PEOPLE V.

QUASHA, 93 PHIL 333 (1953)

FACTS: Pacific Airways Corp registered its articles of incorporation with SEC. The article was
prepared and the registration was effected by accused Quasha (lawyer), who was in fact the
organizer of the corporation
1. The articles of incorporation stated that the business of Pacific Airways was a common
carrier by air, land or water
2. It appeared in the articles of incorporation that one Arsenio Baylon, a Filipino citizen, had
subscribed to and was the owner of 60.005& of the subscribed capital stock of the
corporation
3. It was admitted during the trial that the money paid by Baylon on his subscription did not
belong to him but to the American subscribers to the corporate stock and Baylon was a
mere trustee for the American incorporators
4. The CFI held that Quasha was guilty of falsification of a public and commercial
document when he made it appear that the corporation was 60% Filipino owned when
in fact most of the shares were held by the Americans.

ISSUE: WON Pacific Airways violated the constitutional provision which prohibits the operation of
public utilities by non-Filipinos

HELD: No. The Constitution does not prohibit the mere formation of a public utility corporation
without the required formation of Filipino capital. What it does prohibit is the granting of a
franchise or other form of authorization for the operation of a public utility to a corporation
already in existence but without the requisite proportion of Filipino capital. This is obvious from
the context, for the constitutional provision qualifies the terms franchise, certificate, or any
other form of authorization with the phrase for the operation of a public utility, thereby
making it clear that the franchise meant is not the primary franchise that invest a body of men
with corporate existence but the secondary franchise or the privilege to operate as a public
utility after the corporation has already come into being.

Quasha draws a distinction between the primary franchise of a corporate entity by virtue of
which it is constituted as a body politic endowed with a separate juridical entity, and the
secondary franchise that it may receive during its life for the exercise of a privilege granted by
law, such as the operation of public utility.



















GAMBOA V. TEVES, G.R. NO 176579 (2011)
FACTS: PLDT was granted an initial 50-year charter and the right to establish a telephone network
in 1928.
1. In 1969, American-owned General Telephone and Electronics Corp (GTE), a major
shareholder of PLDT, sold 26% of PDLTs equity to PTIC. PTIC was incorporated in 1967 and
is engaged in the business of investment holdings. It held 13.847% of the total outstanding
common stocks of PLDT
2. In 1977, Prime Holdings Inc (PHI) was incorporated and 100% owned by the Cojuangco
group. Subsequently, PHI acquired 46.125% of PTIC by virtue of 3 Deeds of Assignment
3. PCGG ordered the sequestration of the PTIC shares held by PHI after the Marcos regime.
These shares were then declared to be owned by the Republic
4. In 1999, First Pacific Company Ltd (First Pacific), a Bermuda registered, Hong Kong based
investment firm, acquired the remaining 54% equity of PTIC
5. Thereafter, the government decided to sell its 46.1% stake in PTIC) or 6.4% indirect stake in
PLDT) with Parallax, Singapore based corporation, as the highest bidder
6. During the hearing in the Congress, it was noted that the auction of the governments
PTIC shares were in conformity with existing legal procedures and that First Pacifics
intended acquisition of the governments shares in PTIC (resulting in its 100% ownership of
PTIC) does not violate the 40% constitutional limit on foreign ownership of a public utility
since PTIC held only 13.847% of the total outstanding common stocks of PLDT
7. Subsequently, the government informed First Pacific of the results of the bidding and
gave it until February 2007 to exercise its right of first refusal. However First Pacific was
unable to raise the money for the purchase on the deadline and thus yield the right to
PTIC itself.
8. First Pacific, through it subsidiary, Metro Pacific Assets Holdings Inc (MPAH) entered into a
conditional sale with the government for the latters 46.1% stake in PTIC
9. Wilson Gamboa, as shareholder of PLDT filed the petition to declare the nullity of the sale
arguing that the sale to First Pacific violates the constitutional limitation on foreign
ownership of a public utility
10. Petitioner argued that the 40% foreign equity limitation in domestic public utilities refers
only to common shares because such shares are entitled to vote and it is through the
voting that control over a corporation is exercised

ISSUE: WON the term capital in Sec 11, Art XII of the 1987 Constitution refers to the total
common shares only or to the total outstanding capital stock (combined total of common and
non-voting preferred shares) of PLDT, a public utility

HELD: Yes. The 60% of the capital refers to the controlling interest (common shares) in the
corporation based on the Constitutional Commission deliberations. It will be absurd for capital to
pertain as inclusive of non-voting shares. This is because in a corporation consisting of 1,000,000
capital stocks, 100% of which are common shares which are foreign-owned and the rest as
preferred shares which are non-voting shares and are Filipino owned, While this seems
compliant with the constitutional provision, only the foreigners holding the common shares have
voting rights in the corporation. Thus, even with a miniscule equity, they can exercise control
over the public utility.

In this case, it is true that at least 77.85% of the capital is owned by Filipinos (the PLDT subscribers).
But these subscribers, who hold non-voting preferred shares, have no control over the
corporation. Hence, capital should only pertain to common shares.

Thus, to be compliant with the constitution, 60% of the common shares of PLDT should be Filipino
owned. That is not so in this case as it appears that 81.47% of the common shares are already
foreign owned (split between First Pacific (37%) and a Japanese corporation (Docomo).
GAMBOA V. TEVES, G.R. NO 176579 (2012)
FACTS: PSE, Manuel Pangilinan, Napoleon Nazareno and SEC filed a motion for reconsideration
of the June 2011 decision. Movants contended that the term capital in Sec 11, Art XII has long
been settled and defined to refer to the total outstanding shares of stock, whether voting or
non-voting

ISSUE: WON the term capital includes both voting and non-voting shares

HELD: No. Pursuant the control test, a corporation whereby the more than 60% of the voting
shares is foreign-owned is in contravention with the 60% Philippine nationality requirement in the
Constitution.

The purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural
resources. Necessarily, therefore, the rule interpreting the constitutional provision should not
diminish the right through the legal fiction of corporate ownership and control. The constitutional
provision, as interpreted and practiced via the 1967 SEC Rules, has favored foreigners contrary
to the Constitution. Hence, the Grandfather Rule must be applied to accurately determine the
actual participation, both direct and indirect, of foreigners in a corporation engaged in
nationalized activity or business.

The 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1)
Filipino citizens, or (2) corporations or associations at least 60 percent of whose "capital" is owned
by Filipino citizens. Hence, in the case of individuals, only Filipino citizens can validly own and
operate a public utility. In the case of corporations or associations, at least 60 percent of their
"capital" must be owned by Filipino citizens. In other words, under Sec 11, Art XII of the 1987
Constitution, to own and operate a public utility a corporations capital must at least be 60
percent owned by Philippine nationals.

























REDMONT CONSOLIDATED MINES CORP V. MCARTHUR MINING CORP, SEC CASE NO 09-09-177
(2010)
FACTS: Redmont is a domestic corporation engaged in the mining business. McArthur et al are
likewise domestic corporations engaged in mining. MBMI is a Canadian mining company
1. Redmont filed a complaint for revocation praying that the SEC certificates of McArthur
et al be revoked on the ground that said corporations violated the constitutional
prohibition of foreign ownership of corporations engaged in the exploitation,
development and utilization of natural resources
2. It appears that MBMI had more than 60% controlling interest in said corporations. This was
determined using the Grandfather Rule, which petitione argued must be observed in
determining the nationality of a corporation instead of control test
3. Respondents argued that
a. The outstanding capital stock, not the paid-up capital, is the determining
basis for nationality of corporations
b. The correct method of computation of Filipino and foreign equity is the
control test not the Grandfather rule

ISSUE: Which between the Grandfather Rule and the Control Test should be used in the case at
bar

HELD: Grandfather Rule. Since the purpose of the Constitution is to place in the hands of Filipinos
the exploitation of our natural resources, the rule interpreting the constitutional provi sion should
not diminish such right through legal fiction of corporate ownership and control. The Grandfather
Rule must be applied to accurately determine the actual participation, both direct and indirect,
of foreigners in a corporation engaged in a nationalized activity or business.

Compliance with the constitutional limitations on engaging in nationalized activities must be
determined by ascertaining if 60% of the investing corporations outstanding capital stock is
owned by Filipino citizens. If such investing corporation is in turn owned to some extent by
another investing corporation, the same process must be observed. One must not stop until the
citizenships of the individual or natural stockholders of layer after layer of investing corporations
have been established.





















HAW PIA V. CHINA BANKING CORP, 80 PHIL 604 (1948)
FACTS: Haw Pia had previously contracted a loan from China Banking Corporation in the
amount of P5,103.35, which, according to Haw Pia, had been completely paid, on different
occasions from 1942 to 1944 through Bank of Taiwan, Ltd., which was appointed by the
Japanese Military authorities as liquidator of China Banking Corp
1. With this, Haw Pia instituted an action against China Banking Corp to compel the bank to
execute a deed of cancellation of mortgage on the property used as security for the
loan and to deliver its title
2. However, upon service of summons, China Banking Corp demanded from Haw Pia for
the payment of the sum of its indebtedness with interests, which also constituted its
counter claim in its answer.
3. RTC rendered a decision in favor of China Banking Corp. on the basis that there was no
evidence to show that Bank of Taiwan was authorized by China Banking Corp to accept
Haw Pia's payment and that Bank of Taiwan, as an agency of the Japanese invading
army, was not authorized under the international law to liquidate the business of China
Banking Corp. As such, Haw Pia's payment to Bank of Taiwan has not extinguished his
indebtedness to China Banking Corp.

HELD: The Court ruled that under the Hague Convention, a belligerent occupier can order the
sequestration of private property. But this sequestration is different from confiscation.

WAR TIME TEST: Although the corporation may be organized under the laws of the Philippines,
but if the controlling stockholders are enemies, then the veil of corporate fiction will be pierced
and the nationality of the corporation will be based on the citizenship of the majority
stockholders in times of war.



























NATIONAL COAL CO V. CIR, 46 PHIL 583 (1924)
FACTS: National Coal Co (NCC) was a corporation created by Act 2705 for the purpose of
developing the coal industry in the Philippines and is actually engaged in coal mining on
reserved lands belonging to the government
1. In 1917, the Governor-General ordered the withdrawal from settlement, entry, sale, or
other disposition of all coal bearing lands in Zamboanga and Polilio Islands. After this
proclamation, NCC immediately took possession of said areas
2. CIR assessed specific tax which NCC paid under protest.
3. NCC claimed that it was liable only to internal revenue taxes under Art 2710 since it was
either a lessee or owner of the coal bearing lands.
4. The court held that NCC is a private corporation and should not be given special
privilege in entering the coal bearing lands

ISSUE: WON NCC is a public corporation

HELD: No. NCC is a private corporation. The mere fact that the government happens to the
majority stockholder does not make it a corporation. No provision of Act 2705 are found to be
inconsistent with the provisions of the Corporation Law. As a private corporation, it has no
greater rights, powers or privileges than any other corporation which might be organized for the
same purpose under the Corporation Law, and certainly it was not the intention of the
Legislature to give it a preference or right or privilege over other legitimate private corporations
in the mining of coal.





























CERVANTES V. AUDITOR GENERAL, 91 PHIL 359 (1952)
FACTS: National Abaca and other Fibers Corp (NAFCO) was created by Commonwealth Act no
332 with a capital stock of P20,000,000, 51% of which was subscribed by the National
Government and the remainder was offered to LGUs and the general public.
1. The corporation was made subject to the provisions of the corporation law insofar as
they were compatible with the provisions of its charter
2. Petitioner Cervantes was the manager of NAFCO in 1949. The Board of Directors of
NAFCO approved additional allowance for Cervantes.
3. However, the Auditor General and the Control Committee disapproved the increase

ISSUE: WON NAFCO is a private corporation

HELD: Yes. With its controlling stock owned by the Government and the power of appointing its
directors vested in the President of the Philippines, there is no question that NAFCO is a GOCC
subject to the provisions of RA 51 and EO 93. Consequently, it is subject to the powers of the
Control Committee created in said EO.


In Cervantes v. Auditor General, a government owned or controlled corporation (GOCC) when
organized under the Corporation Code is still a private corporation. But being a GOCC makes it
liable for laws and provisions applicable to the Government or its entities and subject to the
control of the Government.






























MARILAO WATER CONSUMERS ASSOCIATION INC V. IAC, 201 SCRA 438 (1991)
FACTS: Under PD 198, water districts were created by different local legislative bodies. The
primary function of such water districts is to sell water to residents within their territory.
1. Pursuant to PD 198, Marilao Water District was created by the Municipality of Marilao
2. Thereafter, petitioners filed a petition claiming that the creation of the Marilao Water
District was defective and illegal. Petitioners, then, prayed for the dissolution of the water
district
3. In its answer, the Marilao Water District alleged that the trial court lacked jurisdiction in
this case since the water districts dissolution fell under the original and exclusive
jurisdiction of SEC and the matter of the propriety of water rates was within the primary
administrative jurisdiction of LWUA
4. The trial court found for the respondents and dismissed the Consumer Associations suit.
On appeal, IAC held that SEC had jurisdiction over the instant case since it involved
controversies arising out of intra-corporate or partnership relations, between and among
stockholders, member or associates

ISSUE: WON Marilao Water District being a quasi-public corporation is a corporation governed by
the Corporation Code

HELD: No. Juridical entities known as water districts created by PD 198, although classified as
quasi-public corporations and granted the same powers as private corporations, water districts
are not really corporations. They have no incorporators, stockholders, or members who have the
right to vote for directors, or amend the articles of incorporation or by-laws or pass resolutions, or
otherwise perform such other acts as are authorized to stockholders or members of corporations
by the Corporation Code. In a word, there can be no such thing as a relation of corporation
and stockholders or members in a water district for the simple reason that in the latter there are
no stockholders or members. Between the water district and those who are recipients of its water
services, there exists not the relationship of corporation-and-stockholder, but that of a service
agency and users or customers. There can therefore be no such thing in a water district was
intra-corporate partnership relations, between and among stockholders, members or
associates (or) between any or all of them and the corporation, partnership or association of
which they are stockholders, members or associates, respectively, within the contemplation of
Sec 5 Corporation Code so as to bring controversies involving them within the competence and
cognizance of SEC.



















CIR V. CLUB FILIPINO, 5 SCRA 321 (1962)
FACTS: BIR assessed Club Filipino for unpaid percentage taxes on the gross receipts of its bar and
restaurant.
1. Club Filipino requested for the cancellation of the assessment arguing that it operated a
clubhouse, a bowling alley and a golf course.
2. It argued that the bar-restaurant was a necessary incident to the operation of the club
and its golf course.

ISSUE: WON the club is liable to pay business taxes

HELD: No. What is determinative of whether or not the club is engaged in the business of bar and
restaurant operations 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.

Having found that the club was organized to develop and cultivate sports, that whatever profits
it derived are actually used to defray its overhead expenses, it stands to reason that the club
was not engaged in the business of an operation of a bar and restaurant.

For a stock corporation to exist, two requisites must be complied with:
1. A capital stock divided into shares; ad
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.

CAB: Nowhere in its articles of incorporation or by-laws could be found an authority for the
distribution of its dividends or surplus profits. Strictly speaking, it cannot be considered a stock
corporation within the contemplation of the corporation law.