cause of action.
In other words the corporation must be joined as a party because it is its cause of action that is being litigated and because
MAMBULAO LUMBER COMPANY V. PNB (G.R. NO. L-22973)
Facts:
Petitioner Mambulao Lumber applied for an industrial loan with herein respondent PNB and was approved with its real estate, machinery and
equipments as collateral. PNB released the approved loan but petitioner failed to pay and was later discovered to have already stopped in its
operation. PNB then moved for the foreclosure and sale of the mortgaged properties. The properties were sold and petitioner sent a bank
draft to PNB to settle the balance of the obligation. PNB however alleges that a remaining balance stands and a foreclosure sale would still be
held unless petitioner remits said amount. The foreclosure sale proceeded and petitioner’s properties were taken out of its compound.
Petitioner filed actions before the court and claims among others, moral damages.
Issue:
Whether or not petitioner corporation, who has already ceased its operation, may claim for moral damages.
Ruling: NO.
Herein appellant’s claim for moral damages, however, seems to have no legal or factual basis. Obviously, an artificial person like herein
appellant corporation cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social
humiliation which are basis of moral damages. A corporation may have a good reputation which, if besmirched, may also be a ground for the
award of moral damages. The same cannot be considered under the facts of this case, however, not only because it is admitted that herein
appellant had already ceased in its business operation at the time of the foreclosure sale of the chattels, but also for the reason that whatever
adverse effects of the foreclosure sale of the chattels could have upon its reputation or business standing would undoubtedly be the same
whether the sale was conducted at Jose Panganiban, Camarines Norte, or in Manila which is the place agreed upon by the parties in the
mortgage contract.
ASSET PRIVATIZATION VS CA (300 SCRA 579)
Asset Privatization Trust vs Court of Appeals
300 SCRA 579 [GR No. 121171 December 29, 1998]
Facts: The development, exploration and utilization of the mineral deposits in the Surigao Mineral Reservation have been authorized by the
Republic Act No. 1528, as amended by Republic Act No. 2077 and Republic Act No. 4167, by virtue of which laws, a memorandum of agreement
was drawn on July 3, 1968, whereby the Republic of the Philippines thru the Surigao Mineral Reservation Board, granted MMIC the exclusive
right to explore, develop and exploit nickel, cobalt, and other minerals in the Surigao Mineral Reservation. MMIC is a domestic corporation
engaged in mining with respondent Jesus S. Cabarrus Sr. as president and among its original stockholders. The Philippine government
undertook to support the financing of MMIC by purchase of MMIC debenture bonds and extension of guarantees. Further, from the DBP
and/or the government financing institutions to subscribe in MMIC and issue guarantee/s of foreign loans or deferred payment arrangements
secured from the US Eximbank, Asian Development Bank (ADB), Kobe steel of amount not exceeding US$100 million. On July 13, 1981, MMIC,
PNB, and DBP executed a mortgage trust agreement whereby MMIC as mortgagor, agreed to constitute a mortgage in favor of PNB and DBP
as mortgages, over all MMIC assets; subject of real estate and chattel mortgage executed by the mortgagor, and additional assets described
and identified, including assets of whatever kind, nature or description, which the mortgagor may acquire whether in substitution of, in
replenishment or in addition thereto. Due to the unsettled obligations, a financial restructuring plan (FRP) was suggested, however not
finalized. The obligations matured and the mortgage was foreclosed. The foreclosed assets were sold to PNB as the lone bidder and were
assigned to the newly formed corporations namely Nonoc Mining Corporation, Maricalum Mining and Industrial Corporation and Island
Cement Corporation. In 1986, these assets were transferred to the asset privatization trust. On February 28, 1985, Jesus S. Cabarrus Sr.
together with the other stockholders of MMIC, filed a derivative suit against DBP and PNB before the RTC of Makati branch 62, for annulment
of foreclosures, specific performance and damages. The suit docketed as civil case no. 9900, prayed that the court: 1.) Annul the foreclosures,
restore the foreclosed assets to MMIC, and require the banks to account for their use and operation in the interim; 2.) Direct the banks to
honor and perform their commitments under the alleged FRP; 3.) Pay moral and exemplary damages, attorney’s fees, litigation expenses and
costs. A compromise and arbitration agreement was entered by the parties to which committee awarded damages in favor of Cabarrus.
Issue: Whether or not the award granted to Cabarrus was proper.
Held: No. Civil case no. 9900 filed before the RTC being a derivative suit, MMIC should have been impleaded as a party. It was not joined as a
part plaintiff or party defendant at any stage before of the proceedings as it is, the award for damages to MMIC, which was not party before
the arbitration committee is a complete nullity.
Settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the stockholder filing suit for the corporation’s
behalf is only a nominal party. The corporation should be included s a party in the suit.
An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to protect or
vindicate corporate rights, whenever 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 part in interest.
It is a condition sine qua non that the corporation be impleaded as a party because – not only is the corporation an indispensable party, but it
is also the present rule that it must be served with process. The reason given is that the judgement must be made binding upon the corporation
in order that the corporation may get the benefit of the suit and may not bring a subsequent suit against the same defendants for the same
judgement must be a res judicata against it.
The reasons given for not allowing direct individual suit are:
1. That the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in the case of Evangelista vs Santos that the
“Stockholders may not directly claim those damages for themselves for that would result in the appropriation by, and the
distribution among them of part of the corporate assets before the
2. The universally recognized doctrine that a stockholder in a corporation has no title legal or equitable to the corporate property;
that both of these are in the corporation itself for the benefit of the stockholders. In other words, to allow shareholders to sue
separately would conflict with the separate corporate entity principle.
3. dissolution of the corporation and the liquidation of its debts and liabilities, something which cannot be legally done in view of
section 16 of the corporation law.
4. The filing of such suits would conflict with the duty of the management to sue for the protection of all concerned;
5. It would produce wasteful multiplicity of suits; and
6. It would involve confusion in ascertaining the effect of partial recovery by an individual on the damages recoverable by the
corporation for the same act.
Abscbn vs ca
In 1992, ABS-CBN Broadcasting Corporation, through its vice president Charo Santos-Concio, requested Viva Production, Inc. to allow ABS-CBN
to air at least 14 films produced by Viva. Pursuant to this request, a meeting was held between Viva’s representative (Vicente Del Rosario) and
ABS-CBN’s Eugenio Lopez (General Manager) and Santos-Concio was held on April 2, 1992. During the meeting Del Rosario proposed a film
package which will allow ABS-CBN to air 104 Viva films for P60 million. Later, Santos-Concio, in a letter to Del Rosario, proposed a
counterproposal of 53 films (including the 14 films initially requested) for P35 million. Del Rosario presented the counter offer to Viva’s Board
of Directors but the Board rejected the counter offer. Several negotiations were subsequently made but on April 29, 1992, Viva made an
agreement with Republic Broadcasting Corporation (referred to as RBS – or GMA 7) which gave exclusive rights to RBS to air 104 Viva films
including the 14 films initially requested by ABS-CBN.
ABS-CBN now filed a complaint for specific performance against Viva as it alleged that there is already a perfected contract between Viva and
ABS-CBN in the April 2, 1992 meeting. Lopez testified that Del Rosario agreed to the counterproposal and he (Lopez) even put the agreement
in a napkin which was signed and given to Del Rosario. ABS-CBN also filed an injunction against RBS to enjoin the latter from airing the films.
The injunction was granted. RBS now filed a countersuit with a prayer for moral damages as it claimed that its reputation was debased when
they failed to air the shows that they promised to their viewers. RBS relied on the ruling in People vs Manero and Mambulao Lumber vs PNB
which states that a corporation may recover moral damages if it “has a good reputation that is debased, resulting in social humiliation”. The
trial court ruled in favor of Viva and RBS. The Court of Appeals affirmed the trial court.
ISSUE:
1. Whether or not a contract was perfected in the April 2, 1992 meeting between the representatives of the two corporations.
2. Whether or not a corporation, like RBS, is entitled to an award of moral damages upon grounds of debased reputation.
HELD:
1. No. There is no proof that a contract was perfected in the said meeting. Lopez’ testimony about the contract being written in a napkin is
not corroborated because the napkin was never produced in court. Further, there is no meeting of the minds because Del Rosario’s offer was
of 104 films for P60 million was not accepted. And that the alleged counter-offer made by Lopez on the same day was not also accepted
because there’s no proof of such. The counter offer can only be deemed to have been made days after the April 2 meeting when Santos-
Concio sent a letter to Del Rosario containing the counter-offer. Regardless, there was no showing that Del Rosario accepted. But even if he
did accept, such acceptance will not bloom into a perfected contract because Del Rosario has no authority to do so.
As a rule, corporate powers, such as the power; to enter into contracts; are exercised by the Board of Directors. But this power may be
delegated to a corporate committee, a corporate officer or corporate manager. Such a delegation must be clear and specific. In the case at
bar, there was no such delegation to Del Rosario. The fact that he has to present the counteroffer to the Board of Directors of Viva is proof
that the contract must be accepted first by the Viva’s Board. Hence, even if Del Rosario accepted the counter-offer, it did not result to a
contract because it will not bind Viva sans authorization.
2. No. The award of moral damages cannot be granted in favor of a corporation because, being an artificial person and having existence only
in legal contemplation, it has no feelings, no emotions, no senses, It cannot, therefore, experience physical suffering and mental anguish,
which call be experienced only by one having a nervous system. No moral damages can be awarded to a juridical person. The statement in the
case of People vs Manero and Mambulao Lumber vs PNB is a mere obiter dictum hence it is not binding as a jurisprudence.
MERALCO vs.TEC ET AL DIGEST
DECEMBER 21, 2016 ~ VBDIAZ

TOPIC: ENTITLEMENT TO MORAL DAMAGES
MERALCO vs.TEC ET AL
G.R. No. 131723
December 13, 2007
FACTS: Respondent T.E.A.M. Electronics Corporation (TEC) is wholly owned by respondent Technology Electronics Assembly and
Management Pacific Corporation (TPC). On the other hand, petitioner Manila Electric Company (Meralco) is a utility company supplying
electricity in the Metro Manila area.
MERALCO alleges that TEC tampered the electric meters in its buildings and should thus be liable for differential billings. For failure of TEC to
pay such differential billing, petitioner disconnected the electricity supply to said buildings.
TEC and TPC filed a complaint for damages against MERALCO before the RTC Pasig. The RTC ruled in favor of TEC-TPC and ordered MERALCO
to pay the former AD, MD, ED and AF. The court found the evidence of petitioner insufficient to prove that TEC was guilty of tampering the
meter installations. The CA affirmed the RTC decision with modifications, hence this petition for review on certiorari under Rule 45.
ISSUE: is the award of MD proper?
HELD: NO
We, however, deem it proper to delete the award of moral damages. TEC’s claim was premised allegedly on the damage to its goodwill and
reputation. As a rule, a corporation is not entitled to moral damages because, not being a natural person, it cannot experience physical
suffering or sentiments like wounded feelings, serious anxiety, mental anguish and moral shock.
The only exception to this rule is when the corporation has a reputation that is debased, resulting in its humiliation in the business
realm. But in such a case, it is imperative for the claimant to present proof to justify the award. It is essential to prove the existence of the
factual basis of the damage and its causal relation to petitioner’s acts. In the present case, the records are bereft of any evidence that the
name or reputation of TEC/TPC has been debased as a result of petitioner’s acts
G.R. No. L-6776 May 21, 1955
THE REGISTER OF DEEDS OF RIZAL, petitioner-appellee,
vs.
UNG SIU SI TEMPLE, respondent-appellant.
Alejo F. Candido for appellant.
Office of the Solicitor General Querube C. Makalintal and Solicitor Felix V. Makasiar for appellee.
REYES, J.B.L., J.:
The Register of Deeds for the province of Rizal refused to accept for record a deed of donation executed in due form on January 22, 1953, by
Jesus Dy, a Filipino citizen, conveying a parcel of residential land, in Caloocan, Rizal, known as lot No. 2, block 48-D, PSD-4212, G.L.R.O.
Record No. 11267, in favor of the unregistered religious organization "Ung Siu Si Temple", operating through three trustees all of Chinese
nationality. The donation was duly accepted by Yu Juan, of Chinese nationality, founder and deaconess of the Temple, acting in
representation and in behalf of the latter and its trustees.
The refusal of the Registrar was elevated en Consultato the IVth Branch of the Court of First Instance of Manila. On March 14, 1953, the
Court upheld the action of the Rizal Register of Deeds, saying:
The question raised by the Register of Deeds in the above transcribed consulta is whether a deed of donation of a parcel of land
executed in favor of a religious organization whose founder, trustees and administrator are Chinese citizens should be registered
or not.
It appearing from the record of the Consulta that UNG SIU SI TEMPLE is a religious organization whose deaconess, founder,
trustees and administrator are all Chinese citizens, this Court is of the opinion and so hold that in view of the provisions of the
sections 1 and 5 of Article XIII of the Constitution of the Philippines limiting the acquisition of land in the Philippines to its citizens,
or to corporations or associations at least sixty per centum of the capital stock of which is owned by such citizens adopted after
the enactment of said Act No. 271, and the decision of the Supreme Court in the case of Krivenko vs. the Register of Deeds of
Manila, the deed of donation in question should not be admitted for admitted for registration. (Printed Rec. App. pp 17-18).
Not satisfied with the ruling of the Court of First Instance, counsel for the donee Uy Siu Si Temple has appealed to this Court, claiming: (1)
that the acquisition of the land in question, for religious purposes, is authorized and permitted by Act No. 271 of the old Philippine
Commission, providing as follows:
SECTION 1. It shall be lawful for all religious associations, of whatever sort or denomination, whether incorporated in the
Philippine Islands or in the name of other country, or not incorporated at all, to hold land in the Philippine Islands upon which to
build churches, parsonages, or educational or charitable institutions.
SEC. 2. Such religious institutions, if not incorporated, shall hold the land in the name of three Trustees for the use of such
associations; . . .. (Printed Rec. App. p. 5.)
and (2) that the refusal of the Register of Deeds violates the freedom of religion clause of our Constitution [Art. III, Sec. 1(7)].
We are of the opinion that the Court below has correctly held that in view of the absolute terms of section 5, Title XIII, of the Constitution,
the provisions of Act No. 271 of the old Philippine Commission must be deemed repealed since the Constitution was enacted, in so far as
incompatible therewith. In providing that, —
Save in cases of hereditary succession, no private agricultural land shall be transferred or assigned except to individuals,
corporations or associations qualified to acquire or hold lands of the public domain in the Philippines,
the Constitution makes no exception in favor of religious associations. Neither is there any such saving found in sections 1 and 2 of Article
XIII, restricting the acquisition of public agricultural lands and other natural resources to "corporations or associations at least sixty per
centum of the capital of which is owned by such citizens" (of the Philippines).
The fact that the appellant religious organization has no capital stock does not suffice to escape the Constitutional inhibition, since it is
admitted that its members are of foreign nationality. The purpose of the sixty per centum requirement is obviously to ensure that
corporations or associations allowed to acquire agricultural land or to exploit natural resources shall be controlled by Filipinos; and the spirit
of the Constitution demands that in the absence of capital stock, the controlling membership should be composed of Filipino citizens.
To permit religious associations controlled by non-Filipinos to acquire agricultural lands would be to drive the opening wedge to revive alien
religious land holdings in this country. We can not ignore the historical fact that complaints against land holdings of that kind were among
the factors that sparked the revolution of 1896.
As to the complaint that the disqualification under article XIII is violative of the freedom of religion guaranteed by Article III of the
Constitution, we are by no means convinced (nor has it been shown) that land tenure is indispensable to the free exercise and enjoyment of
religious profession or worship; or that one may not worship the Deity according to the dictates of his own conscience unless upon land held
in fee simple.
The resolution appealed from is affirmed, with costs against appellant.
RCADI v. LRC and RD of Davao DIGEST
DECEMBER 21, 2016 ~ VBDIAZ
TOPIC: Nationality of a corporation
Roman Catholic Apostolic Administrator of Davao, Inc. v. The Land Registration Commission and the Register of Deeds of Davao City, G.R.
No. L-8451, December 20,1957
Facts: incorporated, and entirely independent on the others in the management and ownership of their temporalities. To allow theory that the

On October 4, 1954, Mateo L. Rodis, a Filipino citizen and resident of the City of Davao, executed a deed of sale of a parcel of land located in Roman Catholic Churches all over the world follow the citizenship of their Supreme Head, the Pontifical Father, would lead to the absurdity

the same city covered by Transfer Certificate No. 2263, in favor of the Roman Catholic Apostolic Administrator of Davao Inc.,(RCADI) is of finding the citizens of a country who embrace the Catholic faith and become members of that religious society, likewise citizens of the

corporation sole organized and existing in accordance with Philippine Laws, with Msgr. Clovis Thibault, a Canadian citizen, as actual Vatican or of Italy. And this is more so if We consider that the Pope himself may be an Italian or national of any other country of the world.

incumbent. Registry of Deeds Davao (RD) required RCADI to submit affidavit declaring that 60% of its members were Filipino Citizens. As the The same thing be said with regard to the nationality or citizenship of the corporation sole created under the laws of the Philippines, which

RD entertained some doubts as to the registerability of the deed of sale, the matter was referred to the Land Registration is not altered by the change of citizenship of the incumbent bishops or head of said corporation sole.

Commissioner (LRC) en consulta for resolution. LRC hold that pursuant to provisions of sections 1 and 5 of Article XII of the Philippine We must therefore, declare that although a branch of the Universal Roman Catholic Apostolic Church, every Roman Catholic Church in

Constitution, RCADI is not qualified to acquire land in the Philippines in the absence of proof that at leat 60% of the capital, properties or different countries, if it exercises its mission and is lawfully incorporated in accordance with the laws of the country where it is located, is

assets of the RCADI is actually owned or controlled by Filipino citizens. LRC also denied the registration of the Deed of Sale in the absence of considered an entity or person with all the rights and privileges granted to such artificial being under the laws of that country, separate and

proof of compliance with such requisite. RCADI’s Motion for Reconsideration was denied. Aggrieved, the latter filed a petition for distinct from the personality of the Roman Pontiff or the Holy See, without prejudice to its religious relations with the latter which are

mandamus. governed by the Canon Law or their rules and regulations.

Issue: It has been shown before that: (1) the corporation sole, unlike the ordinary corporations which are formed by no less than 5 incorporators, is

Whether or not the Universal Roman Catholic Apostolic Church in the Philippines, or better still, the corporation sole named the Roman composed of only one persons, usually the head or bishop of the diocese, a unit which is not subject to expansion for the purpose of

Catholic Apostolic Administrator of Davao, Inc., is qualified to acquire private agricultural lands in the Philippines pursuant to the provisions determining any percentage whatsoever; (2) the corporation sole is only the administrator and not the owner of the temporalities located in

of Article XIII of the Constitution. the territory comprised by said corporation sole; (3) such temporalities are administered for and on behalf of the faithful residing in the

Ruling: diocese or territory of the corporation sole; and (4) the latter, as such, has no nationality and the citizenship of the incumbent Ordinary has

RCADI is qualified. nothing to do with the operation, management or administration of the corporation sole, nor effects the citizenship of the faithful

While it is true and We have to concede that in the profession of their faith, the Roman Pontiff is the supreme head; that in the religious connected with their respective dioceses or corporation sole.

matters, in the exercise of their belief, the Catholic congregation of the faithful throughout the world seeks the guidance and direction of In view of these peculiarities of the corporation sole, it would seem obvious that when the specific provision of the Constitution invoked by

their Spiritual Father in the Vatican, yet it cannot be said that there is a merger of personalities resultant therein. Neither can it be said that respondent Commissioner (section 1, Art. XIII), was under consideration, the framers of the same did not have in mind or overlooked this

the political and civil rights of the faithful, inherent or acquired under the laws of their country, are affected by that relationship with the particular form of corporation. If this were so, as the facts and circumstances already indicated tend to prove it to be so, then the

Pope. The fact that the Roman Catholic Church in almost every country springs from that society that saw its beginning in Europe and the inescapable conclusion would be that this requirement of at least 60 per cent of Filipino capital was never intended to apply to corporations

fact that the clergy of this faith derive their authorities and receive orders from the Holy See do not give or bestow the citizenship of the sole, and the existence or not a vested right becomes unquestionably immaterial.

Pope upon these branches. Citizenship is a political right which cannot be acquired by a sort of “radiation”. We have to realize that although G.R. No. L-6055 June 12, 1953
THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
there is a fraternity among all the catholic countries and the dioceses therein all over the globe, the universality that the word “catholic” vs.
WILLIAM H. QUASHA, defendant-appellant.
implies, merely characterize their faith, a uniformity in the practice and the interpretation of their dogma and in the exercise of their belief, Jose P. Laurel for appellant and William H. Quasha in his own behalf.
Office of the Solicitor General Juan R. Liwag and Assistant Solicitor General Francisco Carreon for appellee.
but certainly they are separate and independent from one another in jurisdiction, governed by different laws under which they are REYES, J.:
William H. Quasha, a member of the Philippine bar, was charged in the Court of First Instance of Manila with the crime of falsification of a
public and commercial document in that, having been entrusted with the preparation and registration of the article of incorporation of the
Pacific Airways Corporation, a domestic corporation organized for the purpose of engaging in business as a common carrier, he caused it to
appear in said article of incorporation that one Arsenio Baylon, a Filipino citizen, had subscribed to and was the owner of 60.005 per cent of
the subscribed capital stock of the corporation when in reality, as the accused well knew, such was not the case, the truth being that the
owner of the portion of the capital stock subscribed to by Baylon and the money paid thereon were American citizen whose name did not
appear in the article of incorporation, and that the purpose for making this false statement was to circumvent the constitutional mandate
that no corporation shall be authorize to operate as a public utility in the Philippines unless 60 per cent of its capital stock is owned by
Filipinos.
Found guilty after trial and sentenced to a term of imprisonment and a fine, the accused has appealed to this Court.
The essential facts are not in dispute. On November 4,1946, the Pacific Airways Corporation registered its articles of incorporation with the
Securities and Exchanged Commission. The article were prepared and the registration was effected by the accused, who was in fact the
organizer of the corporation. The article stated that the primary purpose of the corporation was to carry on the business of a common
carrier by air, land or water; that its capital stock was P1,000,000, represented by 9,000 preferred and 100,000 common shares, each
preferred share being of the par value of p100 and entitled to 1/3 vote and each common share, of the par value of P1 and entitled to one
vote; that the amount capital stock actually subscribed was P200,000, and the names of the subscribers were Arsenio Baylon, Eruin E.
Shannahan, Albert W. Onstott, James O'Bannon, Denzel J. Cavin, and William H. Quasha, the first being a Filipino and the other five all
Americans; that Baylon's subscription was for 1,145 preferred shares, of the total value of P114,500, and for 6,500 common shares, of the
total par value of P6,500, while the aggregate subscriptions of the American subscribers were for 200 preferred shares, of the total par value
of P20,000, and 59,000 common shares, of the total par value of P59,000; and that Baylon and the American subscribers had already paid 25
per cent of their respective subscriptions. Ostensibly the owner of, or subscriber to, 60.005 per cent of the subscribed capital stock of the
corporation, Baylon nevertheless did not have the controlling vote because of the difference in voting power between the preferred shares
and the common shares. Still, with the capital structure as it was, the article of incorporation were accepted for registration and a certificate
of incorporation was issued by the Securities and Exchange Commission.
There is no question that Baylon actually subscribed to 60.005 per cent of the subscribed capital stock of the corporation. But it is admitted
that the money paid on his subscription did not belong to him but to the Americans subscribers to the corporate stock. In explanation, the
accused testified, without contradiction, that in the process of organization Baylon was made a trustee for the American incorporators, and
that the reason for making Baylon such trustee was as follows:
Q. According to this article of incorporation Arsenio Baylon subscribed to 1,135 preferred shares with a total value of P1,135. Do
you know how that came to be?
A. Yes.
The people who were desirous of forming the corporation, whose names are listed on page 7 of this certified copy came to my house,
Messrs. Shannahan, Onstott, O'Bannon, Caven, Perry and Anastasakas one evening. There was considerable difficulty to get them all
together at one time because they were pilots. They had difficulty in deciding what their respective share holdings would be. Onstott had
invested a certain amount of money in airplane surplus property and they had obtained a considerable amount of money on those planes
and as I recall they were desirous of getting a corporation formed right away. And they wanted to have their respective shares holdings
resolved at a latter date. They stated that they could get together that they feel that they had no time to settle their respective share
holdings. We discussed the matter and finally it was decided that the best way to handle the things was not to put the shares in the name of
anyone of the interested parties and to have someone act as trustee for their respective shares holdings. So we looked around for a trustee.
And he said "There are a lot of people whom I trust." He said, "Is there someone around whom we could get right away?" I said, "There is
Arsenio. He was my boy during the liberation and he cared for me when i was sick and i said i consider him my friend." I said. They all knew
Arsenio. He is a very kind man and that was what was done. That is how it came about.
Defendant is accused under article 172 paragraph 1, in connection with article 171, paragraph 4, of the Revised Penal Code, which read:
ART. 171. Falsification by public officer, employee, or notary or ecclesiastic minister. — The penalty of prision mayor and a fine not
to exceed 5,000 pesos shall be imposed upon any public officer, employee, or notary who, taking advantage of his official
position, shall falsify a document by committing any of the following acts:
xxx xxx xxx
4. Making untruthful statements in a narration of facts.
ART. 172. Falsification by private individuals and use of falsified documents. — The penalty of prision correccional in its medium
and maximum period and a fine of not more than 5,000 pesos shall be imposed upon:
xxx xxx xxx
1. Any private individual who shall commit any of the falsifications enumerated in the next preceding article in any public or
official document or letter of exchange or any other kind of commercial document.
Commenting on the above provision, Justice Albert, in his well-known work on the Revised Penal Code ( new edition, pp. 407-408), observes,
on the authority of U.S. vs. Reyes, (1 Phil., 341), that the perversion of truth in the narration of facts must be made with the wrongful intent
of injuring a third person; and on the authority of U.S. vs. Lopez (15 Phil., 515), the same author further maintains that even if such wrongful
intent is proven, still the untruthful statement will not constitute the crime of falsification if there is no legal obligation on the part of the
narrator to disclose the truth. Wrongful intent to injure a third person and obligation on the part of the narrator to disclose the truth are
thus essential to a conviction for a crime of falsification under the above article of the Revised Penal Code.
Now, as we see it, the falsification imputed in the accused in the present case consists in not disclosing in the articles of incorporation that
Baylon was a mere trustee ( or dummy as the prosecution chooses to call him) of his American co-incorporators, thus giving the impression
that Baylon was the owner of the shares subscribed to by him which, as above stated, amount to 60.005 per cent of the sub-scribed capital
stock. This, in the opinion of the trial court, is a malicious perversion of the truth made with the wrongful intent circumventing section 8,
Article XIV of the Constitution, which provides that " no franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporation or other entities organized under the law of the Philippines,
sixty per centum of the capital of which is owned by citizens of the Philippines . . . ." Plausible though it may appear at first glance, this
opinion loses validity once it is noted that it is predicated on the erroneous assumption that the constitutional provision just quoted was
meant to prohibit the mere formation of a public utility corporation without 60 per cent of its capital being owned by the Filipinos, a
mistaken belief which has induced the lower court to that the accused was under obligation to disclose the whole truth about the nationality
of the subscribed capital stock of the corporation by revealing that Baylon was a mere trustee or dummy of his American co-incorporators,
and that in not making such disclosure defendant's intention was to circumvent the Constitution to the detriment of the public interests.
Contrary to the lower court's assumption, 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 in question 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.
If the Constitution does not prohibit the mere formation of a public utility corporation with the alien capital, then how can the accused be
charged with having wrongfully intended to circumvent that fundamental law by not revealing in the articles of incorporation that Baylon
was a mere trustee of his American co-incorporation and that for that reason the subscribed capital stock of the corporation was wholly
American? For the mere formation of the corporation such revelation was not essential, and the Corporation Law does not require it.
Defendant was, therefore, under no obligation to make it. In the absence of such obligation and of the allege wrongful intent, defendant
cannot be legally convicted of the crime with which he is charged.
It is urged, however, that the formation of the corporation with 60 per cent of its subscribed capital stock appearing in the name of Baylon
was an indispensable preparatory step to the subversion of the constitutional prohibition and the laws implementing the policy expressed
therein. This view is not correct. For a corporation to be entitled to operate a public utility it is not necessary that it be organized with 60 per
cent of its capital owned by Filipinos from the start. A corporation formed with capital that is entirely alien may subsequently change the
nationality of its capital through transfer of shares to Filipino citizens. conversely, a corporation originally formed with Filipino capital may
subsequently change the national status of said capital through transfer of shares to foreigners. What need is there then for a corporation
that intends to operate a public utility to have, at the time of its formation, 60 per cent of its capital owned by Filipinos alone? That
condition may anytime be attained thru the necessary transfer of stocks. The moment for determining whether a corporation is entitled to
operate as a public utility is when it applies for a franchise, certificate, or any other form of authorization for that purpose. And that can be
done after the corporation has already come into being and not while it is still being formed. And at that moment, the corporation must
show that it has complied not only with the requirement of the Constitution as to the nationality of its capital, but also with the
requirements of the Civil Aviation Law if it is a common carrier by air, the Revised Administrative Code if it is a common carrier by water, and
the Public Service Law if it is a common carrier by land or other kind of public service.
Equally untenable is the suggestion that defendant should at least be held guilty of an "impossible crime" under article 59 of the Revised
Penal Code. It not being possible to suppose that defendant had intended to commit a crime for the simple reason that the alleged
constitutional prohibition which he is charged for having tried to circumvent does not exist, conviction under that article is out of the
question.
The foregoing consideration can not but lead to the conclusion that the defendant can not be held guilty of the crime charged. The majority
of the court, however, are also of the opinion that, even supposing that the act imputed to the defendant constituted falsification at the
time it was perpetrated, still with the approval of the Party Amendment to the Constitution in March, 1947, which placed Americans on the
same footing as Filipino citizens with respect to the right to operate public utilities in the Philippines, thus doing away with the prohibition in
section 8, Article XIV of the Constitution in so far as American citizens are concerned, the said act has ceased to be an offense within the
meaning of the law, so that defendant can no longer be held criminally liable therefor.
In view of the foregoing, the judgment appealed from is reversed and the defendant William H. Quasha acquitted, with costs de oficio.
Filipinas Cia de Seguros v. Christern Huenfeld & Co. - Enemy Corporation
80 PHIL 54
Facts: Narra Nickel Mining vs Redmont
> Oct. 1, 1941, Domestic Corp Christern, after payment of the premium, obtained from Filipinas, fire policy no. 29333 for P100T covering G.R. No. 195580, January 28, 2015
merchandise contained in a building located in Binondo.
> On Feb. 27, 1942, during the Jap occupation, the building and the insured merchandise were burned. Christern submitted to Filipinas its → Full Text ←
claim.
> Salvaged goods were sold and the total loss of Christern was P92T. Facts:
> Filipinas denied liability on the ground that Christern was an enemy corporation and cannot be insured. Narra and its co-petitioner corporations – Tesoro and MacArthur, filed a motion before the SC to reconsider its April 21, 2014 Decision which

Issue: upheld the denial of their MPSA applications. The SC affirmed the CA ruling that there is a doubt to their nationality, and that in applying the
Whether or not Filipinas is liable to Christern, Huenfeld & Co.
Grandfather Rule, the finding is that MBMI, a 100% Canadian-owned corporation, effectively owns 60% of the common stocks of petitioners
Held: by owning equity interests of the petitioners’ other majority corporate shareholders. Narra, Tesoro and MacArthur argued that the
NO.
Majority of the stockholders of Christern were German subjects. This being so, SC ruled that said corporation became an enemy corporation application of the Grandfather Rule to determine their nationality is erroneous and allegedly without basis in the Constitution, the FIA, the
upon the war between the US and Germany. The Phil Insurance Law in Sec. 8 provides that anyone except a public enemy may be
Philippine Mining Act, and the Rules issued by the SEC. These laws and rules supposedly espouse the application of the Control Test in
insured. It stands to reason that an insurance policy ceases to be allowable as soon as an insured becomes a public enemy.
verifying the Philippine nationality of corporate entities for purposes of determining compliance with Sec. 2, Art. XII of the Constitution that
The purpose of the war is to cripple the power ad exhaust the resources of the enemy, and it is inconsistent that one country should destroy
its enemy property and repay in insurance the value of what has been so destroyed, or that it should in such manner increase the resources only corporations or associations at least 60% of whose capital is owned by such Filipino citizens may enjoy certain rights and privileges, like
of the enemy or render it aid.
the exploration and development of natural resources.
All individuals who compose the belligerent powers, exist as to each other, in a state of utter exclusion and are public enemies. Christern Issue: W/N the application by the SC of the grandfather resulted to the abandonment of the ‘control test’
having become an enemy corporation on Dec. 10. 1941, the insurance policy issued in his favor on Oct. 1, 1941 by Filipinas had ceased to be
valid and enforceable, and since the insured goods were burned after Dec. 10, 1941, and during the war, Christern was NOT entitled to any Held:
indemnity under said policy from Filipinas.
No. The ‘control test’ can be applied jointly with the Grandfather Rule to determine the observance of foreign ownership restriction in
Elementary rules of justice require that the premium paid by Christern for the period covered by the policy from Dec. 10, 1941 should be nationalized economic activities. The Control Test and the Grandfather Rule are not incompatible ownership-determinant methods that can
returned by Filipinas.
ISSUE: only be applied alternative to each other. Rather, these methods can, if appropriate, be used cumulatively in the determination of the
Whether or not Christern, Huenefeld and Co is entitled to receive the proceeds from the insurance claim.
HELD: ownership and control of corporations engaged in fully or partly nationalized activities, as the mining operation involved in this case or the
NO. There is no question that majority of the stockholders of Christern were German subjects. This being so, Christern became an enemy
operation of public utilities.
corporation upon the outbreak of the war between the United States and Germany. The Philippine Insurance Law (Act No. 2427, as
amended,) in Section 8, provides that “anyone except a public enemy may be insured.” It stands to reason that an insurance policy ceases to The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control in a corporation, as it could result
be allowable as soon as an insured becomes a public enemy.
The respondent having become an enemy corporation on December 10, 1941, the insurance policy issued in its favor on October 1, 1941, by in an otherwise foreign corporation rendered qualified to perform nationalized or partly nationalized activities. Hence, it is only when the
the petitioner had ceased to be valid and enforceable, and since the insured goods were burned after December 10, 1941, and during the
Control Test is first complied with that the Grandfather Rule may be applied. Put in another manner, if the subject corporation’s Filipino
war, the respondent was not entitled to any indemnity under said policy from the petitioner. However, elementary rules of justice (in the
absence of specific provision in the Insurance Law) require that the premium paid by the respondent for the period covered by its policy equity falls below the threshold 60%, the corporation is immediately considered foreign-owned, in which case, the need to resort to the
from December 11, 1941, should be returned by the petitioner
Palting vs san jose petroleum Grandfather Rule disappears.
In 1956, San Jose Petroleum, Inc. (SJP), a mining corporation organized under the laws of Panama, was allowed by the Securities and Exchange
In this case, using the ‘control test’, Narra, Tesoro and MacArthur appear to have satisfied the 60-40 equity requirement. But the nationality
Commission (SEC) to sell its shares of stocks in the Philippines. Apparently, the proceeds of such sale shall be invested in San Jose Oil Company,
Inc. (SJO), a domestic mining corporation. Pedro Palting opposed the authorization granted to SJP because said tie up between SJP and SJO is of these corporations and the foreign-owned common investor that funds them was in doubt, hence, the need to apply the Grandfather
violative of the constitution; that SJO is 90% owned by SJP; that the other 10% is owned by another foreign corporation; that a mining
corporation cannot be interested in another mining corporation. SJP on the other hand invoked that under the parity rights agreement (Laurel- Rule. ##
Langley Agreement), SJP, a foreign corporation, is allowed to invest in a domestic corporation.
ISSUE: Whether or not SJP is correct. Issue 1: W/N the Grandfather Rule must be applied in this case 2014
HELD: No. The parity rights agreement is not applicable to SJP. The parity rights are only granted to American business enterprises or Yes. It is the intention of the framers of the Constitution to apply the Grandfather Rule in cases where corporate layering is present.
enterprises directly or indirectly controlled by US citizens. SJP is a Panamanian corporate citizen. The other owners of SJO are Venezuelan
corporations, not Americans. SJP was not able to show contrary evidence. Further, the Supreme Court emphasized that the stocks of these First, as a rule in statutory construction, when there is conflict between the Constitution and a statute, the Constitution will prevail. In this
corporations are being traded in stocks exchanges abroad which renders their foreign ownership subject to change from time to time. This
fact renders a practical impossibility to meet the requirements under the parity rights. Hence, the tie up between SJP and SJO is illegal, SJP not instance, specifically pertaining to the provisions under Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will
being a domestic corporation or an American business enterprise contemplated under the Laurel-Langley Agreement.
have no place of application. Corporate layering is admittedly allowed by the FIA, but if it is used to circumvent the Constitution and other
pertinent laws, then it becomes illegal.
Second, under the SEC Rule1 and DOJ Opinion2 , the Grandfather Rule must be applied when the 60-40 Filipino-foreign equity ownership is in
doubt. Doubt is present in the Filipino equity ownership of Narra, Tesoro, and MacArthur since their common investor, the 100% Canadian-
owned corporation – MBMI, funded them.
Under the Grandfather Rule, it is not enough that the corporation does have the required 60% Filipino stockholdings at face value. To
determine the percentage of the ultimate Filipino ownership, it must first be traced to the level of the investing corporation and added to
the shares directly owned in the investee corporation. Applying this rule, it turns out that the Canadian corporation owns more than 60% of
the equity interests of Narra, Tesoro and MacArthur. Hence, the latter are disqualified to participate in the exploration, development and
utilization of the Philippine’s natural resources.
1 DOJ Opinion No. 020 Series of 2005 (paragraph 7)
2 SEC Opinion May 13, 1990
Heirs of Gamboa v. Teves, et al., G.R. No. 176579, 09 October 2012
18APR
[CARPIO, J.]
FACTS
Movants Philippine Stock Exchange’s (PSE) President, Manuel V. Pangilinan, Napoleon L. Nazareno, and the Securities and Exchange
Commission (SEC) contend that the term “capital” in Section 11, Article XII of the Constitution has long been settled and defined to refer to
the total outstanding shares of stock, whether voting or non-voting. In fact, movants claim that the SEC, which is the administrative agency
tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in the Constitution and various statutes, has consistently
adopted this particular definition in its numerous opinions. Movants point out that with the 28 June 2011 Decision, the Court in effect
introduced a “new” definition or “midstream redefinition” of the term “capital” in Section 11, Article XII of the Constitution.
ISSUE
Whether the term “capital” includes both voting and non-voting shares.
RULING
NO.
The Constitution expressly declares as State policy the development of an economy “effectively controlled” by Filipinos. Consistent with such
State policy, the Constitution explicitly reserves the ownership and operation of public utilities to Philippine nationals, who are defined in the
Foreign Investments Act of 1991 as Filipino citizens, or corporations or associations at least 60 percent of whose capital with voting
rights belongs to Filipinos. The FIA’s implementing rules explain that “[f]or stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights is essential.” In effect, the FIA clarifies, reiterates and confirms the interpretation that the term “capital” in Section
11, Article XII of the 1987 Constitution refers to shares with voting rights, as well as with full beneficial ownership. This is precisely because
the right to vote in the election of directors, coupled with full beneficial ownership of stocks, translates to effective control of a corporation.
GAMBOA VS TEVES (G.R. NO. 176579 JUNE 28, 2011)
Gamboa vs Teves
G.R. No. 176579 June 28, 2011
Facts: On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT a franchise and the right to engage in
telecommunications business. In 1969, General Telephone and Electronics Corporation (GTE), an American company and a major PLDT
stockholder, sold 26 percent of the outstanding common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by
several persons, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became the owner of 111,415 shares of stock of PTIC by
virtue of three Deeds of Assignment executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares of
stock of PTIC held by PHI were sequestered by the Presidential Commission on Good Government (PCGG). The 111,415 PTIC shares, which
represent about 46.125 percent of the outstanding capital stock of PTIC, were later declared by this Court to be owned by the Republic of the
Philippines. Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of PTIC shares is actually an indirect
sale of 12 million shares or about 6.3 percent of the outstanding common shares of PLDT. With the sale, First Pacifics common shareholdings
in PLDT increased from 30.7 percent to 37 percent, thereby increasing the common shareholdings of foreigners in PLDT to about 81.47 percent.
This violates Section 11, Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to not
more than 40 percent.
Issue: Whether or not the term capital in Section 11, Article XII of the Constitution refers to the common shares of PLDT, a public utility.
Held: Yes. Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the Filipinization of public utilities, to
wit:
Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens
of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is
owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years.
Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by
the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The
participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital,
and all the executive and managing officers of such corporation or association must be citizens of the Philippines. (Emphasis supplied)
Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum nationality requirement prescribed in
Section 11, Article XII of the Constitution. Hence, for a corporation to be granted authority to operate a public utility, at least 60 percent of its
capital must be owned by Filipino citizens.
Thus, the 40% foreign ownership limitation should be interpreted to apply to both the beneficial ownership and the controlling interest.
Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution refers to ownership of
shares of stock entitled to vote, i.e., common shares. Furthermore, ownership of record of shares will not suffice but it must be shown that
the legal and beneficial ownership rests in the hands of Filipino citizens. Consequently, in the case of petitioner PLDT, since it is already
admitted that the voting interests of foreigners which would gain entry to petitioner PLDT by the acquisition of SMART shares through the
Questioned Transactions is equivalent to 82.99%, and the nominee arrangements between the foreign principals and the Filipino owners is
likewise admitted, there is, therefore, a violation of Section 11, Article XII of the Constitution.
Indisputably, one of the rights of a stockholder is the right to participate in the control or management of the corporation. This is exercised
through his vote in the election of directors because it is the board of directors that controls or manages the corporation. In the absence of
provisions in the articles of incorporation denying voting rights to preferred shares, preferred shares have the same voting rights as common
shares. However, preferred shareholders are often excluded from any control, that is, deprived of the right to vote in the election of directors
and on other matters, on the theory that the preferred shareholders are merely investors in the corporation for income in the same manner
as bondholders. In fact, under the Corporation Code only preferred or redeemable shares can be deprived of the right to vote. Common shares
cannot be deprived of the right to vote in any corporate meeting, and any provision in the articles of incorporation restricting the right of
common shareholders to vote is invalid.
Considering that common shares have voting rights which translate to control, as opposed to preferred shares which usually have no voting
rights, the term capital in Section 11, Article XII of the Constitution refers only to common shares. However, if the preferred shares also have
the right to vote in the election of directors, then the term capital shall include such preferred shares because the right to participate in the
control or management of the corporation is exercised through the right to vote in the election of directors. In short, the term capital in Section
11, Article XII of the Constitution refers only to shares of stock that can vote in the election of directors.
This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of Filipino citizens the control and
management of public utilities.
As shown in PLDTs 2010 GIS, as submitted to the SEC, the par value of PLDT common shares is P5.00 per share, whereas the par value of
preferred shares is P10.00 per share. In other words, preferred shares have twice the par value of common shares but cannot elect directors
and have only 1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos while foreigners
own only a minuscule 0.56% of the preferred shares. Worse, preferred shares constitute 77.85% of the authorized capital stock of PLDT while
common shares constitute only 22.15%.62 This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred shares
but with the common shares, blatantly violating the constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership
in a public utility.
G.R. No. 207246, November 22, 2016
JOSE M. ROY III, Petitioner, v. CHAIRPERSON TERESITA HERBOSA,THE SECURITIES AND EXCHANGE COMMISSION, AND PHILILIPPINE LONG
DISTANCE TELEPHONE COMPANY, Respondents.
WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN P. GABINETE, ANTONIO V. PESINA, JR., MODESTO MARTIN Y. MAMON
III, AND GERARDO C. EREBAREN, Petitioners-in-Intervention,
PHILIPPINE STOCK EXCHANGE, INC., Respondent-in-Intervention,
SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES, INC., Respondent-in-Intervention.
DECISION
CAGUIOA, J.:
The petitions1 before the Court are special civil actions for certiorari under Rule 65 of the Rules of Court seeking to annul Memorandum
Circular No. 8, Series of 2013 ("SEC-MC No. 8") issued by the Securities and Exchange Commission ("SEC") for allegedly being in violation of
the Court's Decision2 ("GamboaDecision") and Resolution3 ("Gamboa Resolution") in Gamboa v. Finance Secretary Teves, G.R. No. 176579,
respectively promulgated on June 28, 2011, and October 9, 2012, which jurisprudentially established the proper interpretation of Section 11,
Article XII of the Constitution.chanroblesvirtuallawlibrary
The Antecedents
On June 28, 2011, the Court issued the Gamboa Decision, the dispositive portion of which reads:chanRoblesvirtualLawlibrary
WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section 11, Article XII of the 1987 Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total
outstanding capital stock (common and non-voting preferred shares). Respondent Chairperson of the Securities and Exchange Commission
is DIRECTED to apply this definition of the term "capital" in determining the extent of allowable foreign ownership in respondent Philippine
Long Distance Telephone Company, and if there is a violation of Section 11, Article XII of the Constitution, to impose the appropriate
sanctions under the law.
SO ORDERED.4
Several motions for reconsideration were filed assailing the Gamboa Decision. They were denied in the Gamboa Resolution issued by the
Court on October 9, 2012, viz:chanRoblesvirtualLawlibrary
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall be entertained.
SO ORDERED.5
The Gamboa Decision attained finality on October 18, 2012, and Entry of Judgment was thereafter issued on December 11, 2012.6
On November 6, 2012, the SEC posted a Notice in its website inviting the public to attend a public dialogue and to submit comments on the
draft memorandum circular (attached thereto) on the guidelines to be followed in determining compliance with the Filipino ownership
requirement in public utilities under Section 11, Article XII of the Constitution pursuant to the Court's directive in the Gamboa Decision.7
On November 9, 2012, the SEC held the scheduled dialogue and more than 100 representatives from various organizations, government
agencies, the academe and the private sector attended.8
On January 8, 2013, the SEC received a copy of the Entry of Judgment9 from the Court certifying that on October 18, 2012,
the Gamboa Decision had become final and executory.10
On March 25, 2013, the SEC posted another Notice in its website soliciting from the public comments and suggestions on the draft
guidelines.11
On April 22, 2013, petitioner Atty. Jose M. Roy III ("Roy") submitted his written comments on the draft guidelines.12
On May 20, 2013, the SEC, through respondent Chairperson Teresita J. Herbosa, issued SEC-MC No. 8 entitled "Guidelines on Compliance
with the Filipino-Foreign Ownership Requirements Prescribed in the Constitution and/or Existing Laws by Corporations Engaged in
Nationalized and Partly Nationalized Activities." It was published in the Philippine Daily Inquirer and the Business Mirror on May 22,
2013.13Section 2 of SEC-MC No. 8 provides:chanRoblesvirtualLawlibrary
Section 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of
determining compliance therewith, the required percentage of Filipino ownership shall be applied to BOTH (a) the total number of
outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or
not entitled to vote in the election of directors.
Corporations covered by special laws which provide specific citizenship requirements shall comply with the provisions of said law.14
On June 10, 2013, petitioner Roy, as a lawyer and taxpayer, filed the Petition,15 assailing the validity of SEC-MC No. 8 for not conforming to
the letter and spirit of the Gamboa Decision and Resolution and for having been issued by the SEC with grave abuse of discretion. Petitioner
Roy seeks to apply the 60-40 Filipino ownership requirement separately to each class of shares of a public utility corporation, whether
common, preferred nonvoting, preferred voting or any other class of shares. Petitioner Roy also questions the ruling of the SEC that
respondent Philippine Long Distance Telephone Company ("PLDT") is compliant with the constitutional rule on foreign ownership. He prays
that the Court declare SEC-MC No. 8 unconstitutional and direct the SEC to issue new guidelines regarding the determination of compliance
with Section 11, Article XII of the Constitution in accordance with Gamboa.
Wilson C. Gamboa, Jr.,16 Daniel V. Cartagena, John Warren P. Gabinete, Antonio V. Pesina, Jr., Modesto Martin Y. Mamon III, and Gerardo C.
Erebaren ("intervenors Gamboa, et al.") filed a Motion for Leave to File Petition-in-Intervention17 on July 30, 2013, which the Court granted.
The Petition-in-Intervention18filed by intervenors Gamboa, et al. mirrored the issues, arguments and prayer of petitioner Roy.
On September 5, 2013, respondent PLDT filed its Comment (on the Petition dated 10 June 2013).19 PLDT posited that the Petition should be
dismissed because it violates the doctrine of hierarchy of courts as there are no compelling reasons to invoke the Court's original
jurisdiction; it is prematurely filed because petitioner Roy failed to exhaust administrative remedies before the SEC; the principal
actions/remedies of mandamus and declaratory relief are not within the exclusive and/or original jurisdiction of the Court; the petition
for certiorari is an inappropriate remedy since the SEC issued SEC-MC No. 8 in the exercise of its quasi-legislative power; it deprives the
necessary and indispensable parties of their constitutional right to due process; and the SEC merely implemented the dispositive portion of
the Gamboa Decision.
On September 20, 2013, respondents Chairperson Teresita Herbosa and SEC filed their Consolidated Comment.20 They sought the dismissal
of the petitions on the following grounds: (1) the petitioners do not possess locus standi to assail the constitutionality of SEC-MC No. 8; (2) a
petition for certiorari under Rule 65 is not the appropriate and proper remedy to assail the validity and constitutionality of the SEC-MC No.
8; (3) the direct resort to the Court violates the doctrine of hierarchy of courts; (4) the SEC did not abuse its discretion; (5) on PLDT's
compliance with the capital requirement as stated in the Gamboaruling, the petitioners' challenge is premature considering that the SEC has
not yet issued a definitive ruling thereon.
On October 22, 2013, PLDT filed its Comment (on the Petition-in-Intervention dated 16 July 2013).21PLDT adopted the position that
intervenors Gamboa, et al. have no standing and are not the proper party to question the constitutionality of SEC-MC No. 8; they are in no
position to assail SEC-MC No. 8 considering that they did not participate in the public consultations or give comments thereon; and their
Petition-in-Intervention is a disguised motion for reconsideration of the Gamboa Decision and Resolution.
On May 7, 2014, Petitioner Roy and intervenors Gamboa, et al.22 filed their Joint Consolidated Reply with Motion for Issuance of Temporary
Restraining Order.23
On May 22, 2014, PLDT filed its Rejoinder [To Petitioner and Petitioners-in-Intervention's Joint Consolidated Reply dated 7 May 2014] and
Opposition [To Petitioner and Petitioners-in-Intervention's Motion for Issuance of a Temporary Restraining Order dated 7 May 2014].24
On June 18, 2014, the Philippine Stock Exchange, Inc. ("PSE") filed its Motion to Intervene with Leave of Court25 and its Comment-in
Intervention.26 The PSE alleged that it has standing to intervene as the primary regulator of the stock exchange and will sustain direct injury
should the petitions be granted. The PSE argued that in the Gamboa ruling, "capital" refers only to shares entitled to vote in the election of
directors, and excludes those not so entitled; and the dispositive portion of the decision is the controlling factor that determines and settles
the questions presented in the case. The PSE further argued that adopting a new interpretation of Section 11, Article XII of the Constitution
violates the policy of conclusiveness of judgment, stare decisis, and the State's obligation to maintain a stable and predictable legal
framework for foreign investors under international treaties; and adopting a new definition of "capital" will prove disastrous for the
Philippine stock market. The Court granted the Motion to Intervene filed by PSE.27
PLDT filed its Consolidated Memorandum28 on February 10, 2015.
On June 1, 2016, Shareholders' Association of the Philippines, Inc.29 ("SHAREPHIL") filed an Omnibus Motion [1] For Leave to Intervene; and
[2] To Admit Attached Comment-in-Intervention.30 The Court granted the Omnibus Motion of SHAREPHIL.31
On June 30, 2016, petitioner Roy filed his Opposition and Reply to Interventions of Philippine Stock Exchange and Sharephil.32 Intervenors
Gamboa, et al. then filed on September 14, 2016, their Reply (to Interventions by Philippine Stock Exchange and Sharephil).33
The Issues
The twin issues of the Petition and the Petition-in-Intervention are: (1) whether the SEC gravely abused its discretion in issuing SEC-MC No. 8
in light of the Gamboa Decision and Gamboa Resolution, and (2) whether the SEC gravely abused its discretion in ruling that PLDT is
compliant with the constitutional limitation on foreign ownership.chanroblesvirtuallawlibrary
The Court's Ruling
At the outset, the Court disposes of the second issue for being without merit. In its Consolidated Comment dated September 13, 2013,34 the
SEC already clarified that it "has not yet issued a definitive ruling anent PLDT's compliance with the limitation on foreign ownership imposed
under the Constitution and relevant laws [and i]n fact, a careful perusal of x x x SEC-MC No. 8 readily reveals that all existing covered
corporations which are non-compliant with Section 2 thereof were given a period of one (1) year from the effectivity of the same within
which to comply with said ownership requirement. x x x."35 Thus, in the absence of a definitive ruling by the SEC on PLDT's compliance with
the capital requirement pursuant to the Gamboa Decision and Resolution, any question relative to the inexistent ruling is premature.
Also, considering that the Court is not a trier of facts and is in no position to make a factual determination of PLDT's compliance with the
constitutional provision under review, the Court can only resolve the first issue, which is a pure question of law. However, before the Court
tackles the first issue, it has to rule on certain procedural challenges that have been raised.chanroblesvirtuallawlibrary
The Procedural Issues
The Court may exercise its power of judicial review and take cognizance of a case when the following specific requisites are met: (1) there is
an actual case or controversy calling for the exercise of judicial power; (2) the petitioner has standing to question the validity of the subject
act or issuance, i.e., he has a personal and substantial interest in the case that he has sustained, or will sustain, direct injury as a result of the
enforcement of the act or issuance; (3) the question of constitutionality is raised at the earliest opportunity; and (4) the constitutional
question is the very lis mota of the case.36
The first two requisites of judicial review are not met.
Petitioners' failure to sufficiently allege, much less establish, the existence of the first two requisites for the exercise of judicial review
warrants the perfunctory dismissal of the petitions.
a. No actual controversy.
Regarding the first requisite, the Court in Belgica v. Ochoa37 stressed anew that an actual case or controversy is one which involves a conflict
of legal rights, an assertion of opposite legal claims, susceptible of judicial resolution as distinguished from a hypothetical or abstract
difference or dispute since the courts will decline to pass upon constitutional issues through advisory opinions, bereft as they are of
authority to resolve hypothetical or moot questions. Related to the requirement of an actual case or controversy is the requirement of
"ripeness", and a question is ripe for adjudication when the act being challenged has a direct adverse effect on the individual challenging it.
Petitioners have failed to show that there IS an actual case or controversy which is ripe for adjudication.
The Petition and the Petition-in-Intervention identically allege:chanRoblesvirtualLawlibrary
3. The standing interpretation of the SEC found in MC8 practically encourages circumvention of the 60-40 ownership rule by impliedly
allowing the creation of several classes of voting shares with different degrees of beneficial ownership over the same, but at the same time,
not imposing a 40% limit on foreign ownership of the higher yielding stocks.38
4. For instance, a situation may arise where a corporation may issue several classes of shares of stock, one of which are common shares with
rights to elect directors, another are preferred shares with rights to elect directors but with much lesser entitlement to dividends, and still
another class of preferred shares with no rights to elect the directors and even less dividends. In this situation, the corporation may issue
common shares to foreigners amounting to forty percent (40%) of the outstanding capital stock and issue preferred shares entitled to vote
the directors of the corporation to Filipinos consisting of 60%39 percent (sic) of the outstanding capital stock entitled to vote. Although it may
appear that the 60-40 rule has been complied with, the beneficial ownership of the corporation remains with the foreign stockholder since
the Filipino owners of the preferred shares have only a miniscule share in the dividends and profit of the corporation. Plainly, this situation
runs contrary to the Constitution and the ruling of this x x x Court.40
Petitioners' hypothetical illustration as to how SEC-MC No. 8 "practically encourages circumvention of the 60-40 ownership rule" is evidently
speculative and fraught with conjectures and assumptions. There is clearly wanting specific facts against which the veracity of the
conclusions purportedly following from the speculations and assumptions can be validated. The lack of a specific factual milieu from which
the petitions originated renders any pronouncement from the Court as a purely advisory opinion and not a decision binding on identified
and definite parties and on a known set of facts.
Firstly, unlike in Gamboa, the identity of the public utility corporation, the capital of which is at issue, is unknown. Its outstanding capital
stock and the actual composition thereof in terms of numbers, classes, preferences and features are all theoretical. The description
"preferred shares with rights to elect directors but with much lesser entitlement to dividends, and still another class of preferred shares with
no rights to elect the directors and even less dividends" is ambiguous. What are the specific dividend policies or entitlements of the
purported preferred shares? How are the preferred shares' dividend policies different from those of the common shares? Why and how did
the fictional public utility corporation issue those preferred shares intended to be owned by Filipinos? What are the actual features of the
foreign-owned common shares which make them superior over those owned by Filipinos? How did it come to be that Filipino holders of
preferred shares ended up with "only a miniscule share in the dividends and profit of the [hypothetical] corporation"? Any answer to any of
these questions will, at best, be contingent, conjectural, indefinite or anticipatory.
Secondly, preferred shares usually have preference over the common shares in the payment of dividends. If most of the "preferred shares
with rights to elect directors but with much lesser entitlement to dividends" and the other "class of preferred shares with no rights to elect
the directors and even less dividends" are owned by Filipinos, they stand to receive their dividend entitlement ahead of the foreigners, who
are common shareholders. For the common shareholders to have "bigger dividends" as compared to the dividends paid to the preferred
shareholders, which are supposedly predominantly owned by Filipinos, there must still be unrestricted retained earnings of the fictional
corporation left after payment of the dividends declared in favor of the preferred shareholders. The fictional illustration does not even
intimate how this situation can be possible. No permutation of unrestricted retained earnings of the hypothetical corporation is shown that
makes the present conclusion of the petitioners achievable. Also, no concrete meaning to the petitioners' claim of the Filipinos' "miniscule
share in the dividends and profit of the [fictional] corporation" is demonstrated.
Thirdly, petitioners fail to allege or show how their hypothetical illustration will directly and adversely affect them. That is impossible since
their relationship to the fictional corporation is a matter of guesswork.
From the foregoing, it is evident that the Court can only surmise or speculate on the situation or controversy that the petitioners
contemplate to present for judicial determination. Petitioners are likewise conspicuously silent on the direct adverse impact to them of the
implementation of SEC-MC No. 8. Thus, the petitions must fail because the Court is barred from rendering a decision based on assumptions,
speculations, conjectures and hypothetical or fictional illustrations, more so in the present case which is not even ripe for decision.
b. No locus standi.
The personal and substantial interest that enables a party to have legal standing is one that is both material, an interest in issue and to be
affected by the government action, as distinguished from mere interest in the issue involved, or a mere incidental interest, and real, which
means a present substantial interest, as distinguished from a mere expectancy or a future, contingent, subordinate, or consequential
interest.41cralawred
As to injury, the party must show that (1) he will personally suffer some actual or threatened injury because of the allegedly illegal conduct
of the government; (2) the injury is fairly traceable to the challenged action; and (3) the injury is likely to be redressed by a favorable
action.42 If the asserted injury is more imagined than real, or is merely superficial and insubstantial, an excursion into constitutional
adjudication by the courts is not warranted.43
Petitioners have no legal standing to question the constitutionality of SEC-MC No. 8.
To establish his standing, petitioner Roy merely claimed that he has standing to question SEC-MC No. 8 "as a concerned citizen, an officer of
the Court and as a taxpayer" as well as "the senior law partner of his own law firm[, which] x x x is a subscriber of PLDT."44 On the other
hand, intervenors Gamboa, et al.allege, as basis of their locus standi, their "[b]eing lawyers and officers of the Court" and "citizens x x x and
taxpayers."45

The Court has previously emphasized that the locus standi requisite is not met by the expedient invocation of one's citizenship or
membership in the bar who has an interest in ensuring that laws and orders of the Philippine government are legally and validly issued as
these supposed interests are too general, which are shared by other groups and by the whole citizenry.46 Per their allegations, the personal
interest invoked by petitioners as citizens and members of the bar in the validity or invalidity of SEC-MC No. 8 is at best equivocal, and
totally insufficient.
Petitioners' status as taxpayers is also of no moment. As often reiterated by the Court, a taxpayer's suit is allowed only when the petitioner
has demonstrated the direct correlation of the act complained of and the disbursement of public funds in contravention of law or the
Constitution, or has shown that the case involves the exercise of the spending or taxing power of Congress.47 SEC-MC No. 8 does not involve
an additional expenditure of public funds and the taxing or spending power of Congress.
The allegation that petitioner Roy's law firm is a "subscriber of PLDT" is ambiguous. It is unclear whether his law firm is a "subscriber" of
PLDT's shares of stock or of its various telecommunication services. Petitioner Roy has not identified the specific direct and substantial injury
he or his law firm stands to suffer as "subscriber of PLDT" as a result of the issuance of SEC-MC No. 8 and its enforcement.
As correctly observed by respondent PLDT, "(w]hether or not the constitutionality of SEC-MC No. 8 is upheld, the rights and privileges of all
PLDT subscribers, as with all the rest of subscribers of other corporations, are necessarily and equally preserved and protected. Nothing is
added [to] or removed from a PLDT subscriber in terms of the extent of his or her participation, relative to what he or she had originally
enjoyed from the beginning. In the most practical sense, a PLDT subscriber loses or gains nothing in the event that SEC-MC No. 8 is either
sustained or struck down by [the Court]."48
More importantly, the issue regarding PLDT's compliance with Section 11, Article XII of the Constitution has been earlier ruled as premature
and beyond the Court's jurisdiction. Thus, petitioner Roy's allegation that his law firm is a "subscriber of PLDT" is insufficient to clothe him
with locus standi.
Petitioners' cursory incantation of "transcendental importance x x x of the rules on foreign ownership of corporations or entities vested with
public interest"49 does not automatically justify the brushing aside of the strict observance of the requisites for the Court's exercise of
judicial review. An indiscriminate disregard of the requisites every time "transcendental or paramount importance or significance" is invoked
would result in an unacceptable corruption of the settled doctrine of locus standi, as every worthy cause is an interest shared by the general
public.50
In the present case, the general and equivocal allegations of petitioners on their legal standing do not justify the relaxation of the locus
standi rule. While the Court has taken an increasingly liberal approach to the rule of locus standi, evolving from the stringent requirements
of personal injury to the broader transcendental importance doctrine, such liberality is not to be abused.51
The Rule on the Hierarchy of Courts has been violated.
The Court in Bañez, Jr. v. Concepcion52 stressed that:chanRoblesvirtualLawlibrary
The Court must enjoin the observance of the policy on the hierarchy of courts, and now affirms that the policy is not to be ignored without
serious consequences. The strictness of the policy is designed to shied the Court from having to deal with causes that are also well within the
competence of the lower courts, and thus leave time to the Court to deal with the more fundamental and more essential tasks that the
Constitution has assigned to it. The Court may act on petitions for the extraordinary writs of certiorari, prohibition and mandamus only
when absolutely necessary or when serious and important reasons exist to justifY an exception to the policy. x x x
x x x Where the issuance of an extraordinary writ is also within the competence of the Court of Appeals or a Regional Trial Court, it is in
either of these courts that the specific action for the writ's procurement must be presented. This is and should continue to be the policy in
this regard, a policy that courts and lawyers must strictly observe. x x x53
Petitioners' invocation of "transcendental importance" is hollow and does not merit the relaxation of the rule on hierarchy of courts. There
being no special, important or compelling reason that justified the direct filing of the petitions in the Court in violation of the policy on
hierarchy of courts, their outright dismissal on this ground is further warranted.54
The petitioners failed to implead indispensable parties.
The cogent submissions of the PSE in its Comment-in-Intervention dated June 16, 201455 and SHAREPHIL in its Omnibus Motion [1] For Leave
to Intervene; and [2] To Admit Attached Comment-in-Intervention dated May 30, 201656 demonstrate how petitioners should have
impleaded not only PLDT but all other corporations in nationalized and partlynationalized industries because the propriety of the SEC's
enforcement of the Court's interpretation of "capital" through SEC-MC No. 8 affects them as well.
Under Section 3, Rule 7 of the Rules of Court, an indispensable party is a party-in-interest without whom there can be no final determination
of an action. Indispensable parties are those with such a material and direct interest in the controversy that a final decree would necessarily
affect their rights, so that the court cannot proceed without their presence.57 The interests of such indispensable parties in the subject
matter of the suit and the relief are so bound with those of the other parties that their legal presence as parties to the proceeding is an
absolute necessity and a complete and efficient determination of the equities and rights of the parties is not possible if they are not joined.58
Other than PLDT, the petitions failed to join or implead other public utility corporations subject to the same restriction imposed by Section
11, Article XII of the Constitution. These corporations are in danger of losing their franchise and property if they are found not compliant
with the restrictive interpretation of the constitutional provision under review which is being espoused by petitioners. They should be
afforded due notice and opportunity to be heard, lest they be deprived of their property without due process.
Not only are public utility corporations other than PLDT directly and materially affected by the outcome of the petitions, their shareholders
also stand to suffer in case they will be forced to divest their shareholdings to ensure compliance with the said restrictive interpretation of
the term "capital". As explained by SHAREPIDL, in five corporations alone, more than Php158 Billion worth of shares must be divested by
foreign shareholders and absorbed by Filipino investors if petitioners' position is upheld.59
Petitioners' disregard of the rights of these other corporations and numerous shareholders constitutes another fatal procedural flaw,
justifYing the dismissal of their petitions. Without giving all of them their day in court, they will definitely be deprived of their property
without due process of law.
During the deliberations, Justice Velasco stressed on the foregoing procedural objections to the granting of the petitions; and Justice
Bersamin added that the special civil action for certiorari and prohibition is not the proper remedy to assail SEC-MC No. 8 because it was not
issued under the adjudicatory or quasi-judicial functions of the SEC.chanroblesvirtuallawlibrary
The Substantive Issue
The only substantive issue that the petitions assert is whether the SEC's issuance of SEC-MC No. 8 is tainted with grave abuse of discretion.
The Court holds that, even if the resolution of the procedural issues were conceded in favor of petitioners, the petitions, being anchored on
Rule 65, must nonetheless fail because the SEC did notcommit 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.
The ratio in the Gamboa Decision and Gamboa Resolution.
To determine what the Court directed the SEC to do - and therefore resolve whether what the SEC did amounted to grave abuse of
discretion - the Court resorts to the decretal portion of the GamboaDecision, as this is the portion of the decision that a party relies upon to
determine his or her rights and duties,60viz:chanRoblesvirtualLawlibrary
WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section II, Article XII of the I987 Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total
outstanding capital stock (common and non-voting preferred shares). Respondent Chairperson of the Securities and Exchange Commission
is DIRECTED to apply this definition of the term "capital" in determining the extent of allowable foreign ownership in respondent Philippine
Long Distance Telephone Company, and if there is a violation of Section II, Article XII of the Constitution, to impose the appropriate
sanctions under the law.61
In turn, the Gamboa Resolution stated:chanRoblesvirtualLawlibrary
In any event, the SEC has expressly manifested62 that it will abide by the Court's decision and defer to the Court's definition of the term
"capital" in Section II, Article XII of the Constitution. Further, the SEC entered its special appearance in this case and argued during the Oral
Arguments, indicating its submission to the Court's jurisdiction. It is clear, therefore, that there exists no legal impediment against the
proper and immediate implementation of the Court's directive to the SEC.
xxxx
x x x The dispositive portion of the Court's ruling is addressed not to PLDT but solely to the SEC, which is the administrative agency tasked
to enforce the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.63
To recall, the sole issue in the Gamboa case was: "whether the term 'capital' in Section 11, Article XII of the 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."64
The Court directly answered the Issue and consistently defined the term "capital" as follows:chanRoblesvirtualLawlibrary
x x x The term "capital" in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors,
and thus in the present case only to common shares, and not to the total outstanding capital stock comprising both common and non voting
preferred shares.
xxxx
Considering that common shares have voting rights which translate to control, as opposed to preferred shares which usually have no voting
rights, the term "capital" in Section 11, Article XII of the Constitution refers only to common shares. However, if the preferred shares also
have the right to vote in the election of directors, then the term "capital" shall include such preferred shares because the right to participate
in the control or management of the corporation is exercised through the right to vote in the election of directors. In short, the term
"capital" in Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the election of directors.65
The decretal portion of the Gamboa Decision follows the definition of the term "capital" in the body of the decision, to wit: "x x x we x x x
rule that the term 'capital' in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of
directors, and thus in the present case only to common shares, and not to the total outstanding capital stock (common and non-voting
preferred shares)."66
The Court adopted the foregoing definition of the term "capital" in Section 11, Article XII of the 1987 Constitution in furtherance of "the
intent and letter of the Constitution that the 'State shall develop a self-reliant and independent national economy effectively controlled by
Filipinos' [because a] broad definition unjustifiably disregards who owns the all-important voting stock, which necessarily equates to control
of the public utility."67 The Court, recognizing that the provision is an express recognition of the sensitive and vital position of public utilities
both in the national economy and for national security, also pronounced that the evident purpose of the citizenship requirement is to
prevent aliens from assuming control of public utilities, which may be inimical to the national interest.68 Further, the Court noted that the
foregoing interpretation is consistent with the intent of the framers of the Constitution to place in the hands of Filipino citizens the control
and management of public utilities; and, as revealed in the deliberations of the Constitutional Commission, "capital" refers to the voting
stock or controlling interest of a corporation.69
In this regard, it would be apropos to state that since Filipinos own at least 60% of the outstanding shares of stock entitled to vote directors,
which is what the Constitution precisely requires, then the Filipino stockholders control the corporation, i.e., they dictate corporate actions
and decisions, and they have all the rights of ownership including, but not limited to, offering certain preferred shares that may have greater
economic interest to foreign investors - as the need for capital for corporate pursuits (such as expansion), may be good for the corporation
that they own. Surely, these "true owners" will not allow any dilution of their ownership and control if such move will not be beneficial to
them.
As owners of the corporation, the economic benefits will necessarily accrue to them. There is thus no logical reason why Filipino
shareholders will allow foreigners to have greater economic benefits than them. It is illogical to speculate that they will create shares which
have features that will give greater economic interests or benefits than they are holding and not benefit from such offering, or that they will
allow foreigners to profit more than them from their own corporation - unless they are dummies. But, Commonwealth Act No. 108, the Anti-
Dummy Law, is NOT in issue in these petitions. Notably, even if the shares of a particular public utility were owned 100% Filipino, that does
not discount the possibility of a dummy situation from arising. Hence, even if the 60-40 ownership in favor of Filipinos rule is applied
separately to each class of shares of a public utility corporation, as the petitioners insist, the rule can easily be side-stepped by a dummy
relationship. In other words, even applying the 60-40 Filipino foreign ownership rule to each class of shares will not assure the lofty purpose
enunciated by petitioners.
The Court observed further in the Gamboa Decision that reinforcing this interpretation of the term "capital", as referring to interests or
shares entitled to vote, is the definition of a Philippine national in the Foreign Investments Act of 1991 ("FIA"), which is explained in the
Implementing Rules and Regulations of the FIA ("FIA-IRR"). The FIA-IRR provides:chanRoblesvirtualLawlibrary
Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding capital stock whether fully
paid or not, but only such stocks which are generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of
which have been assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.70
Echoing the FIA-IRR, the Court stated in the Gamboa Decision that:chanRoblesvirtualLawlibrary
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the Constitution. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required. The legal and beneficial ownership of 60
percent of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional mandate.
Otherwise, the corporation is "considered as non-Philippine national[s]."
xxxx
The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipinos in accordance with the
constitutional mandate. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting
rights, is constitutionally required for the State's grant of authority to operate a public utility. x x x71
Was the definition of the term "capital" in Section 11, Article XII of the 1987 Constitution declared for the first time by the Court in
the Gamboa Decision modified in the Gamboa Resolution?
The Court is convinced that it was not. The Gamboa Resolution consists of 51 pages (excluding the dissenting opinions of Associate Justices
Velasco and Abad). For the most part of the Gamboa Resolution, the Court, after reviewing SEC and DOJ72 Opinions as well as the provisions
of the FIA and its predecessor statutes,73 reiterated that both the Voting Control Test and the Beneficial Ownership Test must be applied to
determine whether a corporation is a "Philippine national"74 and that a "Philippine national," as defined in the FIA and all its predecessor
statutes, is "a Filipino citizen, or a domestic corporation "at least sixty percent (60%) of the capital stock outstanding and entitled to
vote," is owned by Filipino citizens. A domestic corporation is a "Philippine national" only if at least 60% of its voting stock is owned by
Filipino citizens."75 The Court also reiterated that, from the deliberations of the Constitutional Commission, it is evident that the term
"capital" refers to controlling interest of a corporation,76 and the framers of the Constitution intended public utilities to be majority Filipino-
owned and controlled.
The "Final Word" of the Gamboa Resolution put to rest the Court's interpretation of the term "capital", and this is quoted verbatim, to
wit:chanRoblesvirtualLawlibrary
XII.
Final Word
The Constitution expressly declares as State policy the development of an economy "effectively controlled" by Filipinos. Consistent with
such State policy, the Constitution explicitly reserves the ownership and operation of public utilities to Philippine nationals, who are defined
in the Foreign Investments Act of 1991 as Filipino citizens, or corporations or associations at least 60 percent of whose capital with voting
rights belongs to Filipinos. The FIA's implementing rules explain that "[f]or stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of stocks, coupled with
appropriate voting rights is essential." In effect, the FIA clarifies, reiterates and confirms the interpretation that the term "capital" in Section
11, Article XII of the 1987 Constitution refers to shares with voting rights, as well as with full beneficial ownership. This is precisely because
the right to vote in the election of directors, coupled with full beneficial ownership of stocks, translates to effective control of a
corporation.77
Everything told, the Court, in both the Gamboa Decision and Gamboa Resolution, finally settled with the PIA's definition of "Philippine
national" as expounded in the FIA-IRR in construing the term "capital" in Section 11, Article XII of the 1987 Constitution.
The assailed SEC-MC No. 8.
The relevant provision in the assailed SEC-MC No. 8 IS Section 2, which provides:chanRoblesvirtualLawlibrary
Section 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of
determining compliance therewith, the required percentage of Filipino ownership shall be applied to BOTH (a) the total number of
outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or
not entitled to vote in the election of directors.78
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 "[f]ull beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the
voting rights is required."79 Clearly, SEC-MC No. 8 cannot be said to have been issued with grave abuse of discretion.
A simple illustration involving Company X with three kinds of shares of stock, easily shows how compliance with the requirements of SEC-MC
No. 8 will necessarily result to full and faithful compliance with the Gamboa Decision as well as the Gamboa Resolution.

The following is the composition of the outstanding capital stock of Company X:chanRoblesvirtualLawlibrary
100 common shares
100 Class A preferred shares (with right to elect directors)
100 Class B preferred shares (without right to elect directors)
SEC-MC No. 8
(1) 60% (required percentage of Filipino) applied to the total
number of outstanding shares of stock entitled to vote in the
election of directors
GAMBOA DECISION
"shares of stock entitled to vote in the election of
directors"80 (60% of the voting rights)
such security) and/or investment returns or power (which includes the power to dispose of, or direct the disposition of such security) x x
x."84
While it is correct to state that beneficial ownership is that which may exist either through voting power and/or investment returns, it does
not follow, as espoused by the minority opinion, that the SRC-IRR, in effect, recognizes a possible situation where voting power is not
commensurate to investment power. That is a wrong syllogism. The fallacy arises from a misunderstanding on what the definition is for. The
"beneficial ownership" referred to in the definition, while it may ultimately and indirectly refer to the overall ownership of the corporation,
more pertinently refers to the ownership of the share subject of the question: is it Filipino-owned or not?
As noted earlier, the FIA-IRR states:chanRoblesvirtualLawlibrary
Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding capital stock whether
fully paid or not, but only such stocks which are generally entitled to vote are considered.

If at least a total of 120 of common shares and Class A preferred shares (in any combination) are owned and controlled by Filipinos,
Company X is compliant with the 60% of the voting rights in favor of Filipinos requirement of both SEC-MC No. 8 and the Gamboa Decision.
SEC-MC No. 8 GAMBOA DECISION/RESOLUTION
(2) 60% (required percentage of Filipino) applied to BOTH (a) the "Full beneficial ownership of 60 percent of the outstanding capital
total number of outstanding shares of stock, entitled to vote in stock, coupled with 60 percent of the voting rights"81 or "Full
the election of directors; AND (b) the total number of outstanding beneficial ownership of the stocks, coupled with appropriate
shares of stock, whether or not entitled to vote in the election of voting rights x x x shares with voting rights, as well as with full
directors. beneficial ownership"82
If at least a total of 180 shares of all the outstanding capital stock of Company X are owned and controlled by Filipinos, provided that among
those 180 shares a total of 120 of the common shares and Class A preferred shares (in any combination) are owned and controlled by
Filipinos, then Company X is compliant with both requirements of voting rights and beneficial ownership under SEC-MC No. 8 and
the Gamboa Decision and Resolution.
From the foregoing illustration, SEC-MC No. 8 simply implemented, and is fully in accordance with, the Gamboa Decision and Resolution.
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 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 (Republic Act No. 8799;
"SRC") and its implementing rules.83
The full beneficial ownership test.
The minority justifies the application of the 60-40 Filipino-foreign ownership rule separately to each class of shares of a public utility
corporation in this fashion:chanRoblesvirtualLawlibrary
x x x The words "own and control," used to qualify the minimum Filipino participation in Section 11, Article XII of the Constitution, reflects
the importance of Filipinos having both the ability to influence the corporation through voting rights and economic benefits. In other
words, full ownership up to 60% of a public utility encompasses both controland economic rights, both of which must stay in Filipino
hands. Filipinos, who own 60% of the controlling interest, must also own 60% of the economic interest in a public utility.
x x x In mixed class or dual structured corporations, however, there is variance in the proportion of stockholders' controlling interest visa-vis
their economic ownership rights. This resulting variation is recognized by the Implementing Rules and Regulations (IRR) of the Securities
Regulation Code, which defined beneficial ownership as that may exist either through voting power and/or through investment returns. By
using and/or in defining beneficial ownership, the IRR, in effect, recognizes a possible situation where voting power is not commensurate to
investment power.
The definition of "beneficial owner" or "beneficial ownership" in the Implementing Rules and Regulations of the Securities Regulation Code
("SRC-IRR") is consistent with the concept of"full beneficial ownership" in the FIA-IRR.
As defined in the SRC-IRR, "[b]eneficial owner or beneficial ownership means 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
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of
which have been assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.85
The emphasized portions in the foregoing provision is the equivalent of the so-called "beneficial ownership test". That is all.
The term "full beneficial ownership" found in the FIA-IRR is to be understood in the context of the entire paragraph defining the term
"Philippine national". Mere legal title is not enough to meet the required Filipino equity, which means that it is not sufficient that a share is
registered in the name of a Filipino citizen or national, i.e., he should also have full beneficial ownership of the share. If the voting right of a
share held in the name of a Filipino citizen or national is assigned or transferred to an alien, that share is not to be counted in the
determination of the required Filipino equity. In the same vein, if the dividends and other fruits and accessions of the share do not accrue to
a Filipino citizen or national, then that share is also to be excluded or not counted.
In this regard, it is worth reiterating the Court's pronouncement in the Gamboa Decision, which is consistent with the FIA-
IRR, viz:chanRoblesvirtualLawlibrary
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the Constitution. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required. x x x
xxxx
The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipinos in accordance with the
constitutional mandate. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting
rights, is constitutionally required (or the State's grant of authority to operate a public utility. x x x.86
And the "Final Word" of the Gamboa Resolution is in full accord with the foregoing pronouncement of the Court, to
wit:chanRoblesvirtualLawlibrary
XII.
Final Word
x x x The FIA's implementing rules explain that "[f]or stocks to be deemed owned and held by Philippine citizens or Philippine nationals,
mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting
rights is essential."87
Given that beneficial ownership of the outstanding capital stock of the public utility corporation has to be determined for purposes of
compliance with the 60% Filipino ownership requirement, the definition in the SRC-IRR can now be applied to resolve only the question of
who is the beneficial owner or who has beneficial ownership of each "specific stock" of the said corporation. Thus, if a "specific stock" is
owned by a Filipino in the books of the corporation, but the stock's voting power or disposing power belongs to a foreigner, then that
"specific stock" will not be deemed as "beneficially owned" by a Filipino.
Stated inversely, if the Filipino has the "specific stock's" voting power (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 it for him), or he has both (he
can vote and dispose of the "specific stock" or direct another to vote or dispose it for him), then such Filipino is the "beneficial owner" of
that "specific stock" and that "specific stock" is considered (or counted) as part of the 60% Filipino ownership of the corporation. In the end,
all those "specific stocks" that are determined to be Filipino (per definition of "beneficial owner" or "beneficial ownership") will be added
together and their sum must be equivalent to at least 60% of the total outstanding shares of stock entitled to vote in the election of
directors and at least 60% of the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.
To reiterate, the "beneficial owner or beneficial ownership" definition in the SRC-IRR is understood only in determining the respective
nationalities of the outstanding capital stock of a public utility corporation in order to determine its compliance with the percentage of
Filipino ownership required by the Constitution.
The restrictive re-interpretation of "capital" as insisted by the petitioners is unwarranted.
Petitioners' insistence that the 60% Filipino equity requirement must be applied to each class of shares is simply beyond the literal text and
contemplation of Section 11, Article XII of the 1987 Constitution, viz:chanRoblesvirtualLawlibrary
Sec. 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of
the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum or whose capital is
owned by such citizens, nor shall such franchise, certificate or authorization be exclusive in character or for a longer period than fifty years.
Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal
by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public.
The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines.
As worded, effective control by Filipino citizens of a public utility is already assured in the provision. With respect to a stock corporation
engaged in the business of a public utility, the constitutional provision mandates three safeguards: (1) 60% of its capital must be owned by
Filipino citizens; (2) participation of foreign investors in its board of directors is limited to their proportionate share in its capital; and (3) all
its executive and managing officers must be citizens of the Philippines.
In the exhaustive review made by the Court in the Gamboa Resolution of the deliberations of the Constitutional Commission, the opinions of
the framers of the 1987 Constitution, the opinions of the SEC and the DOJ as well as the provisions of the FIA, its implementing rules and its
predecessor statutes, the intention to apply the voting control test and the beneficial ownership test was not mentioned in reference to
"each class of shares." Even the Gamboa Decision was silent on this point.
To be sure, the application of the 60-40 Filipino-foreign ownership requirement separately to each class of shares, whether common,
preferred non-voting, preferred voting or any other class of shares fails to understand and appreciate the nature and features of stocks as
financial instruments.88
There are basically only two types of shares or stocks, i.e., common stock and preferred stock. However, the classes and variety of shares
that a corporation may issue are dictated by the confluence of the corporation's financial position and needs, business opportunities, short-
term and long term targets, risks involved, to name a few; and they can be classified and re-classified from time to time. With respect to
preferred shares, there are cumulative preferred shares, non-cumulative preferred shares, convertible preferred shares, participating
preferred shares.
Because of the different features of preferred shares, it is required that the presentation and disclosure of these financial instruments in
financial statements should be in accordance with the substance of the contractual arrangement and the definitions of a financial liability, a
financial asset and an equity instrument.89
Under IAS90 32.16, a financial instrument is an equity instrument only if (a) the instrument includes no contractual obligation to deliver cash
or another financial asset to another entity, and (b) if the instrument will or may be settled in the issuer's own equity instruments, it is
either: (i) a non derivative that includes no contractual obligation for the issuer to deliver a variable number of its own equity instruments;
or (ii) a derivative that will be settled only by the issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its
own equity instruments.91
The following are illustrations of how preferred shares should be presented and disclosed:chanRoblesvirtualLawlibrary
Illustration - preference shares
If an entity issues preference (preferred) shares that pay a fixed rate of dividend and that have a mandatory redemption feature at a future
date, the substance is that they are a contractual obligation to deliver cash and, therefore, should be recognized as a liability. [IAS 32.18(a)]
In contrast, preference shares that do not have a fixed maturity, and where the issuer does not have a contractual obligation to make any
payment are equity. In this example even though both instruments are legally termed preference shares they have different contractual
terms and one is a financial liability while the other is equity.
Illustration - issuance of fixed monetary amount of equity instruments
A contractual right or obligation to receive or deliver a number of its own shares or other equity instruments that varies so that the fair value
of the entity's own equity instruments to be received or delivered equals the fixed monetary amount of the contractual right or obligation is
a financial liability. [IAS 32.20]
Illustration - one party bas a choice over bow an instrument is settled
When a derivative financial instrument gives one party a choice over how it is settled (for instance, the issuer or the holder can choose
settlement net in cash or by exchanging shares for cash), it is a financial asset or a financial liability unless all of the settlement alternatives
would result in it being an equity instrument. [IAS 32.26]92
The fact that from an accounting standpoint, the substance or essence of the financial instrument is the key determinant whether it should
be categorized as a financial liability or an equity instrument, there is no compelling reason why the same treatment may not be recognized
from a legal perspective. Thus, to require Filipino shareholders to acquire preferred shares that are substantially debts, in order to meet the
"restrictive" Filipino ownership requirement that petitioners espouse, may not bode well for the Philippine corporation and its Filipino
shareholders.
Parenthetically, given the innumerable permutations that the types and classes of stocks may take, requiring the SEC and other government
agencies to keep track of the ever-changing capital classes of corporations will be impracticable, if not downright impossible. And the law
does not require the impossible. (Lex non cogit ad impossibilia.)93
That stock corporations are allowed to create shares of different classes with varying features is a flexibility that is granted, among others,
for the corporation to attract and generate capital (funds) from both local and foreign capital markets. This access to capital - which a stock
corporation may need for expansion, debt relief/repayment, working capital requirement and other corporate pursuits - will be greatly
eroded with further unwarranted limitations that are not articulated in the Constitution. The intricacies and delicate balance between debt
instruments (liabilities) and equity (capital) that stock corporations need to calibrate to fund their business requirements and achieve their
financial targets are better left to the judgment of their boards and officers, whose bounden duty is to steer their companies to financial
stability and profitability and who are ultimately answerable to their shareholders.
Going back to the illustration above, the restrictive meaning of the term "capital" espoused by petitioners will definitely be complied with if
60% of each of the three classes of shares of Company X, consisting of 100 common shares, 100 Class A preferred shares (with right to elect
directors) and 100 Class B preferred shares (without right to elect directors), is owned by Filipinos. However, what if the 60% Filipino
ownership in each class of preferred shares, i.e., 60 Class A preferred shares and 60 Class B preferred shares, is not fully subscribed or
achieved because there are not enough Filipino takers? Company X will be deprived of capital that would otherwise be accessible to it were
it not for this unwarranted "restrictive" meaning of "capital".
The fact that all shares have the right to vote in 8 specific corporate actions as provided in Section 6 of the Corporation Code does not per
se justify the favorable adoption of the restrictive re-interpretation of "capital" as the petitioners espouse. As observed in
the Gamboa Decision, viz:chanRoblesvirtualLawlibrary
The Corporation Code of the Philippines classifies shares as common or preferred, thus:chanRoblesvirtualLawlibrary
Sec. 6. Classification of shares. The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which
classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no
share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise
provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all
of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided,
however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to
issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of
liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not
violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The Board of
Directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange
Commission.
xxxx
A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to
every other share.
Where the articles of incorporation provide for non voting shares in the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:cralawlawlibrary
1. Amendment of the articles of incorporation;ChanRoblesVirtualawlibrary
2. Adoption and amendment of by-laws;ChanRoblesVirtualawlibrary
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate
property;ChanRoblesVirtualawlibrary
4. Incurring, creating or increasing bonded indebtedness;ChanRoblesVirtualawlibrary
5. Increase or decrease of capital stock;ChanRoblesVirtualawlibrary
6. Merger or consolidation of the corporation with another corporation or other corporations;ChanRoblesVirtualawlibrary
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this
Code shall be deemed to refer only to stocks with voting rights.
Indisputably, one of the rights of a stockholder is the right to participate in the control or management of the corporation. This is exercised
through his vote in the election of directors because it is the board of directors that controls or manages the corporation. In the absence of
provisions in the articles of incorporation denying voting rights to preferred shares, preferred shares have the same voting rights as common
shares. However, preferred shareholders are often excluded from any control, that is, deprived of the right to vote in the election of
directors and on other matters, on the theory that the preferred shareholders are merely investors in the corporation for income in the
same manner as bondholders. In fact, under the Corporation Code only preferred or redeemable shares can be deprived of the right to vote.
Common shares cannot be deprived of the right to vote in any corporate meeting, and any provision in the articles of incorporation
restricting the right of common shareholders to vote is invalid.
Considering that common shares have voting rights which translate to control, as opposed to preferred shares which usually have no voting
rights, the term "capital" in Section 11, Article XII of the Constitution refers only to common shares. However, if the preferred shares also
have the right to vote in the election of directors, then the term "capital" shall include such preferred shares because the right to participate
in the control or management of the corporation is exercised through the right to vote in the election of directors. In short, the term
"capital" in Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the election of directors.
This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of Filipino citizens the control and
management of public utilities. As revealed in the deliberations of the Constitutional Commission, "capital" refers to the voting stock
or controlling interest of a corporation x x x.94
The Gamboa Decision held that preferred shares are to be factored in only if they are entitled to vote in the election of directors. If
preferred shares have no voting rights, then they cannot elect members of the board of directors, which wields control of the corporation.
As to the right of non voting preferred shares to vote in the 8 instances enumerated in Section 6 of the Corporation Code,
the Gamboa Decision considered them but, in the end, did not find them significant in resolving the issue of the proper interpretation of the
word "capital" in Section 11, Article XII of the Constitution.
Therefore, to now insist in the present case that preferred shares be regarded differently from their unambiguous treatment in
the Gamboa Decision is enough proof that the Gamboa Decision, which had attained finality more than 4 years ago, is being drastically
changed or expanded.
In this regard, it should be noted that the 8 corporate matters enumerated in Section 6 of the Corporation Code require, at the outset, a
favorable recommendation by the management to the board. As mandated by Section 11, Article XII of the Constitution, all the executive
and managing officers of a public utility company must be Filipinos. Thus, the all-Filipino management team must first be convinced that any
of the 8 corporate actions in Section 6 will be to the best interest of the company. Then, when the all-Filipino management team
recommends this to the board, a majority of the board has to approve the recommendation and, as required by the Constitution, foreign
participation in the board cannot exceed 40% of the total number of board seats. Since the Filipino directors comprise the majority, they, if
united, do not even need the vote of the foreign directors to approve the intended corporate act. After approval by the board, all the
shareholders (with and without voting rights) will vote on the corporate action. The required vote in the shareholders' meeting is 2/3 of the
outstanding capital stock.95 Given the super majority vote requirement, foreign shareholders cannot dictate upon their Filipino counterpart.
However, foreigners (if owning at least a third of the outstanding capital stock) must agree with Filipino shareholders for the corporate
action to be approved. The 2/3 voting requirement applies to all corporations, given the significance of the 8 corporate actions
contemplated in Section 6 of the Corporation Code.
In short, if the Filipino officers, directors and shareholders will not approve of the corporate act, the foreigners are helpless.
Allowing stockholders holding preferred shares without voting rights to vote in the 8 corporate matters enumerated in Section 6 is an
acknowledgment of their right of ownership. If the owners of preferred shares without right to vote/elect directors are not allowed to vote
in any of those 8 corporate actions, then they will not be entitled to the appraisal right provided under Section 8196 of the Corporation Code
in the event that they dissent in the corporate act. As required in Section 82, the appraisal right can only be exercised by any stockholder
who voted against the proposed action. Thus, without recognizing the right of every stockholder to vote in the 8 instances enumerated in
Section 6, the stockholder cannot exercise his appraisal right in case he votes against the corporate action. In simple terms, the right to vote
in the 8 instances enumerated in Section 6 is more in furtherance of the stockholder's right of ownership rather than as a mode of control.
As to financial interest, giving short-lived preferred or superior terms to certain classes or series of shares may be a welcome option to
expand capital, without the Filipino shareholders putting up additional substantial capital and/or losing ownership and control of the
company. For shareholders who are not keen on the creation of those shares, they may opt to avail themselves of their appraisal right. As
acknowledged in the Gamboa Decision, preferred shareholders are merely investors in the company for income in the same manner as
bondholders. Without a lucrative package, including an attractive return of investment, preferred shares will not be subscribed and the
much-needed additional capital will be elusive. A too restrictive definition of "capital", one which was never contemplated in
the GamboaDecision, will surely have a dampening effect on the business milieu by eroding the flexibility inherent in the issuance of
preferred shares with varying terms and conditions. Consequently, the rights and prerogatives of the owners of the corporation will be
unwarrantedly stymied.
Moreover, the restrictive interpretation of the term "capital" would have a tremendous impact on the country as a whole and to all Filipinos.
The PSE's Comment-in-Intervention dated June 16, 201497 warns that:chanRoblesvirtualLawlibrary
80. [R]edefining "capital" as used in Section 11, Article XII of the 1987 Constitution and adopting the supposed "Effective Control Test" will
lead to disastrous consequences to the Philippine stock market.
81. Current data of the PSE show that, if the "Effective Control Test" were applied, the total value of shares that would be deemed in excess
of the foreign-ownership limits based on stock prices as of 30 April 2014 is One Hundred Fifty Nine Billion Six Hundred Thirty Eight Million
Eight Hundred Forty Five Thousand Two Hundred Six Pesos and Eighty Nine Cents (Php159,638,845,206.89).
82. The aforementioned value of investments would have to be discharged by foreign holders, and consequently must be absorbed by
Filipino investors. Needless to state, the lack of investments may lead to shutdown of the affected enterprises and to immeasurable
consequences to the Philippine economy.98
In its Omnibus Motion [1] For Leave to Intervene; and [2] To Admit Attached Comment-in-Intervention dated May 30, 2016,99 SHAREPHIL
further warns that "[t]he restrictive re-interpretation of the term "capital" will result in massive forced divestment of foreign stockholdings
in Philippine corporations."100SHAREPHIL explains:chanRoblesvirtualLawlibrary
4.51. On 16 October 2012, Deutsche Bank released a Market Research Study, which analyzed the implications of the ruling in Gamboa. The
Market Research Study stated that:chanRoblesvirtualLawlibrary
"If this thinking is applied and becomes established precedent, it would significantly expand on the rules for determining nationality in
partially nationalized industries. If that were to happen, not only will PLDT's move to issue the 150m voting prefs be inadequate to address
the issue, a large number of listed companies with similar capital structures could also be affected."
4.52. In five (5) companies alone, One Hundred Fifty Eight Billion Pesos (PhP158,000,000,000.00) worth of shares will have to be sold by
foreign shareholders in a forced divestment, if the obiter in Gamboa were to be implemented. Foreign shareholders of PLDT will have to
divest One Hundred Three Billion Eight Hundred Sixty Million Pesos (PhP103,860,000,000.00) worth of shares.
 a. Foreign shareholders of Globe Telecom will have to divest Thirty Eight Billion Two Hundred Fifty Million Pesos
(PhP38,250,000,000.00) worth of shares.
b. Foreign shareholders of Ayala Land will have to divest Seventeen Billion Five Hundred Fifty Million Pesos
(PhP17,550,000,000.00) worth of shares.
c. Foreign shareholders of ICTSI will have to divest Six Billion Four Hundred Ninety Million Pesos (PhP6,490,000,000.00)
worth of shares.
d. Foreign shareholders of MWC will have to divest Seven Billion Seven Hundred Fourteen Million Pesos
(PhP7,714,000,000.00) worth of shares.
4.53. Clearly, the local stock market which has an average value turn-over of Seven Billion Pesos cannot adequately absorb the influx of
shares caused by the forced divestment. As a result, foreign stockholders will have to sell these shares at bargain prices just to comply with
the Obiter.
4.54. These shares being part of the Philippine index, their forced divestment vis-a-vis the inability of the local stock market to absorb these
shares will necessarily bring immense downward pressure on the index. A domino-effect implosion of the Philippine stock market and the
Philippine economy, in general is not remote. x x x.101
Petitioners have failed to counter or refute these submissions of the PSE and SHAREPHIL. These unrefuted observations indicate to the Court
that a restrictive interpretation - or rather, re-interpretation, of "capital", as already defined with finality in the Gamboa Decision and
Resolution - directly affects the well-being of the country and cannot be labelled as "irrelevant and impertinent concerns x x x add[ing]
burden [to] the Court."102 These observations by the PSE103 and SHAREPHIL,104 unless refuted, must be considered by the Court to be valid
and sound.
The Court in Abacus Securities Corp. v. Ampil105 observed that: "[s]tock market transactions affect the general public and the national
economy. The rise and fall of stock market indices reflect to a considerable degree the state of the economy. Trends in stock prices tend to
herald changes in business conditions. Consequently, securities transactions are impressed with public interest x x x."106 The importance of
the stock market in the economy cannot simply be glossed over.
In view of the foregoing, the pronouncement of the Court in the Gamboa Resolution - the constitutional requirement to apply uniformly and
across the board to all classes of shares, regardless of nomenclature and category, comprising the capital of a corporation107 - is clearly
an obiter dictum that cannot override the Court's unequivocal definition of the term "capital" in both the Gamboa Decision and Resolution.
Nowhere in the discussion of the definition of the term "capital" in Section 11, Article XII of the 1987 Constitution in the Gamboa Decision
did the Court mention the 60% Filipino equity requirement to be applied to each class of shares. The definition of "Philippine national" in the
FIA and expounded in its IRR, which the Court adopted in its interpretation of the term "capital", does not support such application. In fact,
even the Final Word of the Gamboa Resolution does not even intimate or suggest the need for a clarification or re-interpretation.
To revisit or even clarify the unequivocal definition of the term "capital" as referring "only to shares of stock entitled to vote in the election
of directors" and apply the 60% Filipino ownership requirement to each class of share is effectively and unwarrantedly amending or
changing the Gamboa Decision and Resolution. The Gamboa Decision and Resolution Doctrine did NOT make any definitive ruling that the
60% Filipino ownership requirement was intended to apply to each class of share.
In Malayang Manggagawa ng Stayfast Phils., Inc. v. NLRC,108 the Court stated:chanRoblesvirtualLawlibrary
Where a petition for certiorari under Rule 65 of the Rules of Court alleges grave abuse of discretion, the petitioner should establish that the
respondent court or tribunal acted in a capricious, whimsical, arbitrary or despotic manner in the exercise of its jurisdiction as to be
equivalent to lack of jurisdiction. This is so because "grave abuse of discretion" is well-defined and not an amorphous concept that may
easily be manipulated to suit one's purpose. In this connection, Yu v. Judge Reyes-Carpio, is instructive:chanRoblesvirtualLawlibrary
The term "grave abuse of discretion" has a specific meaning. An act of a court or tribunal can only be considered as with grave abuse of
discretion when such act is done in a "capricious or whimsical exercise of judgment as is equivalent to lack of jurisdiction." The abuse of
discretion must be so patent and gross as to amount to an "evasion of a positive duty or to a virtual refusal to perform a duty enjoined by
law, or to act at all in contemplation of law, as where the power is exercised in an arbitrary and despotic manner by reason of passion and
hostility." Furthermore, the use of a petition for certiorari is restricted only to "truly extraordinary cases wherein the act of the lower court
or quasi-judicial body is wholly void." From the foregoing definition, it is clear that the special civil action of certiorari under Rule 65 can only
strike an act down for having been done with grave abuse of discretion if the petitioner could manifestly show that such act was patent
and gross. x x x.
The onus rests on petitioners to clearly and sufficiently establish that the SEC, in issuing SEC-MC No. 8, acted in a capricious, whimsical,
arbitrary or despotic manner in the exercise of its jurisdiction as to be equivalent to lack of jurisdiction or that the SEC's abuse of discretion is
so patent and gross as to amount to an evasion of a positive duty or to a virtual refusal to perform a duty enjoined by law, or to act at all in
contemplation of law and the Gamboa Decision and Resolution. Petitioners miserably failed in this respect.
The clear and unequivocal definition of "capital" in Gamboa has attained finality.
It is an elementary principle in procedure that the resolution of the court in a given issue as embodied in the dispositive portion or fallo of a
decision controls the settlement of rights of the parties and the questions, notwithstanding statement in the body of the decision which may
be somewhat confusing, inasmuch as the dispositive part of a final decision is definite, clear and unequivocal and can be wholly given effect
without need of interpretation or construction.109
As explained above, the fallo or decretal/dispositive portions of both the Gamboa Decision and Resolution are definite, clear and
unequivocaL While there is a passage in the body of the Gamboa Resolution that might have appeared contrary to the fallo of
the Gamboa Decision - capitalized upon by petitioners to espouse a restrictive re-interpretation of "capital" - the definiteness and clarity of
the fallo of the GamboaDecision must control over the obiter dictum in the Gamboa Resolution regarding the application of the 60-40
Filipino-foreign ownership requirement to "each class of shares, regardless of differences in voting rights, privileges and restrictions."
The final judgment as rendered is the judgment of the court irrespective of all seemingly contrary statements in the decision because at the
root of the doctrine that the premises must yield to the conclusion is, side by side with the need of writing finis to litigations, the recognition
of the truth that "the trained intuition of the judge continually leads him to right results for which he is puzzled to give unimpeachable legal
reasons."110
Petitioners cannot, after Gamboa has attained finality, seek a belated correction or reconsideration of the Court's unequivocal definition of
the term "capital". At the core of the doctrine of finality of judgments is that public policy and sound practice demand that, at the risk of
occasional errors, judgments of courts should become final at some definite date fixed by law and the very objects for which courts were
instituted was to put an end to controversies.111 Indeed, the definition of the term "capital" in the fallo of the Gamboa Decision has acquired
finality.
Because the SEC acted pursuant to the Court's pronouncements in both the Gamboa Decision and Gamboa Resolution, then it could not
have gravely abused its discretion. That portion found in the body of the Gamboa Resolution which the petitioners rely upon is nothing more
than an obiter dictum and the SEC could not be expected to apply it as it was not - is not - a binding pronouncement of the Court.112
Furthermore, as opined by Justice Bersamin during the deliberations, the doctrine of immutability of judgment precludes the Court from re
examining the definition of "capital" under Section 11, Article XII of the Constitution. Under the doctrine of finality and immutability of
judgment, a decision that has acquired finality becomes immutable and unalterable, and may no longer be modified in any respect, even if
the modification is meant to correct erroneous conclusions of fact and law, and even if the modification is made by the court that rendered
it or by the Highest Court of the land. Any act that violates the principle must be immediately stricken down.113 The petitions have not
succeeded in pointing to any exceptions to the doctrine of finality of judgments, under which the present case falls, to wit: (1) the correction
of clerical errors; (2) the so-called nunc pro tunc entries which cause no prejudice to any party; (3) void judgments; and (4) whenever
circumstances transpire after the finality of the decision rendering its execution unjust and inequitable.114
With the foregoing disquisition, the Court rules that SEC-MC No. 8 is not contrary to the Court's definition and interpretation of the term
"capital". Accordingly, the petitions must be denied for failing to show grave abuse of discretion in the issuance of SEC-MC No. 8.
The petitions are second motions for Reconsideration, which are proscribed.
As Justice Bersamin further noted during the deliberations, the petitions are in reality second motions for reconsideration prohibited by
the Internal Rules of the Supreme Court.115 The parties, particularly intervenors Gamboa, et al., could have filed a motion for clarification
in Gamboa in order to fill in the perceived shortcoming occasioned by the non-inclusion in the dispositive portion of the GamboaResolution
of what was discussed in the body.116 The statement in the fallo of the Gamboa Resolution to the effect that "[n]o further pleadings shall be
entertained" could not be a hindrance to a motion for clarification that sought an unadulterated inquiry arising upon an ambiguity in the
decision.117
Closing
Ultimately, the key to nationalism is in the individual. Particularly for a public utility corporation or association, whether stock or non-stock,
it starts with the Filipino shareholder or member who, together with other Filipino shareholders or members wielding 60% voting power,
elects the Filipino director who, in turn, together with other Filipino directors comprising a majority of the board of directors or trustees,
appoints and employs the all-Filipino management team. This is what is envisioned by the Constitution to assure effective control by
Filipinos. If the safeguards, which are already stringent, fail, i.e., a public utility corporation whose voting stocks are beneficially owned by YES. First, the Court agrees with the petitioner that the “charter test” cannot be applied. Essentially, the “charter test” provides that the
Filipinos, the majority of its directors are Filipinos, and all its managing officers are Filipinos, is proalien (or worse, dummies), then that is not
the fault or failure of the Constitution. It is the breakdown of nationalism in each of the Filipino shareholders, Filipino directors and Filipino test to determine whether a corporation is government owned or controlled, or private in nature is simple. Is it created by its own charter
officers of that corporation. No Constitution, no decision of the Court, no legislation, no matter how ultranationalistic they are, can
guarantee nationalism. for the exercise of a public function, or by incorporation under the general corporation law? Those with special charters are government

WHEREFORE, premises considered, the Court DENIES the Petition and Petition-in-Intervention. corporations subject to its provisions, and its employees are under the jurisdiction of the CSC, and are compulsory members of the GSIS.

SO ORDERED.ChanRoblesVirtualawlibrary
And since the “charter test” had been introduced by the 1935 Constitution and not earlier, it follows that the test cannot apply to the

PSPCA VS. COA DIGEST petitioner, which was incorporated by virtue of Act No. 1285, enacted on January 19, 1905. Settled is the rule that laws in general have no

retroactive effect, unless the contrary is provided. All statutes are to be construed as having only a prospective operation, unless the
DECEMBER 21, 2016 ~ VBD IAZ
purpose and intention of the legislature to give them a retrospective effect is expressly declared or is necessarily implied from the language
PHILIPPINE SOCIETY FOR THE PREVENTION OF CRUELTY TO ANIMALS vs. COA. G.R. No. 169752 September 25, 2007
used. In case of doubt, the doubt must be resolved against the retrospective effect.
FACTS:
Second, a reading of petitioner’s charter shows that it is not subject to control or supervision by any agency of the State, unlike
The petitioner was incorporated as a juridical entity over one hundred years ago by virtue of Act No. 1285, enacted on January 19, 1905, by
GOCCs. No government representative sits on the board of trustees of the petitioner. Like all private corporations, the successors of its
the Philippine Commission. The petitioner, at the time it was created, was composed of animal aficionados and animal propagandists. The
members are determined voluntarily and solely by the petitioner in accordance with its by-laws, and may exercise those powers generally
objects of the petitioner, as stated in Section 2 of its charter, shall be to enforce laws relating to cruelty inflicted upon animals or the
accorded to private corporations, such as the powers to hold property, to sue and be sued, to use a common seal, and so forth. It may
protection of animals in the Philippine Islands, and generally, to do and perform all things which may tend in any way to alleviate the
adopt by-laws for its internal operations: the petitioner shall be managed or operated by its officers “in accordance with its by-laws in
suffering of animals and promote their welfare.
force.”
At the time of the enactment of Act No. 1285, the original Corporation Law, Act No. 1459, was not yet in existence. Act No. 1285 antedated
Third. The employees of the petitioner are registered and covered by the SSS at the latter’s initiative, and not through the GSIS, which
both the Corporation Law and the constitution of the SEC.
should be the case if the employees are considered government employees. This is another indication of petitioner’s nature as a private
For the purpose of enhancing its powers in promoting animal welfare and enforcing laws for the protection of animals, the petitioner was
entity.
initially imbued under its charter with the power to apprehend violators of animal welfare laws. In addition, the petitioner was to share 1/2
Fourth. The respondents contend that the petitioner is a “body politic” because its primary purpose is to secure the protection and
of the fines imposed and collected through its efforts for violations of the laws related thereto.
welfare of animals which, in turn, redounds to the public good. This argument, is not tenable. The fact that a certain juridical entity is
Subsequently, however, the power to make arrests as well as the privilege to retain a portion of the fines collected for violation of animal-
impressed with public interest does not, by that circumstance alone, make the entity a public corporation, inasmuch as a corporation may
related laws were recalled by virtue of C.A. No. 148. Whereas, the cruel treatment of animals is now an offense against the State, penalized
be private although its charter contains provisions of a public character, incorporated solely for the public good. This class of corporations
under our statutes, which the Government is duty bound to enforce;
may be considered quasi-public corporations, which are private corporations that render public service, supply public wants, or pursue other
When the COA was to perform an audit on them they refuse to do so, by the reason that they are a private entity and not under the said
eleemosynary objectives. While purposely organized for the gain or benefit of its members, they are required by law to discharge functions
commission. It argued that COA covers only government entities. On the other hand the COA decided that it is a government entity.
for the public benefit. Examples of these corporations are utility, railroad, warehouse, telegraph, telephone, water supply corporations and
ISSUE: WON the said petitioner is a private entity.
transportation companies. It must be stressed that a quasi-public corporation is a species of private corporations, but the qualifying factor is
RULING:
the type of service the former renders to the public: if it performs a public service, then it becomes a quasi-public corporation.

Authorities are of the view that the purpose alone of the corporation cannot be taken as a safe guide, for the fact is that almost all
corporations are nowadays created to promote the interest, good, or convenience of the public. A bank, for example, is a private
corporation; yet, it is created for a public benefit. Private schools and universities are likewise private corporations; and yet, they are
rendering public service. Private hospitals and wards are charged with heavy social responsibilities. More so with all common carriers. On
the other hand, there may exist a public corporation even if it is endowed with gifts or donations from private individuals.
The true criterion, therefore, to determine whether a corporation is public or private is found in the totality of the relation of the
corporation to the State. If the corporation is created by the State as the latter’s own agency or instrumentality to help it in carrying out its
governmental functions, then that corporation is considered public; otherwise, it is private. Applying the above test, provinces, chartered
cities, and barangays can best exemplify public corporations. They are created by the State as its own device and agency for the
accomplishment of parts of its own public works.
Fifth. The respondents argue that since the charter of the petitioner requires the latter to render periodic reports to the Civil Governor,
whose functions have been inherited by the President, the petitioner is, therefore, a government instrumentality.
This contention is inconclusive. By virtue of the fiction that all corporations owe their very existence and powers to the State, the
reportorial requirement is applicable to all corporations of whatever nature, whether they are public, quasi-public, or private corporations—
as creatures of the State, there is a reserved right in the legislature to investigate the activities of a corporation to determine whether it
acted within its powers. In other words, the reportorial requirement is the principal means by which the State may see to it that its creature
acted according to the powers and functions conferred upon it.
G.R. No. 193462 February 4, 2014
DENNIS A.B. FUNA, Petitioner,
vs.
MANILA ECONOMIC AND CULTURAL OFFICE and the COMMISSION ON AUDIT, Respondents.
DECISION
PEREZ, J.:
This is a petition for mandamus1 to compel:
1.) the Commission on Audit (COA) to audit and examine the funds of the Manila Economic and Cultural Office (MECO), and
2.) the MECO to submit to such audit and examination.
The antecedents:
Prelude
The aftermath of the Chinese civil war2 left the country of China with two (2) governments in a stalemate espousing competing assertions of
sovereignty.3 On one hand is the communist People’s Republic of China (PROC) which controls the mainland territories, and on the other
hand is the nationalist Republic of China (ROC) which controls the island of Taiwan. For a better part of the past century, both the PROC and
ROC adhered to a policy of "One China" i.e., the view that there is only one legitimate government in China, but differed in their respective
interpretation as to which that government is.4
With the existence of two governments having conflicting claims of sovereignty over one country, came the question as to which of the two
is deserving of recognition as that country’s legitimate government. Even after its relocation to Taiwan, the ROC used to enjoy diplomatic
recognition from a majority of the world’s states, partly due to being a founding member of the United Nations (UN).5 The number of states
partial to the PROC’s version of the One China policy, however, gradually increased in the 1960s and 70s, most notably after the UN General
Assembly adopted the monumental Resolution 2758 in 1971.6 Since then, almost all of the states that had erstwhile recognized the ROC as
the legitimate government of China, terminated their official relations with the said government, in favor of establishing diplomatic relations
with the PROC.7 The Philippines is one of such states.
The Philippines formally ended its official diplomatic relations with the government in Taiwan on 9 June 1975, when the country and the
PROC expressed mutual recognition thru the Joint Communiqué of the Government of the Republic of the Philippines and the Government
of the People’s Republic of China (Joint Communiqué).8
Under the Joint Communiqué, the Philippines categorically stated its adherence to the One China policy of the PROC. The pertinent portion
of the Joint Communiqué reads:9
The Philippine Government recognizes the Government of the People’s Republic of China as the sole legal government of China, fully
understands and respects the position of the Chinese Government that there is but one China and that Taiwan is an integral part of Chinese
territory, and decides to remove all its official representations from Taiwan within one month from the date of signature of this
communiqué. (Emphasis supplied)
The Philippines’ commitment to the One China policy of the PROC, however, did not preclude the country from keeping unofficial relations
with Taiwan on a "people-to-people" basis.10 Maintaining ties with Taiwan that is permissible by the terms of the Joint Communiqué,
however, necessarily required the Philippines, and Taiwan, to course any such relations thru offices outside of the official or governmental
organs.
Hence, despite ending their diplomatic ties, the people of Taiwan and of the Philippines maintained an unofficial relationship facilitated by
the offices of the Taipei Economic and Cultural Office, for the former, and the MECO, for the latter.11
The MECO12 was organized on 16 December 1997 as a non-stock, non-profit corporation under Batas Pambansa Blg. 68 or the Corporation
Code.13 The purposes underlying the incorporation of MECO, as stated in its articles of incorporation,14 are as follows:
1. To establish and develop the commercial and industrial interests of Filipino nationals here and abroad, and assist on all
measures designed to promote and maintain the trade relations of the country with the citizens of other foreign countries;
2. To receive and accept grants and subsidies that are reasonably necessary in carrying out the corporate purposes provided they
are not subject to conditions defeatist for or incompatible with said purpose;
3. To acquire by purchase, lease or by any gratuitous title real and personal properties as may be necessary for the use and need
of the corporation, and to dispose of the same in like manner when they are no longer needed or useful; and
4. To do and perform any and all acts which are deemed reasonably necessary to carry out the purposes. (Emphasis supplied)
From the moment it was incorporated, the MECO became the corporate entity "entrusted" by the Philippine government with the
responsibility of fostering "friendly" and "unofficial" relations with the people of Taiwan, particularly in the areas of trade, economic
cooperation, investment, cultural, scientific and educational exchanges.15To enable it to carry out such responsibility, the MECO was
"authorized" by the government to perform certain "consular and other functions" that relates to the promotion, protection and facilitation
of Philippine interests in Taiwan.16
At present, it is the MECO that oversees the rights and interests of Overseas Filipino Workers (OFWs) in Taiwan; promotes the Philippines as
a tourist and investment destination for the Taiwanese; and facilitates the travel of Filipinos and Taiwanese from Taiwan to the Philippines,
and vice versa.17
Facts Leading to the Mandamus Petition
On 23 August 2010, petitioner sent a letter18 to the COA requesting for a "copy of the latest financial and audit report" of the MECO
invoking, for that purpose, his "constitutional right to information on matters of public concern." The petitioner made the request on the
belief that the MECO, being under the "operational supervision" of the Department of Trade and Industry (DTI), is a government owned and
controlled corporation (GOCC) and thus subject to the audit jurisdiction of the COA.19
Petitioner’s letter was received by COA Assistant Commissioner Jaime P. Naranjo, the following day.
On 25 August 2010, Assistant Commissioner Naranjo issued a memorandum20 referring the petitioner’s request to COA Assistant
Commissioner Emma M. Espina for "further disposition." In this memorandum, however, Assistant Commissioner Naranjo revealed that the
MECO was "not among the agencies audited by any of the three Clusters of the Corporate Government Sector." 21
On 7 September 2010, petitioner learned about the 25 August 2010 memorandum and its contents.
Mandamus Petition
Taking the 25 August 2010 memorandum as an admission that the COA had never audited and examined the accounts of the MECO, the
petitioner filed the instant petition for mandamus on 8 September 2010. Petitioner filed the suit in his capacities as "taxpayer, concerned
citizen, a member of the Philippine Bar and law book author."22 He impleaded both the COA and the MECO.
Petitioner posits that by failing to audit the accounts of the MECO, the COA is neglecting its duty under Section 2(1), Article IX-D of the
Constitution to audit the accounts of an otherwise bona fide GOCC or government instrumentality. It is the adamant claim of the petitioner
that the MECO is a GOCC without an original charter or, at least, a government instrumentality, the funds of which partake the nature of
public funds.23
According to petitioner, the MECO possesses all the essential characteristics of a GOCC and an instrumentality under the Executive Order
No. (EO) 292, s. 1987 or the Administrative Code: it is a non-stock corporation vested with governmental functions relating to public needs;
it is controlled by the government thru a board of directors appointed by the President of the Philippines; and while not integrated within
the executive departmental framework, it is nonetheless under the operational and policy supervision of the DTI.24 As petitioner
substantiates:
1. The MECO is vested with government functions. It performs functions that are equivalent to those of an embassy or a
consulate of the Philippine government.25 A reading of the authorized functions of the MECO as found in EO No. 15, s. 2001,
reveals that they are substantially the same functions performed by the Department of Foreign Affairs (DFA), through its
diplomatic and consular missions, per the Administrative Code.26
2. The MECO is controlled by the government. It is the President of the Philippines that actually appoints the directors of the
MECO, albeit indirectly, by way of "desire letters" addressed to the MECO’s board of directors.27 An illustration of this exercise is
the assumption by Mr. Antonio Basilio as chairman of the board of directors of the MECO in 2001, which was accomplished when
former President Gloria Macapagal-Arroyo, through a memorandum28 dated 20 February 2001, expressed her "desire" to the
board of directors of the MECO for the election of Mr. Basilio as chairman.29
3. The MECO is under the operational and policy supervision of the DTI. The MECO was placed under the operational supervision
of the DTI by EO No. 328, s. of 2004, and again under the policy supervision of the same department by EO No. 426, s. 2005.30
To further bolster his position that the accounts of the MECO ought to be audited by the COA, the petitioner calls attention to the practice,
allegedly prevailing in the United States of America, wherein the American Institute in Taiwan (AIT)—the counterpart entity of the MECO in
the United States—is supposedly audited by that country’s Comptroller General.31 Petitioner claims that this practice had been confirmed in
a decision of the United States Court of Appeals for the District of Columbia Circuit, in the case of Wood, Jr., ex rel. United States of America
v. The American Institute in Taiwan, et al.32
The Position of the MECO
The MECO prays for the dismissal of the mandamus petition on procedural and substantial grounds.
On procedure, the MECO argues that the mandamus petition was prematurely filed.33
The MECO posits that a cause of action for mandamus to compel the performance of a ministerial duty required by law only ripens once
there has been a refusal by the tribunal, board or officer concerned to perform such a duty.34The MECO claims that there was, in this case,
no such refusal either on its part or on the COA’s because the petitioner never made any demand for it to submit to an audit by the COA or
for the COA to perform such an audit, prior to filing the instant mandamus petition.35 The MECO further points out that the only "demand"
that the petitioner made was his request to the COA for a copy of the MECO’s latest financial and audit report— which request was not even
finally disposed of by the time the instant petition was filed.36
On the petition’s merits, the MECO denies the petitioner’s claim that it is a GOCC or a government instrumentality.37While performing public
functions, the MECO maintains that it is not owned or controlled by the government, and its funds are private funds.38 The MECO explains:
1. It is not owned or controlled by the government. Contrary to the allegations of the petitioner, the President of the Philippines
does not appoint its board of directors.39 The "desire letter" that the President transmits is merely recommendatory and not
binding on the corporation.40 As a corporation organized under the Corporation Code, matters relating to the election of its
directors and officers, as well as its membership, are governed by the appropriate provisions of the said code, its articles of
incorporation and its by-laws.41 Thus, it is the directors who elect the corporation’s officers; the members who elect the directors;
and the directors who admit the members by way of a unanimous resolution. All of its officers, directors, and members are
private individuals and are not government officials.42
2. The government merely has policy supervision over it. Policy supervision is a lesser form of supervision wherein the
government’s oversight is limited only to ensuring that the corporation’s activities are in tune with the country’s commitments
under the One China policy of the PROC.43 The day-to-day operations of the corporation, however, remain to be controlled by its
duly elected board of directors.44
The MECO emphasizes that categorizing it as a GOCC or a government instrumentality can potentially violate the country’s commitment to
the One China policy of the PROC.45 Thus, the MECO cautions against applying to the present mandamus petition the pronouncement in the
Wood decision regarding the alleged auditability of the AIT in the United States.46
The Position of the COA
The COA, on the other hand, advances that the mandamus petition ought to be dismissed on procedural grounds and on the ground of
mootness.
The COA argues that the mandamus petition suffers from the following procedural defects:
1. The petitioner lacks locus standi to bring the suit. The COA claims that the petitioner has not shown, at least in a concrete
manner, that he had been aggrieved or prejudiced by its failure to audit the accounts of the MECO.47
2. The petition was filed in violation of the doctrine of hierarchy of courts. The COA faults the filing of the instant mandamus
petition directly with this Court, when such petition could have very well been presented, at the first instance, before the Court
of Appeals or any Regional Trial Court.48 The COA claims that the petitioner was not able to provide compelling reasons to justify
a direct resort to the Supreme Court.49
At any rate, the COA argues that the instant petition already became moot when COA Chairperson Maria Gracia M. Pulido-Tan (Pulido-Tan)
issued Office Order No. 2011-69850 on 6 October 2011.51 The COA notes that under Office Order No. 2011-698, Chairperson Pulido-Tan
already directed a team of auditors to proceed to Taiwan, specifically for the purpose of auditing the accounts of, among other government
agencies based therein, the MECO.52
In conceding that it has audit jurisdiction over the accounts of the MECO, however, the COA clarifies that it does not consider the former as
a GOCC or a government instrumentality. On the contrary, the COA maintains that the MECO is a non-governmental entity.53
The COA argues that, despite being a non-governmental entity, the MECO may still be audited with respect to the "verification fees" for
overseas employment documents that it collects from Taiwanese employers on behalf of the DOLE.54 The COA claims that, under Joint
Circular No. 3-99,55 the MECO is mandated to remit to the Department of Labor and Employment (DOLE) a portion of such "verification
fees."56 The COA, therefore, classifies the MECO as a non-governmental entity "required to pay xxx government share" subject to a partial
audit of its accounts under Section 26 of the Presidential Decree No. 1445 or the State Audit Code of the Philippines (Audit Code).57
OUR RULING
We grant the petition in part. We declare that the MECO is a non-governmental entity. However, under existing laws, the accounts of the
MECO pertaining to the "verification fees" it collects on behalf of the DOLE as well as the fees it was authorized to collect under Section 2(6)
of EO No. 15, s. 2001, are subject to the audit jurisdiction of the COA. Such fees pertain to the government and should be audited by the
COA.
I
We begin with the preliminary issues.
Mootness of Petition
The first preliminary issue relates to the alleged mootness of the instant mandamus petition, occasioned by the COA’s issuance of Office
Order No. 2011-698. The COA claims that by issuing Office Order No. 2011-698, it had already conceded its jurisdiction over the accounts of
the MECO and so fulfilled the objective of the instant petition.58 The COA thus urges that the instant petition be dismissed for being moot
and academic.59
We decline to dismiss the mandamus petition on the ground of mootness.
A case is deemed moot and academic when, by reason of the occurrence of a supervening event, it ceases to present any justiciable
controversy.60 Since they lack an actual controversy otherwise cognizable by courts, moot cases are, as a rule, dismissible.61
The rule that requires dismissal of moot cases, however, is not absolute. It is subject to exceptions. In David v. Macapagal-Arroyo,62 this
Court comprehensively captured these exceptions scattered throughout our jurisprudence:
The "moot and academic" principle is not a magical formula that can automatically dissuade the courts in resolving a case. Courts will decide
cases, otherwise moot and academic, if: first, there is a grave violation of the Constitution;63second, the exceptional character of the
situation and the paramount public interest is involved;64 third, when constitutional issue raised requires formulation of controlling
principles to guide the bench, the bar, and the public;65and fourth, the case is capable of repetition yet evading review.66
In this case, We find that the issuance by the COA of Office Order No. 2011-698 indeed qualifies as a supervening event that effectively
renders moot and academic the main prayer of the instant mandamus petition. A writ of mandamus to compel the COA to audit the
accounts of the MECO would certainly be a mere superfluity, when the former had already obliged itself to do the same.
Be that as it may, this Court refrains from dismissing outright the petition. We believe that the mandamus petition was able to craft
substantial issues presupposing the commission of a grave violation of the Constitution and involving paramount public interest, which need
to be resolved nonetheless:
First. The petition makes a serious allegation that the COA had been remiss in its constitutional or legal duty to audit and examine the
accounts of an otherwise auditable entity in the MECO.
Second. There is paramount public interest in the resolution of the issue concerning the failure of the COA to audit the accounts of the
MECO. The propriety or impropriety of such a refusal is determinative of whether the COA was able to faithfully fulfill its constitutional role
as the guardian of the public treasury, in which any citizen has an interest.
Third. There is also paramount public interest in the resolution of the issue regarding the legal status of the MECO; a novelty insofar as our
jurisprudence is concerned. We find that the status of the MECO—whether it may be considered as a government agency or not—has a
direct bearing on the country’s commitment to the One China policy of the PROC.67
An allegation as serious as a violation of a constitutional or legal duty, coupled with the pressing public interest in the resolution of all
related issues, prompts this Court to pursue a definitive ruling thereon, if not for the proper guidance of the government or agency
concerned, then for the formulation of controlling principles for the education of the bench, bar and the public in general.68 For this purpose,
the Court invokes its symbolic function.69
If the foregoing reasons are not enough to convince, We still add another:
Assuming that the allegations of neglect on the part of the COA were true, Office Order No. 2011-698 does not offer the strongest certainty
that they would not be replicated in the future. In the first place, Office Order No. 2011-698 did not state any legal justification as to why,
after decades of not auditing the accounts of the MECO, the COA suddenly decided to do so. Neither does it state any determination
regarding the true status of the MECO. The justifications provided by the COA, in fact, only appears in the memorandum70 it submitted to
this Court for purposes of this case.
Thus, the inclusion of the MECO in Office Order No. 2011-698 appears to be entirely dependent upon the judgment of the incumbent
chairperson of the COA; susceptible of being undone, with or without reason, by her or even her successor. Hence, the case now before this
Court is dangerously capable of being repeated yet evading review.
Verily, this Court should not dismiss the mandamus petition on the ground of mootness.
Standing of Petitioner
The second preliminary issue is concerned with the standing of the petitioner to file the instant mandamus petition. The COA claims that
petitioner has none, for the latter was not able to concretely establish that he had been aggrieved or prejudiced by its failure to audit the
accounts of the MECO.71
Related to the issue of lack of standing is the MECO’s contention that petitioner has no cause of action to file the instant mandamus
petition. The MECO faults petitioner for not making any demand for it to submit to an audit by the COA or for the COA to perform such an
audit, prior to filing the instant petition.72
We sustain petitioner’s standing, as a concerned citizen, to file the instant petition.
The rules regarding legal standing in bringing public suits, or locus standi, are already well-defined in our case law. Again, We cite David,
which summarizes jurisprudence on this point:73
By way of summary, the following rules may be culled from the cases decided by this Court.1a\^/phi1 Taxpayers, voters, concerned citizens,
and legislators may be accorded standing to sue, provided that the following requirements are met:
(1) the cases involve constitutional issues;
(2) for taxpayers, there must be a claim of illegal disbursement of public funds or that the tax measure is unconstitutional;
(3) for voters, there must be a showing of obvious interest in the validity of the election law in question;
(4) for concerned citizens, there must be a showing that the issues raised are of transcendental importance which must be settled
early; and
(5) for legislators, there must be a claim that the official action complained of infringes upon their prerogatives as legislators.
We rule that the instant petition raises issues of transcendental importance, involved as they are with the performance of a constitutional
duty, allegedly neglected, by the COA. Hence, We hold that the petitioner, as a concerned citizen, has the requisite legal standing to file the
instant mandamus petition.
To be sure, petitioner does not need to make any prior demand on the MECO or the COA in order to maintain the instant petition. The duty
of the COA sought to be compelled by mandamus, emanates from the Constitution and law, which explicitly require, or "demand," that it
perform the said duty. To the mind of this Court, petitioner already established his cause of action against the COA when he alleged that the
COA had neglected its duty in violation of the Constitution and the law.
Principle of Hierarchy of Courts
The last preliminary issue is concerned with the petition’s non-observance of the principle of hierarchy of courts. The COA assails the filing of
the instant mandamus petition directly with this Court, when such petition could have very well been presented, at the first instance, before
the Court of Appeals or any Regional Trial Court.74 The COA claims that the petitioner was not able to provide compelling reasons to justify a
direct resort to the Supreme Court.75
In view of the transcendental importance of the issues raised in the mandamus petition, as earlier mentioned, this Court waives this last
procedural issue in favor of a resolution on the merits.76
II
To the merits of this petition, then.
The single most crucial question asked by this case is whether the COA is, under prevailing law, mandated to audit the accounts of the
MECO. Conversely, are the accounts of the MECO subject to the audit jurisdiction of the COA?
Law, of course, identifies which accounts of what entities are subject to the audit jurisdiction of the COA.
Under Section 2(1) of Article IX-D of the Constitution,77 the COA was vested with the "power, authority and duty" to "examine, audit and
settle" the "accounts" of the following entities:
1. The government, or any of its subdivisions, agencies and instrumentalities;
2. GOCCs with original charters;
3. GOCCs without original charters;
4. Constitutional bodies, commissions and offices that have been granted fiscal autonomy under the Constitution; and
5. Non-governmental entities receiving subsidy or equity, directly or indirectly, from or through the government, which are
required by law or the granting institution to submit to the COA for audit as a condition of subsidy or equity. 78
The term "accounts" mentioned in the subject constitutional provision pertains to the "revenue," "receipts," "expenditures" and "uses of
funds and property" of the foregoing entities.79
Complementing the constitutional power of the COA to audit accounts of "non-governmental entities receiving subsidy or equity xxx from or
through the government" is Section 29(1)80 of the Audit Code, which grants the COA visitorial authority over the following non-governmental
entities:
1. Non-governmental entities "subsidized by the government";
2. Non-governmental entities "required to pay levy or government share";
3. Non-governmental entities that have "received counterpart funds from the government"; and
4. Non-governmental entities "partly funded by donations through the government."
Section 29(1) of the Audit Code, however, limits the audit of the foregoing non-governmental entities only to "funds xxx coming from or
through the government."81 This section of the Audit Code is, in turn, substantially reproduced in Section 14(1), Book V of the Administrative
Code.82
In addition to the foregoing, the Administrative Code also empowers the COA to examine and audit "the books, records and accounts" of
public utilities "in connection with the fixing of rates of every nature, or in relation to the proceedings of the proper regulatory agencies, for
purposes of determining franchise tax."83
Both petitioner and the COA claim that the accounts of the MECO are within the audit jurisdiction of the COA, but vary on the extent of the
audit and on what type of auditable entity the MECO is. The petitioner posits that all accounts of the MECO are auditable as the latter is a
bona fide GOCC or government instrumentality.84 On the other hand, the COA argues that only the accounts of the MECO that pertain to the
"verification fees" it collects on behalf of the DOLE are auditable because the former is merely a non-governmental entity "required to pay
xxx government share" per the Audit Code.85
We examine both contentions.
The MECO Is Not a GOCC or
Government Instrumentality
We start with the petitioner’s contention.
Petitioner claims that the accounts of the MECO ought to be audited by the COA because the former is a GOCC or government
instrumentality. Petitioner points out that the MECO is a non-stock corporation "vested with governmental functions relating to public
needs"; it is "controlled by the government thru a board of directors appointed by the President of the Philippines"; and it operates "outside
of the departmental framework," subject only to the "operational and policy supervision of the DTI."86 The MECO thus possesses, petitioner
argues, the essential characteristics of a bona fide GOCC and government instrumentality.87
We take exception to petitioner’s characterization of the MECO as a GOCC or government instrumentality. The MECO is not a GOCC or
government instrumentality.
Government instrumentalities are agencies of the national government that, by reason of some "special function or jurisdiction" they
perform or exercise, are allotted "operational autonomy" and are "not integrated within the department framework."88 Subsumed under
the rubric "government instrumentality" are the following entities:89
1. regulatory agencies,
2. chartered institutions,
3. government corporate entities or government instrumentalities with corporate powers (GCE/GICP),90 and
4. GOCCs
The Administrative Code defines a GOCC:91
(13) Government-owned or controlled corporation refers to 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) per cent of its
capital stock: x x x.
The above definition is, in turn, replicated in the more recent Republic Act No. 10149 or the GOCC Governance Act of 2011, to wit:92
(o) Government-Owned or -Controlled Corporation (GOCC) refers to 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 of the Republic of the
Philippines directly or through its instrumentalities either wholly or, where applicable as in the case of stock corporations, to the extent of at
least a majority of its outstanding capital stock: x x x.
GOCCs, therefore, are "stock or non-stock" corporations "vested with functions relating to public needs" that are "owned by the
Government directly or through its instrumentalities."93 By definition, three attributes thus make an entity a GOCC: first, its organization as
stock or non-stock corporation;94 second, the public character of its function; and third, government ownership over the same.
Possession of all three attributes is necessary to deem an entity a GOCC.
In this case, there is not much dispute that the MECO possesses the first and second attributes. It is the third attribute, which the MECO
lacks.
The MECO Is Organized as a Non-Stock Corporation
The organization of the MECO as a non-stock corporation cannot at all be denied. Records disclose that the MECO was incorporated as a
non-stock corporation under the Corporation Code on 16 December 1977.95 The incorporators of the MECO were Simeon R. Roxas, Florencio
C. Guzon, Manuel K. Dayrit, Pio K. Luz and Eduardo B. Ledesma, who also served as the corporation’s original members and directors.96
The purposes for which the MECO was organized also establishes its non-profit character, to wit:97
1. To establish and develop the commercial and industrial interests of Filipino nationals here and abroad and assist on all
measures designed to promote and maintain the trade relations of the country with the citizens of other foreign countries;
2. To receive and accept grants and subsidies that are reasonably necessary in carrying out the corporate purposes provided they
are not subject to conditions defeatist for or incompatible with said purpose;
 3. To acquire by purchase, lease or by any gratuitous title real and personal properties as may be necessary for the use and need
of the corporation, and in like manner when they are
4. To do and perform any and all acts which are deemed reasonably necessary to carry out the purposes. (Emphasis supplied)
The purposes for which the MECO was organized are somewhat analogous to those of a trade, business or industry chamber,98 but only on a
much larger scale i.e., instead of furthering the interests of a particular line of business or industry within a local sphere, the MECO seeks to
promote the general interests of the Filipino people in a foreign land.
Finally, it is not disputed that none of the income derived by the MECO is distributable as dividends to any of its members, directors or
officers.
Verily, the MECO is organized as a non-stock corporation.
The MECO Performs Functions with a Public Aspect.
The public character of the functions vested in the MECO cannot be doubted either. Indeed, to a certain degree, the functions of the MECO
can even be said to partake of the nature of governmental functions. As earlier intimated, it is the MECO that, on behalf of the people of the
Philippines, currently facilitates unofficial relations with the people in Taiwan.
Consistent with its corporate purposes, the MECO was "authorized" by the Philippine government to perform certain "consular and other
functions" relating to the promotion, protection and facilitation of Philippine interests in Taiwan.99The full extent of such authorized
functions are presently detailed in Sections 1 and 2 of EO No. 15, s. 2001:
SECTION 1. Consistent with its corporate purposes and subject to the conditions stated in Section 3 hereof, MECO is hereby authorized to
assist in the performance of the following functions:
1. Formulation and implementation of a program to attract and promote investments from Taiwan to Philippine industries and
businesses, especially in manufacturing, tourism, construction and other preferred areas of investments;
2. Promotion of the export of Philippine products and Filipino manpower services, including Philippine management services, to
Taiwan;
3. Negotiation and/or assistance in the negotiation and conclusion of agreements or other arrangements concerning trade,
investment, economic cooperation, technology transfer, banking and finance, scientific, cultural, educational and other modes of
cooperative endeavors between the Philippines and Taiwan, on a people-to-people basis, in accordance with established rules
and regulations;
4. Reporting on, and identification of, employment and business opportunities in Taiwan for the promotion of Philippine exports,
manpower and management services, and tourism;
5. Dissemination in Taiwan of information on the Philippines, especially in the fields of trade, tourism, labor, economic
cooperation, and cultural, educational and scientific endeavors;
6. Conduct of periodic assessment of market conditions in Taiwan, including submission of trade statistics and commercial
reports for use of Philippine industries and businesses; and
7. Facilitation, fostering and cultivation of cultural, sports, social, and educational exchanges between the peoples of the
Philippines and Taiwan.
SECTION 2. In addition to the above-mentioned authority and subject to the conditions stated in Section 3 hereof, MECO, through its branch
offices in Taiwan, is hereby authorized to perform the following functions:
1. Issuance of temporary visitors’ visas and transit and crew list visas, and such other visa services as may be authorized by the
Department of Foreign Affairs;
2. Issuance, renewal, extension or amendment of passports of Filipino citizens in accordance with existing regulations, and
provision of such other passport services as may be required under the circumstances;
3. Certification or affirmation of the authenticity of documents submitted for authentication;
4. Providing translation services;
5. Assistance and protection to Filipino nationals and other legal/juridical persons working or residing in Taiwan, including making
representations to the extent allowed by local and international law on their behalf before civil and juridical authorities of
Taiwan; and
6. Collection of reasonable fees on the first four (4) functions enumerated above to defray the cost of its operations.
A perusal of the above functions of the MECO reveals its uncanny similarity to some of the functions typically performed by the DFA itself,
through the latter’s diplomatic and consular missions.100 The functions of the MECO, in other words, are of the kind that would otherwise be
performed by the Philippines’ own diplomatic and consular organs, if not only for the government’s acquiescence that they instead be
exercised by the MECO.
Evidently, the functions vested in the MECO are impressed with a public aspect.
The MECO Is Not Owned or Controlled by the Government Organization as a non-stock corporation and the mere performance of functions
with a public aspect, however, are not by themselves sufficient to consider the MECO as a GOCC. In order to qualify as a GOCC, a corporation
must also, if not more importantly, be owned by the government.
The government owns a stock or non-stock corporation if it has controlling interest in the corporation. In a stock corporation, the controlling
interest of the government is assured by its ownership of at least fifty-one percent (51%) of the corporate capital stock.101 In a non-stock
corporation, like the MECO, jurisprudence teaches that the controlling interest of the government is affirmed when "at least majority of the
members are government officials holding such membership by appointment or designation"102 or there is otherwise "substantial
participation of the government in the selection" of the corporation’s governing board.103
In this case, the petitioner argues that the government has controlling interest in the MECO because it is the President of the Philippines that
indirectly appoints the directors of the corporation.104 The petitioner claims that the President appoints directors of the MECO thru "desire
letters" addressed to the corporation’s board.105 As evidence, the petitioner cites the assumption of one Mr. Antonio Basilio as chairman of
the board of directors of the MECO in 2001, which was allegedly accomplished when former President Macapagal-Arroyo, through a
memorandum dated 20 February 2001, expressed her "desire" to the board of directors of the MECO for the election of Mr. Basilio as
chairman.106
The MECO, however, counters that the "desire letters" that the President transmits are merely recommendatory and not binding on
it.107 The MECO maintains that, as a corporation organized under the Corporation Code, matters relating to the election of its directors and
officers, as well as its membership, are ultimately governed by the appropriate provisions of the said code, its articles of incorporation and
its by-laws.108
As between the contrasting arguments, We find the contention of the MECO to be the one more consistent with the law.
The fact of the incorporation of the MECO under the Corporation Code is key. The MECO was correct in postulating that, as a corporation
organized under the Corporation Code, it is governed by the appropriate provisions of the said code, its articles of incorporation and its by-
laws. In this case, it is the by-laws109 of the MECO that stipulates that its directors are elected by its members; its officers are elected by its
directors; and its members, other than the original incorporators, are admitted by way of a unanimous board resolution, to wit:
SECTION II. MEMBERSHIP
Article 2. Members shall be classified as (a) Regular and (b) Honorary.
(a) Regular members – shall consist of the original incorporators and such other members who, upon application for membership,
are unanimously admitted by the Board of Directors.
(b) Honorary member – A person of distinction in business who as sympathizer of the objectives of the corporation, is invited by
the Board to be an honorary member.
SECTION III. BOARD OF DIRECTORS
Article 3. At the first meeting of the regular members, they shall organize and constitute themselves as a Board composed of five (5)
members, including its Chairman, each of whom as to serve until such time as his own successor shall have been elected by the regular
members in an election called for the purpose. The number of members of the Board shall be increased to seven (7) when circumstances so
warrant and by means of a majority vote of the Board members and appropriate application to and approval by the Securities and Exchange
Commission. Unless otherwise provided herein or by law, a majority vote of all Board members present shall be necessary to carry out all
Board resolutions.
During the same meeting, the Board shall also elect its own officers, including the designation of the principal officer who shall be the
Chairman. In line with this, the Chairman shall also carry the title Chief Executive Officer. The officer who shall head the branch or office for
the agency that may be established abroad shall have the title of Director and Resident Representative. He will also be the Vice-Chairman.
All other members of the Board shall have the title of Director.
xxxx
SECTION IV. EXECUTIVE COMMITTEE
Article 5. There shall be established an Executive Committee composed of at least three (3) members of the Board. The members of the
Executive Committee shall be elected by the members of the Board among themselves.
xxxx
SECTION VI. OFFICERS: DUTIES, COMPENSATION
Article 8. The officers of the corporation shall consist of a Chairman of the Board, Vice-Chairman, Chief Finance Officer, and a Secretary.
Except for the Secretary, who is appointed by the Chairman of the Board, other officers and employees of the corporation shall be appointed
by the Board.
The Deputy Representative and other officials and employees of a branch office or agency abroad are appointed solely by the Vice Chairman
and Resident Representative concerned. All such appointments however are subject to ratification by the Board.
It is significant to note that none of the original incorporators of the MECO were shown to be government officials at the time of the
corporation’s organization. Indeed, none of the members, officers or board of directors of the MECO, from its incorporation up to the
present day, were established as government appointees or public officers designated by reason of their office. There is, in fact, no law or
executive order that authorizes such an appointment or designation. Hence, from a strictly legal perspective, it appears that the presidential
"desire letters" pointed out by petitioner—if such letters even exist outside of the case of Mr. Basilio—are, no matter how strong its
persuasive effect may be, merely recommendatory.
The MECO Is Not a Government Instrumentality; It Is a Sui Generis Entity.
The categorical exclusion of the MECO from a GOCC makes it easier to exclude the same from any other class of government
instrumentality. The other government instrumentalities i.e., the regulatory agencies, chartered institutions and GCE/GICP are all, by explicit
or implicit definition, creatures of the law.110 The MECO cannot be any other instrumentality because it was, as mentioned earlier, merely
incorporated under the Corporation Code.
Hence, unless its legality is questioned, and in this case it was not, the fact that the MECO is operating under the policy supervision of the
DTI is no longer a relevant issue to be reckoned with for purposes of this case.
For whatever it is worth, however, and without justifying anything, it is easy enough for this Court to understand the rationale, or necessity
even, of the executive branch placing the MECO under the policy supervision of one of its agencies.
It is evident, from the peculiar circumstances surrounding its incorporation, that the MECO was not intended to operate as any other
ordinary corporation. And it is not. Despite its private origins, and perhaps deliberately so, the MECO was "entrusted"111 by the government
with the "delicate and precarious"112 responsibility of pursuing "unofficial"113 relations with the people of a foreign land whose government
the Philippines is bound not to recognize. The intricacy involved in such undertaking is the possibility that, at any given time in fulfilling the
purposes for which it was incorporated, the MECO may find itself engaged in dealings or activities that can directly contradict the
Philippines’ commitment to the One China policy of the PROC. Such a scenario can only truly be avoided if the executive department
exercises some form of oversight, no matter how limited, over the operations of this otherwise private entity.
Indeed, from hindsight, it is clear that the MECO is uniquely situated as compared with other private corporations. From its over-reaching
corporate objectives, its special duty and authority to exercise certain consular functions, up to the oversight by the executive department
over its operations—all the while maintaining its legal status as a non-governmental entity—the MECO is, for all intents and purposes, sui
generis.
Certain Accounts of the MECO May
Be Audited By the COA.
We now come to the COA’s contention.
The COA argues that, despite being a non-governmental entity, the MECO may still be audited with respect to the "verification fees" for
overseas employment documents that the latter collects from Taiwanese employers on behalf of the DOLE.114 The COA claims that, under
Joint Circular No. 3-99, the MECO is mandated to remit to the national government a portion of such "verification fees."115 The COA,
therefore, classifies the MECO as a non-governmental entity "required to pay xxx government share" per the Audit Code.116
We agree that the accounts of the MECO pertaining to its collection of "verification fees" is subject to the audit jurisdiction of the COA.
However, We digress from the view that such accounts are the only ones that ought to be audited by the COA. Upon careful evaluation of
the information made available by the records vis-à-vis the spirit and the letter of the laws and executive issuances applicable, We find that
the accounts of the MECO pertaining to the fees it was authorized to collect under Section 2(6) of EO No. 15, s. 2001, are likewise subject to
the audit jurisdiction of the COA.
Verification Fees Collected by the MECO
In its comment,117 the MECO admitted that roughly 9% of its income is derived from its share in the "verification fees" for overseas
employment documents it collects on behalf of the DOLE.
The "verification fees" mentioned here refers to the "service fee for the verification of overseas employment contracts, recruitment
agreement or special powers of attorney" that the DOLE was authorized to collect under Section 7 of EO No. 1022,118 which was issued by
President Ferdinand E. Marcos on 1 May 1985. These fees are supposed to be collected by the DOLE from the foreign employers of OFWs
and are intended to be used for "the promotion of overseas employment and for welfare services to Filipino workers within the area of
jurisdiction of [concerned] foreign missions under the administration of the [DOLE]."119
Joint Circular 3-99 was issued by the DOLE, DFA, the Department of Budget Management, the Department of Finance and the COA in an
effort to implement Section 7 of Executive Order No. 1022.120 Thus, under Joint Circular 3-99, the following officials have been tasked to be
the "Verification Fee Collecting Officer" on behalf of the DOLE:121
1. The labor attaché or duly authorized overseas labor officer at a given foreign post, as duly designated by the DOLE Secretary;
2. In foreign posts where there is no labor attaché or duly authorized overseas labor officer, the finance officer or collecting
officer of the DFA duly deputized by the DOLE Secretary as approved by the DFA Secretary;
3. In the absence of such finance officer or collecting officer, the alternate duly designated by the head of the foreign post.
Since the Philippines does not maintain an official post in Taiwan, however, the DOLE entered into a "series" of Memorandum of
Agreements with the MECO, which made the latter the former’s collecting agent with respect to the "verification fees" that may be due
from Taiwanese employers of OFWs.122 Under the 27 February 2004 Memorandum of Agreement between DOLE and the MECO, the
"verification fees" to be collected by the latter are to be allocated as follows: (a) US$ 10 to be retained by the MECO as administrative fee,
(b) US $10 to be remitted to the DOLE, and (c) US$ 10 to be constituted as a common fund of the MECO and DOLE.123
Evidently, the entire "verification fees" being collected by the MECO are receivables of the DOLE.124 Such receipts pertain to the DOLE by
virtue of Section 7 of EO No. 1022.
Consular Fees Collected by the MECO
Aside from the DOLE "verification fees," however, the MECO also collects "consular fees," or fees it collects from the exercise of its
delegated consular functions.
The authority behind "consular fees" is Section 2(6) of EO No. 15, s. 2001. The said section authorizes the MECO to collect "reasonable fees"
for its performance of the following consular functions:
1. Issuance of temporary visitors’ visas and transit and crew list visas, and such other visa services as may be authorized by the
DFA;
2. Issuance, renewal, extension or amendment of passports of Filipino citizens in accordance with existing regulations, and
provision of such other passport services as may be required under the circumstances;
3. Certification or affirmation of the authenticity of documents submitted for authentication; and
4. Providing translation services.
Evidently, and just like the peculiarity that attends the DOLE "verification fees," there is no consular office for the collection of the "consular
fees." Thus, the authority for the MECO to collect the "reasonable fees," vested unto it by the executive order.
The "consular fees," although held and expended by the MECO by virtue of EO No. 15, s. 2001, are, without question, derived from the
exercise by the MECO of consular functions—functions it performs by and only through special authority from the government. There was
never any doubt that the visas, passports and other documents that the MECO issues pursuant to its authorized functions still emanate from
the Philippine government itself.
Such fees, therefore, are received by the MECO to be used strictly for the purpose set out under EO No. 15, s. 2001. They must be
reasonable as the authorization requires. It is the government that has ultimate control over the disposition of the "consular fees," which
control the government did exercise when it provided in Section 2(6) of EO No. 15, s. 2001 that such funds may be kept by the MECO "to
defray the cost of its operations."
The Accounts of the MECO Pertaining to the Verification Fees and Consular Fees May Be Audited by the COA.
Section 14(1), Book V of the Administrative Code authorizes the COA to audit accounts of non-governmental entities "required to pay xxx or
have government share" but only with respect to "funds xxx coming from or through the government." This provision of law perfectly fits
the MECO:
First. The MECO receives the "verification fees" by reason of being the collection agent of the DOLE—a government agency. Out of its
collections, the MECO is required, by agreement, to remit a portion thereof to the DOLE. Hence, the MECO is accountable to the
government for its collections of such "verification fees" and, for that purpose, may be audited by the COA.
Second. Like the "verification fees," the "consular fees" are also received by the MECO through the government, having been derived from
the exercise of consular functions entrusted to the MECO by the government. Hence, the MECO remains accountable to the government for
its collections of "consular fees" and, for that purpose, may be audited by the COA.
Tersely put, the 27 February 2008 Memorandum of Agreement between the DOLE and the MECO and Section 2(6) of EO No. 15, s. 2001, vis-
à-vis, respectively, the "verification fees" and the "consular fees," grant and at the same time limit the authority of the MECO to collect such
fees. That grant and limit require the audit by the COA of the collections thereby generated.
Conclusion
The MECO is not a GOCC or government instrumentality. It is a sui generis private entity especially entrusted by the government with the
facilitation of unofficial relations with the people in Taiwan without jeopardizing the country’s faithful commitment to the One China policy
of the PROC. However, despite its non-governmental character, the MECO handles government funds in the form of the "verification fees" it
collects on behalf of the DOLE and the "consular fees" it collects under Section 2(6) of EO No. 15, s. 2001. Hence, under existing laws, the
accounts of the MECO pertaining to its collection of such "verification fees" and "consular fees" should be audited by the COA.
WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The Manila Economic and Cultural Office is hereby declared a non-
governmental entity. However, the accounts of the Manila Economic and Cultural Office pertaining to: the verification fees contemplated by
Section 7 of Executive Order No. 1022 issued 1 May 1985, that the former collects on behalf of the Department of Labor and Employment,
and the fees it was authorized to collect under Section 2(6) of Executive Order No. 15 issued 16 May 2001, are subject to the audit
jurisdiction of the COA.
No costs.
SO ORDERED.
THE COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.
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 re-valuation 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: WON Club Filipino is liable for the taxes (WON it is a stock corporation)
HELD: No (it is non-stock)
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 disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an
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: alter ego of another corporation.
(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. The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and circumstances of each case. No
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. hard and fast rule can be accurately laid down, but certainly, there are some probative factors of identity that will justify the application of
The 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
the doctrine of piercing the corporate veil, to wit:
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
1. Stock ownership by one or common ownership of both corporations.
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 2. Identity of directors and officers.
are 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 3. The manner of keeping corporate books and records.
always strive, whenever possible, to have surplus
4. Methods of conducting the business.

Concept Builders vs NLRC DIGEST The SEC en banc explained the “instrumentality rule” which the courts have applied in disregarding the separate juridical personality of

DECEMBER 21, 2016 ~ VBD IAZ corporations as follows:

Concept Builders vs NLRC 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

GR 108734; 29 May 1996 the other, the fiction of the corporate entity of the “instrumentality” may be disregarded. The control necessary to invoke the rule is not

Facts: majority or even complete stock control but such domination of instances, policies and practices that the controlled corporation has, so to

Petitioner Concept Builders, Inc., a domestic corporation engaged in the construction business. Private respondents were employed by said speak, no separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind that the control must be

company as laborers, carpenters and riggers. However, they were illegally dismissed. shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately

Aggrieved, private respondents filed a complaint for illegal dismissal. The Labor Arbiter rendered judgment ordering petitioner to reinstate cause the injury or unjust loss for which the complaint is made.

private respondents and to pay them back wages. It became final and executory. The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows:

The alias Writ of Execution cannot be enforced by the sheriff because all the employees inside petitioner’s premises at 355 Maysan Road, 1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business

Valenzuela, Metro Manila, claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by petitioner. Thus, NLRC issued practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will

a break-open order against Concept Builders and HPPI. or existence of its own;

Issue: Whether the piercing the veil of corporate entity is proper. 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other

Held: Yes. positive legal duty or dishonest and unjust act in contravention of plaintiff’s legal rights; and

It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

corporations to which it may be connected. But, this separate and distinct personality of a corporation is merely a fiction created by law for The absence of any one of these elements prevents “piercing the corporate veil.” In applying the “instrumentality” or “alter ego” doctrine,

convenience and to promote justice. So, when the notion of separate juridical personality is used to defeat public convenience, justify the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that

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 operation.

Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of back wages 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.
NASECO GUARDS ASSOCIATION-PEMA (NAGA-PEMA), Petitioner vs NATIONAL SERVICE CORPORATION (NASECO), Respondent. G.R.
No. 165442; August 25, 2010
FACTS:
Respondent National Service Corporation (NASECO) is a wholly-owned subsidiary of the PNB organized under the Corporation Code in
1975. It supplies security and manpower services to different clients such as the SEC, PDIC, Food Terminal Incorporated, Forex Corporation
and PNB. Petitioner NASECO Guards Association-PEMA (NAGA-PEMA) is the collective bargaining representative of the regular rank and file
security guards of respondent. NASECO Employees Union-PEMA (NEMU-PEMA) is the collective bargaining representative of the regular
rank and file (non-security) employees of respondent such as messengers, janitors, typists, clerks and radio-telephone operators.
On June 8, 1995, petitioner and respondent agreed to sign a CBA on non-economic terms. On September 24, 1996, petitioner filed a notice
of strike because of respondent’s refusal to bargain for economic benefits in the CBA. Following conciliation hearings, the parties again
commenced CBA negotiations and started to resolve the issues on wage increase, productivity bonus, incentive bonus, allowances, and
other benefits but failed to reach an agreement.
Meanwhile, respondent and NEMU-PEMA entered into a CBA on non-economic terms. Unfortunately, a dispute among the leaders of
NEMU-PEMA arose and at a certain point, leadership of the organization was unclear. Hence, the negotiations concerning the economic
terms of the CBA were put on hold until the internal dispute could be resolved.
On April 29, 1997, petitioner filed a notice of strike before the NCMB against respondent and PNB due to a bargaining deadlock. The
following day, NEMU-PEMA likewise filed a notice of strike against respondent and PNB on the ground of ULP. Efforts by the NCMB to
conciliate failed. DOLE Secretary assumed jurisdiction over the strike notices. DOLE Secretary issued a Resolution directing petitioner and
respondent to execute a new CBA incorporating therein his dispositions regarding benefits of the employees. The charge of ULP against
respondent and PNB was dismissed.
Respondent filed a petition for certiorari before the CA questioning the DOLE Secretary’s order. CA partly granted the petition and ruled that
a recomputation and reevaluation of the benefits awarded was in order. Petitioner was not in favor with the result of the recomputation.
Hence this petition.
ISSUE:
WON PNB, being the undisputed owner of and exercising control over respondent, should be made liable to pay the CBA benefits awarded
to the petitioner.
RULING:
1. Petitioner argues that the CA erred in stating that respondent was a company operating at a loss and therefore cannot be expected to
act generously and confer upon its employees additional benefits exceeding what is mandated by law. It is the petitioner’s position
that based on the “no loss, no profit” policy of respondent with PNB, respondent in truth has no “pocket” of its own and is, in effect, 1
and the same with PNB with regard to financial gains and/or liabilities. Thus, petitioners contend that the CBA benefits should be
shouldered by PNB considering the poor financial condition of respondent.
What the petitioner is asking this Court to do is to pierce the veil of corporate fiction of respondent and hold PNB (being the mother
company) liable for the CBA benefits. In Concept Builders, Inc. v. NLRC, we explained the doctrine of piercing the corporate veil, as follows:
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.
Also in Pantranco Employees Association (PEA-PTGWO) v. NLRC, this Court ruled:
Whether the separate personality of the corporation should be pierced hinges on obtaining facts appropriately pleaded or proved.
However, any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil
when it is misused or when necessary in the interest of justice. After all, the concept of corporate entity was not meant to promote unfair
objectives.
Applying the doctrine to the case at bar, we find no reason to pierce the corporate veil of respondent and go beyond its legal
personality. Control, 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.
There is no showing that such “no loss, no profit” scheme between respondent and PNB was implemented to defeat public convenience,
justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, nor does the scheme show that respondent is a
mere business conduit or alter ego of PNB. Absent proof of these circumstances, respondent’s corporate personality cannot be pierced.
It is apparent that petitioner wants the Court to disregard the corporate personality of respondent and directly go after PNB in order for it to
collect the CBA benefits. On the same breath, however, petitioner argues that ultimately it is PNB, by virtue of the “no loss, no profit”
scheme, which shoulders and provides the funds for financial liabilities of respondent including wages and benefits of employees. If such
scheme was indeed true as the petitioner presents it, then there was absolutely no need to pierce the veil of corporate fiction of
respondent.
WHEREFORE, the petition is PARTLY GRANTED.
KUKAN INTERNATIONAL CORPORATION v. 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 G.R. No. 182729
September 29, 2010, Velasco, Jr., J. 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; it is not available to confer on the court jurisdiction it has not acquired, in the first place, over a party not impleaded in a case. Facts:
Romeo M. Morales, doing business under the name RM Morales Trophies and Plaques, was awarded a P5 million contract for the supply and
installation of signages in a building constructed in Makati. The contract price was later reduced to P3,388,502. Morales complied with his
contractual obligations but he was paid only the amount of P1,976,371.07 leaving a balance of P1,412,130.93. He filed a case against Kukan,
Inc., for a sum of money with the RTC of Manila. The RTC rendered a decision in favor of Morales and ordered Kunkan, Inc. to pay for the
balance, damages and cost of the suit which became final and executory. During the execution, the sheriff levied the personal properties
found at the office of Kukan, Inc. Claiming it owned the properties levied, Kukan International Corporation (KIC) field an Affidavit of Third
Party Claim. Morales filed an Omnibus Motion praying to apply the principle of piercing the veil of corporate entity. He alleged that Kukan,
Inc. and Kukan International Inc. (KIC) are one and the same corporation. His motion was granted. KIC filed a Motion for Reconsideration
which was denied. Upon appellate review, the CA likewise denied KIC’s petition and Motion for Reconsideration. Hence, this petition.
Issue: Whether the principle of piercing the veil of corporate entity was correctly applied
Ruling: No. 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 corporation and, hence, any proceedings taken against that corporation and its
property would infringe on its right to due process. The doctrine of piercing the veil of corporate fiction comes to play only during the trial of
the case after the court has already acquired jurisdiction over the corporation. Before this doctrine can be applied, the court must first have
jurisdiction over the corporation. The implication of the above comment is two-fold: (1) the court must first acquire jurisdiction over the
corporation or 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. No full-blown trial involving KIC was had when the RTC
disregarded the corporate veil of KIC. KIC was not impleaded in the collection case filed by Morales against Kukan Inc. It was dragged to the
case after it reacted to the improper execution of its properties and veritably hauled to court, not through 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. Board of Directors and Trustees (Responsibility for
“G” HOLDINGS, INC., Petitioner,
vs.
NATIONAL MINES AND ALLIED WORKERS UNION Local 103 (NAMAWU); SHERIFFS RICHARD H. APROSTA and ALBERTO MUNOZ, all acting
Sheriffs; DEPARTMENT OF LABOR AND EMPLOYMENT, Region VI, Bacolod District Office, Bacolod City, Respondents.
FACTS: The petitioner, “G” Holdings, Inc. (GHI), bought ninety percent (90%) of MMC’s shares and financial claims. These financial claims
were converted into three Promissory Notes issued by MMC in favor of GHI totaling P500M and secured by mortgages over MMC’s
properties. National Mines and Allied Workers Union Local 103 (NAMAWU), was the exclusive bargaining agent of the rank and file
employees of Maricalum Mining Corporation (MMC).
GHI immediately took physical possession of the mine site and its facilities, and took full control of the management and operation of MMC.
Almost four years thereafter, or on August 23, 1996, a labor dispute (refusal to bargain collectively and unfair labor practice) arose between
MMC and NAMAWU
ISSUE: WON the Deed of Real Estate and Chattel Mortgage was entered into between MMC and G Holdings for the purpose of evading the
satisfaction of the legitimate claims of the petitioner against MMC.
HELD: No
Since the factual antecedents of this case do not warrant a finding that the mortgage and loan agreements between MMC and GHI were 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation;
simulated, then their separate personalities must be recognized. To pierce the veil of corporate fiction would require that their personalities 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or
as creditor and debtor be conjoined, resulting in a merger of the personalities of the creditor (GHI) and the debtor (MMC) in one person, 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
such that the debt of one to the other is thereby extinguished. But the debt embodied in the 1992 Financial Notes has been established, and corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
even made subject of court litigation (Civil Case No. 95-76132, RTC Manila). This can only mean that GHI and MMC have separate corporate adjunct of another corporation. In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such
personalities. corporate officer cannot be made personally liable for corporate liabilities.
Neither was MMC used merely as an alter ego, adjunct, or business conduit for the sole benefit of GHI, to justify piercing the former’s veil of Assuming arguendo, that PNB may be held liable for the debts of PNEI, petitioners still cannot proceed against the Pantranco properties, the
corporate fiction so that the latter could be held liable to claims of third-party judgment creditors, like NAMAWU. same being owned by PNB-Madecor, notwithstanding the fact that PNB-Madecor was a subsidiary of PNB. The general rule remains that
Time and again, we have reiterated that mere ownership by a single stockholder or by another corporation of all or nearly all of the capital PNB-Madecor has a personality separate and distinct from PNB. The mere fact that a corporation owns all of the stocks of another
stock of a corporation is not, by itself, a sufficient ground for disregarding a separate corporate personality. corporation, taken alone, is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary’s
It is basic that a corporation has a personality separate and distinct from that composing it as well as from that of any other legal entity to separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising
which it may be related. Clear and convincing evidence is needed to pierce the veil of corporate fiction. in their respective businesses.
In this case, the mere interlocking of directors and officers does not warrant piercing the separate corporate personalities of MMC and GHI. In PNB v. Ritratto Group, Inc., we outlined the circumstances which are useful in the determination of whether a subsidiary is but a mere
Not only must there be a showing that there was majority or complete control, but complete domination, not only of finances but of policy instrumentality of the parent-corporation, to wit:
and business practice in respect to the transaction attacked, so that the corporate entity as to this transaction had at the time no separate 1. The parent corporation owns all or most of the capital stock of the subsidiary;
mind, will or existence of its own. The mortgage deed transaction attacked as a basis for piercing the corporate veil was a transaction that 2. The parent and subsidiary corporations have common directors or officers;
was an offshoot, a derivative, of the mortgages earlier constituted in the Promissory Notes dated October 2, 1992. But these Promissory 3. The parent corporation finances the subsidiary;
Notes with mortgage were executed by GHI with APT in the name of MMC, in a full privatization process. It appears that if there was any 4. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation;
control or domination exercised over MMC, it was APT, not GHI, that wielded it. Neither can we conclude that the constitution of the loan 5. The subsidiary has grossly inadequate capital;
nearly four (4) years prior to NAMAWU’s notice of strike could have been the proximate cause of the injury of NAMAWU for having been 6. The parent corporation pays the salaries and other expenses or losses of the subsidiary;
deprived of MMC’s corporate assets. 7. The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the
parent corporation;
PEA-PTGWO vs NLRC 8. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of
No. 170689/170705 the parent corporation, or its business or financial responsibility is referred to as the parent corporation’s own;
17 March 2009 9. The parent corporation uses the property of the subsidiary as its own;
FACTS: Gonzales family owned two (2) corporations, namely, the PNEI and Macris Realty Corporation (Macris). PNEI provided transportation 10. The directors or executives of the subsidiary do not act independently in the interest of the subsidiary, but take their orders from the
services to the public. They incurred huge financial losses and creditors took over the management of PNEI and Maricris. Full ownership was parent corporation;
transferred to one of their creditors, the National Investment Development Corporation (NIDC), a subsidiary of the PNB 11. The formal legal requirements of the subsidiary are not observed.
Macris was later renamed as the National Realty Development Corporation (Naredeco) and eventually merged with the National None of the foregoing circumstances is present in the instant case. Thus, piercing of PNB-Madecor’s corporate veil is not warranted.
Warehousing Corporation (Nawaco) to form the new PNB subsidiary, the PNB-Madecor.
PNEI applied with the Securities and Exchange Commission (SEC) for suspension of payments. A management committee was thereafter
created which recommended to the SEC the sale of the company through privatization. As a cost-saving measure, the committee likewise
suggested the retrenchment of several PNEI employees. Eventually, PNEI ceased its operation. Along with the cessation of business came G.R. No. 166282 February 13, 2013
the various labor claims commenced by the former employees of PNEI where the latter obtained favorable decisions. HEIRS OF FE TAN UY (Represented by her heir, Mauling Uy Lim), Petitioners,
Labor Arbiter issued the Sixth Alias Writ of Execution commanding the NLRC Sheriffs to levy on the assets of PNEI due to its former vs.
employees. The sheriffs were likewise instructed to proceed against PNB, PNB-Madecor and Mega Prime. In implementing the writ, the INTERNATIONAL EXCHANGE BANK, Respondent.
sheriffs levied upon the four valuable pieces of real estate owned by PNB-Madecor. PNB, PNB-Madecor and Mega Prime filed motion to x-----------------------x
quash the writ and third-party claims. G.R. No. 166283
Labor Arbiter declared that the subject Pantranco properties were owned by PNB-Madecor. It being a corporation with a distinct and GOLDKEYDEVELOPMENT CORPORATION, Petitioner,
separate personality, its assets could not answer for the liabilities of PNEI. Considering, however, that PNB-Madecor executed a promissory vs.
note in favor of PNEI for P7,884,000.00, the writ of execution to the extent of the said amount was concerned was considered valid. INTERNATIONAL EXCHANGE BANK, Respondent.
PNB’s third-party claim – to nullify the writ on the ground that it has an interest in the Pantranco properties being a creditor of PNB- DECISION
Madecor, – on the other hand, was denied because it only had an inchoate interest in the properties. MENDOZA, J.:
On appeal to the NLRC, the same was denied and the Labor Arbiter’s disposition was affirmed. MR denied. Before the Court are two consolidated petitions for review on certiorari under Rule 45 of the 1997 Revised Rules of Civil Procedure, assailing
In view of the P7,884,000.00 debt of PNB-Madecor to PNEI, an auction sale was conducted over the Pantranco properties to satisfy the claim the August 16, 2004 Decision1 and the December 2, 2004 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 69817 entitled
of the PNEI employees, wherein CPAR Realty was adjudged as the highest bidder "International Exchange Bank v. Hammer Garments Corp., et al."
On appeal, CA rule in favor of Respondents upholding the separate and distinct personalities of Rs from PNEI. As such, there being no cogent The Facts
reason to pierce the veil of corporate fiction. MR denied. On several occasions, from June 23, 1997 to September 3, 1997, respondent International Exchange Bank (iBank), granted loans to Hammer
ISSUE: Whether former PNEI employees can attach the properties of PNB, PNB-Madecor and Mega Prime to satisfy their unpaid labor claims Garments Corporation (Hammer), covered by promissory notes and deeds of assignment, in the following amounts:3
against PNEI. Date of Promissory Note Amount
DECISION: No. First, the subject property is not owned by the judgment debtor, that is, PNEI. Second, PNB, PNB-Madecor and Mega Prime
are corporations with personalities separate and distinct from that of PNEI. June 23, 1997 P 5,599,471.33
The general rule is that a corporation has a personality separate and distinct from those of its stockholders and other corporations to which July 24, 1997 2,700,000.00
it may be connected. This is a fiction created by law for convenience and to prevent injustice. July 25, 1997 2,300,000.00
Clearly, what can be inferred from the earlier cases is that the doctrine of piercing the corporate veil applies only in three (3) basic areas,
namely: August 1, 1997 2,938,505.04
 August 1, 1997 3,361,494.96
August 14, 1997 980,000.00
August 21, 1997 2,527,200.00
August 21, 1997 3,146,715.00
September 3, 1997 1,385,511.75
Total ₱24,938,898.08
These were made pursuant to the Letter-Agreement,4 dated March 23, 1996, between iBank and Hammer, represented by its President and
General Manager, Manuel Chua (Chua) a.k.a. Manuel Chua Uy Po Tiong, granting Hammer a P 25 Million-Peso Omnibus Line.5 The loans
were secured by a P 9 Million-Peso Real Estate Mortgage6executed on July 1, 1997 by Goldkey Development Corporation (Goldkey) over
several of its properties and a P 25 Million-Peso Surety Agreement7 signed by Chua and his wife, Fe Tan Uy (Uy), on April 15, 1996.
As of October 28, 1997, Hammer had an outstanding obligation of ₱25,420,177.62 to iBank.8 Hammer defaulted in the payment of its loans,
prompting iBank to foreclose on Goldkey’s third-party Real Estate Mortgage. The mortgaged properties were sold for P 12 million during the
foreclosure sale, leaving an unpaid balance of P 13,420,177.62.9 For failure of Hammer to pay the deficiency, iBank filed a Complaint10 for
sum of money on December 16, 1997 against Hammer, Chua, Uy, and Goldkey before the Regional Trial Court, Makati City (RTC).11
Despite service of summons, Chua and Hammer did not file their respective answers and were declared in default. In her separate answer,
Uy claimed that she was not liable to iBank because she never executed a surety agreement in favor of iBank. Goldkey, on the other hand,
also denies liability, averring that it acted only as a third-party mortgagor and that it was a corporation separate and distinct from Hammer.12
Meanwhile, iBank applied for the issuance of a writ of preliminary attachment which was granted by the RTC in its December 17, 1997
Order.13 The Notice of Levy on Attachment of Real Properties, dated July 15, 1998, covering the properties under the name of Goldkey, was
sent by the sheriff to the Registry of Deeds of Quezon City.14
The RTC, in its Decision,15 dated December 27, 2000, ruled in favor of iBank. While it made the pronouncement that the signature of Uy on
the Surety Agreement was a forgery, it nevertheless held her liable for the outstanding obligation of Hammer because she was an officer and
stockholder of the said corporation. The RTC agreed with Goldkey that as a third-party mortgagor, its liability was limited to the properties
mortgaged. It came to the conclusion, however, that Goldkey and Hammer were one and the same entity for the following reasons: (1) both
were family corporations of Chua and Uy, with Chua as the President and Chief Operating Officer; (2) both corporations shared the same
office and transacted business from the same place, (3) the assets of Hammer and Goldkey were co-mingled; and (4) when Chua absconded,
both Hammer and Goldkey ceased to operate. As such, the piercing of the veil of corporate fiction was warranted. Uy, as an officer and
stockholder of Hammer and Goldkey, was found liable to iBank together with Chua, Hammer and Goldkey for the deficiency of
₱13,420,177.62.
Aggrieved, the heirs of Uy and Goldkey (petitioners) elevated the case to the CA. On August 16, 2004, it promulgated its decision affirming
the findings of the RTC. The CA found that iBank was not negligent in evaluating the financial stability of Hammer. According to the appellate
court, iBank was induced to grant the loan because petitioners, with intent to defraud the bank, submitted a falsified Financial Report for
1996 which incorrectly declared the assets and cashflow of Hammer.16 Because petitioners acted maliciously and in bad faith and used the
corporate fiction to defraud iBank, they should be treated as one and the same as Hammer.17
Hence, these petitions filed separately by the heirs of Uy and Goldkey. On February 9, 2005, this Court ordered the consolidation of the two
cases.18
The Issues
Petitioners raise the following issues:
Whether or not a trial court, under the facts of this case, can go out of the issues raised by the pleadings;19
Whether or not there is guilt by association in those cases where the veil of corporate fiction may be pierced;20 and
Whether or not the "alter ego" theory in disregarding the corporate personality of a corporation is applicable to Goldkey. 21
Simplifying the issues in this case, the Court must resolve the following: (1) whether Uy can be held liable to iBank for the loan obligation of
Hammer as an officer and stockholder of the said corporation; and (2) whether Goldkey can be held liable for the obligation of Hammer for
being a mere alter ego of the latter.
Corporation law; Personal liability of a director or officer. Before a director or officer of a corporation can be held personally liable for
corporate obligations, however, the following requisites must concur: (1) the complainant must allege in the complaint that the director or
officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the
complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.
While it is true that the determination of the existence of any of the circumstances that would warrant the piercing of the veil of corporate
fiction is a question of fact which cannot be the subject of a petition for review on certiorari under Rule 45, this Court can take cognizance of
factual issues if the findings of the lower court are not supported by the evidence on record or are based on a misapprehension of facts.
In this case, petitioners are correct to argue that it was not alleged, much less proven, that Uy committed an act as an officer of Hammer
that would permit the piercing of the corporate veil. A reading of the complaint reveals that with regard to Uy, iBank did not demand that
she be held liable for the obligations of Hammer because she was a corporate officer who committed bad faith or gross negligence in the
performance of her duties such that the lifting of the corporate mask would be merited. What the complaint simply stated is that she,
together with her errant husband Chua, acted as surety of Hammer, as evidenced by her signature on the Surety Agreement which was later
found by the RTC to have been forged.
Considering that the only basis for holding Uy liable for the payment of the loan was proven to be a falsified document, there was no
sufficient justification for the RTC to have ruled that Uy should be held jointly and severally liable to iBank for the unpaid loan of Hammer.
Neither did the CA explain its affirmation of the RTC’s ruling against Uy. The Court cannot give credence to the simplistic declaration of the
RTC that liability would attach directly to Uy for the sole reason that she was an officer and stockholder of Hammer.
LANUZA JR. VS BF CORPORATION (G.R. NO. 174938 OCTOBER 1, 2014)
Lanuza Jr. vs BF Corporation
G.R. No. 174938 October 1, 2014
Facts: In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against Shangri-La and the members of its board of
directors: Alfredo C. Ramos, Rufo B.Colayco, Antonio O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III, and Benjamin C. Ramos. BF
Corporation alleged in its complaint that on December 11, 1989 and May 30, 1991, it entered into agreements with Shangri-La wherein it
undertook to construct for Shangri-La a mall and a multilevel parking structure along EDSA.Shangri-La had been consistent in paying BF
Corporation in accordance with its progress billing statements. However, by October 1991, Shangri-La started defaulting in payment. BF
Corporation alleged that Shangri-La induced BF Corporation to continue with the construction of the buildings using its own funds and credit
despite Shangri-La’s default. According to BF Corporation, Shangri-La misrepresented that it had funds to pay for its obligations with BF
Corporation, and the delay in payment was simply a matter of delayed processing of BF Corporation’s progress billing statements. BF
Corporation eventually completed the construction of the buildings. Shangri-La allegedly took possession of the buildings while still owing BF
Corporation an outstanding balance. BF Corporation alleged that despite repeated demands, Shangri-La refused to pay the balance owed
to it.It also alleged that the Shangri-La’s directors were in bad faith in directing Shangri-La’s affairs. Therefore, they should be held jointly and
severally liable with Shangri-La for its obligations as well as for the damages that BF Corporation incurred as a result of Shangri-La’s default.
On August 3, 1993, Shangri-La, Alfredo C. Ramos, Rufo B. Colayco, Maximo G. Licauco III, and Benjamin C. Ramos filed a motion to suspend
the proceedings in view of BF Corporation’s failure to submit its dispute to arbitration, in accordance with the arbitration clause provided in
its contract. Petitioners filed their comment on Shangri-La’s and BF Corporation’s motions, praying that they be excluded from the arbitration
proceedings for being non-parties to Shangri-La’s and BF Corporation’s agreement.
Issue: Whether or not petitioners as directors of Shangri-La is personally liable for the contractual obligations entered into by the
corporation.
Held: No. Because a corporation’s existence is only by fiction of law, it can only exercise its rights and powers through its directors, officers,
or agents, who are all natural persons. A corporation cannot sue or enter into contracts without them.
A consequence of a corporation’s separate personality is that consent by a corporation through its representatives is not consent of the
representative, personally. Its obligations, incurred through official acts of its representatives, are its own. A stockholder, director, or
representative does not become a party to a contract just because a corporation executed a contract through that stockholder, director or
representative.
Hence, a corporation’s representatives are generally not bound by the terms of the contract executed by the corporation. They are not
personally liable for obligations and liabilities incurred on or in behalf of the corporation.
A submission to arbitration is a contract. As such, the Agreement, containing the stipulation on arbitration, binds the parties thereto, as well
as their assigns and heirs.
When there are allegations of bad faith or malice against corporate directors or representatives, it becomes the duty of courts or tribunals
to determine if these persons and the corporation should be treated as one. Without a trial, courts and tribunals have no basis for
determining whether the veil of corporate fiction should be pierced. Courts or tribunals do not have such prior knowledge. Thus, the courts
or tribunals must first determine whether circumstances exist towarrant the courts or tribunals to disregard the distinction between the
corporation and the persons representing it. The determination of these circumstances must be made by one tribunal or court in a
proceeding participated in by all parties involved, including current representatives of the corporation, and those persons whose
personalities are impliedly the sameas the corporation. This is because when the court or tribunal finds that circumstances exist warranting
the piercing of the corporate veil, the corporate representatives are treated as the corporation itself and should be held liable for corporate
acts. The corporation’s distinct personality is disregarded, and the corporation is seen as a mere aggregation of persons undertaking a
business under the collective name of the corporation.
A corporation is an artificial entity created by fiction of law. This means that while it is not a person, naturally, the law gives it a distinct
personality and treats it as such. A corporation, in the legal sense, is an individual with a personality that is distinct and separate from other
persons including its stockholders, officers, directors, representatives, and other juridical entities. The law vests in corporations
rights,powers, and attributes as if they were natural persons with physical existence and capabilities to act on their own. For instance, they
have the power to sue and enter into transactions or contracts. Section 36 of the Corporation Code enumerates some of a corporation’s
powers, thus:
Section 36. Corporate powers and capacity.– Every corporation incorporated under this Code has the power and capacity: 1. To sue and be
sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the
certificate ofincorporation; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in accordance with the provisions of
this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6.
In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code;
and to admit members to the corporation if it be a non-stock corporation; 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 the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and
the Constitution; 8. To enter into merger or consolidation with other corporations as provided in this Code; 9. To make reasonable donations,
including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10. To establish
pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers
as may be essential or necessary to carry out its purpose or purposes as stated in its articles of incorporation.
G.R. No. 182770 September 17, 2014
WPM INTERNATIONAL TRADING, INC. and WARLITO P. MANLAPAZ, Petitioners,
vs.
FE CORAZON LABAYEN, Respondent.
DECISION
BRION, J.:
We review in this petition for review on certiorari1 the decision2 dated September 28, 2007 and the resolution3 dated April 28, 2008 of the
Court of Appeals (CA) in CA-G.R. CV No. 68289 that affirmed with modification the decision4 of the Regional Trial Court (RTC), Branch 77,
Quezon City.
The Factual Background
The respondent, Fe Corazon Labayen, is the owner of H.B.O. Systems Consultants, a management and consultant firm. The petitioner, WPM
International Trading, Inc. (WPM), is a domestic corporation engaged in the restaurant business, while Warlito P. Manlapaz (Manlapaz) is its
president.
Sometime in 1990, WPM entered into a management agreement with the respondent, by virtue of which the respondent was authorized to
operate, manage and rehabilitate Quickbite, a restaurant owned and operated by WPM. As part of her tasks, the respondent looked for a
contractor who would renovate the two existing Quickbite outlets in Divisoria, Manila and Lepanto St., University Belt, Manila. Pursuant to
the agreement, the respondent engaged the services of CLN Engineering Services (CLN) to renovate Quickbite-Divisoria at the cost of
₱432,876.02.
On June 13, 1990, Quickbite-Divisoria’s renovation was finally completed, and its possession was delivered to the respondent. However, out
of the ₱432,876.02 renovation cost, only the amount of ₱320,000.00 was paid to CLN, leaving a balance of ₱112,876.02.
Complaint for Sum of Money (Civil Case No. Q-90-7013)
On October 19, 1990, CLN filed a complaint for sum of money and damages before the RTC against the respondent and Manlapaz, which was
docketed as Civil Case No. Q-90-7013. CLN later amended the complaint to exclude Manlapaz as defendant. The respondent was declared in
default for her failure to file a responsive pleading.
The RTC, in its January 28, 1991 decision, found the respondent liable to pay CLN actual damages inthe amount of ₱112,876.02 with 12%
interest per annum from June 18,1990 (the date of first demand) and 20% of the amount recoverable as attorney’s fees.
Complaint for Damages (Civil Case No. Q-92-13446)
Thereafter, the respondent instituted a complaint for damages against the petitioners, WPM and Manlapaz. The respondent alleged that in
Civil Case No. Q-90-7013, she was adjudged liable for a contract that she entered into for and in behalf of the petitioners, to which she
should be entitled to reimbursement; that her participation in the management agreement was limited only to introducing Manlapaz to
Engineer Carmelo Neri (Neri), CLN’s general manager; that it was actually Manlapaz and Neri who agreed on the terms and conditions of the
agreement; that when the complaint for damages was filed against her, she was abroad; and that she did not know of the case until she
returned to the Philippines and received a copy of the decision of the RTC.
In her prayer, the respondent sought indemnification in the amount of ₱112,876.60 plus interest at 12%per annum from June 18, 1990 until
fully paid; and 20% of the award as attorney’s fees. She likewise prayed that an award of ₱100,000.00 as moral damages and ₱20,000.00 as
attorney’s fees be paid to her.
In his defense, Manlapaz claims that it was his fellow incorporator/director Edgar Alcansajewho was in-charge with the daily operations of
the Quickbite outlets; that when Alcansaje left WPM, the remaining directors were compelled to hire the respondent as manager; that the
respondent had entered intothe renovation agreement with CLN in her own personal capacity; that when he found the amount quoted by
CLN too high, he instructed the respondent to either renegotiate for a lower price or to look for another contractor; that since the
respondent had exceeded her authority as agent of WPM, the renovation agreement should only bind her; and that since WPM has a
separate and distinct personality, Manlapaz cannot be made liable for the respondent’s claim.
Manlapaz prayed for the dismissal of the complaint for lack of cause of action, and by way of counterclaim, for the award of ₱350,000.00 as
moral and exemplary damages and ₱50,000.00 attorney’s fees.
The RTC, through an order dated March 2, 1993 declared WPM in default for its failure to file a responsive pleading.
The Decision of the RTC
In its decision, the RTC held that the respondent is entitled to indemnity from Manlapaz. The RTC found that based on the records, there is a
clear indication that WPM is a mere instrumentality or business conduit of Manlapaz and as such, WPM and Manlapaz are considered one
and the same. The RTC also found that Manlapaz had complete control over WPM considering that he is its chairman, president and
treasurer at the same time. The RTC thus concluded that Manlapaz is liable in his personal capacity to reimburse the respondent the amount
she paid to CLN inconnection with the renovation agreement.
The petitioners appealed the RTC decision with the CA. There, they argued that in view of the respondent’s act of entering into a renovation
agreement with CLN in excess of her authority as WPM’s agent, she is not entitled to indemnity for the amount she paid. Manlapaz also
contended that by virtue ofWPM’s separate and distinct personality, he cannot be madesolidarily liable with WPM.
The Ruling of the Court of Appeals
On September 28, 2007, the CA affirmed, with modification on the award of attorney’s fees, the decision of the RTC.The CA held that the
petitioners are barred from raising as a defense the respondent’s alleged lack of authority to enter into the renovation agreement in view of
their tacit ratification of the contract.
The CA likewise affirmed the RTC ruling that WPM and Manlapaz are one and the same based on the following: (1) Manlapaz is the principal
stockholder of WPM; (2) Manlapaz had complete control over WPM because he concurrently held the positions of president, chairman of
the board and treasurer, in violation of the Corporation Code; (3) two of the four other stockholders of WPM are employed by Manlapaz
either directly or indirectly; (4) Manlapaz’s residence is the registered principal office of WPM; and (5) the acronym "WPM" was derived
from Manlapaz’s initials. The CA applied the principle of piercing the veil of corporate fiction and agreed with the RTC that Manlapaz cannot
evade his liability by simply invoking WPM’s separate and distinct personality.
After the CA's denial of their motion for reconsideration, the petitioners filed the present petition for review on certiorari under Rule 45 of
the Rules of Court.
The Petition
The petitioners submit that the CA gravely erred in sustaining the RTC’s application of the principle of piercing the veil of corporate fiction.
They argue that the legal fiction of corporate personality could only be discarded upon clear and convincing proof that the corporation is
being used as a shield to avoid liability or to commit a fraud. Since the respondent failed to establish that any of the circumstances that
would warrant the piercing is present, Manlapaz claims that he cannot be made solidarily liable with WPM to answerfor damages allegedly
incurred by the respondent.
The petitioners further argue that, assuming they may be held liable to reimburse to the respondentthe amount she paid in Civil Case No. Q-
90-7013, such liability is only limited to the amount of ₱112,876.02, representing the balance of the obligation to CLN, and should not
include the twelve 12% percent interest, damages and attorney’s fees.
The Issues
The core issues are: (1) whether WPM is a mere instrumentality, alter-ego, and business conduit of Manlapaz; and (2) whether Manlapaz is
jointly and severally liable with WPM to the respondent for reimbursement, damages and interest.
Our Ruling
We find merit in the petition.
We note, at the outset, that the question of whether a corporation is a mere instrumentality or alter-ego of another is purely one of
fact.5 This is also true with respect to the question of whether the totality of the evidence adduced by the respondentwarrants the
application of the piercing the veil of corporate fiction doctrine.6
Generally, factual findings of the lower courts are accorded the highest degree of respect, if not finality. When adopted and confirmed by
the CA, these findings are final and conclusive and may not be reviewed on appeal,7save in some recognized exceptions8 among others,
when the judgment is based on misapprehension of facts.
We have reviewed the records and found that the application of the principle of piercing the veil of corporate fiction is unwarranted in the
present case.
On the Application ofthe Principle of Piercing the Veil of Corporate Fiction
The rule is settled that a corporation has a personality separate and distinct from the persons acting for and in its behalf and, in general,
from the people comprising it.9 Following this principle, the obligations incurred by the corporate officers, orother persons acting as
corporate agents, are the direct accountabilities ofthe corporation they represent, and not theirs. Thus, a director, officer or employee of a
corporation is generally not held personally liable for obligations incurred by the corporation;10 it is only in exceptional circumstances that
solidary liability will attach to them.
Incidentally, the doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when the separate and distinct
corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing obligation;
b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or c) is used in alter ego cases,
i.e., where a corporation is essentially 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 so conducted as to make it merely aninstrumentality, agency, conduit or adjunct of another
corporation.11
Piercing the corporate veil based on the alter ego theory requires the concurrence of three elements, namely:
 (1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
(2) Such control must have beenused by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or
other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of.
The absence of any ofthese elements prevents piercing the corporate veil.12
In the present case, the attendantcircumstances do not establish that WPM is a mere alter ego of Manlapaz.
Aside from the fact that Manlapaz was the principal stockholder of WPM, records do not show that WPM was organized and controlled, and
its affairs conducted in a manner that made it merely an instrumentality, agency, conduit or adjunct ofManlapaz. As held in Martinez v.
Court of Appeals,13 the mere ownership by a singlestockholder of even all or nearly all of the capital stocks ofa corporation is not by itself a
sufficient ground to disregard the separate corporate personality. To disregard the separate juridical personality of a corporation, the
wrongdoing must be clearly and convincingly established.14
Likewise, the records of the case do not support the lower courts’ finding that Manlapaz had control or domination over WPM or its
finances. That Manlapaz concurrentlyheld the positions of president, chairman and treasurer, or that the Manlapaz’s residence is the
registered principal office of WPM, are insufficient considerations to prove that he had exercised absolutecontrol over WPM.
In this connection, we stress thatthe control necessary to invoke the instrumentality or alter ego rule is not majority or even complete stock
control but such domination of finances, policies and practices that the controlled corporation has, so tospeak, no separate mind, will or
existence of its own, and is but a conduit for its principal. The control must be shown to have been exercised at the time the acts complained
of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made.
Here, the respondent failed to prove that Manlapaz, acting as president, had absolute control over WPM.1âwphi1 Even granting that he
exercised a certain degree of control over the finances, policies and practices of WPM, in view of his position as president, chairman and
treasurer of the corporation, such control does not necessarily warrant piercing the veil of corporate fiction since there was not a single
proof that WPM was formed to defraud CLN or the respondent, or that Manlapaz was guilty of bad faith or fraud.
On the contrary, the evidence establishes that CLN and the respondent knew and acted on the knowledgethat they were dealing with WPM
for the renovation of the latter’s restaurant, and not with Manlapaz. That WPM later reneged on its monetary obligation to CLN, resulting to
the filing of a civil case for sum of money against the respondent, does not automatically indicate fraud, in the absence of any proof to
support it.
This Court also observed that the CA failed to demonstrate how the separate and distinct personalityof WPM was used by Manlapaz to
defeat the respondent’s right for reimbursement. Neither was there any showing that WPM attempted to avoid liability or had no property
against which to proceed.
Since no harm could be said to have been proximately caused by Manlapaz for which the latter could be held solidarily liable with WPM, and
considering that there was no proof that WPM had insufficient funds, there was no sufficient justification for the RTC and the CA to have
ruled that Manlapaz should be held jointly and severally liable to the respondent for the amount she paid to CLN. Hence, only WPM is liable
to indemnify the respondent.
Finally, we emphasize that the piercing of the veil of corporate fiction is frowned upon and thus, must be done with caution.15 It can only be
done if it has been clearly established that the separate and distinct personality of the corporation is used to justify a wrong, protect fraud,
or perpetrate a deception. The court 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 its rights; it cannot be presumed.
On the Award of Moral Damages
On the award of moral damages, we find the same in order in view of WPM's unjustified refusal to pay a just debt. Under Article 2220 of the
New Civil Code,16 moral damages may be awarded in cases of a breach of contract where the defendant acted fraudulently or in bad faith or
was guilty of gross negligence amounting to bad faith.
In the present case, when payment for the balance of the renovation cost was demanded, WPM, instead of complying with its obligation,
denied having authorized the respondent to contract in its behalf and accordingly refused to pay. Such cold refusal to pay a just debt
amounts to a breach of contract in bad faith, as contemplated by Article 2220. Hence, the CA's order to pay moral damages was in order.
WHEREFORE, in light of the foregoing, the decision dated September 28, 2007 of the Court of Appeals in CA-G.R. CV No. 68289 is MODIFIED
and.that petitioner Warlito P. Manlapaz is ABSOLVED from any liability under the renovation agreement.
SO ORDERED.
G.R. No. 198436, July 08, 2015
PIONEER INSURANCE SURETY CORPORATION, Petitioner, v. MORNING STAR TRAVEL & TOURS, INC., ESTELITA CO WONG, BENNY H.
WONG, ARSENIO CHUA, SONNY CHUA, AND WONG YAN TAK, Respondents.
DECISION
LEONEN, J.:
As a general rule, a corporation has a separate and distinct personality from those who represent it.1 Its officers are solidarily liable only
when exceptional circumstances exist, such as cases enumerated in Section 31 of the Corporation Code.2 The liability of the officers must be
proven by evidence sufficient to overcome the burden of proof borne by the plaintiff.
This case originated from a Complaint3 for Collection of Sum of Money and Damages filed by Pioneer Insurance & Surety Corporation
(Pioneer) against Morning Star Travel & Tours, Inc. (Morning Star) for the amounts Pioneer paid the International Air Transport Association
under its credit insurance policy. The amounts of P100,479,171.59 and US$457,834.14 represent Morning Star's overdue remittances to the
International Air Transport Association.4redarclaw
Pioneer filed this Petition for Review5 assailing the Court of Appeals' February 28, 2011 Decision6 "only insofar as it absolved the individual
respondents of their joint and solidary liability to petitioner[,]"7 and August 31, 2011 Resolution8 denying reconsideration.
Morning Star is a travel and tours agency with Benny Wong, Estelita Wong, Arsenio Chua, Sonny Chua, and Wong Yan Tak as shareholders
and members of the board of directors.9redarclaw
International Air Transport Association is a Canadian corporation licensed to do business in the Philippines "to promote safe, regular and
economical air transport for all people, among others."10redarclaw
International Air Transport Association appointed Morning Star as an accredited travel agent.11 Morning Star "avail[ed] of the privilege of
getting on credit... air transport tickets from various airline companies [to be sold] to passengers at prices fixed by the airline
companies[.]"12redarclaw
Morning Star and International Air Transport Association entered a Passenger Sales Agency Agreement such that Morning Star must report
all air transport ticket sales to International Air Transport Association and account all payments received through the centralized system
called Billing and Settlement Plan.13Morning Star only holds in trust all monies collected as these belong to the airline companies.14redarclaw
International Air Transport Association obtained a Credit Insurance Policy from Pioneer to assure itself of payments by accredited travel
agents for ticket sales and monies due to the airline companies under the Billing and Settlement Plan.15 The policy was for the period from
November 1, 2001 to December 31, 2002, renewed for the period from January 1, 2003 to December 31, 2003.16redarclaw
The policy was made known to the accredited travel agents. Morning Star, through its President, Benny Wong, was among those that
declared itself liable to indemnify Pioneer for any and all claims under the policy. He executed a registration form under the Credit Insurance
Program for BSP-Philippines Agents.17redarclaw
Morning Star had an accrued billing of P49,051,641.80 and US$325,865.35 for the period from December 16, 2002 to December 31, 2002. It
failed to remit these amounts through the Billing and Settlement Plan, prompting the International Air Transport Association to send a letter
dated January 17, 2003 advising on the overdue remittance.18redarclaw
International Air Transport Association again declared Morning Star in default by a letter dated January 20, 2003 for its overdue account
covering the period from January 1, 2003 to January 20, 2003.19redarclaw
Pursuant to the credit insurance policies, International Air Transport Association demanded from Pioneer the sums of P109,728,051.00 and
US$457,834.14 representing Morning Star's overdue account as of April 30, 2003. Pioneer investigated, ascertained, and validated the
claims, then paid International Air Transport Association the amounts of P100,479,171.59 and US$457,834.14.20redarclaw
Consequently, Pioneer demanded these amounts from Morning Star through a letter dated September 23, 2003.21 International Air
Transport Association executed in Pioneer's favor a Release of Claim and Subrogation Receipt on December 23, 2003.22redarclaw
On November 10, 2005, Pioneer filed a Complaint for Collection of Sum of Money and Damages against Morning Star and its shareholders
and directors.23redarclaw
Morning Star, Benny Wong, and Estelita Wong were served with summons and a copy of the Complaint on November 22, 2005, while
Arsenio Chua, Sonny Chua, and Wong Yan Tak were unserved.24redarclaw
The trial court granted Pioneer's Motion to Declare Respondents in Default for failure to file an Answer within the period.25 Pioneer
presented its evidence ex-parte.26redarclaw
Meanwhile, Pioneer filed an Ex-Parte Motion for Issuance of Alias Summons since Morning Star was previously served through substituted
service. The trial court granted the Motion, and alias summons was served on February 5, 2007. Upon motion, Morning Star was declared in
default for failure to file an Answer within the period.27redarclaw
On June 28, 2007, Morning Star filed a Motion for Leave of Court to File Attached Answer explaining that it only received a copy of the
Complaint on February 5, 2007.28 Its counsel also alleged that he was retained only on June 22, 2007.29 The trial court denied the Motion on
July 23, 2007, and also denied reconsideration.30redarclaw
The Regional Trial Court in its Decision31 dated November 9, 2007 ruled in favor of Pioneer and ordered respondents to jointly and severally
pay Pioneer:LawlibraryofCRAlaw
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WHEREFORE PREMISES CONSIDERED, judgment is hereby rendered in favor of the plaintiff as against the defendants ordering the latter to
jointly and severally pay the following amount:LawlibraryofCRAlaw
1. One Hundred Million Four Hundred Seventy Nine Thousand One Hundred Seventy One Pesos and Fifty Nine
(Php100,479,171.59) and Four Hundred Fifty Seven Thousand Eight Hundred Thirty Four Dollars and 14/100
(US$457,834.14), with interest at 12% per annum from September 23, 2003 until the sum is fully
paid;chanRoblesvirtualLawlibrary
2. Php100,000.00 as attorney's fees;chanRoblesvirtualLawlibrary
3. Php100,000.00 as exemplary damages;chanRoblesvirtualLawlibrary
4. Php200,000.00 as litigation expenses[;]
5. costs of suit.
SO ORDERED.32
The Court of Appeals, in its Decision dated February 28, 2011, affirmed the trial court with modification in that only Morning Star was liable
to pay petitioner:LawlibraryofCRAlaw
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WHEREFORE, premises considered, the instant Appeal is DENIED. Accordingly, the assailed 9 November 2007 Decision of the Regional Trial
Court of Makati City, Branch 143 in Civil Case No. 05-993 is AFFIRMED with MODIFICATION. Insofar as the trial court ordered Defendants-
Appellants Estelita Co Wong, Benny H. Wong, Arsenio Chua, Sonny Chua and Wong Yan Tak to jointly and severally pay the amounts
awarded to Plaintiff-Appellee, the same is deleted. Only Morning Star is held personally liable for the payment thereof. Further, exemplary
damages and attorney's fees are likewise deleted for lack of basis.
SO ORDERED.cralawlawlibrary33
The Court of Appeals denied Pioneer's Motion for Partial Reconsideration.34 Thus, Pioneer filed this Petition.
Pioneer submits that its Petition falls under the exceptions to the general rule that petitions for review may raise only questions of
law.35 Pioneer raises conflicting findings and conclusions by the lower courts regarding solidary liability, and misapprehension of facts by the
Court of Appeals.36redarclaw
Pioneer argues that "the individual respondents were, at the very least, grossly negligent in running the affairs of respondent Morning Star
by knowingly allowing it to amass huge debts to [International Air Transport Association] despite its financial distress, thus, giving sufficient
ground for the court to pierce the corporate veil and hold said individual respondents personally liable."37 It cites Section 31 of the
Corporation Code on the liability of directors "guilty of gross negligence or bad faith in directing the affairs of the corporation[.]"38redarclaw
Pioneer also cites jurisprudence39 on the requisites for the doctrine of piercing the corporate veil to apply.40 It submits that all requisites are
present, thus, the individual respondents should be held solidarity liable with Morning Star.41 It cites at length the testimony of its witness
Atty. Vincenzo Nonato M. Taggueg (Atty. Taggueg)42 that based on Morning Star's General Information Sheet and financial statements,
Morning Star "has been accumulating losses as early as 1998 continuing to 1999 and 2000 resulting to a deficit of Php26,168,1768.00 [sic] as
of December 31, 2000[.]"43redarclaw
Pioneer contends that the abnormally large indebtedness to International Air Transport Association was incurred in fraud and bad faith, with
Morning Star having no intention to pay its debt.44 It cites Oria v. McMicking45 on the badges of fraud.46 Pioneer then enumerates "the
unmistakable badges of fraud and deceit committed by individual respondents"47 such as the fact that Morning Star had no assets,48 but the
two corporations also "controlled and managed by the individual respondents were doing relatively well [at] the time . . . Morning Star was
incurring huge losses[.]"49 Moreover, a new travel agency called Morning Star Tour Planners, Inc. now operates at the Morning Star's former
principal place of business in Pedro Gil, Manila, with the children of individual respondents as its stockholders, directors, and
officers.50redarclaw
Respondents counter with the general rule clothing corporations with personality separate and distinct from their officers and
stockholders.51 They submit that "[m]ere sweeping allegations that officers acted in bad faith because it incurred obligations it cannot pay
will not hold any water."52 Respondents argue that Pioneer failed to prove bad faith, relying only on Atty. Taggueg's testimony, but "Mr.
Taggueg admitted that his knowledge about the defendant Morning Star was merely based on his assumptions and his examination of the
[Securities and Exchange Commission] documents."53redarclaw
The issues for resolution are:LawlibraryofCRAlaw
First, whether this case involves an exception to the general rule that petitions for review are limited to questions of law; and
Second, whether the doctrine of piercing the corporate veil applies to hold the individual respondents solidarily liable with respondent
Morning Star Travel and Tours, Inc. to pay the award in favor of petitioner Pioneer Insurance & Surety Corporation.
I
Only questions of law may be raised in a petition for review.54 Factual findings of the Court of Appeals are generally "final and conclusive,
and cannot be reviewed on appeal by [this court], provided they are borne out by the record or based on substantial evidence."55redarclaw
Issues such as whether the separate and distinct personality of a corporation was used for fraudulent ends, or whether the evidence
warrants a piercing of the corporate veil, involve questions of fact.56redarclaw
Jurisprudence established exceptions from the general rule against a factual review by this court. These exceptions include cases when the
judgment appears to be based on a "patent misappreciation of facts."57redarclaw
Petitioner invokes this exception in alleging that "the conflicting findings and conclusions between the Court of Appeals and the trial court
insofar as the solidary liability of respondents to pay petitioner and the misapprehensions of facts by the Court of Appeals constrains
petitioner to raise both questions of fact and law in the Petition."58redarclaw
In ruling against the solidary liability of the individual respondents with respondent Morning Star, the Court of Appeals discussed that "the
trial court merely stated in the dispositive portion thereof that Defendants-Appellants are ordered to pay Plaintiff-Appellee jointly and
severally the judgment award without discussing in the body of the decision the reason for such conclusion."59redarclaw
The Court of Appeals then enumerated the exceptional circumstances warranting solidary liabilities by corporate agents based on
jurisprudence, and found none to be present in this case.60redarclaw
We affirm the Court of Appeals.
II
The law vests corporations with a separate and distinct personality from those that represent these corporations.61redarclaw
The corporate legal structure draws its "economic superiority"62 from key features such as a separate corporate personality. Unlike other
business associations such as partnerships, the corporate framework encourages investment by allowing even small capital contributors to
be part of a big business endeavor made possible by the aggregation of their capital funds.63 The consequent limited liability feature, since
corporate assets will answer for corporate debts, also proves attractive for investors. However, this legal structure should not be abused.
A separate corporate personality shields corporate officers acting in good faith and within their scope of authority from personal liability
except for situations enumerated by law and jurisprudence,64 thus:LawlibraryofCRAlaw
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Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a
rule, only when —
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'1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict
of interest, resulting in damages to the corporation, its stockholders or other persons;
'2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his
written objection thereto;
'3. He agrees to hold himself personally and solidarity liable with the corporation; or
'4. He is made, by a specific provision of law, to personally answer for his corporate action.'65
The first exception comes from Section 31 of the Corporation Code:LawlibraryofCRAlaw
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SECTION 31. Liability of Directors, Trustees or Officers. — Directors or trustees who wilfully 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. (Emphasis supplied)
Petitioner imputes gross negligence and bad faith on the part of the individual respondents for incurring the huge indebtedness to
International Air Transport Association.66redarclaw
Bad faith "imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, not simply bad judgment or
negligence."67 "[I]t means breach of a known duty through some motive or interest or ill will; it partakes of the nature of fraud."68redarclaw
The trial court gave weight to its finding that respondent Morning Star still availed itself of loans and/or obligations with International Air
Transport Association despite its financial standing of operating at a loss:LawlibraryofCRAlaw
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Based on the plaintiff's examination of the financial statements submitted by the defendant Morning Star with the Securities and Exchange
Commission (SEC) for the years 2000 and 2001 with comparative figures for the years ending 1998, 1999 and 2000, herein defendant
corporation has been accumulating losses as early as 1998 continuing to 1999 and 2000 resulting to a deficit of Php26,168,176.80 as of
December 31, 2000. It was also shown that for the prior years of 1998 and 1999, defendant Morning Star incurred a deficit of
Php3,910,763.00 as of December 31, 1998 and Php2,841,626.00 as of December 31, 1999 and in the Balance Sheet, it indicated therein the
defendants' total assets of Php150,579,421.00 while the total liabilities amounted to Php160,222,966.00, thereby making the defendant
Morning Star insolvent. Despite the fact that defendant Morning Star was already incurring losses as early as 1998 up to the year 2000,
the latter still contracted loans and/or obligations with IATA sometime in 2002 and which indebtedness ballooned to the huge amount of
Phpl09,728,051.00 and US$496,403.21 as of April 30, 2003, which obviously it could not pay considering its financial standing.
Further investigation by the plaintiff shows that it could not find any assets or properties in the name of defendant Morning Star because
even the land and the building where it held office was registered in the name of "Morning Star Management Ventures Corporation", as
evidenced by the certified true copies of the transfer certificates of title (TCT) nos. 192243 and 192244 in the name of Morning Star
Management Ventures Corporation and unlike the defendant Morning Star, which has practically the same officers and members of the
Board, has only an asset of Php125,392,960.00 and liabilities of Php4,306,702[.]00 and an income deficit of Php26,922,598.00 as of
December 31, 2001. Similarly, the Pic [']N Pac Mart, Inc., which has the same set of officers, said corporation has shown a total assets of
Php5,423,201.30 and liabilities/stockholders equity of Php5,423,201.30 but with a retained earnings of Php194,412[.]74 as of December 31,
1999. Plaintiff contends that in such a case, defendant Morning Star has used the separate and distinct corporate personality accorded to
it under the Corporation Code to commit said fraudulent transaction of incurring corporate debts and allow the herein individual
defendants to escape personal liability and placing the assets beyond the reach of the creditors. 69 (Emphasis supplied, citations omitted)
On the other hand, the Court of Appeals ruled that the general rule on separate corporate personality and against personal liability by
corporate officers applies since petitioner failed to prove bad faith amounting to fraud by the corporate officers:LawlibraryofCRAlaw
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The mere fact that Morning Star has been incurring huge losses and that it has no assets at the time it contracted large financial obligations
to IATA, cannot be considered that its officers, Defendants-Appellants Estelita Co Wong, Benny H. Wong, Arsenio Chua, Sonny Chua and
Wong Yan Tak, acted in bad faith or such circumstance would amount to fraud, warranting personal and solidary liability of its corporate
officers. The same is also true with the fact that Morning Star Management Ventures Corporation and Pic 'N Pac Mart, Inc., corporations
having the same set of officers as Morning Star, were doing relatively well during the time that the former incurred huge losses. Thus, only
Morning Star should be held personally liable to Plaintiff-Appellee, and not its corporate officers.70
Piercing the corporate veil in order to hold corporate officers personally liable for the corporation's debts requires that "the bad faith or
wrongdoing of the director must be established clearly and convincingly[as] [b]ad faith is never presumed."71redarclaw
III
Oria v. McMicking72 enumerates several badges of fraud. Petitioner argues the existence of the fourth to sixth badges:73
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1. The fact that the consideration of the conveyance is fictitious or is inadequate.
2. A transfer made by a debtor after suit has been begun and while it is pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially.
6. The fact that the transfer is made between father and son, when there are present other of the above circumstances.
7. The failure of the vendee to take exclusive possession of all the property.74 (Emphasis supplied)
Petitioner listed the following circumstances as constituting badges of fraud by the individual respondents:LawlibraryofCRAlaw
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Attention is drawn to the following badges of fraud by individual respondents to use the corporate fiction of respondent Morning Star as a
veil or cloak to insulate themselves from any liability to pay its indebtedness to [sic], to wit:LawlibraryofCRAlaw
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a. As members of the Board of Directors and at the same time, officers of respondent Morning Star, individual respondents Estelita Co Wong
(President and Member of the Board), Benny H. Wong (Chairman of the Board), Arsenio Chua (Member of the Board), Sonny Chua (Secretary
and Member of the Board) and Wong Yan Tak (Treasurer and Member of the Board) undoubtedly exercised complete control and direction
of the financial management and business operations of respondent Morning Star;
b. Similarly, the individual respondents are likewise in direct control of the management of two other corporations, Morning Star
Management Ventures Corp. and Pic 'N Pac Mart[,] Inc., being the shareholders, members of the Board and officers of the said corporations,
as evidenced by the General Information Sheets (GIS) of the said corporations filed with the Securities and Exchange Commission (Exhibits
"O" to "0-4" and "P" to "P-3" of petitioner's Formal Offer of Evidence dated August 15, 2007);
c. Respondent Morning Star has no assets or property in its name that may be levied upon for attachment and execution to secure and to
satisfy any judgment debt, as in fact the land and building where its offices can be found and situated at J. Bocobo Street cor. Pedro Gil
Street, Ermita Manila is not even registered in its name but in the name of another corporation "Morning Star Management Ventures
Corporation" which is similarly owned and controlled by the individual respondents (Exhibits "S" to "S-2" and "T" to "T-2" of petitioner's
Formal Offer of Evidence dated August 15, 2007);
d. As early as 1998, respondent Morning Star had already been incurring huge losses which clearly show the inability to pay its obligations to
IATA but the individual respondents contracted its huge financial obligations from IATA knowing fully well that respondent Morning Star will
be unable to pay such obligations;
e. Strangely, on the other hand, Pic 'N Pac Mart, Inc. and Morning Star Management Ventures Corp., the other two (2) corporations similarly
controlled and managed by the individual respondents, were doing relatively well during the time that respondent Morning Star was
incurring huge losses (Exhibits "U" to "U-7" and "V" to "V-9" of petitioner's Formal Offer of Evidence dated August 15, 2007);
f. Individual respondents allowed the indebtedness of respondent Morning Star to balloon to a staggering amount of Php100,479,171.59
and US$457,834.14[.]75 (Citations omitted)
This court finds that petitioner was not able to clearly and convincingly establish bad faith by the individual respondents, nor substantiate
the alleged badges of fraud.
IV
First, petitioner failed to substantiate the fourth badge of fraud on "[e]vidence of large indebtedness or complete insolvency."76redarclaw
In 1993, International Air Transport Association appointed respondent Morning Star as an accredited travel agent with the privilege of
getting air tickets on credit, and they entered a Passenger Sales Agency Agreement.77 None of the parties made allegations on the financial
status or business standing of respondent Morning Star during the first five years from its accreditation in 1993.
Petitioner relies on Atty. Taggueg's testimony regarding respondent Morning Star's financial statements with the Securities and Exchange
Commission.
Atty. Taggueg testified on the comparative figures for the years ended 1998, 1999, and 2000 and how the company was "accumulating
losses as early as 1998 continuing to 1999 and 2000 resulting to a deficit of Php26,168,1768.00 [sic] as of December 31, 2000 . . . deficit of
Php3,910,763.00 as of December 31, 1998 and another deficit of Php2,841,626.00 as of December 31, 1999[.]"78 He testified that as of
December 31, 2000, respondent Morning Star had total assets of Php150,579,421.00 and total liabilities of Php160,222,966.00.79redarclaw
Atty. Taggueg then testified that despite this insolvency, "Morning Star Travel still contracted loans and/or obligations from the IATA
sometime in December 2002 which indebtedness with IATA ballooned to the huge amount of Php109,728,051.00 and US$496,403.21 as of
April 30, 2003 [.]"80redarclaw
Petitioner did not present Securities and Exchange Commission documents on respondent Morning Star's total assets as of December 2002.
It did not present respondent Morning Star's financial statements for December 2002, the year it incurred obligations from International Air
Transport Association.81redarclaw
The financial statements for years 1998 to 1999 and 1999 to 2000 testified on by Atty. Taggueg are not representative of the financial status
of respondent Morning Star's business. Year 2000 reflected total assets of P150,579,421.00 and total liabilities of P160,222,966.00.82 On the
other hand, year 1999 showed total assets of P134,361,353.00 and total liabilities of P120,678,345.00.83 Businesses may earn profits in some
years and operate at a loss in others as a result of changing economic conditions. These two financial statements do not show that
respondent Morning Star was operating at a loss in 2002. Deficits in the years 1998 to 2000 do not necessarily mean deficits in 2002. It is
unclear if these figures included previous obligations to International Air Transport Association, or whether some or all of such obligations
were paid in subsequent years as an indication of respondent Morning Star's credit history.
In any event, it is in the nature of businesses to take risks when making business judgments, and this includes taking loans and incurring
liabilities.
Atty. Taggueg's association with respondent Morning Star, or this case, is also unclear. Respondents submit in their memorandum that "[i]n
his testimony[,] Mr. Taggueg admitted that his knowledge about . . . Morning Star was merely based on his assumptions and his examination
of the [Securities and Exchange Commission] documents."84redarclaw
Petitioner's reliance on Atty. Taggueg's testimony on respondent Morning Star's financial statements for previous years fails to clearly and
convincingly establish bad faith by the individual respondents.
V from September 23, 2003 until fully paid.
Second, petitioner failed to substantiate the fifth badge of fraud on the "transfer of all or nearly all of his property by a debtor, especially
when he is insolvent or greatly embarrassed financially."85redarclaw
Mere allegations that Morning Star Management Ventures Corporation and Pic 'N Pac Mart, Inc. "were doing relatively well during the time
that respondent Morning Star was incurring huge losses"86 do not establish bad faith or fraud by the individual respondents. Such allegations
alone do not prove that the individual respondents were transferring respondent Morning Star's properties in fraud of its creditors.
Neither does the allegation that Morning Star Management Ventures Corporation has title over the land and building where the offices can
be found establish bad faith or fraud. Petitioner did not show that this title was originally in respondent Morning Star's name and was later
transferred to respondent Morning Star.
This court has held that the "existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the
veil of corporate fiction in the absence of fraud or other public policy considerations."87redarclaw
VI
Third, petitioner also failed to substantiate the sixth badge of fraud that "the transfer is made between father and son, when there are
present other of the above circumstances."88redarclaw
Petitioner submits that:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
It would be the height of injustice to allow individual respondents to get away with their gross negligence to the prejudice of petitioner,
especially since there is now another travel agency in the name of Morning Star Tour Planners, Inc. operating at the respondent Morning
Star's former principal place of business at 1600 J. Bocobo St. corner Pedro Gil Malate, Manila. . . .
....
Curiously, among the stockholders, directors and officers of Morning Star Tour Planners, Inc., are the following: Belinda Wong, Billy Wong,
Barbara C. Wong and Benny C. Wong, Jr., who all have the same address as individual respondents Estelita Co Wong and Benny H. Wong.
Given, these vital pieces of information, it is at once indubitable that respondents have established another travel agency in the name of
their children in order to escape their solidary liability to petitioner!89 (Citation omitted)
This court has held that "compliance with the recognized modes of acquisition of jurisdiction cannot be dispensed with even in piercing the
veil of corporate fiction[.]"90 Morning Star Tour Planners, Inc. is not a party in this case. It would offend due process rights if what petitioner
ultimately seeks in its allegation is to hold Morning Star Tour Planners, Inc. responsible for respondent Morning Star's liability.
In any event, petitioner failed to plead and prove the circumstances that would pass the following control test for the operation of the alter
ego doctrine:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
(1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice
in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence
of its own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of plaintiff's legal right; and
(3) The aforesaid control and breach of duty must [have] proximately caused the injury or unjust loss complained of.91
The records do not show that the individual respondents controlled Morning Star Tour Planners, Inc. and that such control was used to
commit fraud against petitioner. Neither does this suspicion support petitioner's position that the individual respondents were in bad faith
or gross negligence in directing the affairs of respondent Morning Star.
Finally, pursuant to this court's pronouncement in Nacar v. Gallery Frames,92 the interest rate should be 6% per annum on the amount owing
to petitioner representing respondent Morning Star's unpaid air transport tickets availed on credit.
WHEREFORE, the Petition is DENIED. The Court of Appeals Decision is AFFIRMED with MODIFICATION in that legal interest is 6% per annum
SO ORDERED.cralawlawlibrary
OSE EMMANUEL P. GUILLERMO, Petitioner, v. CRISANTO P. USON, Respondent.
November 3, 2017
|
Nathalie Pattugalan
G.R. No. 198967
March 07, 2016
PERALTA, J.:
Facts:
Respondent Uson was an accounting supervisor in Royal Class Venture Phils., Inc. (RCVPI) until Dec. 20, 2000 when he was allegedly dismissed
by petitioner Guillermo, the company’s president/general manager, for having exposed the latter’s practice of dictating and undervaluing the
shares of stocks of the corporation. Thereafter he filed a complaint for illegal dismissal against the corporation, RCVPI.
The Labor Arbiter rendered a decision in favor of Uson, ordering respondent to reinstate him to his former position and pay his backwages,
13th month pay as well as moral damages, exemplary damages and attorney’s fees. RCVPI did not file an appeal but repeated issuances of
Writs of Execution against the same remained unsatisfied.
Uson filed another Motion for Alias Writ of Execution and to Hold Directors and Officers of Respondent Liable for the Decision and quoted
from the sheriff’s return: a) that at RCVPI’s address (to which the writs are being served) there is a new establishment named “ Joel and Sons
Corporation” which was a family corporation owned by the Guillermos, in which Jose Emmanuel Guillermo, the President and General Manager
of RCVPI, is one of the stockholders; b) that Jose received the writ using the nickname “Joey” concealing his real identity and pretended to be
the brother of Jose; c) that RCVPI has already been dissolved.
 Labor Arbiter granted the motion filed by respondent and held herein petitioner Jose Emmanuel Guillermo, in his personal capacity jointly and
severally liable with the corporation stating that the officers of the corporation are jointly and severally liable for the obligations of the
corporation (“piercing the veil of corporate fiction”) to the employees even if the said officers were not parties to the case.

Guillermo filed a Motion for Reconsideration/To Set Aside the Order of the labor arbiter. His contentions were a) officers cannot be included
as judgement obligor in a labor case for the first time only after the decision of the Labor Arbiter had become final and executory b) in piercing
the veil of RCVPI, he was allegedly discriminated against when he alone was belatedly impleaded despite the existence of other officers of
RCVPI; c)that the labor arbiter has no jurisdiction because the case is one of an intra-corporate controversy, with the complainant Uson also
claiming to be a stockholder and director of the corporation.

Issues:
1. Whether an officer of a corporation may be included as judgement obligor in a labor case for the first time only after the decision of the
Labor Arbiter had become final and executory.
2. Whether the twin doctrines of “piercing the veil of corporate fiction” and personal liability of company officers in labor cases apply.

Ruling:
The Petition is denied.

In earlier labor cases, the Court held that persons who were not originally impleaded in the case were, even during execution, held to be
solidarity liable with the employer corporation for the latter's unpaid obligations to complainant-employees. Personal liability attaches only
when, as enumerated by the said Section 31 of the Corporation Code, there is a wilfull and knowing assent to patently unlawful acts of the
corporation, there is gross negligence or bad faith in directing the affairs of the corporation, or there is a conflict of interest resulting in
damages to the corporation. The conferment of liability on officers for a corporation's obligations to labor is held to be an exception to the
general doctrine of separate personality of a corporation.

It also bears emphasis that in cases where personal liability attaches, not even all officers are made accountable. Rather, only the "responsible
officer," i.e., the person directly responsible for and who "acted in bad faith" in committing the illegal dismissal or any act violative of the Labor
Code, is held solidarily liable, in cases wherein the corporate veil is pierced

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.

In the case at hand, respondent Uson’s sworn allegations stating that Guillermo was the responsible officer in charge of running the company
as well as the one who maliciously and illegally dismissed Uson from employment was uncontroverted. Furthermore, 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. He, likewise, was shown to have a role in dissolving the
original obligor company in an obvious "scheme to avoid liability".

Essentially, then, the facts form part of the records and stand as further proof of Guillermo's bad faith and malicious intent to evade the
judgment obligation.

It is settled in jurisprudence that not all conflicts between a stockholder and the corporation are intra-corporate; an examination of the
complaint must be made on whether the complainant is involved in his capacity as a stockholder or director, or as an employee.

In the case at bar, Uson's allegation was that he was maliciously and illegally dismissed as an Accounting Supervisor by Guillermo, the Company
President and General Manager. It raised no intra-corporate relationship issues between him and the corporation or Guillermo; neither did it
raise any issue regarding the regulation of the corporation.

As correctly found by the appellate court, Uson's complaint and redress sought were centered alone on his dismissal as an employee, and not
upon any other relationship he had with the company or with Guillermo. Thus, the matter is clearly a labor dispute cognizable by the labor
tribunals.