Union wrote
Unocal Philippines asking for the separation benefits provided for under, the CBA. According to
the Union, the Merger Agreement of Unocal Corporation, Blue Merger, and Chevron resulted in
the closure and cessation of operations of Unocal Philippines and the implied dismissal of its
employees. Unocal Philippines refused the Union’s request and asserted that the employee
members were not terminated and that the merger did not result in its closure or the cessation of
its operations. As Unocal Philippines and the Union were unable to agree, they decided to submit
the matter to the Department of Labor and Employment’s Administrative Intervention for Dispute
Avoidance Program. However, they were unable to arrive at a “mutually acceptable agreement”.
That on November 24, 2006, the Union claimed that Unocal Philippines was guilty if unfair labor
practive and filed a Notice of Strike. Laterm the Union withdrew it Notice of Strike. On February
5, 2007, the parties agreed to submit their dispute for voluntary arbitration before the DOLE with
the Secretary of Labor and Employment as Voluntary Arbitrator.
Secretary of Labor ruled that, union’s members were impliedly terminated from employment as a
result of the Merger Agreement. It found that the merger resulted in new contracts and a new
employer for the Union’s members. The new contracts allegedly required the employee’s consent;
otherwise, there was no employment contract to speak of. Thus, the Secretary of Labor awarded
the Union separation pay under the CBA
Unocal Philippines filed before the Court of Appeal a Petition for Review questioning the Secretary
of Labor’s Decision. Unocal Philippines claimed that the Union was not entitled to separation
benefits given that Unocal Philippines was not a party to the merger, that it never closed nor
ceased its business, and that it did not terminate its employees after the merger. It asserted that
its operations continued in the same manner, and with the same manpower complement.
Likewise, the employees kept their tenure intact and experienced no changes in their salaries and
benefits.
The Court of Appeals granted the appeal of Unocal Philippines and reversed the earlier decision.
It held that Unocal Philippines as a separate and distinct juridical personality from its parent
company, Unocal Corporation, which was the party that entered into the Merger Agreement. CA
ruled that Unocal Philippine remained undissolved and its employees were unaffected by the
merger. It found that this was evidenced by the Unions’ assumption of its role as the duly
recognized bargaining representative of rank and file employees a few months after the merger.
It also found that although Unocal Corporation became a part of Chevron, Unocal Philippines still
remained as a wholly owned subsidiary of Unocal California after the merger. It ruled that in any
case, the CBA only provided for the payment of separation pay if a reduction in work force results
from redundancy, retrenchment or installation of labor-saving devices, or closure and cessation
of operations, all of which did not occur in this case.
Issue: W/N the merger resulted to the cessation of the employees, NO
3A CORPORATION LAW 2019-2020 pg. 280
Ruling:
A merger is a consolidation of two or more corporations, which results in one or more corporations
being absorbed into one surviving corporation. The separate existence of the absorbed
corporation ceases, and the surviving corporation “retains its identity and takes over the rights,
privileges, franchises, properties, claims, liabilities and obligations of the absorbed
corporation(s).”
If respondent is a subsidiary of Unocal California, which, in turn, is a subsidiary of Unocal
Corporation, then the merger of Unocal Corporation with Blue Merger and Chevron does not affect
respondent or any of its employees. Respondent has a separate and distinct personality from its
parent corporation.
Nonetheless, if respondent is indeed a party to the merger, the merger still does not result in the
dismissal of its employees.
The effects of a merger are provided under Section 80 of the Corporation Code:
SEC. 80. Effects of merger or consolidation. — The merger or consolidation, as provided in the
preceding sections shall have the following effects:
1. The constituent corporations shall become a single corporation which, in case of
merger, shall be the surviving corporation designated in the plan of merger; and, in
case of consolidation, shall be the consolidated corporation designated in the plan of
consolidation;
2. The separate existence of the constituent corporations shall cease, except that of the
surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and powers and shall be subject to all the duties and liabilities of a
corporation organized under this Code;
4. The surviving or the consolidated corporation shall thereupon and thereafter possess
all the rights, privileges, immunities and franchises of each of the constituent
corporations; and all property, real or personal, and all receivables due on whatever
account, including subscriptions to shares and other choses in action, and all and
every other interest of, or belonging to, or due to each constituent corporation, shall
be taken and deemed to be transferred to and vested in such surviving or consolidated
corporation without further act or deed; and
5. The surviving or the consolidated corporation shall be responsible and liable for all the
liabilities and obligations of each of the constituent corporations in the same manner
as if such surviving or consolidated corporation had itself incurred such liabilities or
obligations; and any claim, action or proceeding pending by or against any of such
constituent corporations may be prosecuted by or against the surviving or consolidated
corporation, as the case may be. Neither the rights of creditors nor any lien upon the
property of any of such constituent corporations shall be impaired by such merger or
consolidation.
3A CORPORATION LAW 2019-2020 pg. 281
Although this provision does not explicitly state the merger’s effect on the employees of the
absorbed corporation, Bank of the Philippine Islands v. BPI Employees Union-Davao Chapter
Federation of Unions in BPI Unibank has ruled that the surviving corporation automatically
assumes the employment contracts of the absorbed corporation, such that the absorbed
corporation’s employees become part of the manpower complement of the surviving corporation.
Merger is not one of the circumstances where the employees may claim separation pay. The only
instances where separation pay may be awarded to petitioner are: (a) reduction in workforce as
a result of redundancy; (b) retrenchment or installation of labor-saving devices; or (c) closure and
cessation of operations.
The terms do not provide that a merger is one of the instances where petitioner may claim
separation benefits for its members. Neither can these circumstances be interpreted as to
contemplate a merger with another corporation. In any case, if the parties intended that petitioner
ought to be granted separation pay in case of a merger, it should have been explicitly provided
for in the contract. Absent this express intention, petitioner cannot claim separation pay been
explicitly provided for in the contract. Absent this express intention, petitioner cannot claim
separation pay.
(129)
Sumifro (Philippines) Corporation v. Baya, G.R. No. 188269,
April 17, 2017
(130)
Dennis R. Manzanal v. Ramon K. Ilusorio, G.R. No. 189311,
December 6, 2010
(131)
Valley Golf & Country Club, Inc. v. Caram, G.R. No. 158805,
April 16, 2009
(132)
Calatagan Golf & Country Club, Inc. v. Sixto Clemente, Jr.,
G.R. No. 165443, April 16, 2009
(133)
Tan v. Sycip, G.R. No. 153468, August 17, 2006, 499 SCRA
216
Ang- Abaya vs Ang
GR No. 153468
Date: August 17, 2006
Digested by: Javier, Therese Fatima V.
----------------------------------------------------------------------------------Petitioner: Paul Lee Tan
Respondent: Paul Sycip
Ponente: C.J. Panganiban
Topic: Non- Stock Corporations
3A CORPORATION LAW 2019-2020 pg. 282
----------------------------------------------------------------------------------DOCTRINE: The Right to Vote in Nonstock Corporations: In nonstock corporations, the voting
rights attach to membership. Members vote as persons, in accordance with the law and the
bylaws of the corporation. Each member shall be entitled to one vote unless so limited,
broadened, or denied in the articles of incorporation or bylaws. The Supreme Court hold that when
the principle for determining the quorum for stock corporations is applied by analogy to nonstock
corporations, only those who are actual members with voting rights should be counted. Under
Section 52 of the Corporation Code, the majority of the members representing the actual number
of voting rights, not the number or numerical constant that may originally be specified in the
articles of incorporation, constitutes the quorum.
---------------------------------------------------------------------------------Facts: Vibelle Manufacturing Corporation (VMC) and Genato Investments, Inc. (Genato) are
family-owned corporations, where petitioners and private respondent Eduardo Ang are
shareholders, officers and members of the board of directors. Prior to the instant controversy,
VMC, Genato, and Oriano Manufacturing Corp. filed a Civil case against Eduardo, together with
Michael, and some other persons for allegedly conniving to fraudulently wrest
control/management of the corporations. During the pendency of the Civil Case, Eduardo sought
permission to inspect the corporate books of VMC and Genato on account of petitioners alleged
failure to update him on the financial and business activities of these family corporations.
Petitioners denied the request claiming that Eduardo would use the information obtained from
said inspection for purposes inimical to the corporations’ interests. Because of petitioners’ refusal
to grant Eduardo’s request, the latter filed a complaint for violating his right to inspect under
Sec.74 of the Corporation Code. Petitioners denied violating Sec. 74 and reiterated the allegations
contained in their complaint in Civil Case. They alleged that Eduardo consistently pressured
petitioner Flordeliza, his daughter, to improperly transfer ownership of the corporations’ V.A.G
building to him. When the proposed transfer of the V.A.G. building did not materialize, petitioners
claim that Eduardo instituted an action to compel donation of said property to him. Moreover, they
claim that Eduardo attempted to forcibly evict petitioner Jason from his office at VMC so he can
occupy the same; that Eduardo and his cohorts constantly created trouble by intervening in the
daily operations of the corporations without the knowledge or consent of the board of directors.
Issue: WON petitioners violated defendant’s right to inspect books and records
Held: In Gokongwei, Jr. v. Securities and Exchange Commission, 29 this Court explained the
rationale behind a stockholder's right to inspect corporate books, to wit:
“The stockholder's right of inspection of the corporation's books and records is based
upon their ownership of the assets and property of the corporation. It is, therefore, an
incident of ownership of the corporate property, whether this ownership or interest be
termed an equitable ownership, a beneficial ownership, or a quasi-ownership. This right
is predicated upon the necessity of self-protection. It is generally held by majority of the
courts that where the right is granted by statute to the stockholder, it is given to him as
3A CORPORATION LAW 2019-2020 pg. 283
such and must be exercised by him with respect to his interest as a stockholder and for
some purpose germane thereto or in the interest of the corporation. In other words, the
inspection has to be germane to the petitioner's interest as a stockholder, and has
to be proper and lawful in character and not inimical to the interest of the
corporation.”
In Republic v. Sandiganbayan, the Court declared that the right to inspect and/or examine the
records of a corporation under Section 74 of the Corporation Code is circumscribed by the express
limitation contained in the succeeding proviso, which states that:
[I]t shall be a defense to any action under this section that the person demanding to
examine and copy excerpts from the corporation's records and minutes has improperly
used any information secured through any prior examination of the records or
minutes of such corporation or of any other corporation, or was not acting in good
faith or for a legitimate purpose in making his demand.
Thus, contrary to Eduardo's insistence, the stockholder's right to inspect corporate books is not
without limitations. While the right of inspection was enlarged under the Corporation Code as
opposed to the old Corporation Law (Act No. 1459, as amended), It is now expressly required
as a condition for such examination that the one requesting it must not have been guilty of using
improperly any information secured through a prior examination, or that the person asking for
such examination must be acting in good faith and for a legitimate purpose in making his demand.
In order therefore for the penal provision under Section 144 of the Corporation Code to apply in
a case of violation of a stockholder or member's right to inspect the corporate books/records as
provided for under Section 74 of the Corporation Code, the following elements must be present:
First. A director, trustee, stockholder or member has made a prior demand in writing
for a copy of excerpts from the corporation's records or minutes;
Second. Any officer or agent of the concerned corporation shall refuse to allow the
said director, trustee, stockholder or member of the corporation to examine and
copy said excerpts;
Third. If such refusal is made pursuant to a resolution or order of the board of directors
or trustees, the liability under this section for such action shall be imposed upon
the directors or trustees who voted for such refusal; and,
Fourth. Where the officer or agent of the corporation sets up the defense that the
person demanding to examine and copy excerpts from the corporation's records
and minutes has improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in making
his demand, the contrary must be shown or proved.
3A CORPORATION LAW 2019-2020 pg. 284
Thus, in a criminal complaint for violation of Section 74 of the Corporation Code, the defense of
improper use or motive is in the nature of a justifying circumstance that would exonerate those
who raise and are able to prove the same. Accordingly, where the corporation denies inspection
on the ground of improper motive or purpose, the burden of proof is taken from the shareholder
and placed on the corporation. This being the case, it would be improper for the prosecutor, during
preliminary investigation, to refuse or fail to address the defense of improper use or motive, given
its express statutory recognition. In the past the Supreme Court have declared that if justifying
circumstances are claimed as a defense, they should have at least been raised during preliminary
investigation; which settles the view that the consideration and determination of justifying
circumstances as a defense is a relevant subject of preliminary investigation.
(134)
Cebu Country Club, Inc. v. Elizagaque, G.R. No. 160273,
January 18, 2008.
(135)
Primo Co, Sr., et. al., v. Philippine Canine Club, Inc., G.R. No.
190112, April 22, 2015
(136)
Agdao Landless Residents Association, Inc. v. Maramion, G.R.
Nos. 188642 & 189425, October 17, 2016
(137)
Bustos v. Millian Shoe, Inc., G.R. No. 185024, April 4, 2017
(138)Florete Sr. v. Florete, Jr.
G.R. No. 223321
Date: April 2, 2018
Digested by: Ray Mark Vallesteros
----------------------------------------------------------------------------------Petitioner: ROGELIO M. FLORETE, SR., THE ESTATE OF THE LATE TERESITA F.
MENCHAVEZ, represented by MARY ANN THERESE F. MENCHAVEZ, ROSIE JILL F.
MENCHAVEZ, MA. ROSARIO F. MENCHAVEZ, CRISTINE JOY F. MENCHAVEZ, and
EPHRAIM MENCHAVEZ, and DIANE GRACE F. MENCHAVEZ
Respondent: MARCELINO M. FLORETE, JR. and MA. ELENA F. MUYCO
Ponente: PERALTA, J.
Topic: CLOSE CORPORATIONS
----------------------------------------------------------------------------------Doctrine: Sec. 97. Articles of incorporation. - The articles of incorporation of a close corporation
may provide:
1. For a classification of shares or rights and the qualifications for owning or holding the same
and restrictions on their transfers as may be stated therein, subject to the provisions of the
following section;
----------------------------------------------------------------------------------Facts: On October 7, 1966, Marsal was organized as a close corporation by Marcelino Sr.,
Salome, Rogelio, Marcelino Jr., Ma. Elena, and Teresita (all surnamed Florete). Since its
3A CORPORATION LAW 2019-2020 pg. 285
incorporation, the Articles of Incorporation (AO!) had been amended several times to increase its
authorized capital stocks of ₱500,000.00 to ₱5,000,000.00. Notwithstanding the amendments,
paragraph 7 of their AOI which provides for the procedure in the sale of the shares of stocks of a
stockholder remained the same, to wit:
SEVENTH. - x x x Any stockholder who desires to sell his share of stock in the company must
notify in writing the Board of Directors of the company of his ·intention to sell. The Board of
Directors upon receipt of such notice must immediately notify all stockholders of record within five
days upon receipt of the letter of said stockholder. Any stockholder of record has the preemptive
right to buy any share offered for sale by any stockholder of the company on book value base[ d]
on the balance sheet approved by the Board of Directors. The aforementioned preemptive right
must be exercised by any stockholder of the company within ten (10) days upon his receipt of the
written notice sent to him by the Board of Directors of the offer to sell. Any sale or transfer in
violation of the above terms and conditions shall be null and void. The above terms and conditions
must be printed at the back of the stock certificate.
On October 3; 1990, Marcelino Florete Sr died. Petitioner was later appointed the administrator
of the estate. Petitioner filed for partition, the court approved the project of partition adjudicating
to petitioner Rogelio one-half (1/2) share of the whole estate; and to respondents Ma. Elena and
Marcelino Jr., the undivided one-fourth (1/4) share each of the enumerated properties.
On February 21, 2012, respondents filed for annulment/rescission of sale of shares of stocks and
the exercise of their preemptive rights in Marsal corporation and damages against petitioners.
Respondents claimed that the sale of Teresita's 3,464 Marsal shares of stocks made by petitioner
estate to petitioner Rogelio was void ab initio as it violated paragraph 7 of Marsal's AOI.
----------------------------------------------------------------------------------Issue: Whether or not there was a violation of par 7 of Marsal’s Articles of Incorporation
Ruling: No. Even if the transfer of stocks is made in violation of the restrictions enumerated under
Section 99, such transfer is still valid if it has been consented to by all the stockholders of the
close corporation and the corporation cannot refuse to register the transfer of stock in the name
of the transferee. In this case, the Court found that the sale of Teresita's 3,464 Marsal shares had
already been consented to by respondents and may be registered in the name of petitioner
Rogelio. Hence, there was no violation of par 7 of Marsal’s Articles of Incorporation
3A CORPORATION LAW 2019-2020 pg. 286
(139)
Barayuga v. Adventist University of the Philippines, G.R. No.
168008, August 17, 2011.
PETRONILO J. BARAYUGA, vs. ADVENTIST UNIVERSITY OF THE PHILIPPINES,
THROUGH ITS BOARD
OF TRUSTEES, REPRESENTED BY ITS CHAIRMAN, NESTOR D. DAYSON
G.R. NO.1680008
August 17, 2011
Case Digested by: Nicky Galang
____________________________________________________________________________
Petitioner: Barayuga
Responded Adventis University of the Philippines (AUP), Chairman Nestor Dayson
Ponente: J.Bersamin
____________________________________________________________________________
Facts of the Case:
Adventis University of the Philippines (AUP), a non-stock and non-profit domestic
educational institution incorporated under Philippine laws on March 3, 1932, was directly under
the North Philippine Union Mission (NPUM) of the Southern Asia Pacific Division of the Seventh
Day Adventists. During the 3rd Quinquennial Session of the General Conference of Seventh Day
Adventists held from November 27, 2000 to December 1, 2000, the NPUM Executive Committee
elected the members of the Board of Trustees of AUP, including the Chairman and the Secretary.
Respondent Nestor D. Dayson was elected Chairman while the petitioner was chosen Secretary.
On January 23, 2001, almost two months following the conclusion of the 3rd Quinquennial
Session, the Board of Trustees appointed the petitioner President of AUP. During his tenure, or
from November 11 to 13, 2002, a group from the NPUM conducted an external performance audit.
The audit revealed the petitioners autocratic management style, like making major decisions
without the approval or recommendation of the proper committees, including the Finance
Committee; and that he had himself done the canvassing and purchasing of materials and made
withdrawals and reimbursements for expenses without valid supporting receipts and without the
approval of the Finance Committee. The audit concluded that he had committed serious violations
of fundamental rules and procedure in the disbursement and use of funds.
3A CORPORATION LAW 2019-2020 pg. 287
On January 15, 2003, Chairman Dayson and the NPUM Treasurer likewise informed the
petitioner inside the NPUM office on the findings of the auditors in the presence of the AUP VicePresident for Financial Affairs, and reminded him of the possible consequences should he fail to
satisfactorily explain the irregularities cited in the report.
The members, by secret ballot, voted to remove him as President because of his serious
violations of fundamental rules and procedures in the disbursement and use of funds as revealed
by the special audit; to appoint an interim committee consisting of three members to assume the
powers and functions of the President; and to recommend him to the NPUM for consideration as
Associate Director for Secondary Education.
Issue: Whether or not the removal of the President was proper.
Held: Yes.In light of foregoing, the members of the Board of Trustees were to serve a term of
office of only two years; and the officers, who included the President, were to be elected from
among the members of the Board of Trustees during their organizational meeting, which was held
during the election of the Board of Trustees every two years. Naturally, the officers, including the
President, were to exercise the powers vested by Section 2 of the amended By-Laws for a term
of only two years, not five years.
Ineluctably, the petitioner, having assumed as President of AUP on January 23, 2001,
could serve for only two years, or until January 22, 2003. By the time of his removal for cause as
President on January 27, 2003, he was already occupying the office in a hold-over capacity, and
could be removed at any time, without cause, upon the election or appointment of his successor.
His insistence on holding on to the office was untenable, therefore, and with more reason when
one considers that his removal was due to the loss of confidence on the part of the Board of
Trustees.
(140)
Iglesia Evangelica Metodista enlas Islas Filipinas, Inc. v. Lazaro,
642 SCRA 224 (2010)
IGLESIA EVANGELICA METODISTA EN LAS ISLAS FILIPINAS (IEMELIF) (Corporation
Sole), INC., REV. NESTOR PINEDA, REV. ROBERTO BACANI, BENJAMIN BORLONGAN,
JR., DANILO SAUR, RICHARD PONTI, ALFREDO MATABANG and all the other members
of the IEMELIF TONDO CONGREGATION of the IEMELIF CORPORATION SOLE,
Petitioners,
vs.
3A CORPORATION LAW 2019-2020 pg. 288
BISHOP NATHANAEL LAZARO, REVERENDS HONORIO RIVERA, DANIEL
MADUCDOC, FERDINAND MERCADO, ARCADIO CABILDO, DOMINGO GONZALES,
ARTURO LAPUZ, ADORABLE MANGALINDAN, DANIEL VICTORIA and DAKILA
CRUZ, and LAY LEADER LINGKOD MADUCDOC and CESAR DOMINGO, acting
individually and as members of the Supreme Consistory of Elders and those claiming under the
Corporation Aggregate, Respondents.
July 6, 2010
Digested by: Gutierrez, Jr.
Petitioner:
Respondent:
Ponente: ABAD, J.:
Doctrine:
Facts:
In 1909, Bishop Nicolas Zamora established the petitioner Iglesia Evangelica Metodista En Las
Islas Filipinas, Inc. (IEMELIF) as a corporation sole with Bishop Zamora acting as its "General
Superintendent." Thirty-nine years later in 1948, the IEMELIF enacted and registered a by-laws
that established a Supreme Consistory of Elders (the Consistory), made up of church ministers,
who were to serve for four years. The by-laws empowered the Consistory to elect a General
Superintendent, a General Secretary, a General Evangelist, and a Treasurer General who would
manage the affairs of the organization. For all intents and purposes, the Consistory served as the
IEMELIF’s board of directors.
Apparently, although the IEMELIF remained a corporation sole on paper (with all corporate
powers theoretically lodged in the hands of one member, the General Superintendent), it had
always acted like a corporation aggregate. The Consistory exercised IEMELIF’s decision-making
powers without ever being challenged. Subsequently, during its 1973 General Conference, the
general membership voted to put things right by changing IEMELIF’s organizational structure
from a corporation sole to a corporation aggregate. On May 7, 1973 the Securities and Exchange
Commission (SEC) approved the vote. For some reasons, however, the corporate papers of the
IEMELIF remained unaltered as a corporation sole.
3A CORPORATION LAW 2019-2020 pg. 289
The Consistory resolved to convert the IEMELIF to a corporation aggregate. Respondent Bishop
Nathanael Lazaro, its General Superintendent, instructed all their congregations to take up the
matter with their respective members for resolution. Subsequently, the general membership
approved the conversion, prompting the IEMELIF to file amended articles of incorporation
with the SEC. Bishop Lazaro filed an affidavit-certification in support of the conversion.
Petitioners Reverend Nestor Pineda, et al., which belonged to a faction that did not support the
conversion, filed a civil case for "Enforcement of Property Rights of Corporation Sole,
Declaration of Nullity of Amended Articles of Incorporation from Corporation Sole to Corporation
Aggregate with Application for Preliminary Injunction and/or Temporary Restraining Order" in
IEMELIF’s name against respondent members of its Consistory before the Regional Trial Court
(RTC) of Manila.3 Petitioners claim that a complete shift from IEMELIF’s status as a
corporation sole to a corporation aggregate required, not just an amendment of the
IEMELIF’s articles of incorporation, but a complete dissolution of the existing corporation
sole followed by a re-incorporation.
Issue: Whether or not a corporation sole may be converted into a corporation aggregate by mere
amendment of its articles of incorporation.
Ruling:
Yes.
True, the Corporation Code provides no specific mechanism for amending the articles of
incorporation of a corporation sole. But, as the RTC correctly held, Section 109 of the Corporation
Code allows the application to religious corporations of the general provisions governing nonstock corporations.
For non-stock corporations, the power to amend its articles of incorporation lies in its members.
The code requires two-thirds of their votes for the approval of such an amendment. So how will
this requirement apply to a corporation sole that has technically but one member (the head of the
3A CORPORATION LAW 2019-2020 pg. 290
religious organization) who holds in his hands its broad corporate powers over the properties,
rights, and interests of his religious organization?
Although a non-stock corporation has a personality that is distinct from those of its members who
established it, its articles of incorporation cannot be amended solely through the action of its board
of trustees. The amendment needs the concurrence of at least two-thirds of its membership. If such
approval mechanism is made to operate in a corporation sole, its one member in whom all the
powers of the corporation technically belongs, needs to get the concurrence of two-thirds of its
membership. The one member, here the General Superintendent, is but a trustee, according to
Section 110 of the Corporation Code, of its membership.
There is no point to dissolving the corporation sole of one member to enable the corporation
aggregate to emerge from it. Whether it is a non-stock corporation or a corporation sole, the
corporate being remains distinct from its members, whatever be their number. The increase
in the number of its corporate membership does not change the complexion of its corporate
responsibility to third parties. The one member, with the concurrence of two-thirds of the
membership of the organization for whom he acts as trustee, can self-will the amendment.
He can, with membership concurrence, increase the technical number of the members of the
corporation from "sole" or one to the greater number authorized by its amended articles.
(141)
United Church of Christ in the Philippines, Inc. v. Bradford
United Church of Christ, Inc., G.R. No. 171905, June 20, 2012
United Church of Christ in the Philippines, Inc. v. Bradford United Church of Christ, Inc.,
G.R. No. 171905
June 20, 2012
Digested by: Abrhiem Nico Angeles
----------------------------------------------------------------------------------Petitioner: UNITED CHURCH OF CHRIST IN THE PHILIPPINES, INC (UCCP)
Respondent: BRADFORD UNITED CHURCH OF CHRIST, INC., (BUCCI) PATRIZIO EZRA,
GERONIMO V. NAZARETH, RUPERTO MAYUGA, SR., ROBERT SCHAARE, HENRY CARIAT,
REYNALDO FERRENAL AND JOHN DOES
Ponente: PEREZ, J.
Topic: RELIGIOUS CORPORATIONS
----------------------------------------------------------------------------------Doctrine: An ecclesiastical affair is one that concerns doctrine, creed or form of worship of the
church, or the adoption and enforcement within a religious association of needful laws and
regulations for the government of the membership, and the power of excluding from such
3A CORPORATION LAW 2019-2020 pg. 291
associations those deemed unworthy of membership. Based on this definition, an ecclesiastical
affair involves the relationship between the church and its members and relate to matters of faith,
religious doctrines, worship and governance of the congregation. To be concrete, examples of
this so-called ecclesiastical affairs to which the State cannot meddle are proceedings for
excommunication, ordinations of religious ministers, administration of sacraments and other
activities attached with religious significance.
----------------------------------------------------------------------------------Facts:
Petitioner UCCP is a religious corporation duly organized and existing under the Philippine laws.
Respondent BUCCI is also a religious corporation with a separate personality from UCCP.
UCCP has three (3) governing bodies namely: the General Assembly, the Conference and the
Local Church. As a UCCP local church located in Cebu, BUCCI belonged to the Cebu Conference
Inc. (CCI) with whom it enjoyed peaceful co-existence until late 1989 when BUCCI started
construction of a fence that encroached upon the right-of way allocated by UCCP for CCI and
Visayas jurisdiction.
UCCP General Assembly attempted to settle the dispute a decision was rendered in favor of CCI.
BUCCI disaffiliated from UCCP and amended its Articles of Incorporation and By-laws, which
provided for and effected its disaffiliation from UCCP. The effectivity of the disaffiliation was made
to retroact to 16 September 1990 when BUCCI severed its ties from CCI.
Thereafter, UCCP filed before SEC a complaint/protest for rejection/annulment of Amended
Articles and Incorporation and Injunction. UCCP later on filed an Amended Complaint/Protest
dated 8 March 1994, abandoning the original Complaint/Protest, alleging that the separate
incorporation and registration of BUCCI is not allowed under the UCCP Constitution and By-laws;
and sought to enjoin BUCCI and the respondents from using the name BUCCI, both in its
Amended Articles of Incorporation and its dealings with the public, and from using its properties.
The SEC en banc dismissed UCCPs petition.
----------------------------------------------------------------------------------Issues:
1. Whether or not the separation of [BUCCI] from [UCCP] is valid;
2. Whether or not the amendments to the Articles of Incorporation and By-Laws of BUCCI made
after it separated from UCCP are valid; [and]
3. Whether or not private respondents are entitled to the use of the name "Bradford United Church
of Christ, Inc."(BUCCI).
Ruling: YES. In all issues.
UCCP maintains that the issue on whether the disaffiliation of respondents is valid is purely an
ecclesiastical affair. In any event, the Court believes that the matter at hand is not purely an
ecclesiastical affair.
3A CORPORATION LAW 2019-2020 pg. 292
An ecclesiastical affair is one that concerns doctrine, creed or form of worship of the church, or
the adoption and enforcement within a religious association of needful laws and regulations for
the government of the membership, and the power of excluding from such associations those
deemed unworthy of membership. Based on this definition, an ecclesiastical affair involves the
relationship between the church and its members and relate to matters of faith, religious doctrines,
worship and governance of the congregation. To be concrete, examples of this so-called
ecclesiastical affairs to which the State cannot meddle are proceedings for excommunication,
ordinations of religious ministers, administration of sacraments and other activities attached with
religious significance.
Intertwined with the issue of the validity of the disaffiliation is the question of whether BUCCI had
the power under the law to effect disaffiliation such that it should be given legal consequence and
granted recognition. UCCP and BUCCI, being corporate entities and grantees of primary
franchises, are subject to the jurisdiction of the SEC. Section 3 of PD No. 902-A provides that
SEC shall have absolute jurisdiction, supervision and control over all corporations. Even with their
religious nature, SEC may exercise jurisdiction over them in matters that are legal and corporate.
UCCP’s control and authority over its local churches is not full and supreme; membership of the
local churches in the UCCP is voluntary and not perpetual; local churches enjoy independence
and autonomy and may maintain or continue church-life with or without UCCP.Thus, under the
law and UCCP polity, BUCCI may validly bring about its disaffiliation from UCCP through the
amendment of its Articles of Incorporation and By-laws.
Significantly, SEC approved the amendments on 2 July 1993, which approval has in its favor the
presumption of regularity.45 Government officials are presumed to have regularly performed their
functions and strong evidence is necessary to rebut this presumption.46 In the absence of
convincing proof to the contrary, the presumption must be upheld.
The respondent BUCCI’s church history would show that it has a better right to use its corporate
name on the ground of priority of adoption. As thoroughly discussed by the SEC in its assailed
decision, the evolution of respondent BUCCI to what it is today undoubtedly establishes that it
had acquired the right to make use of its corporate name. As to whether or not BUCCI is
confusingly or deceptively similar to UCCP, We find in the negative. In determining the existence
of confusing similarity in corporate names, the test is whether the similarity is such as to mislead
a person using ordinary care and discrimination.
WHEREFORE, the petition is DENIED.
(142)
Alabang Development Corp. v. Alabang Hills Village
Association, Inc., G.R. No. 187456, June 2, 2014
——————————————————————
3A CORPORATION LAW 2019-2020 pg. 293
Alabang Development Corp. v. Alabang Hills Village Association, Inc.
G.R. No. 187456, June 2, 2014
Digested by: Sarah Bagis
Petitioner: Alabang Development Corp.
Respondent: Alabang Hills Village Association, Inc.
Ponente: Peralta, J
Topic: DISSOLUTION AND LIQUIDATION
—————————————————————
Doctrine:
The trustee of a corporation may continue to prosecute a case commenced by the corporation
within 3 years from its dissolution until rendition of the final judgment, even if such judgment
is rendered beyond the three-year period allowed by Section 122. However, there is nothing
in the said cases which allows an already defunct corporation to initiate a suit after the lapse
of the said three year period. To allow petitioner to initiate the subject complain and pursue
it until final judgment, on the ground that such complaint was filed for the sole purpose of
liquidating its assets would be to circumvent the provisions of Section 122 of the Corporation
Code.
—————————————————————
FACTS
Alabang Development Corporation (ADC) is the developer of Alabang Hills Village. According
to ADC, it still owns certain parcels of land therein that are yet to be sold, as well
as those considered open spaces which have not yet been donated to the local
government of Muntinlupa City.
Sometime in September 2006, ADC learned that Alabang Hills Village Association Inc
(AHVAI) started the construction of a multi-purpose hall and a swimming pool on one
the parcels of land still owned by ADC without the latter’s consent and approval, and
that despite demand, AHVAI failed to desist from constructing said improvement.
ADC thus filed a Complaint for Injunction and Damages in the RTC Muntinlupa against
AHVAI and Rafael Tinio, the President of AHVAI.
AHVAI in its Answer with Compulsory Counterclaim denied ADC’s assertions and claimed that
the latter had no legal capacity to sue since its existence as a registered corporate entity
was revoked by the SEC on May 26, 2003. Thus, ADC had no cause of action because by
law, it is no longer the absolute owner, but is merely holding the property inquestion in trust
for the benefit of AHVAI as beneficial owner thereof; and that the subject lot is part of the
open space required by law to be provided in the subdivision.
AHVAI thus prayed that an order be issued divesting ADC of the title of the property and
declaring AHVAI as owner thereof; and that ADC be made liable for moral and exemplary
damages and attorney’s fees.
3A CORPORATION LAW 2019-2020 pg. 294
ISSUE
WON Alabang Development Corporation has the capacity to sue as a corporation?
HELD
NO
AS held in the case of Columbia Pictures vs CA, the ”lack of capacity to sue” refers to a plaintiff’s
general disability to sue, such as on account of minority, insanity, incompetence, lack of
juridical personality or any other general disqualifications of a party. Lack of legal capacity
to sue also means that the plaintiff is not in the exercise of his civil rights, or does not have
the necessary qualification to appear in the case, or does not have the character or
representation he claims.
There is no dispute that petitioner’s corporate registration as revoked on May 26, 2003. Based
on Sec 122 of the Corporate Code, it has three years, or until May 26, 2006 to prosecute or
defend any suit by or against it. The subject complaint however, was filed only on October
19, 2006, more than three years after such revocation.
SEC. 122. Corporate liquidation. – Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence
for other purposes is terminated in any other manner, shall nevertheless be
continued as a body corporate for three (3) years after the time when it would have
been so dissolved, for the purpose of prosecuting and defending suits by or against
it and enabling it to settle and close its affairs, to dispose of and convey its property
and to distribute its assets, but not for the purpose of continuing the business
for which it was established.
At any time during said three (3) years, said corporation is authorized and
empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest. From and after
any such conveyance by the corporation of its property in trust for the benefit of
its stockholders, members, creditors and others in interest, all interest which
the corporation had in the property terminates, the legal interest vests in the
trustees, and the beneficial interest in the stockholders, members, creditors or
other persons in interest.
Upon winding up of the corporate affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be found shall be escheated
to the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities.
3A CORPORATION LAW 2019-2020 pg. 295
The Court has held that, “It is to be noted that the time during which the corporation, through its
own officers, may conduct the liquidation of its assets and sue and be sued as a corporation
is limited to three years from the time the period of dissolution commences; but there is no
time limit within which the trustees must complete a liquidation placed in their hands.
It is provided only (Corp. Law, Sec. 78 [now Sec. 122]) that the conveyance to the
trustees must be made within the three-year period. It may be found impossible to
complete the work of liquidation within the three-year period or to reduce disputed claims
to judgment. The authorities are to the effect that suits by or against a corporation
abate when it ceased to be an entity capable of suing or being sued; but trustees to whom
the corporate assets have been conveyed pursuant to the authority of Sec. 78 [now
Sec. 122] may sue and be sued as such in all matters connected with the liquidation..”
In the absence of trustees, this Court ruled: “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 the creditors of the corporation, acting for and in its behalf,
might make proper representations with the Securities and Exchange Commission,
which has primary and sufficiently broad jurisdiction in matters of this nature, for
working out a final settlement of the corporate concerns.”
It is likewise not disputed that the subject complaint was filed by petitioner corporation
and not by its directors or trustees. In fact, it is even averred, albeit wrongly, in the first
paragraph of the Complaint that “plaintiff is a duly organized and existing corporation
under the laws of the Philippines, with capacity to sue and be sued.”
Jurisprudence provides the trustee of a corporation may continue to prosecute a case
commenced by the corporation within three years from its dissolution until rendition
of the final judgment, even if such judgment is rendered beyond the three-year period
allowed by Section 122 of the Corporation Code. However, there is nothing in the
said cases which allows an already defunct corporation to initiate a suit after the lapse of
the said three-year period.
In the present case, petitioner filed its complaint not only after its corporate existence
was terminated but also beyond the three-year period allowed by Section 122 of the
Corporation Code. Thus, it is clear that at the time of the filing of the subject
complaint petitioner lacks the capacity to sue as a corporation. To allow petitioner to
initiate the subject complaint and pursue it until final judgment, on the ground that such
complaint was filed for the sole purpose of liquidating its assets, would be to
circumvent the provisions of Section 122 of the Corporation Code.
As to the last issue raised, the basic and pivotal issue in the instant case is petitioner's
capacity to sue as a corporation and it has already been settled that petitioner indeed
lacks such capacity
3A CORPORATION LAW 2019-2020 pg. 296
(143)
Viguilla, et. al. v. Philippine College of Criminology, Inc., G.R.
No. 200094, June 10, 2013
Vigilla vs Philippine College of Criminology, Inc
GR No. 200094
Date: June 10, 2013
Digested by: Therese Javier
________
Petitioner: Benigno Vigilla
Respondent: Philippine College of Criminology
Ponente: J. Mendoza
Topic: Dissolution and Liquidation
________
Doctrine: The executed releases, waivers and quitclaims are valid and binding notwithstanding
the revocation of MBMSI's Certificate of Incorporation. The revocation does not result in the
termination of its liabilities. Section 122 of the Corporation Code provides for a three-year winding
up period for a corporation whose charter is annulled by forfeiture or otherwise to continue as a
body corporate for the purpose, among others, of settling and closing its affairs.
_______
Facts: PCCr is a non-stock educational institution, while the petitioners were janitors, janitresses
and supervisor in the Maintenance Department of PCCr under the supervision and control of Atty.
Florante A. Seril (Atty. Seril), PCCr's Senior Vice President for Administration. The petitioners,
however, were made to understand, upon application with respondent school, that they were
under MBMSI, a corporation engaged in providing janitorial services to clients. Atty. Seril is also
the President and General Manager of MBMSI.
Sometime in 2008, PCCr discovered that the Certificate of Incorporation of MBMSI had been
revoked as of July 2, 2003. On March 16, 2009, PCCr, through its President, respondent Gregory
Alan F. Bautista (Bautista), citing the revocation, terminated the school's relationship with MBMSI,
resulting in the dismissal of the employees or maintenance personnel under MBMSI, except
Alfonso Bongot (Bongot) who was retired.
In September, 2009, the dismissed employees, led by their supervisor, Benigno Vigilla (Vigilla),
filed their respective complaints for illegal dismissal, reinstatement, back wages, separation pay
(for Bongot), underpayment of salaries, overtime pay, holiday pay, service incentive leave, and
13th month pay against MBMSI, Atty. Seril, PCCr, and Bautista. In their complaints, they alleged
that it was the school, not MBMSI, which was their real employer because (a) MBMSI's
3A CORPORATION LAW 2019-2020 pg. 297
certification had been revoked; (b) PCCr had direct control over MBMSI's operations; (c) there
was no contract between MBMSI and PCCr; and (d) the selection and hiring of employees were
undertaken by PCCr.
On the other hand, PCCr and Bautista contended that (a) PCCr could not have illegally dismissed
the complainants because it was not their direct employer; (b) MBMSI was the one who had
complete and direct control over the complainants; and (c) PCCr had a contractual agreement
with MBMSI, thus, making the latter their direct employer. On September 11, 2009, PCCr
submitted several documents before LA Ronaldo Hernandez, including releases, waivers and
quitclaims in favor of MBMSI executed by the complainants to prove that they were employees of
MBMSI and not PCCr. The said documents appeared to have been notarized by one Atty. Ramil
Gabao.
Issue: WON MBMSI had no legal personality to incur civil liabilities as it did not exist as a
corporation on account of the fact that its certificate of Incorporation had been revoked
Held: The executed releases, waivers and quitclaims are valid and binding notwithstanding the
revocation of MBMSI's Certificate of Incorporation. The revocation does not result in the
termination of its liabilities. Section 122 of the Corporation Code provides for a three-year winding
up period for a corporation whose charter is annulled by forfeiture or otherwise to continue as a
body corporate for the purpose, among others, of settling and closing its affairs.
Even if said documents were executed in 2009, six (6) years after MBMSI's dissolution in 2003,
the same are still valid and binding upon the parties and the dissolution will not terminate the
liabilities incurred by the dissolved corporation pursuant to Sections 122 and 145 28 of the
Corporation Code.
(144)
Reyes v. Bancom Development Corp., G.R. No. 190286,
January 11, 2018.
(145)
Tuna Processing, Inc. v. Philippine Kingford, Inc., G.R. No.
185582, February 29, 2012
TUNA PROCESSING, INC., vs. PHILIPPINE KINGFORD, INC.,
GR No. 185582
DATE: Feb. 29, 2012
DIGESTED BY: BRAWNER, YVETTE
PETITIONER: TUNA PROCESSING INC.
RESPONDENT: PHILIPPINE KINGFORD, INC.
3A CORPORATION LAW 2019-2020 pg. 298
PONENTE: JUSTICE PEREZ
TOPIC: FOREIGN CORPORATIONS
DOCTRINES: Sec. 45 of the Alternative Dispute Resolution Act of 2004 provides that the
opposing party in an application for recognition and enforcement of the arbitral award may only
raise grounds enumerated under Article V of the New York Convention, to wit: that parties were
under some incapacity, or the said agreement is not valid, or there was no proper notice of the
appointment of the arbitrator, or the award contains decisions on matters beyond the scope of the
arbitration.
FACTS: In January 2003, Kanemitsu Yamaoka ("licensor"), co-patentee of several patents, and
five (5) Philippine tuna processors namely: Angel Seafood, East Asia Fish Co., Mommy Gina
Tuna Resources, Santa Cruz Seafoods and respondent Kingford (collectively referred to as
"sponsors/licensees") entered into a Memorandum of Agreement (MOA) in order to enforce the
patents, granting licenses and collect royalties. The parties agreed to the establishment of Tuna
Processors Inc (TPI), a corporation established in the State of California, in order to implement
the Agreement.
Due to a series of events not mentioned, the licensees withdrew from petitioner TPI and
correspondingly reneged on their obligations. TPI submitted the dispute for arbitration before the
International Centre for Dispute Resolution in the State of California, US, and won the case
against respondent, awarding it $1.7M for breach of the MOA. TPI filed a Petition for Confirmation,
Recognition, and Enforcement of Foreign Arbitral Award before the RTC Makati.
Kingford filed a Motion to Dismiss which was granted on the ground that petitioner lacked
legal capacity to sue in the Philippines. TPI filed a Petition for Review on Certiorari under Rule
45.
ISSUE: WON a foreign corporation not licensed to do business in the Philippines, but which
collects royalties, sue here to enforce a foreign arbitral award.
Ruling: Yes
The Corporation Code, a general law, provides for the formation, organization and
regulation of private corporations. As a general rule, a corporation that is not licensed to do
business in the Philippines does not have the legal personality to sue in the Philippines. However,
it has been held that a foreign corporation´s capacity to sue in the Philippines is not material
insofar as the recognition and enforcement of a foreign arbital award is concerned, and the
applicable law is a special law, RA9285 which is the Alternative Dispute Resolution Act of 2004.
Sec. 45 of the Alternative Dispute Resolution Act of 2004 provides that the opposing party in an
application for recognition and enforcement of the arbitral award may raise only those grounds
that were enumerated under Article V of the New York Convention, to wit:
Article V
1. Recognition and enforcement of the award may be refused, at the request of the party against
whom it is invoked, only if that party furnishes to the competent authority where the recognition
and enforcement is sought, proof that:
(a) The parties to the agreement referred to in article II were, under the law applicable to them,
under some incapacity, or the said agreement is not valid under the law to which the parties have
subjected it or, failing any indication thereon, under the law of the country where the award was
made; or
3A CORPORATION LAW 2019-2020 pg. 299
(b) The party against whom the award is invoked was not given proper notice of the appointment
of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case; or
(c) The award deals with a difference not contemplated by or not falling within the terms of the
submission to arbitration, or it contains decisions on matters beyond the scope of the submission
to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated
from those not so submitted, that part of the award which contains decisions on matters submitted
to arbitration may be recognized and enforced; or
(d) The composition of the arbitral authority or the arbitral procedure was not in accordance with
the agreement of the parties, or, failing such agreement, was not in accordance with the law of
the country where the arbitration took place; or
(e) The award has not yet become binding on the parties, or has been set aside or suspended by
a competent authority of the country in which, or under the law of which, that award was made.
2. Recognition and enforcement of an arbitral award may also be refused if the competent
authority in the country where recognition and enforcement is sought finds that:
(a) The subject matter of the difference is not capable of settlement by arbitration under the law
of that country; or
(b) The recognition or enforcement of the award would be contrary to the public policy of that
country.
Clearly, not one of these exclusive grounds touched on the capacity to sue of the party seeking
the recognition and enforcement of the award
Pertinent provisions of the Special Rules of Court on Alternative Dispute Resolution, which was
promulgated by the Supreme Court, provide that "any party to a foreign arbitration may petition
the court to recognize and enforce a foreign arbitral award." Capacity to sue is not included.
The SC has stated that it is in the best interest of justice that in the enforcement of a foreign
arbitral award, to deny availment by the losing party of the rule that bars foreign corporations not
licensed to do business in the Philippines from maintaining a suit in the courts. When a party
enters a contract containing foreign arbitral clause, and submits itself to arbitration, it becomes
bound by the contract, by the arbitration and by the result of arbitration.
Case remanded to RTC Makati for further proceedings.
(146)
Philippine Deposit Insurance Corp. v. Citibank, N.A., G.R. No.
170290, April 11, 2012
PHILIPPINE DEPOSIT INSURANCE CORPORATION vs. CITIBANK, N.A. AND BANK OF
AMERICA, S.T. & N.A.
GR NO. 170290
DATE: APRIL 11, 2012
3A CORPORATION LAW 2019-2020 pg. 300
DIGESTED BY: YUI RECINTO
PETITIONER: PHILIPPINE DEPOSIT INSURANCE CORPORATION
RESPONDENT: CITIBANK, N.A. & BANK OF AMERICA, S.T. & N.A.
PONENTE: JUSTICE MENDOZA
DOCTRINE: Section 3(b) of the PDIC Charter provides that the head office of a foreign bank and
its other branches are separate and distinct from their Philippine branches; Also under Section
3(f) of the PDIC Charter, any obligation of a bank which is payable at the office of the bank located
outside of the Philippines shall not be a deposit for any of the purposes of this Act or included as
part of the total deposits or of the insured deposits
FACTS:
Petitioner Philippine Deposit Insurance Corporation (PDIC) is a government instrumentality
created by virtue of Republic Act (R.A.) No. 3591, as amended by R.A. No. 9302. Respondent
Citibank, N.A. (Citibank) is a banking corporation while respondent Bank of America, S.T. & N.A.
(BA) is a national banking association, both of which are duly organized and existing under the
laws of the United States of America and duly licensed to do business in the Philippines, with
offices in Makati City. In 1977, PDIC conducted an examination of the books of account of Citibank
and discovered that the latter received from its head office and other foreign branches a total of
P11,923,163,908.00 in dollars, covered by Certificates of Dollar Time Deposit that were interestbearing with corresponding maturity dates.
This funds under lodged in the books of Citibank under the account “Their Account-head
Office/branches-Foreign Currency,” were not reported to PDIC as deposit liabilities that were
subject to assessment for insurance. As such, in a letter dated March 16, 1978, PDIC assessed
Citibank for deficiency in the sum of P1,595,081.96.
PDIC also examined the books of accounts of Bank of America and revealed that it received from
its head office and its other foreign branches a total of P629,311,869.10 in dollars, covered by
Certificates of Dollar Time Deposit that were interest-bearing with corresponding maturity dates
and lodged in their books under the account “Due to Head Office/Branches,” and excluded the
same funds from its deposit liabilities.
PDIC wrote to BA on October 9, 1979, seeking the remittance of P109,264.83 representing
deficiency premium assessments for dollar deposits.
Citibank and BA each filed a petition for declaratory relief before the Court of First Instance.
In their petitions, Citibank and BA sought a declaratory judgment stating that the money
placements they received from their head office and other foreign branches were not deposits
and did not give rise to insurable deposit liabilities under Sections 3 and 4 of R.A. No. 3591 (the
PDIC Charter) and, as a consequence, the deficiency assessments made by PDIC were improper
and erroneous
The RTC and CA ruled in favor of Respondent banks. That (1) the money placements were
received as part of the bank’s internal dealings by Citibank and BA as agents of their respective
head offices which showed that the head office and the Philippine branch were considered as the
3A CORPORATION LAW 2019-2020 pg. 301
same entity; (2) that the purpose of the creation of PDIC was to protect the deposits of depositors
in the Philippines and not the deposits of the same bank through its head office or foreign
branches; (3) there was no law or jurisprudence on the treatment of inter-branch deposits between
the Philippine branch of a foreign bank and its head office and other branches for purposes of
insurance, the CA was guided by the procedure observed by the FDIC which considered interbranch deposits as non-assessable; and lastly, (4) citing Section 3(f) of R.A. No. 3591, which
specifically excludes obligations payable at the office of the bank located outside the Philippines
from the definition of a deposit or an insured deposit. Since the subject money placements were
made in the respective head offices of Citibank and BA located outside the Philippines, then such
placements could not be subject to assessment under the PDIC Charter.
ISSUES: Whether the funds placed in the Philippine branch by the head office and foreign
branches of Citibank and BA are insurable deposits under the PDIC Charter and, as such, are
subject to assessment for insurance premiums.
Ruling: NO.
As to the oneness of Citibank and Bank of America’s legal personality
The key to the resolution of this controversy is the relationship of the Philippine branches of
Citibank and BA to their respective head offices and their other foreign branches. Citing Sokoloff
vs. The National City Bank of New York, the Supreme Court of New York held that: Where a bank
maintains branches, each branch becomes a separate business entity with separate books of
account. Also, in United States vs. BCCI Holdings Luxembourg where the United States Court of
Appeals emphasized that, “while individual bank branches may be treated as independent of one
another, each branch, unless separately incorporated, must be viewed as a part of the parent
bank rather than as an independent entity.”
While under the Philippine Banking Laws, specifically Section 75 of Republic Act No. 8791,
Section 5 of Republic Act. No. 7721 and Section 1 of the Republic Act. No. 9576, supports the
conclusion that the head office of a foreign bank and its branches are considered as one legal
entity.
The purpose of the PDIC is to protect the depositing public in the event of a bank closure.
The Court also agrees with the CA that there is nothing in the definition of a “bank” and a “banking
institution” in Section 3(b) of the PDIC Charter which explicitly states that the head office of a
foreign bank and its other branches are separate and distinct from their Philippine branches.
As to the funds and its exclusion from assessment
The Court finds that the funds in question are not deposits within the definition of the PDIC Charter
and are, thus, excluded from assessment.
PDIC does not dispute the veracity of the internal transactions of the respondents which gave rise
to the issuance of the certificates of time deposit for the funds the subject of the present dispute.
Neither does it question the findings of the RTC and the CA that the money placements were
made, and were payable, outside of the Philippines, thus, making them fall under the exclusions
to deposit liabilities. PDIC also fails to impugn the truth of the testimony of John David Shaffer,
3A CORPORATION LAW 2019-2020 pg. 302
then a Fiscal Agent and Head of the Assessment Section of the FDIC, that inter-branch deposits
were excluded from the assessment base. Therefore, the determination of facts of the lower
courts shall be accepted at face value by this Court, following the well-established principle that
factual findings of the trial court, when adopted and confirmed by the CA, are binding and
conclusive on this Court, and will generally not be reviewed on appeal. the transfer of funds, which
resulted from the inter-branch transactions, took place in the books of account of the respective
branches in their head office located in the United States. Hence, because it is payable outside
of the Philippines, it is not considered a deposit pursuant to Section 3(f) of the PDIC Charter:
x x x Provided, that any obligation of a bank which is payable at the office of the bank located
outside of the Philippines shall not be a deposit for any of the purposes of this Act or included as
part of the total deposits or of the insured deposits; x x x
WHEREFORE, the petition is DENIED. The October 27, 2005 Decision of the Court of Appeals
in CA-G.R. CV No. 61316 is AFFIRMED.
(147)
Steelcase, Inc. v. Design International Selections, Inc., G.R.
No. 171995, April 18, 2012
Steelcase Inc. vs. Design International Selections
GR No. 171995
Date: April 18, 2012
Digested by: Gillian Briones
-----------------------------------------------------------------------------------Petitioner: Steelcase Inc.
Respondent: Design International Selections Inc.
Ponente: Mendoza, J.
Topic: Foreign Corporations
-----------------------------------------------------------------------------------Doctrine: Steelcase is an unlicensed foreign corporation NOT doing business in the
Philippines. The phrase doing business is clearly defined in Section 3(d) of R.A. No. 7042
(Foreign Investments Act of 1991). This definition is supplemented by its Implementing Rules and
Regulations, Rule I, Section 1(f) which elaborates on the meaning of the same phrase. The
appointment of a distributor in the Philippines is not sufficient to constitute doing business unless
it is under the full control of the foreign corporation. On the other hand, if the distributor is an
independent entity which buys and distributes products, other than those of the foreign
corporation, for its own name and its own account, the latter cannot be considered to be doing
business in the Philippines.
----------------------------------------------------------------------------------Facts:
This as a case wherein Steelcase is a foreign corporation engaged in manufacture of furniture
while Design International Selections, Inc. (DISI) is a corporation existing under Philippine Laws
engaged in the furniture business, including the distribution of furniture.
Steelcase and DISI orally entered into a dealership agreement whereby Steelcase granted DISI
the right to market, sell, distribute, install, and service its products to end-user customers within
3A CORPORATION LAW 2019-2020 pg. 303
the Philippines. The business relationship continued smoothly until it was terminated sometime
after the agreement was breached with neither party admitting any fault.
Steelcase filed a complaint for sum of money against DISI alleging, among others, that DISI had
an unpaid account. Steelcase prayed that DISI be ordered to pay actual or compensatory
damages, exemplary damages, attorney’s fees, and costs of suit.
In its Answer with Compulsory Counterclaims, DISI sought the following: (1) the issuance of a
TRO and a WPI to enjoin Steelcase from selling its products in the Philippines except through
DISI; (2) the dismissal of the complaint for lack of merit; and (3) the payment of damages. DISI
alleged that the complaint failed to state a cause of action and to contain the required allegations
on Steelcase’s capacity to sue in the Philippines despite the fact that it was doing business in the
Philippines without the required license to do so. Consequently, it posited that the complaint
should be dismissed because of Steelcase’s lack of legal capacity to sue in Philippine courts.
Steelcase filed its Motion to Admit Amended Complaint which was granted by the RTC through
then Acting Presiding Judge Diokno. However, Steelcase sought to further amend its complaint
by filing a Motion to Admit Second Amended Complaint
Acting Presiding Judge Bonifacio Sanz Maceda dismissed the complaint, granted the TRO prayed
for by DISI, denied the 2nd motion to amend complaint
Steelcase unwittingly revealed that it participated in the operations of DISI to meet the Dealer
Performance Expectation and it did not have the license to do business in the country thus it was
barred from seeking redress from our courts until it obtained the requisite license to do so
CA affirmed the RTC orders, ruling that Steelcase was a foreign corporation doing or transacting
business in the Philippines without a license.
Issue: W/N Petitioner Steelcase is a foreign corporation, YES
W/N an unlicensed foreign corporation doing business in the Philippines have capcity to
sue, NO
W/N DISI is estopped from challenging Steelcase’s ability to sue, YES
Ruling:
Steelcase is an unlicensed foreign corporation NOT doing business in the Philippines
If indeed Steelcase had been doing business in the Philippines without a license, DISI would
nonetheless be estopped from challenging the formers legal capacity to sue.
By entering into a dealership agreement with Steelcase charged DISI with the knowledge that
Steelcase was not licensed to engage in business activities in the Philippines. This Court has
carefully combed the records and found no proof that, from the inception of the dealership
agreement, DISI even brought to Steelcases attention that it was improperly doing business in
the Philippines without a license. It was only towards the latter part of 1998 that DISI deemed it
3A CORPORATION LAW 2019-2020 pg. 304
necessary to inform Steelcase of the impropriety of the conduct of its business without the
requisite Philippine license. It should, however, be noted that DISI only raised the issue of the
absence of a license with Steelcase after it was informed that it owed the latter US$600,000.00
for the sale and delivery of its products under their special credit arrangement.
By acknowledging the corporate entity of Steelcase and entering into a dealership agreement with
it and even benefiting from it, DISI is estopped from questioning Steelcases existence and
capacity to sue. This is consistent with the Courts ruling in Communication Materials and Design,
Inc. v. Court of Appeals where it was written:
Notwithstanding such finding that ITEC is doing business in the country, petitioner is
nonetheless estopped from raising this fact to bar ITEC from instituting this injunction case
against it.
A foreign corporation doing business in the Philippines may sue in
Philippine Courts although not authorized to do business here against a Philippine
citizen or entity who had contracted with and benefited by said corporation.
The rule is deeply rooted in the time-honored axiom of Commodum ex
injuria sua non habere debet no person ought to derive any advantage of his own
wrong.
The case of Rimbunan Hijau Group of Companies v. Oriental Wood Processing Corporation is
likewise instructive:
Respondents unequivocal admission of the transaction which gave rise to
the complaint establishes the applicability of estoppel against it. Rule 129,
Section 4 of the Rules on Evidence provides that a written admission made
by a party in the course of the proceedings in the same case does not require
proof. We held in the case of Elayda v. Court of Appeals, that an admission
made in the pleadings cannot be controverted by the party making such
admission and are conclusive as to him. Thus, our consistent
pronouncement, as held in cases such as Merril Lynch Futures v. Court of
Appeals, is apropos:
The rule is that a party is estopped to challenge the personality of a
corporation after having acknowledged the same by entering into a contract
with it. And the doctrine of estoppel to deny corporate existence applies to
foreign as well as to domestic corporations; one who has dealt with a
corporation of foreign origin as a corporate entity is estopped to deny its
existence and capacity. The principle will be applied to prevent a person
contracting with a foreign corporation from later taking advantage of its
noncompliance with the statutes, chiefly in cases where such person has
received the benefits of the contract . . .
3A CORPORATION LAW 2019-2020 pg. 305
Court has time and again upheld the principle that a foreign corporation doing business in the
Philippines without a license may still sue before the Philippine courts a Filipino or a Philippine
entity that had derived some benefit from their contractual arrangement because the latter is
considered to be estopped from challenging the personality of a corporation after it had
acknowledged the said corporation by entering into a contract with it.
In Antam Consolidated, Inc. v. Court of Appeals, this Court had the occasion to draw attention to
the common ploy of invoking the incapacity to sue of an unlicensed foreign corporation utilized by
defaulting domestic companies which seek to avoid the suit by the former. The Court cannot allow
this to continue by always ruling in favor of local companies, despite the injustice to the overseas
corporation which is left with no available remedy.
Steelcase is an unlicensed foreign corporation NOT doing business in the Philippines. The
phrase doing business is clearly defined in Section 3(d) of R.A. No. 7042 (Foreign Investments
Act of 1991). This definition is supplemented by its Implementing Rules and Regulations, Rule I,
Section 1(f) which elaborates on the meaning of the same phrase. The appointment of a distributor
in the Philippines is not sufficient to constitute doing business unless it is under the full control of
the foreign corporation. On the other hand, if the distributor is an independent entity which buys
and distributes products, other than those of the foreign corporation, for its own name and its own
account, the latter cannot be considered to be doing business in the Philippines.
It is undisputed that DISI was founded in 1979 and is independently owned and managed by the
spouses Leandro and Josephine Bantug. In addition to Steelcase products, DISI also distributed
products of other companies including carpet tiles, relocatable walls and theater settings. The
dealership agreement between Steelcase and DISI had been described by the owner himself.
The dealership agreement between Steelcase and DISI had been described by the owner himself
as basically a buy and sell arrangement. This clearly belies DISI’s assertion that it was a mere
conduit through which Steelcase conducted its business in the country. From the preceding facts,
the only reasonable conclusion that can be reached is that DISI was an independent contractor,
distributing various products of Steelcase and of other companies, acting in its own name and for
its own account.
(148)
Cargill, Inc. v. Intra Strata Assurance Corp., 615 SCRA 304
(2010)
(149)
Global Business Holdings, Inc. v. Surecomp Software B.V.,
633 SCRA 94 (2010)
(150)
B. Van Zuiden Bros., Ltd. v. CTVL Manufacturing Industries,
Inc., G.R. No. 147905, May 28, 2007, 523 SCRA 233
(151)
Agilent Technologies Singapore (PTE) Ltd. v. Integrated Silicon
Technology Philippines Corp., G.R. No. 154618, April 2004.
3A CORPORATION LAW 2019-2020 pg. 306
(152)
Yuico v. Quiambao, G.R. No. 180416, June 2, 2014
(152) Yuico v. Quiambao
GR No. 180416
June 2, 2014
Digested: Jarah Relato
___________________
Petitioner: Aderito Z. Yujuico and Bonifacio C. Sumbilla
Respondent: Cezar Quiambao and Eric Pilapil
Ponente: Justice Perez
___________________
Doctrine:
A criminal action based on the violation of a stockholder's right to examine or
inspect the corporate records and the stock and transfer book of a corporation
under the second and fourth paragraphs of Section 74 of the Corporation Code
can only be maintained against corporate officers or any other persons acting on
behalf of such corporation
___________________
FACTS:
Strategic Alliance Development Corporation (STRADEC) is a domestic corporation operating as
a business development and investment company. During the annual stockholder's meeting of
STRADEC, petitioner (Yujuico) was elected as president and chairman of the company. Yujuico
replaced respondent (Quiambao).STRADEC appointed petitioner (Sumbilla) as treasurer and one
Joselito John G. Blando (Blando) as corporate secretary. Blando replaced respondent (Pilapil),
the previous corporate secretary of STRADEC
Petitioners filed a criminal complaint against respondents and one Giovanni T. Casanova
(Casanova). The complaint accuses respondents and Casanova of violating Section 74 in relation
to Section 144 of the Corporation Code. Petitioners theorize that the refusal by the respondents
and Casanova to turnover STRADEC's corporate records and stock and transfer book violates
their right, as stockholders, directors and officers of the corporation, to inspect such records and
book under Section 7 4 of the Corporation Code. thus respondents may be held criminally liable
pursuant to Section 144 of the Corporation Code
The OCP absolved Casanova but found probable cause to hail respondents to court on two (2)
offenses: (1) for removing the stock and transfer book of STRADEC from its principal office, and
(2) for refusing access to, and examination of, the corporate records and the stock and transfer
book of STRADEC at its principal office. Pursuant to the resolution, two informations were filed
against the respondents before the(MeTC) of Pasig City. The informations were docketed as
Criminal Case No. 89723 and Criminal Case No. 89724
Criminal Case No. 89723 is for the offense of removing the stock and transfer book of
STRADEC from its principal office while Criminal Case No. 89724, on the other hand, covers
3A CORPORATION LAW 2019-2020 pg. 307
the offense of refusing access to, and examination of, the corporate records and the stock
and transfer book of STRADEC at its principal office.
In dismissing Criminal Case No. 89723, the MeTC held that Section 74, in relation to Section 144,
of the Corporation Code only penalizes the act of "refusing to allow any director, trustee,
stockholder or member of the corporation to examine and copy excerpts from the records or
minutes of the corporation" and that act is already the subject matter of Criminal Case No. 89724.
The RTC issued an Order granting respondents' certiorari petition and directing the dismissal of
Criminal Case No. 89724. It further pointed out that, at most, the evidence on record only supports
probable cause that the respondents were withholding the stock and transfer book of STRADEC.
The RTC, however, opined that refusing to allow inspection of the stock and transfer book, as
opposed to refusing examination of other corporate records, is not punishable as an offense under
the Corporation Code
ISSUE: WON refusal to allow inspection of the stock and transfer book of a corporation constitutes
a violation which is punishable under the Corporation Code
RULING: Petition Denied
The RTC indeed made an inaccurate pronouncement when it held that the act of refusing to allow
inspection of the stock and transfer book of a corporation is not a punishable offense under the
Corporation Code. Such refusal, when done in violation of Section 74(4) of the Corporation Code,
properly falls within the purview of Section 144 of the same code and thus may be penalized as
an offense however, A criminal action based on the violation of a stockholder's right to examine
or inspect the corporate records and the stock and transfer book of a corporation under the second
and fourth paragraphs of Section 74 of the Corporation Code-such as Criminal Case No. 89724-can only be maintained against corporate officers or any other persons acting on behalf of such
corporation. The submissions of the petitioners during the preliminary investigation, however,
clearly suggest that respondents are neither in relation to STRADEC
The problem with the petitioners' complaint and the evidence that they submitted during
preliminary investigation is that they do not establish that respondents were acting on behalf of
STRADEC. Quite the contrary, the scenario painted by the complaint is that the respondents are
merely outgoing officers of STRADEC who, for some reason, withheld and refused to turn-over
the company records of STRADEC; that it is the petitioners who are actually acting on behalf of
STRADEC; and that STRADEC is actually merely trying to recover custody of the withheld
records.
In other words, petitioners are not actually invoking their right to inspect the records and the stock
and transfer book of STRADEC under the second and fourth paragraphs of Section 74. What they
seek to enforce is the proprietary right of STRADEC to be in possession of such records and
book. Such right, though certainly legally enforceable by other means, cannot be enforced by a
criminal prosecution based on a violation of the second and fourth paragraphs of Section 74. That
is simply not the situation contemplated by the second and fourth paragraphs of Section 74 of the
Corporation Code.
3A CORPORATION LAW 2019-2020 pg. 308
(153)
Loreli Lim Po v. DOJ, G.R. No. 195198, February 11, 2013
(154)
James Ient v. Tullett (Prebon) Philippines, Inc., G.R. No.
189158, January 11, 2017
James Ient and Maharlika Schulze vs Tullett Prebon Inc.
GR No. 189158
Date: January 11, 2017
Digested by: Therese Javier
________
Petitioner: James Ient and Maharlika Schulze
Respondent: Tullett Prebon
Ponente: J. Leonardo- De Castro
Topic: Doctrine of Piercing the veil of Corporate Fiction
_________
Doctrine: The Corporation Code was intended as a regulatory measure, not primarily as a penal
statute. Sections 31 to 34 in particular were intended to impose exacting standards of fidelity on
corporate officers and directors but without unduly impeding them in the discharge of their work
with concerns of litigation. Considering the object and policy of the Corporation Code to
encourage the use of the corporate entity as a vehicle for economic growth, the Supreme Court
cannot espouse a strict construction of Sections 31 and 34 as penal offenses in relation to Section
144 in the absence of unambiguous statutory language and legislative intent to that effect.
When Congress intends to criminalize certain acts it does so in plain, categorical language,
otherwise such a statute would be susceptible to constitutional attack. As earlier discussed, this
can be readily seen from the text of Section 45 (j) of Republic Act No. 8189 and Section 74 of the
Corporation Code. The Supreme Court stressed that had the Legislature intended to attach penal
sanctions to Sections 31 and 34 of the Corporation Code it could have expressly stated such
intent in the same manner that it did for Section 74 of the same Code.
_________
Facts: Petitioner lent is a British national and the Chief Financial Officer of Tradition Asia Pacific
in Singapore. Petitioner Schulze is a Filipino-German who does application support for Traditional
Financial Services in London. Tradition Asia and Tradition London are subsidiaries of Compagnie
Financiere Tradition and are part of the "Tradition Group." The Tradition Group is allegedly the
third largest group of Inter-dealer Brokers (IDB) in the world while the corporate organization, of
which respondent Tullett is a part, is supposedly the second largest. In other words, the Tradition
Group and Tullett are competitors in the inter-dealer broking business. IDBs purportedly "utilize
the secondary fixed income and foreign exchange markets to execute their banks and their bank
customers' orders, trade for a profit and manage their exposure to risk, including credit, interest
3A CORPORATION LAW 2019-2020 pg. 309
rate and exchange rate risks." In the Philippines, the clientele for IDBs is mainly comprised of
banks and financial institutions.
Tullett was the first to establish a business presence in the Philippines and had been engaged in
the inter-dealer broking business or voice brokerage here since 1995. Meanwhile, on the part of
the Tradition Group, the needs of its Philippine clients were previously being serviced by Tradition
Asia in Singapore. The other IDBs in the Philippines are Amstel and Icap.
Sometime in August 2008, in line with Tradition Group's motive of expansion and diversification
in Asia, petitioners Ient and Schulze were tasked with the establishment of a Philippine subsidiary
of Tradition Asia to be known as Tradition Financial Services Philippines, Inc. (Tradition
Philippines). Tradition Philippines was registered with the Securities and Exchange Commission
(SEC) with petitioners Ient and Schulze, among others, named as incorporators and directors in
its Articles of Incorporation.
Tullett, through one of its directors, Gordon Buchan, filed a Complaint-Affidavit with the City
Prosecution Office against the officers/employees of the Tradition Group for violation of the
Corporation Code. Impleaded as respondents in the Complaint-Affidavit were petitioners Ient and
Schulze, Jaime Villalon (Villalon), who was formerly President and Managing Director of Tullett,
Mercedes Chuidian (Chuidian), who was formerly a member of Tullett's Board of Directors, and
other John and Jane Does. Villalon and Chuidian were charged with using their former positions
in Tullett to sabotage said company by orchestrating the mass resignation of its entire brokering
staff in order for them to join Tradition Philippines. With respect to Villalon, Tullett claimed that the
former held several meetings with members of Tullett's Spot Desk and brokering staff in order to
convince them to leave the company. Villalon likewise supposedly intentionally failed to renew
the contracts of some of the brokers. A meeting was also allegedly held in Howzat Bar in Makati
City where petitioners and a lawyer of Tradition Philippines were present. At said meeting, the
brokers of complainant Tullett were purportedly induced, en masse, to sign employment contracts
with Tradition Philippines and were allegedly instructed by Tradition Philippines' lawyer as to how
they should file their resignation letters.
Complainant also claimed that Villalon asked the brokers present at the meeting to call up Tullett's
clients to inform them that they had already resigned from the company and were moving to
Tradition Philippines. Villalon allegedly informed Mr. Barry Dennahy, Chief Operating Officer of
Tullett Prebon in the Asia-Pacific, through electronic mail that all of Tullett's brokers had resigned.
Subsequently, in another meeting with Ient and Tradition Philippines' counsel, indemnity contracts
in favor of the resigning employees were purportedly distributed by Tradition Philippines.
According to Tullett, respondents Villalon and Chuidian (who were still its directors or officers at
the times material to the Complaint-Affidavit) violated Sections 31 and 34 of the Corporation Code
which made them criminally liable under Section 144. As for petitioners Ient and Schulze, Tullett
asserted that they conspired with Villalon and Chuidian in the latter's acts of disloyalty against the
company.
3A CORPORATION LAW 2019-2020 pg. 310
Issue: WON Sec. 144 of the Corporation Code applies to Sec 31 and 34, thus, making it a penal
offense
Held: The Corporation Code was intended as a regulatory measure, not primarily as a penal
statute. Sections 31 to 34 in particular were intended to impose exacting standards of fidelity on
corporate officers and directors but without unduly impeding them in the discharge of their work
with concerns of litigation. Considering the object and policy of the Corporation Code to
encourage the use of the corporate entity as a vehicle for economic growth, the Supreme Court
cannot espouse a strict construction of Sections 31 and 34 as penal offenses in relation to Section
144 in the absence of unambiguous statutory language and legislative intent to that effect.
When Congress intends to criminalize certain acts it does so in plain, categorical language,
otherwise such a statute would be susceptible to constitutional attack. As earlier discussed, this
can be readily seen from the text of Section 45 (j) of Republic Act No. 8189 and Section 74 of the
Corporation Code. The Supreme Court stressed that had the Legislature intended to attach penal
sanctions to Sections 31 and 34 of the Corporation Code it could have expressly stated such
intent in the same manner that it did for Section 74 of the same Code.
As additional support for its contentions, respondent cites several opinions of the SEC, applying
Section 144 to various violations of the Corporation Code in the imposition of graduated fines. In
respondent's view, these opinions show a consistent administrative interpretation on the
applicability of Section 144 to the other provisions of the Corporation Code and allegedly render
absurd petitioners' concern regarding the "over-criminalization" of the Corporation Code. We find
respondent's reliance on these SEC opinions to be misplaced. As petitioners correctly point out,
the fines imposed by the SEC in these instances of violations of the Corporation Code are in the
nature of administrative fines and are not penal in nature. Without ruling upon the soundness of
the legal reasoning of the SEC in these opinions, the Supreme Court note that these opinions in
fact support the view that even the SEC construes "penalty" as used in Section 144 as
encompassing administrative penalties, not only criminal sanctions. In all, these SEC issuances
weaken rather than strengthen respondent's case.
(156)
Power Homes Unlimited Corp. v. SEC, G.R. No. 164182,
February 26, 2008
(157)
Securities and Exchange Commission v. Prosperity.Com, Inc.,
G.R. No. 164197, January 25, 2012
Securities
and
Exchange
Commission
v. Prosperity.Com,Inc.,
G.R. No. 164197
January25,2012
Digested by: James San Diego
3A CORPORATION LAW 2019-2020 pg. 311
Petitioner: SECURITIES AND EXCHANGE COMMISSION
Respondent: PROSPERITY.COM, INC.
Ponente: ABAD, J.
Topic: Registration of an investment contract
Facts:
Prosperity.com, Inc. (PCI) came up with a scheme wherein a buyer of its services gets incentives
and commissions by sponsoring and referring down-line buyers to PCI. This scheme was
patterned after another company that stopped operations after being enjoined by SEC. Aggrieved,
elements of the other company filed a complaint against PCI with SEC, where the latter held that
PCI’s scheme constitutes an investment contract, which should have been registered with the
same. Aggrieved, PCI filed a petition for certiorari with CA, which held that PCI’s scheme is not
an investment contract following the Howey Test, which needed to be registered with SEC.
Issue:
Whether or not PCI’s scheme constitutes an investment contract that requires registration
Ruling:
No. Investment contracts are “securities” that have to be registered with the SEC before they can
be distributed and sold; a contract, transaction, or scheme where a person invests his money in
a common enterprise and is led to expect profits primarily for the efforts of others. Following the
Howey Test, for an investment contract to exist, the following elements must concur:1) a contract,
transaction, or scheme; 2) an investment of money; 3) investment is made in a common
enterprise; 4) expectation of profits; and 5) profits arising primarily from the efforts of others. In
this case, PCI’s clients do not make such investments; rather they are engage in network
marketing, a scheme adopted by companies for getting people to buy their products where the
buyer can become a down-line seller, who earns commissions from purchases made by new
buyers whom he refers to the person who sold the product to him, is not an investment contract.
The commissions, interest in real estate, and insurance coverage are incentives to down-line
sellers to bring in other customers which can hardly be regarded as profits from investment of
money under the Howey Test.
(158)
Securities and Exchange Commission v. Santos, G.R. No.
195542, March 19, 2014
3A CORPORATION LAW 2019-2020 pg. 312
(159)Abacus Securities Corp. v. Ampil
G.R. No. 160016
Date: February 17, 2006
Digested by: Ray Mark Vallesteros
----------------------------------------------------------------------------------Petitioner: ABACUS SECURITIES CORPORATION
Respondent: RUBEN U. AMPIL
Ponente: PANGANIBAN, CJ
Topic: INSIDER TRADING, SHORT SWING TRANSACTIONS AND MANIPULATION OF
SECURITY PRICES AND OTHER FRAUDULENT ACTS
----------------------------------------------------------------------------------Doctrine: Extension or maintenance of credits on non-margin transactions, are specifically
prohibited under Section 23(b)
Trading on credit (or "margin trading") allows investors to buy more securities than their cash
position would normally allow.
----------------------------------------------------------------------------------Facts: In April 1997, respondent opened a cash or regular account with petitioner for buying and
selling securities as evidenced by the Account Application Form. The parties’ business
relationship was governed by the terms and conditions stated therein.
Since April 10, 1997, respondent actively traded his account, and as a result of such trading
activities, he accumulated an outstanding obligation in favor of petitioner in the sum of
P6,617,036.22 as of April 30, 1997. Respondent failed to pay petitioner his liabilities. Petitioner
sold respondent’s securities to set off against his unsettled obligations.
After the sale of respondent’s securities and application of the proceeds thereof against his
account, respondent’s remaining unsettled obligation to petitioner was P3,364,313.56.
Petitioner demanded that respondent settle his obligation plus the agreed penalty charges
accruing thereon equivalent to the average 90-day Treasury Bill rate plus 2% per annum. Despite
said demand and the lapse of said requested extension, respondent failed and/or refused to pay
his accountabilities to petitioner. Respondent claims that he was induced to trade in a stock
security with petitioner because the latter allowed offset settlements wherein he is not obliged to
pay the purchase price. Rather, it waits for the customer to sell. And if there is a loss, petitioner
only requires the payment of the deficiency (i.e., the difference between the higher buying price
and the lower selling price). In addition, it charges a commission for brokering the sale. However,
if the customer sells and there is a profit, petitioner deducts the purchase price and delivers only
the surplus – after charging its commission.
----------------------------------------------------------------------------------3A CORPORATION LAW 2019-2020 pg. 313
Issue: Whether or not respondent is liable
Ruling: Yes, respondent is liable for the first but not for the subsequent trades. These margin
requirements are applicable only to transactions entered into by the present parties subsequent
to the initial trades of April 10 and 11, 1997. Thus, we hold that petitioner can still collect from
respondent to the extent of the difference between the latter’s outstanding obligation as of April
11, 1997 less the proceeds from the mandatory sell out of the shares pursuant to the RSA Rules.
Petitioner’s right to collect is justified under the general law on obligations and contracts.
In the present case, petitioner failed to enforce the terms and conditions of its Agreement with
respondent, specifically paragraph 8 thereof, purportedly acting on the plea of respondent to give
him time to raise funds therefor. By failing to ensure respondent’s payment of his first purchase
transaction within the period prescribed by law, thereby allowing him to make subsequent
purchases, petitioner effectively converted respondent’s cash account into a credit account.
However, extension or maintenance of credits on non-margin transactions, are specifically
prohibited under Section 23(b). Thus, petitioner was remiss in its duty and cannot be said to have
come to court with “clean hands” insofar as it intended to collect on transactions subsequent to
the initial trades of April 10 and 11, 1997.
When petitioner tolerated the subsequent purchases of respondent without performing its
obligation to liquidate the first failed transaction, and without requiring respondent to deposit cash
before embarking on trading stocks any further, petitioner, as the broker, violated the law at its
own peril.
(160)
SEC v. Interport Resources Corp., G.R. No. 135808, October
6, 2008
SEC vs Interport Resources Corp.
GR No. 135808
October 6, 2008
Digested by: Ivan Earl Zapanta
----------------------------------------------------------------------------------Petitioner: Securities and Exchange Commission
Respondent: Interport Resources Corporation, Manuel Recto, Rene Villarica, Pelagio Ricalde,
Antonio Reina, Francisco Anonuevo, Joseph Sy, and Santiago Tanchan, Jr.
Ponente: Chico-Nazario, J.
Topic: INSIDER TRADING, SHORT SWING TRANSACTIONS AND MANIPULATION OF
SECURITY PRICES AND OTHER FRAUDULENT ACTS.
----------------------------------------------------------------------------------Doctrine: The mere absence of implementing rules cannot effectively invalidate provisions of law
where a reasonable construction that will support the law may be given. It is well established that
administrative authorities have the power to promulgate rules and regulations to confirm to the
3A CORPORATION LAW 2019-2020 pg. 314
terms and standards prescribed by the statute as well as purport to carry into effect its general
policies.
The insider's misuse of nonpublic and undisclosed information is the gravamen of illegal conduct.
The intent of the law is the protection of investors against fraud, committed when an insider, using
secret information, takes advantage of an uninformed investor. Insiders are obligated to disclose
material information to the other party or abstain from trading the shares of his corporation. This
duty to disclose or abstain is based on two factors: 1) the existence of a relationship giving access,
directly or indirectly to information intended to be available only for a corporate purpose and not
for the personal benefit of anyone and 2) the inherent unfairness involved when a party takes
advantage of such information knowing it is unavailable to those with whom he is dealing.
----------------------------------------------------------------------------------Facts:
•
August 6, 1994: Board of Directors of IRC approved a Memorandum of Agreement (MoA)
with Ganda Holdings Berhad (GHB).
1.
Under the MoA, IRC acquired 100% or the entire capital stock of Ganda Energy Holdings,
Inc. (GEHI), which would own and operate a 102 megawatt gas turbine power-generating barge.
2.
Also stipulated is that GEHI would assume a five-year power purchase contract with
National Power Corp. At that time, GEHI’s power-generating barge was 97% complete and would
go on-line by mid-Sept 1994.
3.
In exchange, IRC will issue to GHB 55% of the expanded capital stock of IRC (amounting
to 40.88 billion shares – total par value of P488.44 million).
4.
On the side, IRC would acquire 67% of the entire capital stock of Philippine Racing Club,
Inc. (PRCI). PRCI owns 25.724 hectares of real estate property in Makati.
5.
Under the Agreement, GHB, a member of the Westmont Group of Companies in Malaysia,
shall extend or arrange a loan required to pay for the proposed acquisition by IRC of PRCI.
•
August 8, 1994: IRC alleged that a press release announcing the approval of the
agreement was sent through fax to Philippine Stock Exchange (PSE) and the SEC, but that the
fax machine of SEC could not receive it. Upon the advice of SEC, IRC sent the press release on
the morning of 9 Aug 1994.
•
SEC averred that it received reports that IRC failed to make timely public disclosures of
its negotiations with GHB and that some of its directors heavily traded IRC shares utilizing this
material insider information.
•
August 14 1994: SEC Chairman issued a directive requiring IRC to submit to SEC a copy
of its aforesaid MoA with GHB and further directed all principal officers of IRC to appear at a
hearing before the Brokers and Exchanges Dept (BED) of SEC to explain IRC’s failure to
immediately disclose the information as required by the Rules on Disclosure of Material Facts by
Corporations Whose Securities are Listed in Any Stock Exchange or Registered/Licensed Under
the Securities Act
•
IRC sent a letter to SEC, attaching copies of MoA and its directors appeared to explain
IRC’s alleged failure to immediately disclose material information as required under the Rules on
Disclosure of Material Facts.
•
19 Sept 1994 – SEC Chairman issued an Order finding that IRC violated the Rules on
Disclosure when it failed to make timely disclosure, and that some of the officers and directors of
3A CORPORATION LAW 2019-2020 pg. 315
IRC entered into transactions involving IRC shares in violation of Sec 30, in relation to Sec 36 of
the Revised Securities Act.
•
IRC filed an Omnibus Motion (later an Amended Omnibus Motion) alleging that SEC had
no authority to investigate the subject matter, since under Sec 8 of PD 902-A, as amended by PD
1758, jurisdiction was conferred upon the Prosecution and Enforcement Dept (PED) of SEC
•
IRC also claimed that SEC violated their right to due process when it ordered that the
respondents appear before SEC and show cause why no administrative, civil or criminal sanctions
should be imposed on them, and thus, shifted the burden of proof to the respondents. They filed
a Motion for Continuance of Proceedings.
•
No formal hearings were conducted in connection with the Motions.
•
January 25, 1995: SEC issued an Omnibus Order: creating a special investigating panel
to hear and decide the case in accordance with Rules of Practice and Procedure before the PED,
SEC; to recall the show cause orders; and to deny the Motion for Continuance for lack of merit.
•
Respondents filed a petition before the CA questioning the Omnibus Orders and filed a
Supplemental Motion wherein they prayed for the issuance of a writ of preliminary injunction.
•
May 5, 1995: CA granted their motion and issued a writ of preliminary injunction, which
effectively enjoined SEC from filing any criminal, civil or administrative case against the
respondents.
August 20, 1998 – CA promulgated a Decision
•
Determined that there were no implementing rules and regulations regarding disclosure,
insider trading, or any of the provisions of the Revised Securities Acts which respondents
allegedly violated.
•
It found no statutory authority for SEC to initiate and file any suit for civil liability under Sec
8, 30 and 36 of the Revised Securities Act, thus, it ruled that no civil, criminal or administrative
proceedings may possibly be held against the respondents without violating their rights to due
process and equal protection.
•
It further resolved that absent any implementing rules, the SEC cannot be allowed to
quash the assailed Omnibus Orders
•
Further decided that the Rules of Practice and Procedure before the PED did not comply
with the statutory requirements contained in the Administrative Code of 1997. Section 9, Rule V
of the Rules of Practice and Procedure before the PED affords a party the right to be present but
without the right to cross-examine witnesses presented against him, in violation of Sec 12(3),
Chap 3, Book VII of the Administrative Code.
----------------------------------------------------------------------------------Issues: 1. Do sections 8, 30, and 36 of the Revised Securities Act require the enactment of
implementing rules to make them binding and effective? NO.
2. Does the right to cross-examination be demanded during investigative proceedings before the
PED? NO.
3. May a criminal case still be filed against the respondents despite the repeal of Sections 8, 30,
and 36 of the Revised Securities Act? YES.
3A CORPORATION LAW 2019-2020 pg. 316
4. Did SEC retain the jurisdiction to investigate violations of the Revised Securities Act, reenacted in the Securities Regulations Code, despite the abolition of the PED? YES.
5. Does the instant case prescribed already? NO.
6. Is CA justified in denying SEC’s Motion for Leave to Quash SEC Omnibus Orders? YES.
Ruling: The petition is impressed with merit.
* It should be noted that while the case was pending in SC, RA 8799 (Securities Regulation Code)
took effect on 8 August 2000. Section 8 of PD 902-A, as amended, which created the PED, was
already repealed as provided for in Sec 76 of Securities Regulation Code. Thus, under the new
law, the PED has been abolished, and the Securities Regulation Code has taken the place of the
Revised Securities Act.
On the merits:
1.
Sections 8, 30, and 36 of the Revised Securities Act (RSA) do not require the enactment
of implementing rules to make them binding and effective.
• The mere absence of implementing rules cannot effectively invalidate provisions of law, where
a reasonable construction that will support the law may be given.
• Absence of any constitutional or statutory infirmity, which may concern Secs 30 and 36 of RSA,
the provisions are legal and binding.
• Every law has in its favour the presumption of validity. Unless and until a specific provision of
the law is declared invalid and unconstitutional, the same is valid and binding for all intents and
purposes.
• The Court does not discern any vagueness or ambiguity in Sec 30 and 36 of RSA.
Sec 30 – Insider’s duty to disclose when trading
Insiders are obligated to disclose material information to the other party or abstain from trading
the shares of his corporation. This duty to disclose or abstain is based on two factors: 1. The
existence of a relationship giving access, directly or indirectly, to information intended to be
available only for a corporate purpose and not for the personal benefit of anyone.; 2. The inherent
unfairness involved when a party takes advantage of such information knowing it is unavailable
to those with whom he is dealing.
The intent of the law is the protection of investors against fraud, committed when an insider, using
secret information, takes advantage of an uninformed investor.
In some cases, however, there may be valid corporate reasons for nondisclosure of material
information. Where such reasons exist, an issuer’s decision not to make any public disclosures is
not ordinarily considered as a violation of insider trading. At the same time, the undisclosed
information should not be improperly used for non-corporate purposes, particularly to
3A CORPORATION LAW 2019-2020 pg. 317
disadvantage other persons with whom an insider might transact, and therefore the insider must
abstain from entering into transactions involving such securities.
Sec 36 – Directors, officers and principal stockholders
A straightforward provision that imposes upon: 1. A beneficial owner of more than 10 percent of
any class of any equity security or; 2.
A director or any officer of the issuer of such security
the obligation to submit a statement indicating his or her ownership of the issuer’s securities and
such changes in his or her ownership.
• Sections 30 and 36 of the RSA were enacted to promote full disclosure in the securities market
and prevent unscrupulous individuals, who by their positions obtain non-public information, from
taking advantage of an uninformed public.
• Sec 30 prevented the unfair use of non-public information in securities transactions, while Sec
36 allowed the Sec to monitor the transactions entered into by corporate officers and directors as
regards the securities of their companies.
•
The lack of implementing rules cannot suspend the effectivity of these provisions.
2.
The right to cross-examination is not absolute and cannot be demanded during
investigative proceedings before the PED.
• Sec 4, Rule 1 of the PED Rules of Practice and Procedure, categorically stated that the
proceedings before the PED are summary in nature, not necessarily adhering to or following the
technical rules of evidence obtaining in the courts of law
• Rule V – Submission of documents, determination of necessity of hearing and disposition of
case. A formal hearing was not mandatory, it was within the discretion of the Hearing Officer
whether there was a need for a formal hearing. Since the holding of a hearing before the PED is
discretionary, then the right to cross-examination could not have been demanded by either party.
• Chapter 3, Book VII of the Administrative Code refers to “Adjudication” and does not affect the
investigatory functions of the agencies.
• The law creating PED empowers it to investigate violations of the rules and regulations
promulgated by the SEC and to file and prosecute such cases.
•
It fails to mention any adjudicatory functions insofar as the PED is concerned. Thus, PED
Rules of Practice need not comply with the provisions of the Administrative Code on adjudication.
•
The only powers which the PED was likely to exercise over the respondents were
investigative in nature
In proceedings before administrative or quasi-judicial bodies, such as NLRC and POEA, created
under laws which authorize summary proceedings, decisions may be reached on the basis of
position papers or other documentary evidence only. They are not bound by technical rules of
procedure and evidence. It is enough that every litigant be given reasonable opportunity to appear
and defend his right and to introduce relevant evidence in his favour, to comply with the due
process requirements.
3A CORPORATION LAW 2019-2020 pg. 318
3.
The Securities Regulation Code (SRC) did not repeal Sections 8, 30, and 36 of the
Revised Securities Act since said provisions were re-enacted in the new law.
• When the repealing law punishes the act previously penalized under the old law, the act
committed before the re-enactment continues to be an offense and pending cases are not
affected.
•
Sec 8 of RSA, which previously provided for the registration of securities and the
information that needs to be included in the registration statements, was expanded under Sec 12
of the Securities Regulations Code. Further details of the information required to be disclosed by
the registrant are explained.
•
Sec 30 of RSA has been re-enacted as Sec 27 of SRC, still penalizing an insider’s misuse
of material and non-public information about the issuer, for the purpose of protecting public
investors.
•
Sec 23 of SRC was practically lifted from Sec 36 of RSA.
The legislature had not intended to deprive the courts of their authority to punish a person charged
with violation of the old law that was repealed
4.
The SEC retained the jurisdiction to investigate violations of the Revised Securities Act,
re-enacted in the Securities Regulations Code, despite the abolition of the PED.
Sec 53 of SRC clearly provides that criminal complaints for violations of rules and regulations
enforced or administered by SEC shall be referred to the DOJ for preliminary investigation, while
the SEC nevertheless retains limited investigatory powers. SEC may still impose the appropriate
administrative sanctions under Sec 54.
5.
The instant case has not yet prescribed.
• Respondents point out that the prescription period applicable to offenses punished under special
laws is 12 years. Since the offense was committed in 1994, they reasoned that prescription set in
as early as 2006 and rendered this case moot.
• It is an established doctrine that a preliminary investigation interrupts the prescription period. A
preliminary investigation is essentially a determination whether an offense has been committed,
and whether there is probable cause for the accused to have committed as offense.
6.
The CA was justified in denying SEC’s Motion for Leave to Quash SEC Omnibus Orders
dated 23 October 1995.
• Since it found other issues that were more important than whether or not the PED was the proper
body to investigate the matter, CA denied SEC’s motion for leave to quash SEC Omnibus Orders.
In all, the SC rules that no implementing rules were needed to render effective Sections 8, 30,
and 36 of the Revised Securities Act; nor was the PED Rules of Practice and Procedure invalid,
prior to the enactment of the Securities Regulations Code, for failure to provide parties with the
right to cross-examine the witnesses presented against them. Thus, the respondents maybe
investigated by the appropriate authority under the proper rules of procedure of the Securities
Regulations Code for violations of Secs 8, 30, and 36 of the Revised Securities Act.
3A CORPORATION LAW 2019-2020 pg. 319
The instant Petition is Granted. The SC reversed the decision of the CA. The SC also declares
that the investigation of the respondents for violations of Sec. 8, 30, and 36 of the Revised
Securities Act may be undertaken by the proper authorities in accordance with the Securities
Regulation Code.
J. Tinga – Concurring:
•
Manipulative devices and deceptive practices, including insider trading, throw a monkey
wrench right into the heart of the securities industry – when someone trades in the market with
unfair advantage in the form of highly valuable secret inside information, all other participants are
defrauded.
J. Carpio – Dissenting:
•
Proceedings referred to in Sec 2 of Act No. 3326 are judicial proceedings and not
administrative proceedings. Contrary to the majority opinion’s claim that “a preliminary
investigation interrupts the prescriptive period,“ only the institution of judicial proceedings can
interrupt the running of the prescriptive period. The criminal charges may proceed separately and
independently of the administrative proceedings.
(161)
La Bugal-B’Laan Tribal Association, Inc. v. Ramos, G.R. No.
127882, December 1, 2004, 445 SCRA 1
La Bugal-B’Laan Tribal Association, Inc. v. Ramos
G.R. No. 127882
December 1, 2004
Digested by: Abrhiem Nico Angeles
----------------------------------------------------------------------------------Petitioner: LA BUGAL-B'LAAN TRIBAL ASSOCIATION, INC et al
Respondent: VICTOR O. RAMOS, Secretary, Department of Environment and Natural Resources
(DENR); HORACIO RAMOS, Director, Mines and Geosciences Bureau (MGB-DENR); RUBEN
TORRES, Executive Secretary; and WMC (PHILIPPINES), INC.
Ponente: PANGANIBAN, J.
Topic: INSIDER TRADING, SHORT SWING TRANSACTIONS AND MANIPULATION OF
SECURITY PRICES AND OTHER FRAUDULENT ACTS.
----------------------------------------------------------------------------------Doctrine: The Supreme Court upheld the constitutionality of the Philippine Mining Law, its
implementing rules and regulations – insofar as they relate to financial and technical agreements
as well as the subject Financial and Technical Assistance Agreement.
Full control is not anathematic to day-to-day management by the contractor, provided that the
State retains the power to direct overall strategy; and to set aside, reverse or modify plans and
actions of the contractor. The idea of full control is similar to that which is exercised by the board
3A CORPORATION LAW 2019-2020 pg. 320
of directors of a private corporation, the performance of managerial, operational, financial,
marketing and other functions may be delegated to subordinate officers or given to contractual
entities, but the board retains full residual control of the business.
----------------------------------------------------------------------------------Facts:
On January 27, 2004, the Court en banc promulgated its Decision granting the Petition and
declaring the unconstitutionality of certain provisions of Philippine Mining Act of 1995 (RA 7942)
and its implementing rules and regulation, DAO 96-40, as well as of the entire Financial and
Technical Assistance Agreement (FTAA) executed between the government and Western Mining
Corporation Philippines (WMCP), mainly on the finding that FTAAs are service contracts
prohibited by the 1987 Constitution.
The Decision struck down the subject FTAA for being similar to service contracts, which, though
permitted under the 1973 Constitution, were subsequently denounced for being antithetical to the
principle of sovereignty over our natural resources, because they allowed foreign control over the
exploitation of our natural resources, to the prejudice of the Filipino nation.
The Decision quoted several legal scholars and authors who had criticized service contracts for,
inter alia, vesting in the foreign contractor exclusive management and control of the enterprise,
including operation of the field in the event petroleum was discovered; control of production,
expansion and development; nearly unfettered control over the disposition and sale of the
products discovered/extracted; effective ownership of the natural resource at the point of
extraction; and beneficial ownership of our economic resources. According to the Decision, the
1987 Constitution (Section 2 of Article XII) effectively banned such service contracts.
----------------------------------------------------------------------------------Issue: WON FTAA should be struck down for being unethical because it allows foreign control
over our natural resources.
Ruling: No. Although Section 2of Article XII of the 1987 Constitution sanctions the participation of
foreign-owned corporations in the exploration, development, and utilization of natural resources,
it imposes certain limitations or conditions to agreements with such corporations. First, the parties
to FTAAs. Only the President, in behalf of the State, may enter into these agreements, and only
with corporations. By contrast, under the 1973 Constitution, a Filipino citizen, corporation or
association may enter into a service contract with a foreign person or entity. Second, the size of
the activities: only large-scale exploration, development, and utilization are allowed. The largescale usually refers to very capital-intensive activities. Third, the natural resources subject of the
activities is restricted to minerals, petroleum and other mineral oils, the intent being to limit service
contracts to those areas where Filipino capital may not be sufficient. Fourth, consistency with the
provisions of statute. The agreements must be in accordance with the terms and conditions
provided by law. Fifth, Section 2 prescribes certain standards for entering into such agreements.
The agreements must be based on real contributions to economic growth and general welfare of
the country. Sixth, the agreements must contain rudimentary stipulations for the promotion of the
3A CORPORATION LAW 2019-2020 pg. 321
development and use of local scientific and technical resources. Seventh, the notification
requirement. The President shall notify Congress of every financial or technical assistance
agreement entered into within thirty days from its execution. Finally, the scope of the agreements.
While the 1973 Constitution referred to “service contracts for financial, technical, management,
or other forms of assistance” the 1987 Constitution provides for “agreements . . . involving either
financial or technical assistance.” It bears noting that the phrases “service contracts” and
“management or other forms of assistance” in the earlier constitution have been omitted.
The State, being the owner of the natural resources, is accorded the primary power and
responsibility in the exploration, development and utilization thereof. As such, it may undertake
these activities through four modes: The State may directly undertake such activities. (2) The
State may enter into co-production, joint venture or production- sharing agreements with Filipino
citizens or qualified corporations. (3) Congress may, by law, allow small-scale utilization of natural
resources by Filipino citizens. (4) For the large-scale exploration, development and utilization of
minerals, petroleum and other mineral oils, the President may enter into agreements with foreignowned corporations involving technical or financial assistance. Except to charge the Mines and
Geosciences Bureau of the DENR with performing researches and surveys, and a passing
mention of government-owned or controlled corporations, R.A. No. 7942 does not specify how
the State should go about the first mode. The third mode, on the other hand, is governed by
Republic Act No. 7076 (the People’s Small-Scale Mining Act of 1991) and other pertinent laws.
R.A. No. 7942 primarily concerns itself with the second and fourth modes.
------------------------------------------------------------Contrary to the majority's assertions, the foregoing provisions do not provide merely temporary or
stop-gap solutions. The determination of the FTAA contractor permanently reverses the
"Rejection Notice" of the DENRsince, by the majority opinion's own admission, there is no
available remedy for the DENR under the agreement except to seek the cancellation of the same.
Indeed, the justification for the foregoing provisions is revealing:
xxx First, avoidance of long delays in these situations will undoubtedly redound to the benefit of
the State as well as to the contractor. Second, who is to say that the work program or budget
proposed by the contractor and deemed approved under Clause 8.3 would not be the better or
more reasonable or more effective alternative? The contractor, being the "insider," as it were, may
be said to be in a better position than the State – an outsider looking in – to determine what work
program or budget would be appropriate, more effective, or more suitable under the
circumstances. (Emphasis and underscoring supplied)
Both reasons tacitly rely on the unstated assumption that the interest of the foreign FTAA
contractor and that of the Government are identical. They are not.
Private businesses, including large foreign-owned corporations brimming with capital and
technical expertise, are primarily concerned with maximizing the pecuniary returns to their owners
or shareholders. To this extent, they can be relied upon to pursue the most efficient courses of
action which maximize their profits at the lowest possible cost.
The Government, on the other hand, is mandated to concern itself with more than just narrow
self-interest. With respect to the nation's natural wealth, as the majority opinion points out, the
Government is mandated to preserve, protect and even maximize the beneficial interest of the
Filipino people in their natural resources. Moreover, it is directed to ensure that the large-scale
exploration, development and utilization of these resources results in real contributions to the
3A CORPORATION LAW 2019-2020 pg. 322
economic growth and general welfare of the nation. To achieve these broader goals, the
Constitution mandates that the State exercise full control and supervision over the exploration,
development and utilization of the country's natural resources.
However, taking the majority opinion's reasoning to its logical conclusion, the business "insider's
opinion" would always be superior to the Government's administrative or regulatory determination
with respect to mining operations. Consequently, it is the foreign contractor's opinion that should
always prevail. Ultimately, this means that, at least for the majority, foreign private business
interests outweigh those of the State – at least with respect to the conduct of mining operations.
Indeed, in what other industry can the person regulated permanently overrule the administrative
determinations of the regulatory agency?
To any reasonable mind, the absence of an effective means to enforce even administrative
determinations over an FTAA contractor, except to terminate the contract itself, falls far too short
of the concept of "full control and supervision" as to cause the offending FTAA to fall outside the
ambit of Section 2, Article XII of the Constitution.
Verily, viewed in its entirety, the WMCP FTAA cannot withstand a rigid constitutional scrutiny
since, by its provisions, it conveys both the beneficial ownership of Philippine minerals and control
over their exploration, development and utilization to a foreign corporation. Being contrary to both
the letter and intent of Section 2, Article XII of the Constitution, the WMCP FTAA must be declared
void and of no effect whatsoever.
(162)
CEMCO Holdings, Inc. v. National Life, G.R. No. 171815,
August 7, 2007
CEMCO HOLDINGS, INC VS NATIONAL LIFE INSURANCE CO., OF THE PHILIPPINES, INC
G.R. No. 171815
Date: August 7, 2007
Digested by: Rosinie Suico
____________________________________________________________________________
_____________________________
Petitioner: CEMCO HOLDINGS, INC.
Respondent: NATIONAL LIFE INSURANCE COMPANY OF THE PHILIPPINES, INC.,
Ponente: CHICO-NAZARIO, J.:
Topic: INSIDER TRADING, SHORT SWING TRANSACTIONS AND MANIPULATION OF
SECURITY PRICES AND OTHER FRAUDULENT ACTS.
____________________________________________________________________________
____________________________
FACTS:
Union Cement Corporation (UCC), a publicly-listed company, has two principal stockholders –
UCHC, a non-listed company, with shares amounting to 60.51%, and Cemco with 17.03%.
3A CORPORATION LAW 2019-2020 pg. 323
UCHC’s stocks were owned by BCI with 21.31% and ACC with 29.69%. Cemco owned 9%.
In a disclosure letter dated 5 July 2004, BCI informed the Philippine Stock Exchange (PSE) that
it and its subsidiary ACC had passed resolutions to sell to Cemco BCI’s stocks in UCHC
equivalent to 21.31% and ACC’s stocks in UCHC equivalent to 29.69%.
As a consequence of this disclosure, the PSE, in a letter to the SEC dated 15 July 2004, inquired
as to whether the Tender Offer Rule under Rule 19 of the Implementing Rules of the Securities
Regulation Code is not applicable to the purchase by petitioner of the majority of shares of UCC.
The SEC’s Corporate Finance Department responded to the query of the PSE that while it was
the stance of the department that the tender offer rule was not applicable, the matter must still
have to be confirmed by the SEC en banc.
SEC en banc had resolved that the Cemco transaction was not covered by the tender offer rule.
Feeling aggrieved by the transaction, respondent National Life Insurance Company of the
Philippines, Inc., a minority stockholder of UCC, sent a letter to Cemco demanding the latter to
comply with the rule on mandatory tender offer. Cemco, however, refused.
Respondent National Life Insurance Company of the Philippines, Inc. filed a complaint with the
SEC asking it to reverse its 27 July 2004 Resolution and to declare the purchase agreement of
Cemco void and praying that the mandatory tender offer rule be applied to its UCC shares.
The SEC ruled in favor of the respondent by reversing and setting aside its 27 July
2004Resolution and directed petitioner Cemco to make a tender offer for UCC shares to
respondent and other holders of UCC shares similar to the class held by UCHC in accordance
with Section 9(E), Rule 19 of the Securities Regulation Code.
On petition to the Court of Appeals, the CA rendered a decision affirming the ruling of the SEC. It
ruled that the SEC has jurisdiction to render the questioned decision and, in any event, Cemco
was barred by estoppel from questioning the SEC’s jurisdiction.
It, likewise, held that the tender offer requirement under the Securities Regulation Code and its
Implementing Rules applies to Cemco’s purchase of UCHC stocks. Cemco’s motion for
reconsideration was likewise denied.
ISSUES:
1. Whether or not the SEC has jurisdiction over respondent’s complaint and to require Cemco to
make a tender offer for respondent’s UCC shares.
2. Whether or not the rule on mandatory tender offer applies to the indirect acquisition of shares
in a listed company, in this case, the indirect acquisition by Cemco of 36% of UCC, a publiclylisted company, through its purchase of the shares in UCHC, a non-listed company
RULING
1. YES.
3A CORPORATION LAW 2019-2020 pg. 324
In taking cognizance of respondent’s complaint against petitioner and eventually rendering a
judgment which ordered the latter to make a tender offer, the SEC was acting pursuant to Rule
19(13) of the Amended Implementing Rules and Regulations of the Securities Regulation Code,
to wit:
13. Violation “If there shall be violation of this Rule by pursuing a purchase of equity shares of a
public company at threshold amounts without the required tender offer, the Commission, upon
complaint, may nullify the said acquisition and direct the holding of a tender offer. This shall be
without prejudice to the imposition of other sanctions under the Code.
The foregoing rule emanates from the SEC’s power and authority to regulate, investigate or
supervise the activities of persons to ensure compliance with the Securities Regulation Code,
more specifically the provision on mandatory tender offer under Section 19 thereof. 7
The foregoing provision bestows upon the SEC the general adjudicative power which is implied
from the express powers of the Commission or which is incidental to, or reasonably necessary to
carry out, the performance of the administrative duties entrusted to it. As a regulatory agency, it
has the incidental power to conduct hearings and render decisions fixing the rights and obligations
of the parties.
Moreover, petitioner is barred from questioning the jurisdiction of the SEC. It must be pointed out
that petitioner had participated in all the proceedings before the SEC and had prayed for
affirmative relief.
By the very nature of its functions, it dedicated to the study and administration of the corporate
and securities laws and has necessarily developed an expertise on the subject.
Based on said functions, the Honorable Commission is necessarily tasked to issue rulings with
respect to matters involving corporate matters and share acquisitions. Verily when this Honorable
Commission rendered the Ruling that " … the acquisition of Cemco Holdings of the majority
shares of Union Cement Holdings, Inc., a substantial stockholder of a listed company, Union
Cement Corporation, is not covered by the mandatory tender offer requirement of the SRC Rule
19," it was well within its powers and expertise to do so.
2. YES.
Tender 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. It is an offer by the acquiring person to
stockholders of a public company for them to tender their shares therein on the terms specified in
the offer.14 Tender offer is in place to protect minority shareholders against any scheme that
dilutes the share value of their investments. It gives the minority shareholders the chance to exit
the company under reasonable terms, giving them the opportunity to sell their shares at the same
price as those of the majority shareholders.15
Under Section 19 of Republic Act No. 8799, it is stated:
Tender Offers. 19.1. (a) Any person or group of persons acting in concert who intends to acquire
at least fifteen percent (15%) of any class of any equity security of a listed corporation or of any
class of any equity security of a corporation with assets of at least Fifty million pesos
3A CORPORATION LAW 2019-2020 pg. 325
(₱50,000,000.00) and having two hundred (200) or more stockholders with at least one hundred
(100) shares each or who intends to acquire at least thirty percent (30%) of such equity over a
period of twelve (12) months shall make a tender offer to stockholders by filing with the
Commission a declaration to that effect; and furnish the issuer, a statement containing such of
the information required in Section 17 of this Code as the Commission may prescribe. Such
person or group of persons shall publish all requests or invitations for tender, or materials making
a tender offer or requesting or inviting letters of such a security. Copies of any additional material
soliciting or requesting such tender offers subsequent to the initial solicitation or request shall
contain such information as the Commission may prescribe, and shall be filed with the
Commission and sent to the issuer not later than the time copies of such materials are first
published or sent or given to security holders.
The SEC and the Court of Appeals accurately pointed out that the coverage of the mandatory
tender offer rule covers not only direct acquisition but also indirect acquisition or "any type of
acquisition." This is clear from the discussions of the Bicameral Conference Committee on the
Securities Act of 2000, on 17 July 2000.
The petitioner posits that what it acquired were stocks of UCHC and not UCC. By happenstance,
as a result of the transaction, it became an indirect owner of UCC. We are constrained, however,
to construe ownership acquisition to mean both direct and indirect. What is decisive is the
determination of the power of control. The legislative intent behind the tender offer rule makes
clear that the type of activity intended to be regulated is the acquisition of control of the listed
company through the purchase of shares. Control may [be] effected through a direct and indirect
acquisition of stock, and when this takes place, irrespective of the means, a tender offer must
occur. The bottomline of the law is to give the shareholder of the listed company the opportunity
to decide whether or not to sell in connection with a transfer of control. x x x.21
(163)
Abacus Securities Corp. v. Ampil, G.R. No. 160016, February
17, 2006
————————————————————————Abacus Securities Corp. v. Ampil, G.R. No. 160016,
February 17, 2006
Digested by: Sarah Bagis
Petitioner: Abacus Securities Corp.
Respondent Ruben Ampil
Ponente: Panganiban, CJ
Topic: Securites Regulation Code - INSIDER TRADING, SHORT SWING TRANSACTIONS
AND MANIPULATION OF SECURITY PRICES AND OTHER FRAUDULENT ACTS.
3A CORPORATION LAW 2019-2020 pg. 326
—————————————————————————
Doctrine: Stock market transactions affect the general public and the national economy. The
rise and fall of stock market indices reflect the state of the economy. Trends in stock prices
tend to herald changes in business conditions. Consequently, securities transactions are
impressed with public interest, and are thus subject to public regulation. In particular, the
laws and regulations requiring payment of traded shares within specified periods are meant
to protect the economy from excessive stock market speculations, and are thus mandatory.
In this case, the pari delicto rule does not apply to all the transactions entered into by the
parties but applies only to transactions entered into after the initial trades made on
April 10 and 11, 1997.
——-———————————————————————
FACTS
[Petitioner] is engaged in business as a broker and dealer of securities of listed companies at
the Philippine Stock Exchange Center.
In April 8 1997, [respondent] opened a cash or regular account with [petitioner] for the purpose
of buying and selling securities under their agreed terms and conditions in the Account
Opening Form (AOF).
From April 10, 1997, [respondent’ accumulated an outstanding obligation in favor of [petitioner]
in the principal sum of P6,617,036.22 as of April 30, 1997.
Despite the lapse of the period within which to pay his account as well as sufficient time given
by [petitioner] to settle his account, the latter failed to do so. [petitioner] thereafter sold
[respondent's] securities to set off against his unsettled obligations.
After the sale, [respondent] had remaining unsettled obligation of P3,364,313.56. [Petitioner]
then referred the matter to its legal counsel for collection purposes.
Despite demand and the lapse of a requested 60 day extension, [respondent] failed and/or
refused to pay his accountabilities to [petitioner].
In defense, [respondent] claims that he was induced to trade in a stock security with [petitioner]
because the latter allowed offset settlements wherein he is not obliged to pay the purchase
price. Rather, it waits for the customer to sell. And if there is a loss, [petitioner] only requires
the payment of the deficiency (i.e., the difference between the higher buying price and the
lower selling price). In addition, it charges a commission for brokering the sale. However, if
the customer sells and there is a profit, [petitioner] deducts the purchase price and delivers
only the surplus after charging its commission.
[Respondent] further claims that:
1. all his trades with [petitioner] were not paid in full in cash at anytime after purchase or within
the T+4 [4 days subsequent to trading] and none of these trades was cancelled by
[petitioner] as required.
3A CORPORATION LAW 2019-2020 pg. 327
2. Neither did [petitioner] apply with either the Philippine Stock Exchange or the SEC for an
extension of time for the payment or settlement of his cash purchases.
3. His trade under an offset transaction with [petitioner] is unlimited subject only to the discretion
of the broker.
4. [Petitioner] did not apply RSA [Rule 25-1 par. C, which mandates that if you do not pay for
the first] order, you cannot subsequently make any further order without depositing the cash
price in full.
6. [Petitioner] did not likewise apply for extension of the T+4 rule. Because of the offset
transaction, When [respondent] failed to comply with the T+3, [petitioner] did not require him
to put up a deposit before it executed its subsequent orders.
[Respondent] filed for damages against [petitioner] with the RTC.
RTC held that petitioner violated Sections 23 and 25 of the Revised Securities Act (RSA) and
Rule 25-1 of the Rules Implementing the Act (RSA Rules) when it failed to: 1) require the
respondent to pay for his stock purchases within three (T+3) or four days (T+4) from trading;
and 2) request from the appropriate authority an extension of time for the payment of
respondent's cash purchases.
The trial court noted that despite respondent's non-payment within the required period,
petitioner did not cancel the purchases of respondent. Neither did it require him to deposit
cash payments before it executed the buy and/or sell orders subsequent to the first unsettled
transaction. According to the RTC, by allowing respondent to trade his account actively
without cash, petitioner effectively induced him to purchase securities thereby incurring
excessive credits.
The trial court also found respondent in peri delicto with petitioner, by incurring excessive credits
and waiting to see how his investments turned out before deciding to invoke the RSA. Thus,
they are without recourse against each other.
CA upheld findings in pari delicto because [Petioner] allowed respondent to keep on trading
despite the latter's failure to pay his outstanding obligations. Whether [respondent's] trading
transaction would result in a surplus or deficit, he is still be liable to pay [petitioner] its
commission.
Petitioner now contends that the court lacks jurisdiction to determine violations of the RSA.
ISSUE:
1. WON the petitioner and respondent are in pari delicto which bars any recovery,
considering that respondent was the first one who violated the terms of the AOF.
HELD
1. Only to transactions entered into after the initial trades made on April 10 and 11,
1997.
3A CORPORATION LAW 2019-2020 pg. 328
a. In the present controversy, the following pertinent facts are undisputed: (1) on April
8, 1997, respondent opened a cash account with petitioner for his transactions in
securities;(2) respondent's purchases were consistently unpaid from April 10 to 30,
1997; (3) respondent failed to pay in full, or even just his deficiency, for the
transactions on April 10 and 11, 1997; (4) despite respondent's failure to cover his
initial deficiency, petitioner subsequently purchased and sold securities for
respondent's account on April 25 and 29; (5) petitioner did not cancel or liquidate
a substantial amount of respondent's stock transactions until May 6, 1997.
The provisions governing the above transactions are Sec 23 and 25 of the RSA and
Rule 25-1 of the RSA Rules, which state as follows:
"SEC. 23. Margin Requirements.
(b) It shall be unlawful for any member of an exchange or any broker or dealer, directly
or indirectly, to extend or maintain credit or arrange for the extension or maintenance
of credit to or for any customer:
On any security other than an exempted security, in contravention of the rules and
regulations which the Commission shall prescribe under subsection (a) of this
Section;
Without collateral or on any collateral other than securities, except (i) to maintain a credit
initially extended in conformity with the rules and regulations of the Commission and
(ii) in cases where the extension or maintenance of credit is not for the purpose of
purchasing or carrying securities or of evading or circumventing the provisions of
subparagraph (1) of this subsection.
"SEC. 25. Enforcement of margin requirements and restrictions on borrowings. To
prevent indirect violations of the margin requirements under Section 23 hereof, the
broker or dealer shall require the customer in nonmargin transactions to pay the
price of the security purchased for his account within such period as the Commission
may prescribe, which shall in no case exceed three trading days; otherwise, the
broker shall sell the security purchased starting on the next trading day but not
beyond ten trading days following the last day for the customer to pay such purchase
price, unless such sale cannot be effected within said period for justifiable reasons.
The sale shall be without prejudice to the right of the broker or dealer to recover any
deficiency from the customer. x x x."
"RSA RULE 25-1
"Purchases and Sales in Cash Account
"(a) Purchases by a customer in a cash account shall be paid in full within three (3)
business days after the trade date.
"(b) If full payment is not received within the required time period, the broker or dealer
shall cancel or otherwise liquidate the transaction, or the unsettled portion thereof,
starting on the next business day but not beyond ten (10) business days following
3A CORPORATION LAW 2019-2020 pg. 329
the last day for the customer to pay, unless such sale cannot be effected within said
period for justifiable reasons.
"(c) If a transaction is cancelled or otherwise liquidated as a result of non-payment by
the customer, prior to any subsequent purchase during the next ninety (90) days,
the customer shall be required to deposit sufficient funds in the account to cover
each purchase transaction prior to execution.
"(f) Written application for an extension of the period of time required for payment under
paragraph (a) be made by the broker or dealer to the Philippine Stock Exchange, in
the case of a member of the Exchange, or to the Commission, in the case of a nonmember of the Exchange. Applications for the extension must be based upon
exceptional circumstances and must be filed and acted upon before the expiration
of the original payment period or the expiration of any subsequent extension.
Section 23(b) above -- the alleged violation of petitioner which provides the basis for
respondent's defense -- makes it unlawful for a broker to extend or maintain credit
on any securities other than in conformity with the rules and regulations issued by
Securities and Exchange Commission (SEC). Section 25 lays down the rules to
prevent indirect violations of Section 23 by brokers or dealers. RSA Rule 25-1
prescribes in detail the regulations governing cash accounts.
MARGIN REQUIREMENT
The main purpose of the above statute on margin requirements is to regulate the volume of
credit flow, by way of speculative transactions, into the securities market and redirect
resources into more productive uses. Specifically, the main objective of the law on margins
is explained in this wise:
The margin requirements set out in the RSA are primarily intended to achieve a macroeconomic
purpose -- the protection of the overall economy from excessive speculation in securities.
Their recognized secondary purpose is to protect small investors.
MANDATORY CLOSE-OUT RULE
The law places the burden of compliance with margin requirements primarily upon the
brokers and dealers. Sections 23 and 25 and Rule 25-1, otherwise known as the
"mandatory close-out rule," clearly vest upon petitioner the obligation, not just the right, to
cancel or otherwise liquidate a customer's order, if payment is not received within three days
from the date of purchase.
For transactions subsequent to an unpaid order, the broker should require its customer to
deposit funds into the account sufficient to cover each purchase transaction prior to its
execution. These duties are imposed upon the broker to ensure faithful compliance with the
3A CORPORATION LAW 2019-2020 pg. 330
margin requirements of the law, which forbids a broker from extending undue credit to a
customer.
The nature of the stock brokerage business enables brokers, not the clients, to verify, at any
time, the status of the client's account. Brokers, therefore, are in the superior position to
prevent the unlawful extension of credit. Because of this awareness, the law imposes upon
them the primary obligation to enforce the margin requirements.
Respondent Liable for the First, But Not for the Subsequent Trades
Nonetheless, these margin requirements are applicable only to transactions entered into by the
present parties subsequent to the initial trades of April 10 and 11, 1997. Thus, we hold that
petitioner can still collect from respondent to the extent of the difference between the latter's
outstanding obligation as of April 11, 1997 less the proceeds from the mandatory sell out of
the shares pursuant to the RSA Rules. Petitioner's right to collect is justified under the
general law on obligations and contracts.
Article 1236 (second paragraph) of the Civil Code, provides:
"Whoever pays for another may demand from the debtor what he has paid, except that if he
paid without the knowledge or against the will of the debtor, he can recover only insofar as
the payment has been beneficial to the debtor." (Emphasis supplied)
Since a brokerage relationship is essentially a contract for the employment of an agent,
principles of contract law also govern the broker-principal relationship.
The right to collect cannot be denied to petitioner as the initial transactions were entered
pursuant to the instructions of respondent. The obligation of respondent for stock
transactions made and entered into on April 10 and 11, 1997 remains outstanding. These
transactions were valid and the obligations incurred by respondent concerning his stock
purchases on these dates subsist. At that time, there was no violation of the RSA yet.
Petitioner's fault arose only when it failed to: 1) liquidate the transactions on the fourth day
following the stock purchases, or on April 14 and 15, 1997; and 2) complete its liquidation
no later than ten days thereafter, applying the proceeds thereof as payment for respondent's
outstanding obligation.
In securities trading, the brokers are essentially the counterparties to the stock transactions at
the Exchange. Since the principals of the broker are generally undisclosed, the broker is
personally liable for the contracts thus made. Hence, petitioner had to advance the
payments for respondent's trades. Brokers have a right to be reimbursed for sums advanced
by them with the express or implied authorization of the principal, in this case, respondent.
Not to require respondent to pay for his April 10 and 11 trades would put a premium on his
circumvention of the laws and would enable him to enrich himself unjustly at the expense of
petitioner.
3A CORPORATION LAW 2019-2020 pg. 331
In the present case, petitioner failed to enforce the terms and conditions of its Agreement with
respondent, specifically paragraph 8 thereof, purportedly acting on the plea of respondent
to give him time to raise funds therefor. These stipulations, in relation to paragraph 4,
constituted faithful compliance with the RSA. By failing to ensure respondent's payment of
his first purchase transaction within the period prescribed by law, thereby allowing him to
make subsequent purchases, petitioner effectively converted respondent's cash account
into a credit account. However, extension or maintenance of credits on nonmargin
transactions, are specifically prohibited under Section 23(b). Thus, petitioner was remiss in
its duty and cannot be said to have come to court with "clean hands" insofar as it intended
to collect on transactions subsequent to the initial trades of April 10 and 11, 1997.
2. YES court has jurisdiction. The instant controversy is an ordinary civil case seeking to enforce
rights arising from the Agreement (AOF) between petitioner and respondent. It relates to
acts committed by the parties in the course of their business relationship. The purpose of
the suit is to collect respondent's alleged outstanding debt to petitioner for stock purchases.
The RSA and its Rules are to be read into the Agreement entered into between petitioner
and respondent. Compliance with the terms of the AOF necessarily means
compliance with the laws. Thus, to determine whether the parties fulfilled their
obligations in the AOF, this Court had to pass upon their compliance with the RSA
and its Rules. This, in no way, deprived the SEC of its authority to determine willful
violations of the RSA and impose appropriate sanctions therefor, as provided under
Sections 45 and 46 of the Act.
The SEC in its Opinion, :
"As to the issue of jurisdiction, it is settled that a party cannot invoke the jurisdiction of a
court to secure affirmative relief against his opponent and after obtaining or failing to
obtain such relief, repudiate or question that same jurisdiction.
3A CORPORATION LAW 2019-2020 pg. 332