Batangas Laguna Tayabas Bus Co. vs.

Bitanga (362 SCRA 635 [2001])

These cases involve the Batangas Laguna Tayabas Bus Company, Inc., which has
been owned by four generations of the Potenciano family. Immediately prior to the
events leading to this controversy, the Potencianos owned 87.5% of the outstanding
capital stock of BLTB.1

On October 28, 1997, Dolores A. Potenciano, Max Joseph A. Potenciano, Mercedelin

A. Potenciano, Delfin C. Yorro, and Maya Industries, Inc., entered into a Sale and
Purchase Agreement,2 whereby they sold to BMB Property Holdings, Inc.,
represented by its President, Benjamin Bitanga, their 21,071,114 shares of stock in
BLTB. The said shares represented 47.98% of the total outstanding capital stock of
BLTB.

On October 28, 1997, Dolores A. Potenciano, Max Joseph A. Potenciano, Mercedelin

A. Potenciano, Delfin C. Yorro, and Maya Industries, Inc., entered into a Sale and
Purchase Agreement,2 whereby they sold to BMB Property Holdings, Inc.,
represented by its President, Benjamin Bitanga, their 21,071,114 shares of stock in
BLTB. The said shares represented 47.98% of the total outstanding capital stock of
BLTB.

During a meeting of the Board of Directors on April 14, 1998, the newly elected
directors of BLTB scheduled the annual stockholders' meeting on May 19, 1998, to
be held at the principal office of BLTB in San Pablo, Laguna. Before the scheduled
meeting, on May 16, 1998, Michael Potenciano wrote Benjamin Bitanga, requesting
for a postponement of the stockholders' meeting due to the absence of a thirty-day
advance notice. However, there was no response from Bitanga on whether or not
the request for postponement was favorably acted upon.

On the scheduled date of the meeting, May 19, 1998, a notice of postponement of the
stockholders' meeting was published in the Manila Bulletin. Inasmuch as there was
no notice of postponement prior to that, a total of two hundred eighty six
stockholders, representing 87% of the shares of stock of BLTB, arrived and attended
the meeting. The majority of the stockholders present rejected the postponement
and voted to proceed with the meeting. The Potenciano group was re-elected to the
Board of Directors,6 and a new set of officers was thereafter elected.7

However, the Bitanga group refused to relinquish their positions and continued to
act as directors and officers of BLTB. The conflict between the Potencianos and the
Bitanga group escalated to levels of unrest and even violence among laborers and
employees of the bus company

A Hearing Panel of the SEC conducted joint hearings of SEC Cases Nos. 05-98-5973
and 05-98-5978. On June 17, 1998, the SEC Hearing Panel granted the Bitanga
group's application for a writ of preliminary injunction upon the posting of a bond
in the amount of P20,000,000.00.10 It declared that the May 19, 1998 stockholders'
meeting was void on the grounds that, first, Michael Potenciano had himself asked
for its postponement due to improper notice; and, second, there was no quorum,
since BMB Holdings, Inc., represented by the Bitanga group, which then owned
50.26% of BLTB's shares having purchased the same from the Potenciano group,
was not present at the said meeting. The Hearing Panel further held that the Bitanga
Board remains the legitimate Board in a hold-over capacity

In the July 21, 1998 Order of the SEC En Banc, the validity of the BLTB stockholders'
meeting held on May 19, 1998 was sustained, in light of the time-honored doctrine
in corporation law that a transfer of shares is not valid unless recorded in the books
of the corporation. The SEC En Banc went on to rule that —

It is not disputed that the transfer of the shares of the group of Dolores Potenciano
to the Bitanga group has not yet been recorded in the books of the corporation.
Hence, the group of Dolores Potenciano, in whose names those shares still stand,
were the ones entitled to attend and vote at the stockholders' meeting of the BLTB
on 19 May 1998. This being the case, the Hearing Panel committed grave abuse of
discretion in holding otherwise and in concluding that there was no quorum in said
meeting.

Based on the foregoing premises, the SEC En Banc issued a writ of preliminary
injunction against the Bitanga group. In so ruling, the SEC En Banc merely exercised
its wisdom and competence as a specialized administrative agency specifically
tasked to deal with corporate law issues. We are in full accord with the SEC En Banc
on this matter. Indeed, until registration is accomplished, the transfer, though valid
between the parties, cannot be effective as against the corporation. Thus, the
unrecorded transferee, the Bitanga group in this case, cannot vote nor be voted for.
The purpose of registration, therefore, is two-fold: to enable the transferee to
exercise all the rights of a stockholder, including the right to vote and to be voted
for, and to inform the corporation of any change in share ownership so that it can
ascertain the persons entitled to the rights and subject to the liabilities of a
stockholder.26 Until challenged in a proper proceeding, a stockholder of record has a
right to participate in any meeting;27 his vote can be properly counted to determine
whether a stockholders' resolution was approved, despite the claim of the alleged
transferee.28 On the other hand, a person who has purchased stock, and who desires
to be recognized as a stockholder for the purpose of voting, must secure such a
standing by having the transfer recorded on the corporate books.29 Until the
transfer is registered, the transferee is not a stockholder but an outsider.30

We find no error either in jurisdiction or judgment on the part of the SEC En Banc,
since its conclusions of law were anchored on established principles and
jurisprudence

WHEREFORE, in view of all the foregoing, the instant petitions for review are
GRANTED. The Decision of the Court of Appeals dated November 23, 1998 in CA-
G.R. SP No. 48374 and its resolution dated March 25, 1999 are SET ASIDE. The
Orders of the SEC En Banc dated July 21, 1998 and July 27, 1998 in SEC Case No. EB
611 are ordered REINSTATED.

SO ORDERED.

Bitong vs. CA [292 SCRA 503 (July 13 1998)]

Ownership of Corporate Shares/ Stock Certificates: Valid Issuance

Facts: Bitong was the treasurer and member of the BoD of Mr. & Mrs.
Corporation. She filed a complaint with the SEC to hold respondent spouses Apostol
liable for fraud, misrepresentation, disloyalty, evident bad faith, conflict of interest
and mismanagement in directing the affairs of the corporation to the prejudice of
the stockholders. She alleges that certain transactions entered into by the
corporation were not supported by any stockholder’s resolution.
The complaint sought to enjoin Apostol from further acting as president-director of
the corporation and from disbursing any money or funds. Apostol contends that
Bitong was merely a holder-in-trust of the JAKA shares of the corporation, hence,
not entitled to the relief she prays for. SEC Hearing Panel issued a writ enjoining
Apostol.
After hearing the evidence, SEC Hearing Panel dissolved the writ and dismissed the
complaint filed by Bitong. Bitong appealed to the SEC en banc. The latter reversed
SEC Hearing Panel decision. Apostol filed petition for review with the CA. CA
reversed SEC en banc ruling holding that Bitong was not the owner of any share of
stock in the corporation and therefore, not a real party in interest to prosecute the
complaint. Hence, this petition with the SC. Issue: Whether or not Bitong was the
real party in interest.

Held: Based on the evidence presented, it could be gleaned that Bitong was not a
bona fide stockholder of the corporation. Several corporate documents disclose that
the true party in interest was JAKA.
Although her buying of the shares were recorded in the Stock and Transfer Book of
the corporation, and as provided by Sec. 63 of the Corp Code that no transfer shall
be valid except as between the parties until the transfer is recorded in the books of
the corporation, and upon its recording the corporation is bound by it and is
estopped to deny the fact of transfer of said shares, this provision is not conclusive
even against the corporation but are prima facie evidence only. Parol evidence may
be admitted to supply the omissions in the records, explain ambiguities, or show
what transpired where no records were kept, or in some cases where such records
were contradicted. Besides, the provision envisions a formal certificate of stock
which can be issued only upon compliance with certain requisites: (1) certificates
must be signed by the president or vice president, countersigned by the secretary or
assistant secretary, and sealed with the seal of the corporation, (2) delivery of the
certificate; (3) the par value, as to par value shares, or the full subscription as to no
par value shares, must be first fully paid; (4) the original certificate must be
surrendered where the person requesting the issuance of a certificate is a transferee
from a stockholder.
These considerations are founded on the basic principle that stock issued without
authority and in violation of the law is void and confers no rights on the person to
whom it is issued and subjects him to no liabilities. Where there is an inherent lack
of power in the corporation to issue the stock, neither the corporation nor the
person to whom the stock is issued is estopped to question its validity since an
estoppel cannot operate to create stock which under the law cannot have existence.

The admissions of a party against his interest inscribed upon the record books of a
corporation are competent and persuasive evidence against him. 35 These
admissions render nugatory any argument that petitioner is a bona fide stockholder
of Mr. & Ms. at any time before 1988 or at the time the acts complained of were
committed. There is no doubt that petitioner was an employee of JAKA as its
managing officer, as testified to by Senator Enrile himself. 36 However, in the
absence of a special authority from the board of directors of JAKA to institute a
derivative suit for and in its behalf, petitioner is disqualified by law to sue in her
own name. The power to sue and be sued in any court by a corporation even as a
stockholder is lodged in the board of directors that exercises its corporate powers
and not in the president or officer thereof. 37

It is well settled in this jurisdiction that where corporate directors are guilty of a
breach of trust, not of mere error of judgment or abuse of discretion, and
intracorporate remedy is futile or useless, a stockholder may institute a suit in
behalf of himself and other stockholders and for the benefit of the corporation, to
bring about a redress of the wrong inflicted directly upon the corporation and
indirectly upon the stockholders. 38 The stockholder's right to institute a derivative
suit is not based on any express provision of The Corporation Code but is impliedly
recognized when the law makes corporate directors or officers liable for damages
suffered by the corporation and its stockholders for violation of their fiduciary
duties.

Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate

assets because of a special injury to him for which he is otherwise without redress.
39 In effect, the suit is an action for specific performance of an obligation owed by
the corporation to the stockholders to assist its rights of action when the
corporation has been put in default by the wrongful refusal of the directors or
management to make suitable measures for its protection. 40

The basis of a stockholder's suit is always one in equity. However, it cannot prosper
without first complying with the legal requisites for its institution. The most
important of these is the bona fide ownership by a stockholder of a stock in his own
right at the time of the transaction complained of which invests him with standing to
institute a derivative action for the benefit of the corporation. 41

WHEREFORE, the petition is DENIED. The 31 August 1995 Decision of the Court of
Appeals dismissing the complaint of petitioner Nora A. Bitong in CA-G.R. No. SP
33291, and granting the petition for certiorari and prohibition filed by respondent
Edgardo U. Espiritu as well as annulling the 5 November 1993, 24 January 1993 and
18 February 1994 Orders of the SEC En Banc in CA-G.R. No. SP 33873, is AFFIRMED.
Costs against petitioner.

Case Digest on CHUA GAN V. SAMAHANG MAGSASAKA, INC.

62 PHIL 473 (1935)

Facts: A certain Co Toco was the owner of 5,894 shares of Samahang Magsasaka,
Inc. which he mortgaged to Chua Chiu to guarantee the payment of a P20,000.00
debt. The corresponding certificates were delivered to Chua Chiu and was duly
registered in the office of the register of deeds of Manila and in the office of the said
corporation. About five months after, Chua Chui assigned all his rights and interest
in said mortgage to the plaintiff, Chua Gan which was also duly recorded. Co Toco
defaulted. The plaintiff foreclosed on the mortgage. In the public auction he won as
the highest bidder. However, upon presenting the certificates to the corporation for
registration, the officers refused because they and the plaintiff could not agree on
the noting of nine other attachments that had been issued, served and noted on the
books of the corporation against the shares of Co Toco.

Issue: Whether or not the said mortgage takes priority over the already noted writs
of attachment.

Decision: The Supreme Court ruled that the attaching creditors are entitled to
priority over the defectively registered mortgage of the appellant. The court argues
that the registration in the register of deeds must be done both at the place where
the owner is domiciled and at the place where the principal office of the corporation
is located. The purpose of this is to give sufficient constructive of any claim or
encumbrance over the recorded shares to third persons. Furthermore, any share
still standing in the name of the debtor on the books of the corporation will be liable
to seizure by attachment or levy on execution at the instance of other
creditors. Thus, the game here is to have the highest or most preferred priority
over any pledged or mortgaged shares.

Comment: The pledge of stocks is better than a chattel mortgage since the former
requires the surrender of the object of pledge to the pledgee.

NON-TRANSFERABILITY AND TERMINATION OF MEMBERSHIP IN NON-STOCK

CORPORATION

Membership in a non-stock corporation is considered personal to the member and

he cannot transfer his rights as such, unless the articles of incorporation or by-laws
otherwise provide. The pertinent provisions are:

§ 90. Non-Transferability of membership. — Membership in a non-stock

corporation, and all rights arising therefrom, are personal and non-transferable,
unless the articles of incorporation or the by-laws otherwise provide.

§ 91. Termination of Membership. — Membership shall be terminated in the

manner and for the causes provided in the articles of incorporation or the by-
laws. Termination of membership shall have the effect of extinguishing all rights of
a member in the corporation or in its property, unless otherwise provided in the
articles of incorporation or the by-laws.

This is an appeal from a judgment of the Court of First Instance of Nueva Ecija in an
action for a writ of mandamus. The case is remarkable for the following reason: that
the parties entered into a stipulation in which the defendants admitted all of the
allegations of the complaint and the plaintiff admitted all of the special defenses in
the answer of the defendants, and on this stipulation they submitted the case for
decision.

The Chattel Mortgage Law, Act No. 1508, as amended by Act No. 2496, contains the
following provision:
 SEC. 4. A chattel mortgage shall not be valid against any person except the
mortgagor, his executors or administrators, unless the possession of the
property is delivered to and retained by the mortgagee or unless the
mortgage is recorded in the office of the register of deeds of the province in
which the mortgagor resides at the time of making the same, or, if he resides
the Philippine Islands, in the province in which the property is situated:
Provided, however, That if the property is situated in a different province
from that in which the mortgagor resides, the mortgage shall be recorded in
the office of the register of deeds of both the province in which the
mortgagor resides and that in which the property is situated, and for the
purposes of this Act the City of Manila Shall be deemed to be a province.

The practical application of the Chattel Mortgage Law to shares of stock of a

corporation presents considerable difficulty and we have obtained little aid from the
decisions of other jurisdictions because that form of mortgage is ill suited to the
hypothecation of shares of stock and has been rarely used elsewhere. In fact, it has
been doubted whether shares of stock in a corporation are chattels in the sense in
which that word is used chattel mortgage statutes. This doubt is reflected in our
own decision in the case of Fua Cun vs. Summers and China Banking Corporation (44
Phil., 705), in which we said:

". . . an equity in shares of stock is of such an intangible character that it is somewhat

difficult to see how it can be treated as a chattel and mortgaged in such a manner
that the recording of the mortgage will furnish constructive notice to third parties. . .
."And we held that the chattel mortgage there involved: "at least operated as a
conditional equitable assignment." In that case we quoted the following from
Spalding vs. Paine's Adm'r. (81 Ky., 416), with regard to a chattel mortgage of shares
of stock:

"These certificates of stock are in the pockets of the owner, and go with him
where he may happen to locate, as choses in action, or evidence of his right,
without any means on the part of those with whom he proposes to deal on
 the faith of such a security of ascertaining whether or not this stock is in
pledge or mortgaged to others. He finds the name of the owner on the books
of the company as a subscriber of paid-up stock, amounting to 180 shares,
with the certificates in his possession, pays for these certificates their full
value, and has the transfer to him made on the books of the company,
thereby obtaining a perfect title. What other inquiry is he to make, so as to
make his investment certain and secure? Where is he to look, in order to
ascertain whether or not this stock has been mortgaged? The chief office of
the company may be at one place today and at another tomorrow. The owner
may have no fixed or permanent abode, and with his notes in one pocket and
his certificates of stock in the other — the one evidencing the extent of his
interest in the stock of the corporation, the other his right to money owing
him by his debtor, we are asked to say that the mortgage is effectual as to the
one and inoperative as to the other."

Section 4 of Act No. 1508 provides two ways for executing a valid chattel mortgage
which shall be effective against third persons. First, the possession of the property
mortgage must be delivered to and retained by the mortgagee; and, second, without
such delivery the mortgage must be recorded in the proper office or offices of the
register or registers of deeds. If a chattel mortgage of shares of stock of a
corporation may validly be made without the delivery of possession of the property
to the mortgagee and the mere registration of the mortgage is sufficient to
constructive notice to third parties, we are confronted with the question as to the
proper place of registration of such a mortgage. Section 4 provides that in such a
case the mortgage resides at the time of making the same or, if he is a non-resident,
in the province in which the property is situated; and it also provides that if the
property is situated in a different province from that in which the mortgagor resides
the mortgage shall be recorded both in the province of the mortgagor's residence
and in the province where the property is situated.
If with respect to a chattel mortgage of shares of stock of a corporation, registration
in the province of the owner's domicile should be sufficient, those who lend on such
security would be confronted with the practical difficulty of being compelled not
only to search the records of every province in which the mortgagor might have
been domiciled but also every province in which a chattel mortgage by any former
owner of such shares might be registered. We cannot think that it was the intention
of the legislature to put this almost prohibitive impediment upon the hypothecation
of shares of stock in view of the great volume of business that is done on the faith of
the pledge of shares of stock as collateral.

It is a common but not accurate generalization that the situs of shares of stock is at
the domicile of the owner. The term situs is not one of fixed of invariable meaning or
usage. Nor should we lose sight of the difference between the situs of the shares and
the situs of the certificates of shares. The situs of shares of stock for some purposes
may be at the domicile of the owner and for others at the domicile of the
corporation; and even elsewhere.

By analogy with the foregoing and considering the ownership of shares in a

corporation as property distinct from the certificates which are merely the evidence
of such ownership, it seems to us a reasonable construction of section 4 of Act No.
1508 to hold that the property in the shares may be deemed to be situated in the
province in which the corporation has its principal office or place of business. If this
province is also the province of the owner's domicile, a single registration sufficient.
If not, the chattel mortgage should be registered both at the owner's domicile and in
the province where the corporation has its principal office or place of business. In
this sense the property mortgaged is not the certificate but the participation and
share of the owner in the assets of the corporation

In view of the premises, the attaching creditors are entitled to priority over the
defectively registered mortgage of the appellant and the judgment appealed from
must be affirmed without special pronouncement as to costs in this instance. 1
The Rural Bank of Lipa City Inc., etc. vs. Court of Appeals [GR 124535, 28
September 2001]

First Division, Ynares-Santiago (J): 4 concur

Facts: Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa City,
executed a Deed of Assignment, wherein he assigned his shares, as well as those of 8
other shareholders under his control with a total of 10,467 shares, in favor of the
stockholders of the Bank represented by its directors Bernardo Bautista, Jaime
Custodio and Octavio Katigbak. Sometime thereafter, Reynaldo Villanueva, Sr. and
his wife, Avelina, executed an Agreement wherein they acknowledged their
indebtedness to the Bank in the amount of P4,000,000.00, and stipulated that said
debt will be paid out of the proceeds of the sale of their real property described in
the Agreement. At a meeting of the Board of Directors of the Bank on 15 November
1993, the Villanueva spouses assured the Board that their debt would be paid on or
before December 31 of that same year; otherwise, the Bank would be entitled to
liquidate their shareholdings, including those under their control. In such an event,
should the proceeds of the sale of said shares fail to satisfy in full the obligation, the
unpaid balance shall be secured by other collateral sufficient therefor. When the
Villanueva spouses failed to settle their obligation to the Bank on the due date, the
Board sent them a letter demanding: (1) the surrender of all the stock certificates
issued to them; and (2) the delivery of sufficient collateral to secure the balance of
their debt amounting to P3,346,898.54. The Villanuevas ignored the bank's
demands, whereupon their shares of stock were converted into Treasury Stocks.
Later, the Villanuevas, through their counsel, questioned the legality of the
conversion of their shares. On 15 January 1994, the stockholders of the Bank met to
elect the new directors and set of officers for the year 1994. The Villanuevas were
not notified of said meeting. In a letter dated 19 January 1994, Atty. Amado Ignacio,
counsel for the Villanueva spouses, questioned the legality of the said stockholders'
meeting and the validity of all the proceedings therein. In reply, the new set of
officers of the Bank informed Atty. Ignacio that the Villanuevas were no longer
entitled to notice of the said meeting since they had relinquished their rights as
stockholders in favor of the Bank. Consequently, the Villanueva spouses filed with
the Securities and Exchange Commission (SEC), a petition for annulment of the
stockholders' meeting and election of directors and officers on 15 January 1994,
with damages and prayer for preliminary injunction (SEC Case 02-94-4683_. Joining
them as co-petitioners were Catalino Villanueva, Andres Gonzales, Aurora Lacerna,
Celso Laygo, Edgardo Reyes, Alejandro Tonogan, and Elena Usi. Named respondents
were the newly-elected officers and directors of the Rural Bank, namely: Bernardo
Bautista, Jaime Custodio, Octavio Katigbak, Francisco Custodio and Juanita Bautista.
On 6 April 1994, the Villanuevas' application for the issuance of a writ of
preliminary injunction was denied by the SEC Hearing Officer on the ground of lack
of sufficient basis for the issuance thereof. However, a motion for reconsideration
was granted on 16 December 1994, upon finding that since the Villanuevas' have
not disposed of their shares, whether voluntarily or involuntarily, they were still
stockholders entitled to notice of the annual stockholders' meeting was sustained by
the SEC. Accordingly, a writ of preliminary injunction was issued enjoining Bautista,
et. al. from acting as directors and officers of the bank. Thereafter, Bautista, et al.
filed an urgent motion to quash the writ of preliminary injunction, challenging the
propriety of the said writ considering that they had not yet received a copy of the
order granting the application for the writ of preliminary injunction. With the
impending 1995 annual stockholders' meeting only 9 days away, the Villanuevas
filed an Omnibus Motion praying that the said meeting and election of officers
scheduled on 14 January 1995 be suspended or held in abeyance, and that the 1993
Board of Directors be allowed, in the meantime, to act as such. 1 day before the
scheduled stockholders meeting, the SEC Hearing Officer granted the Omnibus
Motion by issuing a temporary restraining order preventing Bautista, et al. from
holding the stockholders meeting and electing the board of directors and officers of
the Bank. A petition for Certiorari and Annulment with Damages was filed by the
Rural Bank, its directors and officers before the SEC en banc. On 7 June 1995, the
SEC en banc denied the petition for certiorari. A subsequent motion for
reconsideration was likewise denied by the SEC en banc in a Resolution dated 29
September 1995. A petition for review was filed before the Court of Appeals (CA-GR
SP 38861), assailing the Order dated 7 June 1995 and the Resolution dated 29
September 1995 of the SEC en banc in SEC EB 440. The appellate court upheld the
ruling of the SEC. Bautista, et al.'s motion for reconsideration was likewise denied by
the Court of Appeals in an Order dated 29 March 1996. The bank, Bautista, et al. filed
the instant petition for review.

Issue: Whether there was valid transfer of the shares to the Bank.

Held: For a valid transfer of stocks, there must be strict compliance with the mode
of transfer prescribed by law. The requirements are: (a) There must be delivery of
the stock certificate: (b) The certificate must be endorsed by the owner or his
attorney-in-fact or other persons legally authorized to make the transfer; and (c) To
be valid against third parties, the transfer must be recorded in the books of the
corporation. As it is, compliance with any of these requisites has not been clearly
and sufficiently shown. Still, while the assignment may be valid and binding on the
bank, et al. and the Villanuevas, it does not necessarily make the transfer effective.
Consequently, the bank et al., as mere assignees, cannot enjoy the status of a
stockholder, cannot vote nor be voted for, and will not be entitled to dividends,
insofar as the assigned shares are concerned. Parenthetically, the Villanuevas
cannot, as yet, be deprived of their rights as stockholders, until and unless the issue
of ownership and transfer of the shares in question is resolved with finality.

Section 63 of the Corporation Code states: "x x x Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or
certificates indorsed by the owner x x x. No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the books of
the corporation so as to show the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and the
number of shares transferred."
 In the case at bench, when private respondents executed a deed of
assignment of their shares of stocks in favor of the Stockholders of the Rural
Bank of Lipa City, represented by Bernardo Bautista, Jaime Custodio and
Octavio Katigbak, title to such shares will not be effective unless the duly
indorsed certificate of stock is delivered to them. For an effective transfer of
shares of stock, the mode and manner of transfer as prescribed by law should
be followed. Private respondents are still presumed to be the owners of the
shares and to be stockholders of the Rural Bank.

Hence, the instant petition for review seeking to annul the Court of Appeals'
decision dated February 27, 1996 and the resolution dated March 29, 1996. In
particular, the decision is challenged for its ruling that notwithstanding the
execution of the deed of assignment in favor of the petitioners, transfer of title to
such shares is ineffective until and unless the duly indorsed certificate of stock is
delivered to them. Moreover, petitioners faulted the Court of Appeals for not taking
into consideration the acts of disloyalty committed by the Villanueva spouses
against the Bank.

We find no merit in the instant petition.

The Court of Appeals did not err or abuse its discretion in affirming the order of the
SEC en banc, which in turn upheld the order of the SEC Hearing Officer, for the said
rulings were in accordance with law and jurisprudence.

The Corporation Code specifically provides:

SECTION 63. Certificate of stock and transfer of shares. — The capital stock of
stock corporations shall be divided into shares for which certificates signed
by the president or vice president, countersigned by the secretary or
assistant secretary, and sealed with the seal of the corporation shall be
issued in accordance with the by-laws. Shares of stocks so issued are personal
property and may be transferred by delivery of the certificate or certificates
 indorsed by the owner or his attorney-in-fact or other person legally authorized
to make the transfer. No transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the corporation so as to
show the names of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim
shall be transferable in the books of the corporation. (Emphasis ours)

Petitioners argue that by virtue of the Deed of Assignment,19 private respondents

had relinquished to them any and all rights they may have had as stockholders of
the Bank. While it may be true that there was an assignment of private respondents'
shares to the petitioners, said assignment was not sufficient to effect the transfer of
shares since there was no endorsement of the certificates of stock by the owners,
their attorneys-in-fact or any other person legally authorized to make the transfer.
Moreover, petitioners admit that the assignment of shares was not coupled with
delivery, the absence of which is a fatal defect. The rule is that the delivery of the
stock certificate duly endorsed by the owner is the operative act of transfer of
shares from the lawful owner to the transferee.20 Thus, title may be vested in the
transferee only by delivery of the duly indorsed certificate of stock.21

We have uniformly held that for a valid transfer of stocks, there must be strict
compliance with the mode of transfer prescribed by law.22 The requirements are:
(a) There must be delivery of the stock certificate: (b) The certificate must be
endorsed by the owner or his attorney-in-fact or other persons legally authorized to
make the transfer; and (c) To be valid against third parties, the transfer must be
recorded in the books of the corporation. As it is, compliance with any of these
requisites has not been clearly and sufficiently shown.

It may be argued that despite non-compliance with the requisite endorsement and
delivery, the assignment was valid between the parties, meaning the private
respondents as assignors and the petitioners as assignees. While the assignment
may be valid and binding on the petitioners and private respondents, it does not
necessarily make the transfer effective. Consequently, the petitioners, as mere
assignees, cannot enjoy the status of a stockholder, cannot vote nor be voted for, and
will not be entitled to dividends, insofar as the assigned shares are concerned
Parenthetically, the private respondents cannot, as yet, be deprived of their rights as
stockholders, until and unless the issue of ownership and transfer of the shares in
question is resolved with finality.

There being no showing that any of the requisites mandated by law23 was complied
with, the SEC Hearing Officer did not abuse his discretion in granting the issuance of
the preliminary injunction prayed for by petitioners in SEC Case No. 02-94-4683
(herein private respondents). Accordingly, the order of the SEC en banc affirming
the ruling of the SEC Hearing Officer, and the Court of Appeals decision upholding
the SEC en banc order, are valid and in accordance with law and jurisprudence, thus
warranting the denial of the instant petition for review.

To enable the shareholders of the Rural Bank of Lipa City, Inc. to meet and elect
their directors, the temporary restraining order issued by the SEC Hearing Officer
on January 13, 1995 must be lifted. However, private respondents shall be notified
of the meeting and be allowed to exercise their rights as stockholders thereat.

While this case was pending, Republic Act No. 879924 was enacted, transferring to
the courts of general jurisdiction or the appropriate Regional Trial Court the SEC's
jurisdiction over all cases enumerated under Section 5 of Presidential Decree No.
902-A.25 One of those cases enumerated is any controversy "arising out of intra-
corporate or partnership relations, between and among stockholders, members, or
associates, between any and/or all of them and the corporation, partnership or
association of which they are stockholders, members or associates, respectively; and
between such corporation, partnership or association and the state insofar as it
concerns their individual franchise or right to exist as such entity." The instant
controversy clearly falls under this category of cases which are now cognizable by
the Regional Trial Court.
Pursuant to Section 5.2 of R.A. No. 8799, this Court designated specific branches of
the Regional Trial Courts to try and decide cases formerly cognizable by the SEC. For
the Fourth Judicial Region, specifically in the Province of Batangas, the RTC of
Batangas City, Branch 32 is the designated court.26

WHEREFORE, in view of all the foregoing, the instant petition for review on
certiorari is DENIED. The Decision and Resolution of the Court of Appeals in CA-G.R.
SP No. 38861 are hereby AFFIRMED. The case is ordered REMANDED to the
Regional Trial Court of Batangas City, Branch 32, for proper disposition. The
temporary restraining order issued by the SEC Hearing Officer dated January 13,
1995 is ordered LIFTED.

SO ORDERED.

TORRES VS CA DIGEST

278 SCRA 793 – Business Organization – Corporation Law – Transfer of Shares of

Stocks – Corporate Records

Judge Manuel Torres, Jr. owns about 81% of the capital stocks of Tormil Realty &
Development Corporation (TRDC). TRDC is a small family owned corporation and
other stockholders thereof include Judge Torres’ nieces and nephews. However,
even though Judge Torres owns the majority of TRDC and was also the president
thereof, he is only entitled to one vote among the 9-seat Board of Directors, hence,
his vote can be easily overridden by minority stockholders. So in 1987, before the
regular election of TRDC officers, Judge Torres assigned one share (qualifying share)
each to 5 “outsiders” for the purpose of qualifying them to be elected as directors in
the board and thereby strengthen Judge Torres’ power over other family members.

However, the said assignment of shares were not recorded by the corporate
secretary, Ma. Christina Carlos (niece) in the stock and transfer book of TRDC. When
the validity of said assignments were questioned, Judge Torres ratiocinated that it is
impractical for him to order Carlos to make the entries because Carlos is one of his
opposition. So what Judge Torres did was to make the entries himself because he
was keeping the stock and transfer book. He further ratiocinated that he can do what
a mere secretary can do because in the first place, he is the president.

Since the other family members were against the inclusion of the five outsiders, they
refused to take part in the election. Judge Torres and his five assignees then decided
to conduct the election among themselves considering that the 6 of them constitute
a quorum.

ISSUE: Whether or not the inclusion of the five outsiders are valid. Whether or not
the subsequent election is valid.

HELD: No. The assignment of the shares of stocks did not comply with procedural
requirements. It did not comply with the by laws of TRDC nor did it comply with
Section 74 of the Corporation Code. Section 74 provides that the stock and transfer
book should be kept at the principal office of the corporation. Here, it was Judge
Torres who was keeping it and was bringing it with him. Further, his excuse of not
ordering the secretary to make the entries is flimsy. The proper procedure is to
order the secretary to make the entry of said assignment in the book, and if she
refuses, Judge Torres can come to court and compel her to make the entry. There are
judicial remedies for this. Needless to say, the subsequent election is invalid because
the assignment of shares is invalid by reason of procedural infirmity. The Supreme
Court also emphasized: all corporations, big or small, must abide by the provisions
of the Corporation Code. Being a simple family corporation is not an exemption.
Such corporations cannot have rules and practices other than those established by
law.

It is the corporate secretary’s duty and obligation to register valid transfers of

stocks and if said corporate officer refuses to comply, the transferor-stockholder
may rightfully bring suit to compel performance.25 In other words, there are
remedies within the law that petitioners could have availed of, instead of taking the
law in their own hands, as the cliché goes.

Thus, we agree with the ruling of the SEC en banc as affirmed by the Court of
Appeals:

We likewise sustain respondent SEC when it ruled, interpreting Section 74 of the

Corporation Code, as follows (Rollo, p. 45):

In the absence of (any) provision to the contrary, the corporate secretary is the
custodian of corporate records. Corollarily, he keeps the stock and transfer book and
makes proper and necessary entries therein.

Contrary to the generally accepted corporate practice, the stock and transfer book of
TORMIL was not kept by Ms. Maria Cristina T. Carlos, the corporate secretary but by
respondent Torres, the President and Chairman of the Board of Directors of
TORMIL. In contravention to the above cited provision, the stock and transfer book
was not kept at the principal office of the corporation either but at the place of
respondent Torres.

PROVIDENT INTERNATIONAL RESOURCES CORPORATION (PIRC) vs. VENUS

G.R. No. 167041, June 17, 2008
Facts: Herein petitioner, PIRC, is registered with the SEC on September 20, 1979. As
a group known as the Marcelo group, were its incorporators, original stockholders,
and directors. The Asistio group claimed that the Marcelo group acquired shares in
PIRC as mere trustees for the Asistio group. The Marcelo group allegedly executed a
waiver of pre-emptive right, blank deeds of assignment, and blank deeds of transfer;
endorsed in blank their respective stock certificates over all of the outstanding
capital stock registered in their names; and completed the blank deeds in 2002 to
effect transfers to the Asistio group. On August 6, 2002, the Company Registration
and Monitoring Department (CRMD) of the SEC issued a certification stating that
verification made on the available records of PIRC showed failure to register its
stock and transfer book (STB). The Asistio group registered PIRCs STB. Upon
learning of this, PIRCs assistant corporate secretary requested the SEC for a
certification of the registration in 1979 of PIRCs STB. It presents the 1979-
registered STB bearing the SEC stamp and the signature of the officer in charge of
book registration. Subsequently the Asistio group filed in the RTC a complaint
against the Marcelo group. The Asistio group prayed that the Marcelo group be
enjoined from acting as directors of PIRC, from physically holding office at PIRCs
office, and from taking custody of PIRCs corporate records. On October 30, 2002, the
CRMD of the SEC issued a letter recalling the certification it had issued on August 6,
2002 and canceling the 2002-registered STB. The Asistio group appealed to the SEC
Board of Commissioners. They claimed that the issue of which of the two STBs is
valid is intra-corporate in nature; hence, the RTC, not the SEC, has jurisdiction.
Issue: Whether the SEC has the jurisdiction to recall and cancel a stock and transfer
book which it issued in 2002? Ruling: Yes. The powers and functions of the SEC
under the Securities Regulation Code (Republic Act No. 8799), it can be said that the
SECs regulatory authority over private corporations encompasses a wide margin of
areas, touching nearly all of a corporations concerns. This authority more vividly
springs from the fact that a corporation owes its existence to the concession of its
corporate franchise from the state. Going to the particular facts of the instant case,
the Supreme Court find that the SEC has the primary competence and means to
determine and verify whether the subject 1979 STB presented by the incumbent
assistant corporate secretary was indeed authentic, and duly registered by the SEC
as early as September 1979. As the administrative agency responsible for the
registration and monitoring of STBs, it is the body cognizant of the STB registration
procedures, and in possession of the pertinent files, records and specimen
signatures of authorized officers relating to the registration of STBs. The evaluation
of whether a STB was authorized by the SEC primarily requires an examination of
the STB itself and the SEC files. This function necessarily belongs to the SEC as part
of its regulatory jurisdiction. The Supreme Court further ruled that as the regulatory
body, it is the SECs duty to ensure that there is only one set of STB for each
corporation. The determination of whether or not the 1979-registered STB is valid
and of whether to cancel and revoke the August 6, 2002 certification and the
registration of the 2002 STB on the ground that there already is an existing STB is
impliedly and necessarily within the regulatory jurisdiction of the SEC.

Going to the particular facts of the instant case, we find that the SEC has the primary
competence and means to determine and verify whether the subject 1979 STB
presented by the incumbent assistant corporate secretary was indeed authentic, and
duly registered by the SEC as early as September 1979. As the administrative agency
responsible for the registration and monitoring of STBs, it is the body cognizant of
the STB registration procedures, and in possession of the pertinent files, records
and specimen signatures of authorized officers relating to the registration of STBs.
The evaluation of whether a STB was authorized by the SEC primarily requires an
examination of the STB itself and the SEC files. This function necessarily belongs to
the SEC as part of its regulatory jurisdiction. Contrary to the allegations of
respondents, the issues involved in this case can be resolved without going into the
intra-corporate controversies brought up by respondents.

As the regulatory body, it is the SEC's duty to ensure that there is only one set of STB
for each corporation. The determination of whether or not the 1979-registered STB
is valid and of whether to cancel and revoke the August 6, 2002 certification and the
registration of the 2002 STB on the ground that there already is an existing STB is
impliedly and necessarily within the regulatory jurisdiction of the SEC.

WHEREFORE, premises considered and finding the 1979 stock and transfer
book authentic and duly executed, the Commission hereby recall the
certification issued on 6 August 2002 and cancel the stock and transfer book
registered on October 2002. Accordingly, the stock and transfer book
registered on 25 September 1979 shall remain valid.

SO ORDERED.15

We find the above ruling proper and within the SEC's jurisdiction to make.

Noteworthy, during the pendency of the instant petition, a decision16 in the civil case
was rendered by the RTC. On April 23, 2005, the RTC of Muntinlupa City, Branch
276, dismissed the claim of the Asistio group and declared the Marcelo group the
duly constituted officers of PIRC, thus upholding the validity of the 1979-registered
STB.

WHEREFORE, the petition is GRANTED. The assailed Decision dated December 13,
2004 and Resolution dated February 3, 2005 of the Court of Appeals in CA-G.R. SP
No. 77672, are REVERSED and SET ASIDE; the Order dated May 27, 2003, of the
Securities and Exchange Commission (SEC) En Banc in CRMD-AA-Case No. 04-03-22
is AFFIRMED.

Lanuza vs. CA

GR No. 131394 | March 28, 2005

Facts:
 Petitioners seek to nullify the Court of Appeals’ Decision in CA–G.R. SP No.
414731 promulgated on 18 August 1997, affirming the SEC Order dated 20 June
1996, and the Resolution2 of the Court of Appeals dated 31 October 1997 which
denied petitioners’ motion for reconsideration.
In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated,
with seven hundred (700) founders’ shares and seventy-six (76) common shares as
its initial capital stock subscription reflected in the articles of incorporation
Onrubia et. al, who were in control of PMMSI registered the company’s stock and
transfer book for the first time in 1978, recording thirty-three (33) common shares
as the only issued and outstanding shares of PMMSI.
In 1979, a special stockholders’ meeting was called and held on the basis of what
was considered as a quorum of twenty-seven (27) common shares, representing
more than two-thirds (2/3) of the common shares issued and outstanding.
In 1982, Juan Acayan, one of the heirs of the incorporators filed a petition for the
registration of their property rights was filed before the SEC over 120 founders’
shares and 12 common shares owned by their father
SEC Hearing Officer: heirs of Acayan were entitled to the claimed shares and
called for a special stockholders’ meeting to elect a new set of officers.
SEC en banc: affirmed the decision
As a result, the shares of Acayan were recorded in the stock and transfer book.
On May 6, 1992, a special stockholders’ meeting was held to elect a new set of
directors
Onrubia et al filed a petition with SEC questioning the validity of said
meeting alleging that the quorum for the said meeting should not be based on the
165 issued and outstanding shares as per the stock and transfer book, but on the
initial subscribed capital stock of seven hundred seventy-six (776) shares, as
reflected in the 1952 Articles of Incorporation
Petition was dismissed
SC en banc: shares of the deceased incorporators should be duly represented by
their respective administrators or heirs concerned. Called for a stockholders
 meeting on the basis of the stockholdings reflected in the articles of incorporation
for the purpose of electing a new set of officers for the corporation
Lanuza, Acayan et al, who are PMMSI stockholders, filed a petition for review
with the CA, raising the following issues:
1. whether the basis the outstanding capital stock and accordingly also for
determining the quorum at stockholders’ meetings it should be the 1978 stock and
transfer book or if it should be the 1952 articles of incorporation
(They contended that the basis is the stock and transfer book, not articles of
incorporation in computing the quorum)
2. whether the Espejo decision (decision of SEC en banc ordering the recording of
the shares of Jose Acayan in the stock and transfer book) is applicable to the benefit
of Onrubia et al
CA decision:
1. For purposes of transacting business, the quorum should be based on the
outstanding capital stock as found in the articles of incorporation
2. To require a separate judicial declaration to recognize the shares of the original
incorporators would entail unnecessary delay and expense. Besides. the
incorporators have already proved their stockholdings through the provisions of the
articles of incorporation.
Appeal was made by Lanuza et al before the SC
Lanuza et al’ contention:
a. 1992 stockholders’ meeting was valid and legal
b. Reliance on the 1952 articles of incorporation for determining the quorum
negates the existence and validity of the stock and transfer book Onrubia et
al prepared
c. Onrubia et al must show and prove entitlement to the founders and common
shares in a separate and independent action/proceeding in order to avail of
the benefits secured by the heirs of Acayan

Onrubia et al’s contention, based on the Memorandum: petition should be

dismissed on the ground of res judicata
 Another appeal was made
Lanuza et al’s contention: instant petition is separate and distinct from G.R. No.
131315, there being no identity of parties, and more importantly, the parties in the
two petitions have their own distinct rights and interests in relation to the subject
matter in litigation
Onrubia et al’s manifestation and motion: moved for the dismissal of the case

Issue: What should be the basis of quorum for a stockholders’ meeting—the

outstanding capital stock as indicated in the articles of incorporation or that
contained in the company’s stock and transfer book?

Ruling:

Articles of Incorporation
- Defines the charter of the corporation and the contractual relationships between
the State and the corporation, the stockholders and the State, and between the
corporation and its stockholders.
- Contents are binding, not only on the corporation, but also on its shareholders.
Stock and transfer book
- Book which records the names and addresses of all stockholders arranged
alphabetically, the installments paid and unpaid on all stock for which subscription
has been made, and the date of payment thereof; a statement of every alienation,
sale or transfer of stock made, the date thereof and by and to whom made; and such
other entries as may be prescribed by law
- necessary as a measure of precaution, expediency and convenience since it
provides the only certain and accurate method of establishing the various corporate
acts and transactions and of showing the ownership of stock and like matters
- Not public record, and thus is not exclusive evidence of the matters and things
which ordinarily are or should be written therein
 In this case, the articles of incorporation indicate that at the time of
incorporation, the incorporators were bona fide stockholders of 700 founders’
shares and 76 common shares. Hence, at that time, the corporation had 776 issued
and outstanding shares.
According to Sec. 52 of the Corp Code, “a quorum shall consist of the stockholders
representing a majority of the outstanding capital stock.” As such, quorum is based
on the totality of the shares which have been subscribed and issued, whether it be
founders’ shares or common shares
To base the computation of quorum solely on the obviously deficient, if not
inaccurate stock and transfer book, and completely disregarding the issued and
outstanding shares as indicated in the articles of incorporation would work injustice
to the owners and/or successors in interest of the said shares.
The stock and transfer book of PMMSI cannot be used as the sole basis for
determining the quorum as it does not reflect the totality of shares which have been
subscribed, more so when the articles of incorporation show a significantly larger
amount of shares issued and outstanding as compared to that listed in the stock and
transfer book.
One who is actually a stockholder cannot be denied his right to vote by the
corporation merely because the corporate officers failed to keep its records
accurately. A corporation’s records are not the only evidence of the ownership of
stock in a corporation.
It is no less than the articles of incorporation that declare the incorporators to
have in their name the founders and several common shares. Thus, to disregard the
contents of the articles of incorporation would be to pretend that the basic
document which legally triggered the creation of the corporation does not exist and
accordingly to allow great injustice to be caused to the incorporators and their
heirs

WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED. Costs
against petitioners
Presented in the case at bar is the apparently straight-forward but complicated
question: What should be the basis of quorum for a stockholders’ meeting—the
outstanding capital stock as indicated in the articles of incorporation or that
contained in the company’s stock and transfer book?

Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with seven
hundred (700) founders’ shares and seventy-six (76) common shares as its initial
capital stock subscription reflected in the articles of incorporation. However, private
respondents and their predecessors who were in control of PMMSI registered the
company’s stock and transfer book for the first time in 1978, recording thirty-three
(33) common shares as the only issued and outstanding shares of PMMSI. Sometime
in 1979, a special stockholders’ meeting was called and held on the basis of what
was considered as a quorum of twenty-seven (27) common shares, representing
more than two-thirds (2/3) of the common shares issued and outstanding.

the heirs of one of the original incorporators, Juan Acayan, filed a petition with the
Securities and Exchange Commission (SEC) for the registration of their property
rights over one hundred (120) founders’ shares and twelve (12) common shares
owned by their father. The SEC hearing officer held that the heirs of Acayan were
entitled to the claimed shares and called for a special stockholders’ meeting to elect
a new set of officers.3 The SEC En Banc affirmed the decision. As a result, the shares
of Acayan were recorded in the stock and transfer book.

The Court of Appeals held that for purposes of transacting business, the quorum
should be based on the outstanding capital stock as found in the articles of
incorporation.9 As to the second issue, the Court of Appeals held that the ruling in
the Acayan case would ipso facto benefit the private respondents, since to require a
separate judicial declaration to recognize the shares of the original incorporators
would entail unnecessary delay and expense. Besides, the Court of Appeals added,
the incorporators have already proved their stockholdings through the provisions of
the articles of incorporation.10

In both petitions, petitioners assert that the Court of Appeals’ Decision effectively
negates the existence and validity of the stock and transfer book, as well as
automatically grants private respondents’ shares of stocks which they do not own,
or the ownership of which remains to be unproved. Petitioners in the two petitions
rely on the entries in the stock and transfer book as the proper basis for computing
the quorum, and consequently determine the degree of control one has over the
company. Essentially, the affirmance of the SEC Order had the effect of diminishing
their control and interests in the company, as it allowed the participation of the
individual private respondents in the election of officers of the corporation.

The crucial issue in this case is whether it is the company’s stock and transfer book,
or its 1952 Articles of Incorporation, which determines stockholders’ shareholdings,
and provides the basis for computing the quorum.

We agree with the Court of Appeals.

The articles of incorporation has been described as one that defines the charter of
the corporation and the contractual relationships between the State and the
corporation, the stockholders and the State, and between the corporation and its
stockholders.27 When PMMSI was incorporated, the prevailing law was Act No.
1459, otherwise known as "The Corporation Law." Section 6 thereof states:

There is no gainsaying that the contents of the articles of incorporation are binding,
not only on the corporation, but also on its shareholders. In the instant case, the
articles of incorporation indicate that at the time of incorporation, the incorporators
were bona fide stockholders of seven hundred (700) founders’ shares and seventy-
six (76) common shares. Hence, at that time, the corporation had 776 issued and
outstanding shares.

On the other hand, a stock and transfer book is the book which records the names
and addresses of all stockholders arranged alphabetically, the installments paid and
unpaid on all stock for which subscription has been made, and the date of payment
thereof; a statement of every alienation, sale or transfer of stock made, the date
thereof and by and to whom made; and such other entries as may be prescribed by
law.31 A stock and transfer book is necessary as a measure of precaution, expediency
and convenience since it provides the only certain and accurate method of
establishing the various corporate acts and transactions and of showing the
ownership of stock and like matters.32 However, a stock and transfer book, like
other corporate books and records, is not in any sense a public record, and thus is
not exclusive evidence of the matters and things which ordinarily are or should be
written therein.33 In fact, it is generally held that the records and minutes of a
corporation are not conclusive even against the corporation but are prima facie
evidence only,34 and may be impeached or even contradicted by other competent
evidence.35 Thus, parol evidence may be admitted to supply omissions in the
records or explain ambiguities, or to contradict such records.36

Thus, quorum is based on the totality of the shares which have been subscribed and
issued, whether it be founders’ shares or common shares.37 In the instant case, two
figures are being pitted against each other— those contained in the articles of
incorporation, and those listed in the stock and transfer book.

To base the computation of quorum solely on the obviously deficient, if not

inaccurate stock and transfer book, and completely disregarding the issued
and outstanding shares as indicated in the articles of incorporation would
work injustice to the owners and/or successors in interest of the said shares.
This case is one instance where resort to documents other than the stock and
transfer books is necessary. The stock and transfer book of PMMSI cannot be
used as the sole basis for determining the quorum as it does not reflect the
 totality of shares which have been subscribed, more so when the articles of
incorporation show a significantly larger amount of shares issued and
outstanding as compared to that listed in the stock and transfer book It is to
be explained, that if at the onset of incorporation a corporation has 771
shares subscribed, the Stock and Transfer Book should likewise reflect 771
shares. Any sale, disposition or even reacquisition of the company of its own
shares, in which it becomes treasury shares, would not affect the total
number of shares in the Stock and Transfer Book. All that will change are the
entries as to the owners of the shares but not as to the amount of shares
already subscribed.

This is precisely the reason why the Stock and Transfer Book was not given
probative value. Did the shares, which were not recorded in the Stock and
Transfer Book, but were recorded in the Articles of Iincorporation just vanish
into thin air? . . . .39

As shown above, at the time the corporation was set-up, there were already seven
hundred seventy-six (776) issued and outstanding shares as reflected in the articles
of incorporation. No proof was adduced as to any transaction effected on these
shares from the time PMMSI was incorporated up to the time the instant petition
was filed, except for the thirty-three (33) shares which were recorded in the stock
and transfer book in 1978, and the additional one hundred thirty-two (132) in 1982.
But obviously, the shares so ordered recorded in the stock and transfer book are
among the shares reflected in the articles of incorporation as the shares subscribed
to by the incorporators named therein.

One who is actually a stockholder cannot be denied his right to vote by the
corporation merely because the corporate officers failed to keep its records
accurately.40 A corporation’s records are not the only evidence of the ownership of
stock in a corporation.41 In an American case,42 persons claiming shareholders
status in a professional corporation were listed as stockholders in the amendment
to the articles of incorporation. On that basis, they were in all respects treated as
shareholders. In fact, the acts and conduct of the parties may even constitute
sufficient evidence of one’s status as a shareholder or member.43 In the instant case,
no less than the articles of incorporation declare the incorporators to have in their
name the founders and several common shares. Thus, to disregard the contents of
the articles of incorporation would be to pretend that the basic document which
legally triggered the creation of the corporation does not exist and accordingly to
allow great injustice to be caused to the incorporators and their heirs.

WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED. Costs
against petitioners.

SO ORDERED.

Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

Neugene Marketing Inc. vs. CA [303 SCRA 295 (Feb 18 1999)]

Ownership of Corporate Share/Stock Certificates

Facts: Neugene was duly registered with SEC to engage in trading business. Private
Respondents Sy, Yang, and Suen, holders of 5250 shares or 2/3 of the outstanding
capital stock sent notice to the BoD for a board meeting. In this meeting, they
approved a resolution dissolving Neugene.
SEC thus issued a Certificate of Dissolution of Neugene. Petitioners Tan, Martin,
Moreno and Lee brought an action to annul said SEC Certification contending that
they were the majority stockholders of the corporation, and that prior to the board
meeting, the private respondents had already divested themselves of their
stockholdings by endorsing them in blank and delivering them to the Uy family. The
latter in turn awarded said stock certificates to Johnny Uy, who in turn sold the
same to petitioners. Hence, private respondents could no longer validly vote for the
dissolution of Neugene at the time of the board meeting.
Private respondents contend that the assignment of shares were simulated and
fraudulently effected since the endorsement in blank by them of the stock
certificates to the Uy family was only for safekeeping when they were stolen from a
vault by Johnny Uy.
SEC nullified the Certificate of Dissolution. CA, on the other hand, upheld Neugene’s
dissolution. Hence, this petition with the SC.

Issue: Whether or not private respondents divested themselves of their

stockholdings when they voted for the resolution dissolving Neugene.

Held: No. Entries in the Stock and Transfer Book show that at the time of
dissolution of Neugene, the private respondents owned at least 2/3 of the
outstanding capital stock, in sufficient compliance with Sec. 118 of the Corporation
Code of the Philippines.
Petitioners submitted the same Stock and Transfer Book to show that the
certificates of private respondents were cancelled. But after a careful examination
of the evidence on record, SC found that the stock certificates of private respondents
were stolen and therefore not validly transfered, and the transfers of stock relied
upon by petitioners were fraudulently recorded in the Stock and Transfer Book of
Neugene.
The true relationship between stockholders of Neugene and that of the Uy family
was that they had an understanding that the beneficial ownership of Neugene would
remain with the Uy family, such that the shares of stock were endorsed in blank,
upon issuance, by the shareholders and entrusted to the Uy family for
safekeeping. Such beneficial ownership has been admitted through the testimonies
not only of private respondents but also of petitioners.

In its Resolution dated December 9, 1993, the Court of Appeals denied petitioners’
motion for reconsideration, and further ruled that the transfers of stock in question
could not be valid and effective for the simple reason that there is a complete
absence of proof that the alleged transfers were recorded in the books of the
corporation. It relied on Section 63 of the Corporation Code of the Philippines which
provides that no transfer shall be valid except as between the parties, until the
transfer is recorded in the books of the corporation.

In the Petition under scrutiny, petitioners contend that the Court of Appeals:" (1)
misapprehended the facts of the case and (2) failed to consider the evidence on
record showing that the private respondents were no longer holders of the
necessary number of shares of stock at the time of the dissolution of NEUGENE." 9

The pivot of inquiry here is whether or not the private respondents lacked the
requisite number of shares of stock or had divested themselves of their
stockholdings as of November 30, 1987 when they voted for the resolution
dissolving NEUGENE.
Entries in the Stock and Transfer Book of NEUGENE, particularly on the right hand
portion of Exhibits "A-9", "A-10" and "A-12", support the disquisition and conclusion
arrived at by the Court of Appeals that at the time of dissolution of NEUGENE on
November 30, 1987, the private respondents, Lok Chun Suen, Charles O. Sy and
Arsenio Yang, Jr., owned at least two-thirds (2/3) of NEUGENE’s outstanding capital
stock, in sufficient compliance with the germane provision of Section 118 of the
Corporation Code of the Philippines.
Therefore, the entries on the right hand portion of NEUGENE’s Stock and Transfer
Book, under the column "Certificates Issued", indubitably record the private
respondents as the holders of 5,250 shares, constituting at least two-thirds (2/3) of
NEUGENE’s outstanding capital stock of 7,000 shares.
In light of the foregoing and after a careful examination of the evidence on record,
and a judicious study of the provisions of law and jurisprudence in point, we are
with the Court of Appeals on the finding and conclusion that the certificates of stock
of the private respondents were stolen and therefore not validly transferred, and
the transfers of stock relied upon by petitioners were fraudulently recorded in the
Stock and Transfer Book of NEUGENE under the column "Certificates Cancelled."
Although well-established is the rule that the appellate court will not generally
disturb the factual findings by the trial court for the reason that the trial court heard
the testimonies of the witnesses and observed their deportment and manner of
testifying during the trial and was afforded the singular chance to assess the
probative value of the evidence. The rule does not apply where, as in this case, the
SEC overlooked certain facts of substance and value which if considered would
affect the result of the case. (Tomas v. CA, 185 SCRA 627 [1990]; People v. Alforte,
219 SCRA 458 [1993])

In the case under consideration, records reveal that the SEC En Banc and its Panel Of
Hearing Officers misappreciated the true nature of the relationship between the
stockholders of NEUGENE and the Uy family, who had the understanding that the
beneficial ownership of NEUGENE would remain with the Uy family, such that
subject shares of stock were, immediately upon issuance, endorsed in blank by the
shareholders and entrusted to the Uy family, through Ban Ha Chua, for safekeeping.
Such beneficial ownership of the Uy family is admitted not only in the testimonies of
private respondents but also of the petitioners, Sonny Moreno and Johnson Lee. 10

Both the petitioners Johnson Lee (a member of the Uy family himself), and Sonny
Moreno, the corporate secretary, were aware of the real import or significance of
the indorsements in blank on the stock certificates of the private respondents.
Obviously, then, they (Lee and Moreno) acted in bad faith in assigning subject
certificates of stock to the petitioners, Nicanor Martin and Leoncio Tan, and in
recording the said transfers in dispute in the Stock and Transfer Book of NEUGENE.

Then, too, as nominees of the Uy family, the approval by the private respondents,
Charles O. Sy, Lok Chun Suen and Arsenio Yang, Jr., was necessary for the validity
and effectivity of the transfer of the stock certificates registered under their (private
respondents) names. In the case under consideration, not only did the transfers of
stock in question lack the requisite approval, the private respondents categorically
declared under oath that subject certificates of stock of theirs were stolen from the
confidential vault of the Uy family and illegally transferred to the names of
petitioners in the Stock and Transfer Book of NEUGENE.
All things studiedly evaluated in proper perspective, we are of the irresistible
conclusion that the private respondents herein are the legitimate holders and
owners of at least two-thirds (2/3) of the outstanding capital stock of NEUGENE,
with the corresponding right to vote for its dissolution, in accordance with Section
118 of the Corporation Code of the Philippines.

WHEREFORE, the Petition is DISMISSED for lack of merit and the Decision of the
Court of Appeals AFFIRMED, in its entirety. No pronouncement as to costs.

SO ORDERED.

G.R. No. L-20850 November 29, 1965

THE EDWARD J. NELL COMPANY, petitioner,

vs.
PACIFIC FARMS, INC., respondent

G.R. No. L-20850 November 29, 1965

Lessons Applicable: Types of Acquisitions / Transfers (Corporate Law)

FACTS:

 March 21, 1958: Pacific Farms Inc. (Pacific) purchased as highest bidder from a
bank auction 1,000 shares of stock of Insular Farms for P285,126.99 and BOD of
Insular as reorganized, then caused its assets, including its leasehold rights over a
public land in Bolinao, Pangasinan, to be sold to Insular for P10,000.00 and paid
for the other assets of Insular Farms.
  October 9, 1958: Edward J. Nell Co. (Edward) in Civil Case No. 58579 of the
Municipal Court of Manila against Insular Farms, Inc. (Insular) a judgment for the
sum of P1,853.80 unpaid balance for a pump sold with interest plus P125
attorney's fees and P84.00 as costs.
 August 14, 1959: A writ of execution, issued after the judgment had become final
returned unsatisfied, stating that Insular Farms had no leviable property.
 November 13, 1959: Edward filed the present action against Pacific upon the
theory that Pacific is the alter ego of Insular Farms
 CA affirmed Municipal Court: dismissed the complaint

ISSUE: W/N Pacific Farms is an alter ego of Insular Farms

HELD: NO. Appeal Affirmed

 GR: where one corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor
 EX:

1. where the purchaser expressly or impliedly agrees to assume such debts - no proof
2. where the transaction amounts to a consolidation or merger of the corporations -
not claimed
3. where the purchasing corporation is merely a continuation of the selling
corporation; - no proof
4. where the transaction is entered into fraudulently in order to escape liability for
such debts - no proof
o price paid was fair and reasonable

appellant secured in Civil Case No. 58579 of the Municipal Court of Manila against
Insular Farms, Inc. — hereinafter referred to as Insular Farms a judgment for the sum of
P1,853.80 — representing the unpaid balance of the price of a pump sold by appellant to
Insular Farms
for the collection of the judgment aforementioned, upon the theory that appellee is the
alter ego of Insular Farms, which appellee has denied. In due course, the municipal court
rendered judgment dismissing appellant's complaint. Appellant appealed, with the same
result, to the court of first instance and, subsequently, to the Court of Appeals.

Generally where one corporation sells or otherwise transfers all of its assets to
another corporation, the latter is not liable for the debts and liabilities of the
transferor, except: (1) where the purchaser expressly or impliedly agrees to
assume such debts; (2) where the transaction amounts to a consolidation or
merger of the corporations; (3) where the purchasing corporation is merely a
continuation of the selling corporation; and (4) where the transaction is entered
into fraudulently in order to escape liability for such debts.

In the case at bar, there is neither proof nor allegation that appellee had expressly or
impliedly agreed to assume the debt of Insular Farms in favor of appellant herein, or that
the appellee is a continuation of Insular Farms, or that the sale of either the shares of
stock or the assets of Insular Farms to the appellee has been entered into fraudulently, in
order to escape liability for the debt of the Insular Farms in favor of appellant herein. In
fact, these sales took place (March, 1958) not only over six (6) months before the
rendition of the judgment (October 9, 1958) sought to be collected in the present action,
but, also, over a month before the filing of the case (May 29, 1958) in which said
judgment was rendered. Moreover, appellee purchased the shares of stock of Insular
Farms as the highest bidder at an auction sale held at the instance of a bank to which said
shares had been pledged as security for an obligation of Insular Farms in favor of said
bank. It has, also, been established that the appellee had paid P285,126.99 for said shares
of stock, apart from the sum of P10,000.00 it, likewise, paid for the other assets of Insular
Farms.

Neither is it claimed that these transactions have resulted in the consolidation or merger
of the Insular Farms and appellee herein.
On the contrary, appellant's theory to the effect that appellee is an alter ego of the Insular
Farms negates such consolidation or merger, for a corporation cannot be its own alter
ego.

It is urged, however, that said P10,000.00 paid by appellee for other assets of Insular
Farms is a grossly inadequate price, because, appellant now claims, said assets were
worth around P285,126.99, and that, consequently, the sale must be considered
fraudulent. However, the sale was submitted to and approved by the Securities and
Exchange Commission. It must be presumed, therefore, that the price paid was fair and
reasonable. Moreover, the only issue raised in the court of origin was whether or not
appellee is an alter ego of Insular Farms. The question of whether the aforementioned
sale of assets for P10,000.00 was fraudulent or not, had not been put in issue in said
court. Hence, it may, not be raised on appeal.

Being a mere consequence of the first assignment of error, which is thus clearly
untenable, appellant's second assignment of error needs no discussion.

WHEREFORE, the decision appealed from is hereby affirmed, with costs against the
appellant. It is so ordered.

Sundowner Devt. Corp. vs. Drilon (180 SCRA 14 [1989])

FACTS:
Private respondent Hotel Mabuhay, Inc. (Mabuhay for short,) leased the premises
belonging to Santiago Syjuco, Inc. (Syjuco for short) located at 1430 A. Mabini St.,
Ermita, Manila. However, due to non-payment of rentals, a case for ejectment was filed
by Syjuco against Mabuhay in the Metropolitan Trial Court of Manila. Mabuhay offered
to amicably settle the case by surrendering the premises to Syjuco and to sell its assets
and personal property to any interested party.
Syjuco offered the said premises for lease to petitioner. The negotiation culminated with
the execution of the lease agreement on April 16, 1987 to commence on May 1, 1987 and
to expire on April 30,1992.

On same date Syjuco formally turned over the possession of the leased premises to
petitioner who actually took possession and occupied the same on May 1, 1987.

On May 4, 1987, respondent National Union of Workers in Hotel, Restaurant and Allied
Services (NUWHRAIN for short) picketed the leased premises, barricaded the entrance
to the leased premises and denied petitioner’s officers, employees and guests free access
to and egress from said premises. Thus, petitioner wrote a letter-complaint to Syjuco.

A complaint for damages with preliminary injunction and/or temporary restraining order
was filed by petitioner on May 7, 1987 with the Regional Trial Court of Manila. On the
same day, the Executive Judge of said court issued a restraining order against respondent
NUWHRAIN.

On May 14, 1987, an order was issued by public respondent Secretary of Labor assuming
jurisdiction over the labor dispute, requiring all striking employees to return to work and
for respondent Mabuhay to accept all returning employees pending final determination of
the issue of the absorption of the former employees of Mabuhay. The parties were also
directed to submit their respective position papers within ten (10) days from receipt of the
order.

On May 25, 1987, Mabuhay submitted its position paper alleging among others that it
had sold all its assets and personal properties to petitioner and that there was no sale or
transfer of its shares whatsoever and that Mabuhay completely ceased operation effective
April 28,1987 and surrendered the premises to petitioner so that there exists a legal and
physical impossibility on its part to comply with the return to work order specifically on
absorption.

On June 26, 1987, petitioner in order to commence its operation, signed a tri-partite
agreement so the workers may lift their strike, by and among petitioner, respondents
NUWHRAIN and Mabuhay whereby the latter paid to respondent NUWHRAIN the sum
of P 638,000.00 in addition to the first payment in the sum of P 386,447.11, for which
reason respondent NUWHRAIN agreed to lift the picket .

Respondent NUWHRAIN on July 13, 1987 filed its position paper alleging connivance
between Mabuhay and petitioner in selling the assets and closing the hotel to escape its
obligations to the employees of Mabuhay and so it prays that petitioner accept the
workforce of Mabuhay and pay backwages from April 15,1986 to April 28,1987, the day
Mabuhay stopped operation.

On January 20, 1988, the public respondent issued an order requiring petitioner to absorb
the members of the union and to pay backwages from the time it started operations up to
the date of the order.

Petitioner filed on January 27,1988 a motion for reconsideration of the aforesaid order.
Respondent NUWHRAIN also filed a motion for clarification of the aforesaid order.

On March 8, 1988, the public respondent denied said motion for reconsideration and
motion for clarification for lack of merit.

Hence, this petition for review by certiorari with prayer for preliminary injunction and/or
temporary restraining order filed by petitioner.

ISSUE:
HELD:
In the case at bar, contrary to the claim of the public respondent that the transaction
between petitioner and Mabuhay was attended with bad faith, the court finds no cogent
basis for such contention. Thus, the absorption of the employees of Mabuhay may not be
imposed on petitioner.

It is undisputed that when Mabuhay surrendered the leased premises to Syjuco and asked
Syjuco to offer same to other lessees it was Syjuco who found petitioner and persuaded
petitioner to lease said premises. Mabuhay had nothing to do with the negotiation and
consummation of the lease contract between petitioner and Syjuco.

It was only when Mabuhay offered to sell its assets and personal properties in the
premises to petitioner that they came to deal with each other. It appears that petitioner
agreed to purchase said assets of respondent Mabuhay to enable Mabuhay to pay its
obligations to its striking employees and to Syjuco. Indeed, in the deed of assignment that
was executed by Mabuhay in favor of petitioner on April 14, 1 987 for and in
consideration of P2,500,000.00, it is specifically provided therein that the same is “purely
for and in consideration of the sale/transfer and assignment of the personal properties and
assets of Hotel Mabuhay, Inc. listed . . . ” and “in no way involves any assumption or
undertaking on the part of Second Party (petitioner) of any debts or liabilities whatsoever
of Hotel Mabuhay, Inc.” The liabilities alluded to in this agreement should be interpreted
to mean not only any monetary liability of Mabuhay but any other liability or obligation
arising from the operation of its business including its liability to its employees.

The principal issue in this case is whether or not the purchaser of the assets of
an employer corporation can be considered a successor employer of the latter's
employees
Mabuhay offered to amicably settle the case by surrendering the premises to
Syjuco and to sell its assets and personal property to any interested party.
Mabuhay offered to sell its assets and personal properties in the premises to
petitioner to which petitioner agreed. A deed of assignment of said assets and
personal properties was executed by Mabuhay on April 29,1987 in favor of
petitioner. 2

Mabuhay submitted its position paper alleging among others that it had sold all
its assets and personal properties to petitioner and that there was no sale or
transfer of its shares whatsoever and that Mabuhay completely ceased operation
effective April 28,1987 and surrendered the premises to petitioner so that there
exists a legal and physical impossibility on its part to comply with the return to
work order specifically on absorption.

Respondent NUWHRAIN on July 13, 1987 filed its position paper alleging
connivance between Mabuhay and petitioner in selling the assets and closing the
hotel to escape its obligations to the employees of Mabuhay and so it prays that
petitioner accept the workforce of Mabuhay and pay backwages from April
15,1986 to April 28,1987, the day Mabuhay stopped operation.

As a general rule, there is no law requiring a bona fide purchaser of assets of an

on-going concern to absorb in its employ the employees of the latter. 7

However, although the purchaser of the assets or enterprise is not legally bound
to absorb in its employ the employers of the seller of such assets or enterprise,
the parties are liable to the employees if the transaction between the parties is
colored or clothed with bad faith. 8

In the case at bar, contrary to the claim of the public respondent that the
transaction between petitioner and Mabuhay was attended with bad faith, the
court finds no cogent basis for such contention. Thus, the absorption of the
employees of Mabuhay may not be imposed on petitioner.

It is undisputed that when Mabuhay surrendered the leased premises to Syjuco

and asked Syjuco to offer same to other lessees it was Syjuco who found
petitioner and persuaded petitioner to lease said premises. Mabuhay had nothing
to do with the negotiation and consummation of the lease contract between
petitioner and Syjuco.

It was only when Mabuhay offered to sell its assets and personal properties in
the premises to petitioner that they came to deal with each other. It appears that
petitioner agreed to purchase said assets of respondent Mabuhay to enable
Mabuhay to pay its obligations to its s The liabilities alluded to in this agreement
should be interpreted to mean not only any monetary liability of Mabuhay but any
other liability or obligation arising from the operation of its business including its
liability to its employees.

triking employees and to Syjuco. I

The liabilities alluded to in this agreement should be interpreted to mean not only
any monetary liability of Mabuhay but any other liability or obligation arising from
the operation of its business including its liability to its employees.

From the foregoing, it is clear that petitioner has no liability whatsoever to the
employees of Mabuhay And its responsibility if at all, is only to consider them for
re-employment in the operation of the business in the same premises. There can
be no implied acceptance of the employees of Mabuhay by petitioner and
acceptance of statutory wrong as it is expressly provided in the agreement that
petitioner has no commitment or duty to absorb them.

Much less is there any evidence that petitioner and respondent Mabuhay are
joint tortfeasors as found by public respondent. While it is true that petitioner is
using the leased property for the same type of business as that of respondent
Mabuhay, there can be no continuity of the business operations of the
predecessor employer by the successor employer as respondent Mabuhay had
not retained control of the business. Petitioner is a corporation entirely different
from Mabuhay. It has no controlling interest whatever in respondent Mabuhay.
Petitioner and Mabuhay have no privity and are strangers to each other.

What is obvious is that the petitioner, by purchasing the assets of respondent

Mabuhay in the hotel premises, enabled Mabuhay to pay its obligations to its
employees. There being no employer-employee relationship between the
petitioner and the Mabuhay employees, the petition must fail. Petitioner can not
be compelled to absorb the employees of Mabuhay and to pay them backwages.

WHEREFORE, the petition is GRANTED and the questioned orders of public

respondent Secretary of Labor and Employment dated January 20, 1988 and
March 8, 1988 are reversed and set aside. The restraining order that this Court
issued on March 20,1988 is hereby made permanent. No pronouncement as to
costs.

SO ORDERED.

Caltex (Phils), Inc. v. PNOC Shipping and Transport Corporation

Facts: PSTC and Luzon Stevedoring Corporation (LUSTEVECO) entered into an
Agreement of Assumption of Obligations, which provides that PSTC shall assume all
obligations of LUSTEVECO with respect to certain claims enumerated in the
Annexes of the Agreement. This Agreement also provides that PSTC shall control the
conduct of any litigation pending which may be filed with respect to such claims, and
that LUSTEVECO appoints and constitutes PSTC as its attorney-in-fact to demand
and receive any claim out of the countersuits and counterclaims arising from said
claims. Among the actions mentioned is Caltex (Phils) v. Luzon Stevedoring
Corporation, which was then pending appeal before the IAC. The IAC affirmed the
decision of the CFI ordering LUSTEVECO to pay Caltex P103,659.44 with legal
interest. When the decision became final and executor, a writ of execution was issued
in favor of Caltex but such judgment was not satisfied because of the prior
foreclosure of LESTEVECO’s properties. Upon learning of the Agreement between
PSTC and LUSTEVECO, Caltex demanded payment from PSTC and brought the
action. The RTC ruled in favor of Caltex but the CA reversed on appeal. CA ruled
that Caltex has no personality to sue PSTC, that non-compliance with the Agreement
could only be questioned by signatories of the contract, and that only LUSTEVECO
and PSTC who can enforce Agreement. The CA also rendered fatal the omission of
LUSTEVECO, as real party in interest, as party defendant, and that Caltex is not a
beneficiary of a stipulation pour atrui because there is no stipulation which clearly
and deliberately favors Caltex. Issues: 1. 2. Whether PSTC is bound by the
Agreement when it assumed all the obligations of LUSTEVECO; and Whether Caltex
is a real party in interest to file an action to recover from PSTC the judgment debt
against LUSTEVECO. Held: 1. Yes. Caltex may recover the judgment debt from
PSTC not because of a stipulation in Caltex’s favor but because the Agreement
provides that PSTC shall assume all the obligations of LUSTEVECO. LUSTEVECO
transferred, conveyed and assigned to PSTC all of LUSTEVECO’s business,
properties and assets pertaining to its tanker and bulk business “together with all the
obligations relating to the said business, properties and assets.” The assumption of
obligations was stipulated not only in the Agreement of Assumption of Obligations
but also in the Agreement of Transfer. Even without the Agreement, PSTC is still
liable. While the Corporation Code allows the transfer of all or substantially all the
properties and assets of a corporation, the transfer should not prejudice the creditors
of the assignor by holding the assignee liable for the former’s obligations. To allow
an assignor to make a transfer without the consent of its creditors and without
requiring the assignee to assume the former’s obligations will defraud creditors. In
the case of Oria v. McMicking, the Court enumerated the badges of fraud including a
transfer made by a debtor after suit has been begun and while it is pending against
him, and the transfer of all or nearly all of his property by a debtor, especially when
he is insolvent or greatly embarrassed financially. The Agreement also constitutes a
novation of LUSTEVECO’s obligations by substituting the person of the debtor. And
because it was done without the consent of Caltex, the assets transferred remain even
in the hands of PSTC still subject to execution to satisfy the judgment claim of
Caltex. Yes. Ordinarily, one who is not privy to a contract may not bring an action to
enforce it. But this case falls under the exception when those who are not principally
or subsidiarily obligated in a 2. contract may show their detriment that could result
from it. In this case, non-performance of PSTC’s obligations will defraud Caltex

The Case

Before the Court is a petition for review1 assailing the 31 May 2001 Decision2 and 9
November 2001 Resolution3 of the Court of Appeals in CA-G.R. CV No. 46097. The
Court of Appeals reversed the 1 June 1994 Decision4 of the Regional Trial Court of
Manila, Branch 51 ("trial court"), and dismissed the complaint filed by Caltex
(Philippines), Inc. ("Caltex") against PNOC Shipping and Transport Corporation (PSTC).

The Antecedent Facts

On 6 July 1979, PSTC and Luzon Stevedoring Corporation ("LUSTEVECO") entered

into an Agreement of Assumption of Obligations ("Agreement"). The Agreement
provides that PSTC shall assume all the obligations of LUSTEVECO with respect to the
claims enumerated in Annexes "A" and "B" ("Annexes") of the Agreement. The
Agreement also provides that PSTC shall control the conduct of any litigation pending or
which may be filed with respect to the claims in the Annexes. The Agreement further
provides that LUSTEVECO shall deliver to PSTC all papers and records of the claims in
the Annexes. Finally, the Agreement provides that LUSTEVECO appoints and
constitutes PSTC as its attorney-in-fact to demand and receive any claim out of the
countersuits and counterclaims arising from the claims in the Annexes.

The case was an appeal from the Decision by the then Court of First Instance of
Manila (CFI) directing LUSTEVECO to pay Caltex P103,659.44 with legal interest
from the filing of the action until full payment. In its 12 November 1985 Decision,5
the IAC affirmed with modification the Decision of the CFI.

Caltex subsequently learned of the Agreement between PSTC and LUSTEVECO.

Caltex sent successive demands to PSTC asking for the satisfaction of the judgment
rendered by the CFI.

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the

plaintiff, ordering defendant to pay plaintiff the sums due the latter in the decision
rendered by the Court of Appeals in CA-G.R. No. 62613, CALTEX vs. LUSTEVECO, or
to pay plaintiff

The Ruling of the Court of Appeals

 In its 31 May 2001 Decision, the Court of Appeals found the appeal meritorious. The
Court of Appeals ruled that Caltex has no personality to sue PSTC. The Court of Appeals
held that non-compliance with the Agreement could only be questioned by the signatories
to the contract, namely, LUSTEVECO and PSTC. The Court of Appeals stated that
LUSTEVECO and PSTC are the only parties who can file an action to enforce the
Agreement. The Court of Appeals considered fatal the omission of LUSTEVECO, the
real party in interest, as a party defendant in the case. The Court of Appeals further ruled
that Caltex is not a beneficiary of a stipulation pour autrui because there is no stipulation
in the Agreement which clearly and deliberately favors Caltex.

The Issues

The issues in this case are:

1. Whether PSTC is bound by the Agreement when it assumed all

the obligations of LUSTEVECO; and

2. Whether Caltex is a real party in interest to file an action to recover from PSTC the
judgment debt against LUSTEVECO.

The Ruling of this Court

The petition is meritorious.

Caltex May Recover from PSTC Under the Terms of the Agreement

Caltex may recover the judgment debt from PSTC not because of a stipulation in Caltex’s
favor but because the Agreement provides that PSTC shall assume all the obligations of
LUSTEVECO.

WHEREAS, on April 1, 1979, ASSIGNOR, for valuable consideration, executed an

Agreement of Transfer with ASSIGNEE whereby ASSIGNOR transferred, conveyed
and assigned unto ASSIGNEE all of ASSIGNOR’s business, properties and assets
appertaining to its tanker and bulk all (sic) departments, together with all the
obligations relating to said business, properties and assets;

When PSTC assumed all the properties, business and assets of LUSTEVECO
pertaining to LUSTEVECO’s tanker and bulk business, PSTC also assumed all of
LUSTEVECO’s obligations pertaining to such business. The assumption of
obligations was stipulated not only in the Agreement of Assumption of Obligations
but also in the Agreement of Transfer. The Agreement specifically mentions the
case between LUSTEVECO and Caltex, docketed as AC-G.R. CV No. 62613, then
pending before the IAC

PSTC is bound by the Agreement. PSTC cannot accept the benefits without assuming the
obligations under the same Agreement. PSTC cannot repudiate its commitment to assume
the obligations after taking over the assets for that will amount to defrauding the creditors
of LUSTEVECO. It will also result in failure of consideration since the assumption of
obligations is part of the consideration for the transfer of the assets from LUSTEVECO to
PSTC. Failure of consideration will revert the assets to LUSTEVECO for the benefit of
the creditors of LUSTEVECO. Thus, PSTC cannot escape from its undertaking to assume
the obligations of LUSTEVECO as stated in the Agreement.

Disposition of Assets should not Prejudice Creditors

Even without the Agreement, PSTC is still liable to Caltex.

The disposition of all or substantially all of the assets of a corporation is allowed

under Section 40 of Batas Pambansa Blg. 68, otherwise known as The Corporation
Code of the Philippines ("Corporation Code"). Section 40

SEC. 40. Sale or other disposition of assets. ─ Subject to the provisions of existing laws
on illegal combinations and monopolies, a corporation may, by a majority vote of its
board of directors, or trustees, sell, lease, exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its property and assets, including its goodwill, upon
such terms and conditions and for such consideration, which may be money, stocks,
bonds or other instruments for the payment of money or other property or consideration,
as its board of directors or trustees may deem expedient, when authorized by the vote of
the stockholders representing at least two-thirds (2/3) of the outstanding capital stock; or
in case of non-stock corporation, by the vote of at least two-thirds (2/3) of the members,
in a stockholders’ or members’ meeting duly called for the purpose. Written notice of the
proposed action and of the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with postage prepaid, or served
personally: Provided, That any dissenting stockholder may exercise his appraisal right
under the conditions provided in this Code.

A sale or other disposition shall be deemed to cover substantially all the corporate
property and assets, if thereby the corporation would be rendered incapable of continuing
the business or accomplishing the purposes for which it was incorporated.

While the Corporation Code allows the transfer of all or substantially all the
properties and assets of a corporation, the transfer should not prejudice the
creditors of the assignor. The only way the transfer can proceed without prejudice
to the creditors is to hold the assignee liable for the obligations of the assignor. The
acquisition by the assignee of all or substantially all of the assets of the assignor
necessarily includes the assumption of the assignor’s liabilities,10 unless the
creditors who did not consent to the transfer choose to rescind the transfer on the
ground of fraud.11 To allow an assignor to transfer all its business, properties and
assets without the consent of its creditors and without requiring the assignee to
assume the assignor’s obligations will defraud the creditors. The assignment will
place the assignor’s assets beyond the reach of its creditors

In this case, PSTC was aware of the pendency of the case between Caltex and
LUSTEVECO. PSTC assumed LUSTEVECO’s obligations, including specifically any
obligation that might arise from Caltex’s suit against LUSTEVECO
If PSTC does not assume the obligations of LUSTEVECO as PSTC had committed under
the Agreement, the creditors of LUSTEVECO could no longer collect the debts of
LUSTEVECO. The assignment becomes a fraud on the part of PSTC, because PSTC
would then have inveigled LUSTEVECO to transfer the assets on the promise to pay
LUSTEVECO’s creditors. However, after taking over the assets, PSTC would now turn
around and renege on its promise.

Caltex may enforce its cause of action against PSTC because PSTC expressly assumed
all the obligations of LUSVETECO pertaining to its tanker and bulk business and
specifically, those relating to AC-G.R. CV No. 62613. While Caltex is not a party to the
Agreement, it has a real interest in the performance of PSTC’s obligations under the
Agreement because the non-performance of PSTC’s obligations will defraud Caltex.

Even if PSTC did not expressly assume to pay the creditors of LUSTEVECO, PSTC
would still be liable to Caltex up to the value of the assets transferred. The transfer of all
or substantially all of the unencumbered assets of LUSTEVECO to PSTC cannot work to
defraud the creditors of LUSTEVECO. A creditor has a real interest to go after any
person to whom the debtor fraudulently transferred its assets.

WHEREFORE, we REVERSE and SET ASIDE the 31 May 2001 Decision and 9
November 2001 Resolution of the Court of Appeals in CA-G.R. CV No. 46097. We
AFFIRM the 1 June 1994 Decision of the Regional Trial Court of Manila, Branch 51, in
Civil Case No. 91-59512. Costs against respondent.

BARAYOGA V. ASSET PRIVATIZATION TRUST

Facts: Bisudeco-Philsucor Corfarm Workers Union (Union) is composed of workers of
Bicolandia
Sugar Development Corporation (BISUDECO), a sugar plantation.
On the other hand, Asset Privatization Trust (APT), was a public trust mandated to take
title to and possession of, manage and dispose of non-performing assets of the
government identified for privatization or disposition.
President Corazon Aquino issued Administrative Order No. 14 identifying certain assets
of government institutions that were to be transferred to the National Government.
Among the assets transferred was the financial claim of the Philippine National Bank
against BISUDECO in the form of a secured loan. APT was constituted as trustee over
BISUDECO’s account with the PNB.
BISUDECO contracted the services of Philippine Sugar Corporation (Philsucor) to take
over the management of the sugar plantation and milling operations until August 31,
1992
Meanwhile, because of the continued failure of BISUDECO to pay its outstanding loan
with PNB, its mortgaged properties were foreclosed and subsequently sold in a public
auction to APT, as the sole bidder
Then, Bicol-Agro-Industrial Cooperative (BAPCI) purchased the foreclosed assets of
BISUDECO from
APT and took over its sugar milling operations under the name PENSUMIL
The union under BISUDECO filed a complaint for unfair labor practice, illegal dismissal,
illegal deduction and underpayment of wages and other labor standard benefits as against
BISUDECO, Pensumil and APT.
BISUDECO, Pensumil and APT all interposed the defense of lack of employer-employee
relationship.
APT was held liable by the NLRC, such ruling wass reversed by the CA.

Issue: Whether APT, as mortgagee of BISUDECO, is liable for the union’s claims.

Held: NO. The duties and liabilities of BISUDECO, including its monetary liabilities to
its employees, were not all automatically assumed by APT as purchaser of the foreclosed
properties at the auction sale. Any assumption of liability must be specifically and
categorically agreed upon. In Sundowner Development Corp. v. Drilon, the Court ruled
that, unless expressly assumed, labor contracts like collective bargaining agreements are
not enforceable against the transferee of an enterprise. Labor contracts are in personam
and thus binding only between the parties. No succession of employment rights and
obligations can be said to have taken place between the two. Between the employees of
BISUDECO and APT, there is no privity of contract that would make the latter a
substitute employer that should be burdened with the obligations of the corporation. To
rule otherwise would result in unduly imposing upon APT an unwarranted assumption of
accounts not contemplated in Proclamation No. 50 or in the Deed of Transfer between the
national government and PNB.
Furthermore, under the principle of absorption, a bona fide buyer or transferee of all, or
substantially all, the properties of the seller or transferor is not obliged to absorb the
latter’s employees. The most that the purchasing company may do, for reasons of public
policy and social justice, is to give preference of reemployment to the selling company’s
qualified separated employees, who in its judgment are necessary to the continued
operation of the business establishment.
In any event, the national government (in whose trust APT previously held the mortgage
credits of BISUDECO) is not the employer of petitioner-union’s members, who had been
dismissed sometime in May 1991, even before APT took over the assets of the
corporation. Hence, under existing law and jurisprudence, there is no reason to expect
any kind of bailout by the national government.
The liabilities of the previous owner to its employees are not enforceable against the
buyer or transferee, unless (1) the latter unequivocally assumes them; or (2) the sale or
transfer was made in bad faith. Thus, APT cannot be held responsible for the monetary
claims of petitioners who had been dismissed even before it actually took over
BISUDECO’s assets.

responsibility for the liabilities of a mortgagor towards its employees cannot be

transferred via an auction sale to a purchaser who is also the mortgagee-creditor of
the foreclosed assets and chattels. Clearly, the mortgagee-creditor has no employer-
employee relations with the mortgagor’s workers. The mortgage constitutes a lien
on the determinate properties of the employer-debtor, because it is a specially
preferred credit to which the worker’s monetary claims is deemed subordinate
"Bisudeco-Philsucor Corfarm Workers Union is composed of workers of Bicolandia
Sugar Development Corporation (BISUDECO), a sugar plantation mill located in
Himaao, Pili, Camarines Sur.

"On December 8, 1986, [Respondent] Asset Privatization Trust (APT), a public trust
was created under Proclamation No. 50, as amended, mandated to take title to and
possession of, conserve, provisionally manage and dispose of non-performing assets
of the Philippine government identified for privatization or disposition

failure of BISUDECO to pay its outstanding loan with PNB, its mortgaged properties
were foreclosed and subsequently sold in a public auction to APT, as the sole bidder. On
April 2, 1991, APT was issued a Sheriff’s Certificate of Sale.

union filed a complaint for unfair labor practice, illegal dismissal, illegal deduction and
underpayment of wages and other labor standard benefits plus damages.

union alleged that when Philsucor initially took over the operations of the company, it
retained BISUDECO’s existing personnel under the same terms and conditions of
employment. Nonetheless, at the start of the season sometime in May 1991, Philsucor
started recalling workers back to work, to the exception of the union members.
Management told them that they will be re-hired only if they resign from the union. Just
the same, thereafter, the company started to employ the services of outsiders under the
‘pakyaw’ system.

"BISUDECO, Pensumil and APT all interposed the defense of lack of employer-
employee relationship.

The NLRC affirmed APT’s liability for petitioners’ money claims. While no employer-
employee relationship existed between members of the petitioner union and APT, at the
time of the employees’ illegal dismissal, the assets of BISUDECO had been transferred to
the national government through APT. Moreover, the NLRC held that APT should have
treated petitioners’ claim as a lien on the assets of BISUDECO. The Commission opined
that APT should have done so, considering its awareness of the pending complaint of
petitioners at the time BISUDECO sold its assets to BAPCI, and APT started paying
separation pay to the workers.

Ruling of the Court of Appeals

The CA ruled that APT should not be held liable for petitioners’ claims for unfair labor
practice, illegal dismissal, illegal deduction and underpayment of wages, as well as other
labor-standard benefits plus damages. As found by the NLRC, APT was not the employer
of petitioners, but was impleaded only for possessing BISUDECO’s mortgaged
properties as trustee and, later, as the highest bidder in the foreclosure sale of those
assets.

In brief, the main issue raised is whether Respondent APT is liable for petitioners’
monetary claims.

Main Issue:

Whether APT Is Liable for the Claims of

Petitioners Against Their Former Employer

The question now before the Court is whether APT is liable to pay petitioners’ monetary
claims, including back wages from May 1, 1991, to October 30, 1992 (the date of the sale
of BISUDECO assets to BAPCI).

We rule in the negative. The duties and liabilities of BISUDECO, including its monetary
liabilities to its employees, were not all automatically assumed by APT as purchaser of
the foreclosed properties at the auction sale. Any assumption of liability must be
specifically and categorically agreed upon. In Sundowner Development Corp. v. Drilon,13
the Court ruled that, unless expressly assumed, labor contracts like collective bargaining
agreements are not enforceable against the transferee of an enterprise. Labor contracts are
in personam and thus binding only between the parties.
No succession of employment rights and obligations can be said to have taken place
between the two. Between the employees of BISUDECO and APT, there is no privity of
contract that would make the latter a substitute employer that should be burdened with
the obligations of the corporation. To rule otherwise would result in unduly imposing
upon APT an unwarranted assumption of accounts not contemplated in Proclamation No.
50 or in the Deed of Transfer between the national government and PNB.

Furthermore, under the principle of absorption, a bona fide buyer or transferee of all, or
substantially all, the properties of the seller or transferor is not obliged to absorb the
latter’s employees.14 The most that the purchasing company may do, for reasons of public
policy and social justice, is to give preference of reemployment to the selling company’s
qualified separated employees, who in its judgment are necessary to the continued
operation of the business establishment.15

Hence, under existing law and jurisprudence, there is no reason to expect any kind of
bailout by the national government.16 Even the NLRC found that no employer-employee
relationship existed between APT and petitioners. Thus, the Commission gravely abused
its discretion in nevertheless holding that APT, as the transferee of the assets of
BISUDECO, was liable to petitioners.

There can be no controversy for it is a principle well-recognized, that it is within the

employer’s legitimate sphere of management control of the business to adopt economic
policies or make some changes or adjustments in their organization or operations that
would insure profit to itself or protect the investment of its stockholders. As in the
exercise of such management prerogative, the employer may merge or consolidate its
business with another, or sell or dispose all or substantially all of its assets and properties
which may bring about the dismissal or termination of its employees in the process. Such
dismissal or termination should not however be interpreted in such a manner as to permit
the employer to escape payment of termination pay. x x x.

"In a number of cases on this point, the rule has been laid down that the sale or
disposition must be motivated by good faith as an element of exemption from
liability. Indeed, an innocent transferee of a business establishment has no liability
to the employees of the transferor to continue employing them. Nor is the transferee
liable for past unfair labor practices of the previous owner, except, when the liability
therefor is assumed by the new employer under the contract of sale, or when
liability arises because of the new owner’s participation in thwarting or defeating
the rights of the employees."22 (Citations omitted.)

In other words, the liabilities of the previous owner to its employees are not enforceable
against the buyer or transferee, unless (1) the latter unequivocally assumes them; or (2)
the sale or transfer was made in bad faith. Thus, APT cannot be held responsible for the
monetary claims of petitioners who had been dismissed even before it actually took over
BISUDECO’s assets.

Moreover, it should be remembered that APT merely became a transferee of

BISUDECO’s assets for purposes of conservation because of its lien on those assets --
a lien it assumed as assignee of the loan secured by the corporation from PNB.
Subsequently, APT, as the highest bidder in the auction sale, acquired ownership of
the foreclosed properties.

This Court has ruled in a long line of cases24 that under Articles 2241 and 2242 of
the Civil Code, a mortgage credit is a special preferred credit that enjoys preference
with respect to a specific/determinate property of the debtor.

A preference applies only to claims which do not attach to specific properties. A lien
creates a charge on a particular property. The right of first preference as regards unpaid
wages recognized by Article 110 does not constitute a lien on the property of the
insolvent debtor in favor of workers. It is but a preference of credit in their favor, a
preference in application. It is a method adopted to determine and specify the order in
which credits should be paid in the final distribution of the proceeds of the insolvent’s
assets. It is a right to a first preference in the discharge of the funds of the judgment
debtor. x x x"
Furthermore, workers’ claims for unpaid wages and monetary benefits cannot be
paid outside of a bankruptcy or judicial liquidation proceedings against the
employer.26

The Court hastens to add that the present Petition was brought against APT alone. In
holding that the latter, which has never really been an employer of petitioners, is not
liable for their claims, this Court is not reversing or ruling upon their entitlement to back
wages and other unpaid benefits from their previous employer.

On the basis of the foregoing clarification, the Court finds no reversible error in the
questioned CA Decision, which set aside the February 8, 2000 Decision of the NLRC. As
a mere transferee of the mortgage credit and later as the purchaser in a public auction of
BISUDECO’s foreclosed properties, APT cannot be held liable for petitioners’ claims
against BISUDECO: illegal dismissal, unpaid back wages and other monetary benefits.

WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and
Resolution AFFIRMED. Costs against petitioners

Phil. Veterans Investment Dev. Corp. vs. CA (181 SCRA 669 [1990])

G.R. No. 85266 January 30, 1990

PHILIPPINE VETERANS INVESTMENT DEVELOPMENT CORPORATION,

petitioner,
vs.
COURT OF APPEALS and VIOLETA MONTELIBANO BORRES, respondents.

This case arose when Violeta M. Borres, private respondent herein, was injured
in an accident that was later held by the trial and respondent courts to be due to
the negligence of Phividec Railways, Inc. (PRI). 1 The accident occurred on
March 29, 1979. On May 25, 1979, petitioner Philippine Veterans Investment
Development Corporation (PHIVIDEC) sold all its rights and interests in the PRI
to the Philippine Sugar Commission (PHILSUCOM). Two days later,
PHILSUCOM caused the creation of a wholly-owned subsidiary, the Panay
Railways, Inc., to operate the railway assets acquired from PHIVIDEC. On
January 21, 1980, Borres filed a complaint for damages against PRI and Panay
Railways Inc. (Panay ), 2 whereupon the latter filed with leave of court a third-
party complaint against the herein petitioner. 3 It alleged that upon the sale to
PHILSUCOM of PRI, the corporate name of PRI was changed to Panay
Railways, Inc. It disclaimed liability on the ground that in the Agreement
concluded between PHIVIDEC and PHILSUCOM,

Regional Trial Court of Iloilo held Phividec Railways, Inc. negligent and so liable
to the plaintiff for damages. It also held that as PRI was a wholly-owned
subsidiary of PHIVIDEC, the latter should answer for PRI's liability. The decision
was affirmed on appeal by the respondent court, 4 which is now faulted for grave
abuse of discretion in this petition.

It is the position of the petitioner that PHIVIDEC and PRI are entirely distinct and
separate corporations although the latter is its subsidiary. The transfer of the
shares of stock of PRI to PHILSUCOM did not divest PRI of its juridical
personality or of its capacity to direct its own affairs and conduct its own business
under the control of its own board of directors

The rule is that:

Where it appears that two business enterprises are owned,

conducted and controlled by the same parties, both law and equity
will, when necessary to protect the rights of third persons, disregard
the legal fiction that two corporations are distinct entities, and treat
them as identical. 9
In fact, contrary to the suggestion in the petition, what the Court said in the Nell
Case was:

Generally where one corporation sells or otherwise transfers all of

its assets to another corporation, the latter is not liable for the debts
and liabilities of the transferor, except: (1) where the purchaser
expressly or impliedly agrees to assume such debts; (2) where the
transaction amounts to a consolidation or merger of the
corporations; (3) where the purchasing corporation is merely a
continuation of the selling corporation; and (4) where the
transaction is entered into fraudulently in order to escape liability for
such debts.

It is clear from the evidence of record that by virtue of the agreement between
PHIVIDEC and PHILSUCOM, particularly the stipulation exempting the latter
from any "claim or liability arising out of any act or transaction" prior to the turn-
over, PHIVIDEC had expressly assumed liability for any claim against PRI. Since
the accident happened before that agreement and PRI ceased to exist after the
turn-over, it should follow that PHIVIDEC cannot evade its liability for the injuries
sustained by the private respondent.

A contrary conclusion would leave the private respondent without any recourse
for her legitimate claim. In the interest of justice and equity, and to prevent the
veil of corporate fiction from denying her the reparation to which she is entitled,
that veil must be pierced and PHIVIDEC and PRI regarded as one and the same
entity.

WHEREFORE, the challenged decision is AFFIRMED and the petition is

DENIED, with costs against the petitioner. It is so ordered.

Narvasa, Gancayco, Griño-Aquino and Medialdea, JJ., concur.

Manlimos vs. NLRC (242 SCRA 145 [1995])

The petitioners were among the regular employees of the Super Mahogany
Plywood Corporation, a domestic corporation organized in 1988 and based in
Butuan City. They had been hired as patchers, taper-graders, and receivers-
dryers. On 1 September 1991, a new owner/management group headed by
Alfredo Roxas acquired complete ownership of the corporation. The petitioners
were advised of such change of ownership; however, the petitioners continued to
work for the new owner and were considered terminated, with their conformity,
only as of December 1991 when they received their separation pay, 13th month
pay, and all other benefits due them computed as of the said month. Each of
them then executed on 17 December 1991 a Release and Waiver which they
acknowledged before Atty. Nolasco Discipulo, Hearing Officer of the Butuan City
District Office of the Department of Labor and Employment (DOLE).

The petitioners maintained that they remained regular employees regardless of

the change of management in September 1991 and their execution of the
Release and Waiver. They argue that being a corporation, the private
respondent's juridical personality was unaffected even if ownership of its shares
of stock changed hands. Their signing of the Release and Waiver was of no
moment not only because the consideration was woefully inadequate, but also
because employees who receive their separation pay are not barred from
contesting the legality of their dismissal and quit claims executed by laborers are
frowned upon for being contrary to public policy.

On the other hand, the private respondent contended that the petitioners were
deemed legally terminated from their previous employment as evidenced by the
execution of the Release and Waiver and the filing of their applications for
employment with the new owner; that the new owner was well within its legal
right or prerogative in considering as terminated the petitioners'
probationary/temporary appointment; and that the petitioners were not illegally
dismissed; hence, they are not entitled to the reliefs prayed
Labor Arbiter Marissa Macaraig-Guillen ruled for the petitioners and decreed as
follows:

WHEREFORE, in view of the foregoing, judgment is hereby

rendered declaring the dismissals of complainant Ronald Manlimos,
Froilan Pagalan, Merlita Duhay lungsod, Elizabeth Andagan, Doris
Serdan, Leonora Bibiano, Perla Cumpay, Virginia Etic, Remegia
Noel, Ronald Booc, German Gista, Jaime Timber [sic], Federico
Amper, Renante Yacapin, and Francisco Evale as invalid and
illegal and ordering respondent Super Mahogany Plywood
Corporation represented by its Vice President, Mr. Alberto Go to:

1. To reinstate the complainants to their positions

without loss of seniority rights and privileges;

2. To pay then backwages, 13th month pay, service

incentive leave pay and attorney's fees in the total
sum of FIVE HUNDRED FORTY TWO THOUSAND
ONE HUNDRED FIFTY PESOS and 40/100 ONLY
(P542,150.40) in accordance with the computation
herein provided for.

All other claims are dismissed for lack of merit.

It is the thesis of the Labor Arbiter that the transfer of ownership partook of a
cessation of business operation not due to business reverses under Article 283
of the Labor Code and pursuant to the doctrine laid down in Mobil Employees
Association vs. National Labor Relations Commission, 9 the following requisites
must be complied with before the dismissal of employees may be effected: (1)
service of written notice to the employees and to the Ministry of Labor and
Employment (MOLE) at least one month before the intended date thereof; (2) the
cessation of or withdrawal from business operations must be bona fide in
character; and (3) payment to the employees of termination pay amounting to at
least one-half month pay for each year of service or one month pay whichever is
higher

The Labor Arbiter, however, ruled that there was no "cessation of operations
which would lead to the dismissal of the employees." Thus:

In this case, there was actually no cessation of business operations

except for the traditional break between Christmas and New Year.

Secondly, we are merely presuming that there was a purchase because a new
list of stockholders now sit on the board of the corporation and occupy various
positions as corporate officers, but this Office had never been formally apprised
of what actually occurred so that the bulk of existing shareholdings were
transferred to the group of Mr. Alfredo Roxas

NLRC reversed the judgment of the Labor Arbiter, except as to the 13th month
pay which was sustained subject, however, to recomputation based on the actual
services of the petitioners under the new owner up to the actual date of their
separation from the service on 20 June 1992. It found that the change of
ownership in this case was made in good faith since there was no evidence on
record that "the former owners conspired with the new owners to insulate the
former management of any liability to its workers." It ruled that the Labor

has not only misappreciated the facts but . . . has as well distorted
the facts by erroneously applying the ruling in the case of MOBIL.
The facts in said Mobil are far different from the facts in the instant
case. The Mobil case refers to retrenchment or termination of
employment under Article 283 (ART. 284) of the Labor Code, as
mended. It does not involve termination of employment as a result
of the change of corporate ownership or corporate consolidation or
merger.
 General rule is that "(C)hange of ownership or management of a
business establishment or enterprise however, is not one of the just
causes . . . to terminate employment without a definite period." That
"(N)either can it be considered as synonymous with nor or
analogous to closing or cessation of operation of an establishment
or enterprise . . . ." (Central Azucarera del Danao vs. Court of
Appeals, 137 SCRA 295, 303).

However, it is equally a well settled rule that the sale or disposition of a business
enterprise which has been motivated by good faith is "an element of exemption
from liability." Thus, "an innocent transferee of a business has no liability to the
employees of the transfer or to continue employing them. Nor is the transferee
liable for past unfair labor practices of the previous owner, except, when the
liability is assumed by the new employer under the contract of sale, or when
liability arises because the new owners participated in thwarting or defeating the
rights of the employees."

The right to hire and fire is basically a sole management

prerogative which the courts may not interfere.

10 The NLRC was correct in holding that Mobil was not applicable because Mobil
involved the termination of employment under Article 283 (before Article 284) of
the Labor Code and not termination of employment as a result of the change of
corporate ownership, as in the case of private respondent Super Mahogany
Plywood Corporation. In Mobil, the original employer; Mobil Oil Philippines, Inc.,
completely withdrew from business and was even dissolved. In the case at bar,
there was only a change of ownership of Super Mahogany Plywood Corporation
which resulted in a change of ownership. In short, the corporation itself, as a
distinct and separate juridical entity, continues to exist. The issue of whether
there was a closing or cessation of business operations which could have
operated as a just cause for the termination of employment was not material. The
change in ownership of the management was done bona fide and the petitioners
did not for any moment before the filing of their complaints raise any doubt on the
motive for the change. On the contrary, upon being informed thereof and of their
eventual termination from employment, they freely and voluntarily accepted their
separation pay and other benefits and individually executed the Release or
Waiver which they acknowledged before no less than a hearing officer of the
DOLE.

There can be no controversy for it is a principle well-recognized,

that it is within the employer's legitimate sphere of management
control of the business to adopt economic policies or make some
changes or adjustments in their organization or operations that
would insure profit to itself or protect the investment of its
stockholders. As in the exercise of such management prerogative,
the employer may merge or consolidate its business with another,
or sell or dispose all or substantially all of its assets and properties
which may bring about the dismissal or termination of its employees
in the process. Such dismissal or termination should not however
be interpreted in such a manner as to permit the employer the very
concept of social justice.

In a number of cases on this point, the rule has been laid down that
the sale or disposition must be motivated by good faith as an
element of exemption from liability. Indeed, an innocent transferee
of a business establishment has no liability to the employees of the
transfer or to continue employing them. Nor is the transferee liable
for past unfair labor practices of the previous owner, except, when
the liability therefor is assumed by the new employer under the
contract of sale, or when liability arises because of the new owner's
participation in thwarting or defeating the rights of the employees. 13

Where such transfer of ownership is in good faith, the transferee is under no

legal duty to absorb the transferor employees as there is no law compelling such
absorption. The most that the transferee may do, for reasons of public policy and
social justice, is to give preference to the qualified separated employees in the
filling of vacancies in the facilities of the purchaser. 14

WHEREFORE, the instant petition is partly GRANTED. The challenged

resolutions of public respondent National Labor Relations Commission (Fifth
Division) of 2 August 1993 and 14 October 1993 in NLRC Case No. M-001378-
93 are hereby MODIFIED; and as modified, private respondent Super Mahogany
Plywood Corporation is further ordered to pay petitioners Perla Cumpay and
Virginia Etic their backwages corresponding to the period from 4 May 1992 up to
the expiration of their probationary employment contracts.

No pronouncements as to costs in this instance.

SO ORDERED.

Philippine National Bank vs. Andrada Electric & Engineering Co. [GR 142936, 17
April 2002]

Third Division, Panganiban (J): 3 concur, 1 on official leave

Facts: On 26 August 1975, the Philippine national Bank (PNB) acquired the assets of the
Pampanga Sugar Mills (PASUMIL) that were earlier foreclosed by the Development
Bank of the Philippines (DBP) under LOI 311. The PNB organized the ational Sugar
Development Corporation (NASUDECO) in September 1975, to take ownership and
possession of the assets and ultimately to nationalize and consolidate its interest in other
PNB controlled sugar mills. Prior to 29 October 1971, PASUMIL engaged the services of
the Andrada Electric & Engineering Company (AEEC) for electrical rewinding and
repair, most of which were partially paid by PASUMIL, leaving several unpaid accounts
with AEEC. On 29 October 1971, AEEC and PASUMIL entered into a contract for
AEEC to perform the (a) Construction of a power house building; 3 reinforced concrete
foundation for 3 units 350 KW diesel engine generating sets, 3 reinforced concrete
foundation for the 5,000 KW and 1,250 KW turbo generator sets, among others. Aside
from the work contract, PASUMIL required AEEC to perform extra work, and provide
electrical equipment and spare parts. Out of the total obligation of P777,263.80,
PASUMIL had paid only P250,000.00, leaving an unpaid balance, as of 27 June 1973,
amounting to P527,263.80. Out of said unpaid balance of P527,263.80, PASUMIL made
a partial payment to AEEC of P14,000.00, in broken amounts, covering the period from 5
January 1974 up to 23 May 1974, leaving an unpaid balance of P513,263.80. PASUMIL
and PNB, and now NASUDECO, allegedly failed and refused to pay AEEC their just,
valid and demandable obligation (The President of the NASUDECO is also the Vice-
President of the PNB. AEEC besought said official to pay the outstanding obligation of
PASUMIL, inasmuch as PNB and NASUDECO now owned and possessed the assets of
PASUMIL, and these defendants all benefited from the works, and the electrical, as well
as the engineering

Commercial Law - Corporation Law, 2005 ( 9 )

Narratives (Berne Guerrero)

and repairs, performed by AEEC). Because of the failure and refusal of PNB, PASUMIL
and/or NASUDECO to pay their obligations, AEEC allegedly suffered actual damages in
the total amount of P513,263.80; and that in order to recover these sums, AEEC was
compelled to engage the professional services of counsel, to whom AEEC agreed to pay a
sum equivalent to 25% of the amount of the obligation due by way of attorney's fees.
PNB and NASUDECO filed a joint motion to dismiss on the ground that the complaint
failed to state sufficient allegations to establish a cause of action against PNB and
NASUDECO, inasmuch as there is lack or want of privity of contract between the them
and AEEC. Said motion was denied by the trial court in its 27 November order, and
ordered PNB nad NASUDECO to file their answers within 15 days. After due
proceedings, the Trial Court rendered judgment in favor of AEEC and against PNB,
NASUDECO and PASUMIL; the latter being ordered to pay jointly and severally the
former (1) the sum of P513,623.80 plus interest thereon at the rate of 14% per annum as
claimed from 25 September 1980 until fully paid; (2) the sum of P102,724.76 as
attorney's fees; and, (3) Costs. PNB and NASUDECO appealed. The Court of Appeals
affirmed the decision of the trial court in its decision of 17 April 2000 (CA-GR CV
57610. PNB and NASUDECO filed the petition for review.

Issue: Whether PNB and NASUDECO may be held liable for PASUMIL’s liability to
AEEC.

Held: Basic is the rule that a corporation has a legal personality distinct and separate
from the persons and entities owning it. The corporate veil may be lifted only if it has
been used to shield fraud, defend crime, justify a wrong, defeat public convenience,
insulate bad faith or perpetuate injustice. Thus, the mere fact that the Philippine National
Bank (PNB) acquired ownership or management of some assets of the Pampanga Sugar
Mill (PASUMIL), which had earlier been foreclosed and purchased at the resulting public
auction by the Development Bank of the Philippines (DBP), will not make PNB liable for
the PASUMIL's contractual debts to Andrada Electric & Engineering Company (AEEC).
Piercing the veil of corporate fiction may be allowed only if the following elements
concur: (1) control — not mere stock control, but complete domination — not only of
finances, but of policy and business practice in respect to the transaction attacked, must
have been such 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 a fraud or a wrong to perpetuate the violation of a statutory or other positive
legal duty, or a dishonest and an unjust act in contravention of plaintiff's legal right; and
(3) the said control and breach of duty must have proximately caused the injury or unjust
loss complained of. The absence of the foregoing elements in the present case precludes
the piercing of the corporate veil. First, other than the fact that PNB and NASUDECO
acquired the assets of PASUMIL, there is no showing that their control over it warrants
the disregard of corporate personalities. Second, there is no evidence that their juridical
personality was used to commit a fraud or to do a wrong; or that the separate corporate
entity was farcically used as a mere alter ego, business conduit or instrumentality of
another entity or person. Third, AEEC was not defrauded or injured when PNB and
NASUDECO acquired the assets of PASUMIL. Hence, although the assets of
NASUDECO can be easily traced to PASUMIL, the transfer of the latter's assets to PNB
and NASUDECO was not fraudulently entered into in order to escape liability for its debt
to AEEC. Neither was there any merger or consolidation with respect to PASUMIL and
PNB. The procedure prescribed under Title IX of the Corporation Code 59 was not
followed. In fact, PASUMIL's corporate existence had not been legally extinguished or
terminated. Further, prior to PNB's acquisition of the foreclosed assets, PASUMIL had
previously made partial payments to AEEC for the former's obligation in the amount of
P777,263.80. As of 27 June 1973, PASUMIL had paid P250,000 to AEEC and, from 5
January 1974 to 23 May 1974, another P14,000. Neither did PNB expressly or impliedly
agree to assume the debt of PASUMIL to AEEC. LOI 11 explicitly provides that PNB
shall study and submit recommendations on the claims of PASUMIL's creditors. Clearly,
the corporate separateness between PASUMIL and PNB remains, despite AEEC's
insistence to the contrary.

Babst vs. Court of Appeals [GR 99398, 26 January 2001]; also Elizalde Steel
Consolidated Inc. vs. Court of Appeals [GR 104625]
First Division, Ynares Santiago (J): 4 concur

Facts: On 8 June 1973, ELISCON obtained from Commercial Bank and Trust Company
(CBTC) a loan in the amount of P8,015,900.84, with interest at the rate of 14% per
annum, evidenced by a promissory note. Elizalde Steel Consolidated, Inc. (ELISCON)
defaulted in its payments, leaving an outstanding indebtedness in the amount of
P2,795,240.67 as of 31 October 1982. The letters of credit, on the other hand, were
opened for ELISCON by CBTC using the credit facilities of Pacific Multi-Commercial
Corporation (MULTI) with the said bank, pursuant to the Resolution of the Board of
Directors of MULTI adopted on 31 August 1977. Subsequently, on 26 September 1978,
Antonio Roxas Chua and Chester G. Babst executed a Continuing Suretyship, whereby
they bound themselves jointly and severally liable to pay any existing indebtedness of
MULTI to CBTC to the extent of P8,000,000.00 each. Sometime in October 1978, CBTC
opened for ELISCON in favor of National Steel Corporation (NSC) 3 domestic letters of
credit in the amounts of P1,946,805.73, P1,702,869.32 and P200,307.72, respectively,
which ELISCON used to purchase tin black plates from NSC. ELISCON defaulted in its
obligation to pay the amounts of the letters of credit, leaving an outstanding account, as
of 31 October 1982, in the total amount of P3,963,372.08. On 22 December 1980, the
Bank of the Philippine Islands (BPI) and CBTC entered into a merger, wherein BPI, as
the surviving corporation, acquired all the assets and assumed all the liabilities of CBTC.
Meanwhile, ELISCON encountered financial difficulties and became heavily indebted to
the Development Bank of the Philippines (DBP). In order to settle its obligations,
ELISCON proposed to convey to DBP by way of dacion en pago all its fixed assets
mortgaged with DBP, as payment for its total indebtedness in the amount of
P201,181,833.16. On 28 December 1978, ELISCON and DBP executed a Deed of
Cession of Property in Payment of Debt. In June 1981, ELISCON called its creditors to a
meeting to announce the take-over by DBP of its assets. In October 1981, DBP formally
took over the assets of ELISCON, including its indebtedness to BPI. Thereafter, DBP
proposed formulas for the settlement of all of ELISCON's obligations to its creditors, but
BPI expressly rejected the formula submitted to it for not being acceptable.
Consequently, on 17 January 1983, BPI, as successor-in-interest of CBTC, instituted with
the Regional Trial Court of Makati, Branch 147, a complaint for sum of money against
ELISCON, MULTI and Babst (Civil Case 49226). On 20 February 1987, the trial court
rendered its Decision in favor of BPI. In due time, ELISCON, MULTI and Babst filed
their respective notices of appeal. On 29 April 1991, the Court of Appeals rendered a
Decision modifying the judgment of the trial court. ELISCON filed a Motion for
Reconsideration of the Decision of the Court of Appeals which was, however, denied in a
Resolution dated 9 March 1992. Subsequently, ELISCON filed a petition for review on
certiorari (GR. 104625). Meanwhile, Babst also filed a petition for review with the Court
(GR 99398).

Issue [1]: Whether the BPI can institute the present case.

Held [1]: There was a valid merger between BPI and CBTC. It is settled that in the
merger of two existing corporations, one of the corporations survives and continues the
business, while the other is dissolved and all its rights, properties and liabilities are
acquired by the surviving corporation. Hence, BPI has a right to institute the present case.

Issue [2]: Whether BPI, the surviving corporation in a merger with CBTC, consented to
the assumption by DBP of the obligations of ELISCON.

Held [2]: Due to the failure of BPI to register its objection to the take-over by DBP of
ELISCON's assets, at the creditors' meeting held in June 1981 and thereafter, it is deemed
to have consented to the substitution of DBP for ELISCON as debtor. The authority
granted by BPI to its account officer to attend the creditors' meeting was an authority to
represent the bank, such that when he failed to object to the substitution of debtors, he did
so on behalf of and for the bank. Even granting arguendo that the said account officer
was not so empowered, BPI could have subsequently registered its objection to the
substitution, especially after it had already learned that DBP had taken over the assets and
assumed the liabilities of ELISCON. Its failure to do so can only mean an acquiescence
in the assumption by DBP of ELISCON's obligations. As repeatedly pointed out by
ELISCON and MULTI, BPI's objection was to the proposed payment formula, not to the
substitution itself. BPI gives no cogent reason in withholding its consent to the
substitution, other than its desire to preserve its causes of action and legal recourse
against the sureties of ELISCON. It must be remembered, however, that while a surety is
solidarily liable with the principal debtor, his obligation to pay only arises upon the
principal debtor's failure or refusal to pay. There was no indication that the principal
debtor will default in payment. In fact, DBP, which had stepped into the shoes of
ELISCON, was capable of payment. Its authorized capital stock was increased by the
government. More importantly, the National Development Company took over the
business of ELISCON and undertook to pay ELISCON's creditors, and earmarked for
that purpose the amount of P4,015,534.54 for payment to BPI. Notwithstanding the fact
that a reliable institution backed by government funds was offering to pay ELISCON's
debts, not as mere surety but as substitute principal debtor, BPI, for reasons known only
to itself, insisted in going after the sureties. BPI's conduct evinced a clear and
unmistakable consent to the substitution of DBP for ELISCON as debtor. Hence, there
was a valid novation which resulted in the release of ELISCON from its obligation to
BPI, whose cause of action should be directed against DBP as the new debtor.

MC Employees Union-PTGWO v. Confessor 262 SCRA 81

(1996)
Facts: San Miguel Corp. spun-off its Magnolia ice cream division
to a new Magnolia Corporation, and the feeds and livestock
division into the San Miguel Feeds, Inc. Will the employees in the
spun-off divisions continue to be considered within the SMB
bargaining unit?
Held: No. Since the spin-offs were done for valid business cause
and in good faith, and therefore valid spin-offs, there is no
reason to allow SMC union's petition to include the employees in
the spun-off divisions to be within the SMC bargaining unit; the
employees in the new corporations constitute new bargaining
units.
43 Republic of the Philippines vs. Cocofed [GRs 147062-64, 14 December 2001]

En Banc, Panganiban (J): 7 concur, 1 filed a dissenting opinion to which 4 joined, 1 filed a
separate opinion to which 1 joined.

Facts: Immediately after the 1986 EDSA Revolution, then President Corazon C. Aquino issued
Executive Orders 1, 5 2 6 and 14. On the explicit premise that vast resources of the government
have been amassed by former President Ferdinand E. Marcos, his immediate family, relatives,
and close associates both here and abroad, the Presidential Commission on Good Government
(PCGG) was created by Executive Order 1 to assist the President in the recovery of the ill-gotten
wealth thus accumulated whether located in the Philippines or abroad. Executive Order 2 stated
that the ill-gotten assets and properties are in the form of bank accounts, deposits, trust accounts,
shares of stocks, buildings, shopping centers, condominiums, mansions, residences, estates, and
other kinds of real and personal properties in the Philippines and in various countries of the
world. Executive Order 14, on the other hand, empowered the PCGG, with the assistance of the
Office of the Solicitor General and other government agencies, inter alia, to file and prosecute all
cases investigated by it under EOs 1 and 2. Pursuant to these laws, the PCGG issued and
implemented numerous sequestrations, freeze orders and provisional takeovers of allegedly ill-
gotten companies, assets and properties, real or personal. Among the properties sequestered by
the Commission were shares of stock in the United Coconut Planters Bank (UCPB) registered in
the names of the alleged “one million coconut farmers,” the so-called Coconut Industry
Investment Fund companies (CIIF companies) and Eduardo Cojuangco Jr. In connection with the
sequestration of the said UCPB shares, the PCGG, on 31 July 1987, instituted an action for
reconveyance, reversion, accounting, restitution and damages (Case 0033) in the Sandiganbayan.
On 15 November 1990, upon Motion of COCOFED, the Sandiganbayan issued a Resolution
lifting the sequestration of the subject UCPB shares on the ground that COCOFED and the so-
called CIIF companies had not been impleaded by the PCGG as parties-defendants in its 31 July
1987 Complaint for reconveyance, reversion, accounting, restitution and damages. The
Sandiganbayan ruled that the Writ of Sequestration issued by the

Commission was automatically lifted for PCGG’s failure to commence the corresponding judicial
action within the six-month period ending on 2 August 1987 provided under Section 26, Article
XVIII of the 1987 Constitution. The anti-graft court noted that though these entities were listed in
an annex appended to the Complaint, they had not been named as parties-respondents. The
Sandiganbayan Resolution was challenged by the PCGG in a Petition for Certiorari (GR 96073)
in the Supreme Court. Meanwhile, upon motion of Cojuangco, the anti-graft court ordered the
holding of elections for the Board of Directors of UCPB. However, the PCGG applied for and
was granted by this Court a Restraining Order enjoining the holding of the election.
Subsequently, the Court lifted the Restraining Order and ordered the UCPB to proceed with the
election of its board of directors. Furthermore, it allowed the sequestered shares to be voted by
their registered owners. The victory of the registered shareholders was fleeting because the Court,
acting on the solicitor general’s Motion for Clarification/Manifestation, issued a Resolution on 16
February 1993, declaring that “the right of COCOFED, et. al. to vote stock in their names at the
meetings of the UCPB cannot be conceded at this time. That right still has to be established by
them before the Sandiganbayan. Until that is done, they cannot be deemed legitimate owners of
UCPB stock and cannot be accorded the right to vote them.” On 23 January 1995, the Court
rendered its final Decision in GR 96073, nullifying and setting aside the 15 November 1990
Resolution of the Sandiganbayan which lifted the sequestration of the subject UCPB shares.
A month thereafter, the PCGG — pursuant to an Order of the Sandiganbayan — subdivided Case
0033 into eight Complaints (Cases 0033-A to 0033-H). Six years later, on 13 February 2001, the
Board of Directors of UCPB received from the ACCRA Law Office a letter written on behalf of
the COCOFED and the alleged nameless one million coconut farmers, demanding the holding of
a stockholders’ meeting for the purpose of, among others, electing the board of directors. In
response, the board approved a Resolution calling for a stockholders’ meeting on 6 March 2001 at
3 p.m. On 23 February 2001, “COCOFED, et al. and Ballares, et al.” filed the “Class Action
Omnibus Motion” in Sandiganbayan Civil Cases 0033-A, 0033-B and 0033-F, asking the
Sandiganbayan to enjoin the PCGG from voting the UCPB shares of stock registered in the
respective names of the more than one million coconut farmers; and to enjoin the PCGG from
voting the SMC shares registered in the names of the 14 CIIF holding companies including those
registered in the name of the PCGG. On 28 February 2001, the Sandiganbayan, after hearing the
parties on oral argument, issued the Order, authorizing COCOFED, et. al. and Ballares, et. al. as
well as Cojuangco, as are all other registered stockholders of the United Coconut Planters Bank,
until further orders from the Court, to exercise their rights to vote their shares of stock and
themselves to be voted upon in the United Coconut Planters Bank (UCPB) at the scheduled
Stockholders’ Meeting on 6 March 2001 or on any subsequent continuation or resetting thereof,
and to perform such acts as will normally follow in the exercise of these rights as registered
stockholders. The Republic of the Philippines represented by the PCGG filed the petition for
certiorari.

Issue: Whether the PCGG can vote the sequestered UCPB shares.

Held: The registered owner of the shares of a corporation exercises the right and the privilege of
voting. This principle applies even to shares that are sequestered by the government, over which
the PCGG as a mere conservator cannot, as a general rule, exercise acts of dominion. On the other
hand, it is authorized to vote these sequestered shares registered in the names of private persons
and acquired with allegedly ill-gotten wealth, if it is able to satisfy the two-tiered test devised by
the Court in Cojuangco v. Calpo and PCGG v. Cojuangco Jr. Two clear “public character”
exceptions under which the government is granted the authority to vote the shares exist (1) Where
government shares are taken over by private persons or entities who/which registered them in
their own names, and (2) Where the capitalization or shares that were acquired with public funds
somehow landed in private hands. The exceptions are based on the common-sense principle that
legal fiction must yield to truth; that public property registered in the names of non-owners is
affected with trust relations; and that the prima facie beneficial owner should be given the
privilege of enjoying the rights flowing from the prima facie fact of ownership. In short, when
sequestered shares registered in the names of private individuals or entities are alleged to have
been acquired with ill-gotten wealth, then the two-tiered test is applied. However, when the
sequestered shares in the name of private individuals or entities are shown,

prima facie, to have been (1) originally government shares, or (2) purchased with public funds or
those affected with public interest, then the two-tiered test does not apply. Rather, the public
character exceptions in Baseco v. PCGG and Cojuangco Jr. v. Roxas prevail; that is, the
government shall vote the shares. Herein, the money used to purchase the sequestered UCPB
shares came from the Coconut Consumer Stabilization Fund (CCSF), otherwise known as the
coconut levy funds. The sequestered UCPB shares are confirmed to have been acquired with coco
levies, not with alleged ill-gotten wealth. As the coconut levy funds are not only affected with
public interest, but are in fact prima facie public funds, the Court believes that the government
should be allowed to vote the questioned shares, because they belong to it as the prima facie
beneficial and true owner. The Sandiganbayan committed grave abuse of discretion in grossly
contradicting and effectively reversing existing jurisprudence, and in depriving the government of
its right to vote the sequestered UCPB shares which are prima facie public in character.