G.R. No. 165744. August 11, 2008.
* tests and declared that jurisdiction should be determined by considering not only the status or relationship of the parties, but also the
OSCAR C. REYES, petitioner, vs. HON. REGIONAL TRIAL COURT OF MAKATI, Branch 142, ZENITH INSURANCE CORPORATION, and
RODRIGO C. REYES, respondents.
Actions; Pleadings and Practice; Fraud; In all averments of fraud or mistake, the circumstances constituting fraud or mistake must be stated
with particularity.—The rule is that a complaint must contain a plain, concise, and direct statement of the ultimate facts constituting the
plaintiff’s cause of action and must specify the relief sought. Section 5, Rule 8 of the Revised Rules of Court provides that in all averments of
fraud or mistake, the circumstances constituting fraud or mistake must be stated with particularity. These rules find specific application to
Section 5(a) of P.D. No. 902-A which speaks of corporate devices or schemes that amount to fraud or misrepresentation detrimental to the
public and/or to the stockholders.
Same; Same; Same; Allegations of deceit, machination, false pretenses, misrepresentation, and threats are largely conclusions of law that,
without supporting statements of the facts to which the allegations of fraud refer, do not sufficiently state an effective cause of action.—
Allegations of deceit, machination, false pretenses, misrepresentation, and threats are largely conclusions of law that, without supporting
statements of the facts to which the allegations of fraud refer, do not sufficiently state an effective cause of action. The late Justice Jose
Feria, a noted authority in Remedial Law, declared that fraud and mistake are required to be averred with particularity in order to enable
the opposing party to controvert the particular facts allegedly constituting such fraud or mistake. Tested against these standards, we find
that the charges of fraud against Oscar were not properly supported by the required factual allegations. While the complaint contained
allegations of fraud purportedly committed by him, these allegations are not particular enough to bring the controversy within the special
commercial court’s jurisdiction; they are not statements of ultimate facts, but are mere conclusions of law: how and why the alleged
appropriation of shares can be characterized as “illegal and fraudulent” were not explained nor elaborated on.
Same; Same; Same; Special Commercial Courts; Jurisdictions; Not every allegation of fraud done in a corporate setting or perpetrated by
corporate officers will bring the case within the special commercial court’s jurisdiction.—Not every allegation of fraud done in a corporate
setting or perpetrated by corporate officers will bring the case within the special commercial court’s jurisdiction. To fall within this
jurisdiction, there must be sufficient nexus showing that the corporation’s nature, structure, or powers were used to facilitate the
fraudulent device or scheme. Contrary to this concept, the complaint presented a reverse situation. No corporate power or office was
alleged to have facilitated the transfer of the shares; rather, Oscar, as an individual and without reference to his corporate personality, was
alleged to have transferred the shares of Anastacia to his name, allowing him to become the majority and controlling stockholder of Zenith,
and eventually, the corporation’s President. This is the essence of the complaint read as a whole.
Same; Same; Same; Same; Same; In ordinary cases, the failure to specifically allege the fraudulent acts does not constitute a ground for
dismissal since such defect can be cured by a bill of particulars, but it is different in intra-corporate controversies since under the Interim
Rules of Procedure on Intra-Corporate Controversies, a bill of particulars is a prohibited pleading.—In ordinary cases, the failure to
specifically allege the fraudulent acts does not constitute a ground for dismissal since such defect can be cured by a bill of particulars. In
cases governed by the Interim Rules of Procedure on Intra-Corporate Controversies, however, a bill of particulars is a prohibited pleading. It
is essential, therefore, for the complaint to show on its face what are claimed to be the fraudulent corporate acts if the complainant wishes
to invoke the court’s special commercial jurisdiction. We note that twice in the course of this case, Rodrigo had been given the opportunity
to study the propriety of amending or withdrawing the complaint, but he consistently refused. The court’s function in resolving issues of
jurisdiction is limited to the review of the allegations of the complaint and, on the basis of these allegations, to the determination of
whether they are of such nature and subject that they fall within the terms of the law defining the court’s jurisdiction. Regretfully, we
cannot read into the complaint any specifically alleged corporate fraud that will call for the exercise of the court’s special commercial
jurisdiction. Thus, we cannot affirm the RTC’s assumption of jurisdiction over Rodrigo’s complaint on the basis of Section 5(a) of P.D. No.
902-A.
Corporation Law; Intra-Corporate Controversies; Relationship Test; A review of relevant jurisprudence shows a development in the Court’s
approach in classifying what constitutes an intra-corporate controversy—initially, the main consideration in determining whether a dispute
constitutes an intra-corporate controversy was limited to a consideration of the intra-corporate relationship existing between or among the
parties.—A review of relevant jurisprudence shows a development in the Court’s approach in classifying what constitutes an intra-corporate
controversy. Initially, the main consideration in determining whether a dispute constitutes an intra-corporate controversy was limited to a
consideration of the intra-corporate relationship existing between or among the parties. The types of relationships embraced under Section
5(b), as declared in the case of Union Glass & Container Corp. v. SEC, 126 SCRA 31 (1983), were as follows: a) between the corporation,
partnership, or association and the public; b) between the corporation, partnership, or association and its stockholders, partners, members,
or officers; c) between the corporation, partnership, or association and the State as far as its franchise, permit or license to operate is
concerned; and d) among the stockholders, partners, or associates themselves. [Emphasis supplied.] The existence of any of the above
intra-corporate relations was sufficient to confer jurisdiction to the SEC, regardless of the subject matter of the dispute. This came to be
known as the relationship test.
Same; Same; Same; Nature of the Controversy Test; In DMRC Enterprises v. Esta del Sol Mountain Reserve, Inc., 132 SCRA 293 (1984), the
Court introduced the nature of the controversy test, under which test the incidents of that relationship must also be considered for the
purpose of ascertaining whether the controversy itself is intra-corporate.—In the 1984 case of DMRC Enterprises v. Esta del Sol Mountain
Reserve, Inc., 132 SCRA 293 (1984), the Court introduced the nature of the controversy test. We declared in this case that it is not the mere
existence of an intra-corporate relationship that gives rise to an intra-corporate controversy; to rely on the relationship test alone will divest
the regular courts of their jurisdiction for the sole reason that the dispute involves a corporation, its directors, officers, or stockholders. We
saw that there is no legal sense in disregarding or minimizing the value of the nature of the transactions which gives rise to the dispute.
Under the nature of the controversy test, the incidents of that relationship must also be considered for the purpose of ascertaining whether
the controversy itself is intra-corporate. The controversy must not only be rooted in the existence of an intra-corporate relationship, but
must as well pertain to the enforcement of the parties’ correlative rights and obligations under the Corporation Code and the internal and
intra-corporate regulatory rules of the corporation. If the relationship and its incidents are merely incidental to the controversy or if there
will still be conflict even if the relationship does not exist, then no intra-corporate controversy exists. The Court then combined the two
nature of the question under controversy. This two-tier test was adopted in the recent case of Speed Distribution, Inc. v. Court of Appeals,
425 SCRA 691 (2004): To determine whether a case involves an intra-corporate controversy, and is to be heard and decided by the branches
of the RTC specifically designated by the Court to try and decide such cases, two elements must concur: (a) the status or relationship of the
parties; and (2) the nature of the question that is the subject of their controversy.
Same; Same; Jurisdictions; Succession; Probate Proceedings; The status of heirs as co-owners of shares of stocks prior to the partition of the
decedent’s estate does not immediately and necessarily make them stockholders of the corporation—unless and until there is compliance
with Section 63 of the Corporation Code on the manner of transferring shares, the heirs do not become registered stockholders of the
corporation.—Article 777 of the Civil Code declares that the successional rights are transmitted from the moment of death of the decedent.
Accordingly, upon Anastacia’s death, her children acquired legal title to her estate (which title includes her shareholdings in Zenith), and
they are, prior to the estate’s partition, deemed co-owners thereof. This status as co-owners, however, does not immediately and
necessarily make them stockholders of the corporation. Unless and until there is compliance with Section 63 of the Corporation Code on the
manner of transferring shares, the heirs do not become registered stockholders of the corporation. Simply stated, the transfer of title by
means of succession, though effective and valid between the parties involved (i.e., between the decedent’s estate and her heirs), does not
bind the corporation and third parties. The transfer must be registered in the books of the corporation to make the transferee-heir a
stockholder entitled to recognition as such both by the corporation and by third parties.
Same; Same; Same; Same; Same; Where there is an absence of partition and transfer of shares, an heir cannot yet be considered a
stockholder of a corporation, and the Court, therefore, cannot declare that an intra-corporate relationship exists that would serve as basis
to bring the case within the special commercial court’s jurisdiction.—Rodrigo must, therefore, hurdle two obstacles before he can be
considered a stockholder of Zenith with respect to the shareholdings originally belonging to Anastacia. First, he must prove that there are
shareholdings that will be left to him and his co-heirs, and this can be determined only in a settlement of the decedent’s estate. No such
proceeding has been commenced to date. Second, he must register the transfer of the shares allotted to him to make it binding against the
corporation. He cannot demand that this be done unless and until he has established his specific allotment (and prima facie ownership) of
the shares. Without the settlement of Anastacia’s estate, there can be no definite partition and distribution of the estate to the heirs.
Without the partition and distribution, there can be no registration of the transfer. And without the registration, we cannot consider the
transferee-heir a stockholder who may invoke the existence of an intra-corporate relationship as premise for an intra-corporate controversy
within the jurisdiction of a special commercial court. In sum, we find that—insofar as the subject shares of stock (i.e., Anastacia’s shares) are
concerned—Rodrigo cannot be considered a stockholder of Zenith. Consequently, we cannot declare that an intra-corporate relationship
exists that would serve as basis to bring this case within the special commercial court’s jurisdiction under Section 5(b) of PD 902-A, as
amended. Rodrigo’s complaint, therefore, fails the relationship test.
Same; Same; Same; Same; Same; Pleadings and Practice; The body rather than the title of the complaint determines the nature of an action;
In the instant case, the complaint yields the conclusion that, more than anything else, it is about the protection and enforcement of
successional rights—the controversy it presents is purely civil rather than corporate, although it is denominated as a “complaint for
accounting of all corporate funds and assets.”—The body rather than the title of the complaint determines the nature of an action. Our
examination of the complaint yields the conclusion that, more than anything else, the complaint is about the protection and enforcement of
successional rights. The controversy it presents is purely civil rather than corporate, although it is denominated as a “complaint for
accounting of all corporate funds and assets.” Contrary to the findings of both the trial and appellate courts, we read only one cause of
action alleged in the complaint. The “derivative suit for accounting of the funds and assets of the corporation which are in the control,
custody, and/or possession of the respondent [herein petitioner Oscar]” does not constitute a separate cause of action but is, as correctly
claimed by Oscar, only an incident to the “action for determination of the shares of stock of deceased spouses Pedro and Anastacia Reyes
allegedly taken by respondent, its accounting and the corresponding delivery of these shares to the parties’ brothers and sisters.” There can
be no mistake of the relationship between the “accounting” mentioned in the complaint and the objective of partition and distribution
when Rodrigo claimed in paragraph 10.1 of the complaint.
Same; Same; Same; Same; Same; A Regional Trial Court, acting as a special commercial court, has no jurisdiction to settle, partition, and
distribute the estate of a deceased; Matters which involve settlement and distribution of the estate of the decedent fall within the exclusive
province of the probate court in the exercise of its limited jurisdiction.—More than the matters of injury and redress, what Rodrigo clearly
aims to accomplish through his allegations of illegal acquisition by Oscar is the distribution of Anastacia’s shareholdings without a prior
settlement of her estate—an objective that, by law and established jurisprudence, cannot be done. The RTC of Makati, acting as a special
commercial court, has no jurisdiction to settle, partition, and distribute the estate of a deceased. A relevant provision—Section 2 of Rule 90
of the Revised Rules of Court—that contemplates properties of the decedent held by one of the heirs declares: Questions as to
advancement made or alleged to have been made by the deceased to any heir may be heard and determined by the court having
jurisdiction of the estate proceedings; and the final order of the court thereon shall be binding on the person raising the questions and on
the heir. [Emphasis supplied.] Worth noting are this Court’s statements in the case of Natcher v. Court of Appeals, 366 SCRA 385 (2001):
Matters which involve settlement and distribution of the estate of the decedent fall within the exclusive province of the probate court in
the exercise of its limited jurisdiction.
Same; Same; Same; Same; Same; That an accounting of the funds and assets of a corporation to determine the extent and value of a
deceased’s shareholdings will be undertaken by a probate court and not by a special commercial court is completely consistent with the
probate court’s limited jurisdiction—it has the power to enforce an accounting as a necessary means to its authority to determine the
properties included in the inventory of the estate to be administered, divided up, and distributed.—That an accounting of the funds and
assets of Zenith to determine the extent and value of Anastacia’s shareholdings will be undertaken by a probate court and not by a special
commercial court is completely consistent with the probate court’s limited jurisdiction. It has the power to enforce an accounting as a
necessary means to its authority to determine the properties included in the inventory of the estate to be administered, divided up, and
distributed. Beyond this, the determination of title or ownership over the subject shares (whether belonging to Anastacia or Oscar) may be
conclusively settled by the probate court as a question of collation or advancement.
Same; Same; Same; Derivative Suits; Requisites.—Rodrigo’s bare claim that the complaint is a derivative suit will not suffice to confer
jurisdiction on the RTC (as a special commercial court) if he cannot comply with the requisites for the existence of a derivative suit. These
requisites are: a. the party bringing suit should be a shareholder during the time of the act or transaction complained of, the number of
shares not being material; b. the party has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for
the appropriate relief, but the latter has failed or refused to heed his plea; and c. the cause of action actually devolves on the corporation;
the wrongdoing or harm having been or being caused to the corporation and not to the particular stockholder bringing the suit.
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the Decision of the Court of
Appeals (CA)[1] promulgated on May 26, 2004in CA-G.R. SP No. 74970. The CA Decision affirmed the Order of the Regional Trial Court (RTC),
Branch 142, Makati City dated November 29, 2002[2] in Civil Case No. 00-1553 (entitled "Accounting of All Corporate Funds and Assets, and
Damages") which denied petitioner Oscar C. Reyes (Oscar) Motion to Declare Complaint as Nuisance or Harassment Suit.
BACKGROUND FACTS
2. that the complaint is not a bona fide derivative suit but is in fact in the nature of a petition for settlement
of estate; hence, it is outside the jurisdiction of the RTC acting as a special commercial court.
Accordingly, he prays for the setting aside and annulment of the CA decision and resolution, and the dismissal of Rodrigos complaint before
the RTC.
THE COURTS RULING
We find the petition meritorious.
The core question for our determination is whether the trial court, sitting as a special commercial court, has jurisdiction over the subject
matter of Rodrigos complaint. To resolve it, we rely on the judicial principle that jurisdiction over the subject matter of a case is conferred
by law and is determined by the allegations of the complaint, irrespective of whether the plaintiff is entitled to all or some of the claims
asserted therein.[12]

Oscar and private respondent Rodrigo C. Reyes (Rodrigo) are two of the four children of the spouses Pedro and Anastacia Reyes. Pedro, JURISDICTION OF SPECIAL COMMERCIAL COURTS
Anastacia, Oscar, and Rodrigo each owned shares of stock of Zenith Insurance Corporation (Zenith), a domestic corporation established by
their family. Pedro died in 1964, while Anastacia died in 1993. Although Pedros estate was judicially partitioned among his heirs sometime in P.D. No. 902-A enumerates the cases over which the SEC (now the RTC acting as a special commercial court) exercises exclusive jurisdiction:
the 1970s, no similar settlement and partition appear to have been made with Anastacias estate, which included her shareholdings in SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and
Zenith. As of June 30, 1990, Anastacia owned 136,598 shares of Zenith; Oscar and Rodrigo owned 8,715,637 and 4,250 shares, respectively. [3] Exchange Commission over corporations, partnership, and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have
On May 9, 2000, Zenith and Rodrigo filed a complaint [4] with the Securities and Exchange Commission (SEC) against Oscar, docketed as SEC original and exclusive jurisdiction to hear and decide cases involving:
Case No. 05-00-6615. The complaint stated that it is a derivative suit initiated and filed by the complainant Rodrigo C. Reyes to obtain an a) Devices or schemes employed by or any acts of
accounting of the funds and assets of ZENITH INSURANCE CORPORATION which are now or formerly in the control, custody, and/or the board of directors, business associates, its officers or
possession of respondent [herein petitioner Oscar] and to determine the shares of stock of deceased spouses Pedro and Anastacia partners, amounting to fraud and misrepresentation which
Reyes that were arbitrarily and fraudulently appropriated [by Oscar] for himself [and] which were not collated and taken into account in the may be detrimental to the interest of the public and/or of the
partition, distribution, and/or settlement of the estate of the deceased spouses, for which he should be ordered to account for all the income stockholders, partners, members of associations or
from the time he took these shares of stock, and should now deliver to his brothers and sisters their just and respective organizations registered with the Commission.
shares.[5] [Emphasis supplied.]
b) Controversies arising out of intra-corporate or
In his Answer with Counterclaim,[6] Oscar denied the charge that he illegally acquired the shares of Anastacia Reyes. He asserted, as a partnership relations, between and among stockholders,
defense, that he purchased the subject shares with his own funds from the unissued stocks of Zenith, and that the suit is not a bona members, or associates; between any or all of them and the
fide derivative suit because the requisites therefor have not been complied with. He thus questioned the SECs jurisdiction to entertain the corporation, partnership or association of which they are
complaint because it pertains to the settlement of the estate of Anastacia Reyes. stockholders, members, or associates, respectively; and
between such corporation, partnership or association and the
When Republic Act (R.A.) No. 8799[7] took effect, the SECs exclusive and original jurisdiction over cases enumerated in Section 5 of State insofar as it concerns their individual franchise or right
Presidential Decree (P.D.) No. 902-A was transferred to the RTC designated as a special commercial court. [8] The records of Rodrigos SEC case to exist as such entity; and
were thus turned over to the RTC, Branch 142, Makati, and docketed as Civil Case No. 00-1553.
c) Controversies in the election or appointment of
On October 22, 2002, Oscar filed a Motion to Declare Complaint as Nuisance or Harassment Suit. [9] He claimed that the complaint is a mere directors, trustees, officers, or managers of such corporations,
nuisance or harassment suit and should, according to the Interim Rules of Procedure for Intra-Corporate Controversies, be dismissed; and partnerships, or associations.
that it is not a bona fide derivative suit as it partakes of the nature of a petition for the settlement of estate of the deceased Anastacia that is
outside the jurisdiction of a special commercial court. The RTC, in its Order dated November 29, 2002 (RTC Order), denied the motion in part
and declared: The allegations set forth in Rodrigos complaint principally invoke Section 5, paragraphs (a) and (b) above as basis for the exercise of the
RTCs special court jurisdiction. Our focus in examining the allegations of the complaint shall therefore be on these two provisions.
A close reading of the Complaint disclosed the presence of two (2) causes of action, namely: a) a derivative suit
for accounting of the funds and assets of the corporation which are in the control, custody, and/or possession Fraudulent Devices and Schemes
of the respondent [herein petitioner Oscar] with prayer to appoint a management committee; and b) an action
for determination of the shares of stock of deceased spouses Pedro and Anastacia Reyes allegedly taken by The rule is that a complaint must contain a plain, concise, and direct statement of the ultimate facts constituting the plaintiffs cause of
respondent, its accounting and the corresponding delivery of these shares to the parties brothers and action and must specify the relief sought.[13] Section 5, Rule 8 of the Revised Rules of Court provides that in all averments of fraud or
sisters. The latter is not a derivative suit and should properly be threshed out in a petition for settlement of mistake, the circumstances constituting fraud or mistake must be stated with particularity.[14] These rules find specific application to
estate. Section 5(a) of P.D. No. 902-A which speaks of corporate devices or schemes that amount to fraud or misrepresentation detrimental to the
public and/or to the stockholders.
Accordingly, the motion is denied. However, only the derivative suit consisting of the first cause of action will
be taken cognizance of by this Court.[10] In an attempt to hold Oscar responsible for corporate fraud, Rodrigo alleged in the complaint the following:

3. This is a complaintto determine the shares of stock of the deceased spouses Pedro
Oscar thereupon went to the CA on a petition for certiorari, prohibition, and mandamus[11] and prayed that the RTC Order be annulled and and Anastacia Reyes that were arbitrarily and fraudulently appropriated for himself
set aside and that the trial court be prohibited from continuing with the proceedings. The appellate court affirmed the RTC Order and [herein petitioner Oscar] which were not collated and taken into account in the
denied the petition in its Decision dated May 26, 2004. It likewise denied Oscars motion for reconsideration in a Resolution dated October partition, distribution, and/or settlement of the estate of the deceased Spouses Pedro
21, 2004. and Anastacia Reyes, for which he should be ordered to account for all the income from
the time he took these shares of stock, and should now deliver to his brothers and sisters
Petitioner now comes before us on appeal through a petition for review on certiorari under Rule 45 of the Rules of Court. their just and respective shares with the corresponding equivalent amount of
P7,099,934.82 plus interest thereon from 1978 representing his obligations to the
Associated Citizens Bank that was paid for his account by his late mother, Anastacia C.
ASSIGNMENT OF ERRORS Reyes. This amount was not collated or taken into account in the partition or distribution
of the estate of their late mother, Anastacia C. Reyes.
Petitioner Oscar presents the following points as conclusions the CA should have made:
3.1. Respondent Oscar C. Reyes, through other schemes of fraud
1. that the complaint is a mere nuisance or harassment suit that should be dismissed under the Interim including misrepresentation, unilaterally, and for his own benefit, capriciously
Rules of Procedure of Intra-Corporate Controversies; and transferred and took possession and control of the management of Zenith Insurance
 Corporation which is considered as a family corporation, and other properties and
businesses belonging to Spouses Pedro and Anastacia Reyes.
xxxx
4.1. During the increase of capitalization of Zenith Insurance Corporation,
sometime in 1968, the property covered by TCT No. 225324 was illegally and fraudulently
used by respondent as a collateral.
xxxx
5. The complainant Rodrigo C. Reyes discovered that by some
manipulative scheme, the shareholdings of their deceased mother, Doa Anastacia C.
Reyes, shares of stocks and [sic] valued in the corporate books at P7,699,934.28, more
or less, excluding interest and/or dividends, had been transferred solely in the name of
respondent. By such fraudulent manipulations and misrepresentation, the shareholdings
of said respondent Oscar C. Reyes abruptly increased to P8,715,637.00 [sic] and becomes
[sic] the majority stockholder of Zenith Insurance Corporation, which portion of said
shares must be distributed equally amongst the brothers and sisters of the respondent
Oscar C. Reyes including the complainant herein.
xxxx
9.1 The shareholdings of deceased Spouses Pedro Reyes and Anastacia C. Reyes valued
at P7,099,934.28 were illegally and fraudulently transferred solely to the respondents
[herein petitioner Oscar] name and installed himself as a majority stockholder of
Zenith Insurance Corporation [and] thereby deprived his brothers and sisters of their
respective equal shares thereof including complainant hereto.
xxxx
10.1 By refusal of the respondent to account of his [sic] shareholdings in the company,
he illegally and fraudulently transferred solely in his name wherein [sic] the shares of
stock of the deceased Anastacia C. Reyes [which] must be properly collated and/or
distributed equally amongst the children, including the complainant Rodrigo C. Reyes
herein, to their damage and prejudice.
xxxx
11.1 By continuous refusal of the respondent to account of his [sic] shareholding with
Zenith Insurance Corporation[,] particularly the number of shares of stocks illegally and
fraudulently transferred to him from their deceased parents Sps. Pedro and Anastacia
Reyes[,] which are all subject for collation and/or partition in equal shares among their
children. [Emphasis supplied.]
Allegations of deceit, machination, false pretenses, misrepresentation, and threats are largely conclusions of law that, without supporting
statements of the facts to which the allegations of fraud refer, do not sufficiently state an effective cause of action. [15] The late Justice Jose
Feria, a noted authority in Remedial Law, declared that fraud and mistake are required to be averred with particularity in order to enable
the opposing party to controvert the particular facts allegedly constituting such fraud or mistake. [16]
Tested against these standards, we find that the charges of fraud against Oscar were not properly supported by the required factual
allegations. While the complaint contained allegations of fraud purportedly committed by him, these allegations are not particular enough
to bring the controversy within the special commercial courts jurisdiction; they are not statements of ultimate facts, but are mere
conclusions of law: how and why the alleged appropriation of shares can be characterized as illegal and fraudulent were not explained nor
elaborated on.
Not every allegation of fraud done in a corporate setting or perpetrated by corporate officers will bring the case within the special
commercial courts jurisdiction. To fall within this jurisdiction, there must be sufficient nexus showing that the corporations nature,
structure, or powers were used to facilitate the fraudulent device or scheme. Contrary to this concept, the complaint presented a reverse
situation. No corporate power or office was alleged to have facilitated the transfer of the shares; rather, Oscar, as an individual and without
reference to his corporate personality, was alleged to have transferred the shares of Anastacia to his name, allowing him to become the
majority and controlling stockholder of Zenith, and eventually, the corporations President. This is the essence of the complaint read as a
whole and is particularly demonstrated under the following allegations:
5. The complainant Rodrigo C. Reyes discovered that by some
manipulative scheme, the shareholdings of their deceased mother, Doa Anastacia C.
Reyes, shares of stocks and [sic] valued in the corporate books at P7,699,934.28, more or
less, excluding interest and/or dividends, had been transferred solely in the name of
respondent. By such fraudulent manipulations and misrepresentation, the
shareholdings of said respondent Oscar C. Reyes abruptly increased to P8,715,637.00
[sic] and becomes [sic] the majority stockholder of Zenith Insurance Corporation, which
portion of said shares must be distributed equally amongst the brothers and sisters of
the respondent Oscar C. Reyes including the complainant herein.
xxxx
9.1 The shareholdings of deceased Spouses Pedro Reyes and Anastacia C. Reyes valued
at P7,099,934.28 were illegally and fraudulently transferred solely to the respondents
[herein petitioner Oscar] name and installed himself as a majority stockholder of
Zenith Insurance Corporation [and] thereby deprived his brothers and sisters of their
respective equal shares thereof including complainant hereto. [Emphasis supplied.]
In ordinary cases, the failure to specifically allege the fraudulent acts does not constitute a ground for dismissal since such defect can be
cured by a bill of particulars. In cases governed by the Interim Rules of Procedure on Intra-Corporate Controversies, however, a bill of
particulars is a prohibited pleading.[17] It is essential, therefore, for the complaint to show on its face what are claimed to be the fraudulent
corporate acts if the complainant wishes to invoke the courts special commercial jurisdiction.
We note that twice in the course of this case, Rodrigo had been given the opportunity to study the propriety of amending or withdrawing
the complaint, but he consistently refused. The courts function in resolving issues of jurisdiction is limited to the review of the allegations of
the complaint and, on the basis of these allegations, to the determination of whether they are of such nature and subject that they fall
within the terms of the law defining the courts jurisdiction. Regretfully, we cannot read into the complaint any specifically alleged corporate
fraud that will call for the exercise of the courts special commercial jurisdiction. Thus, we cannot affirm the RTCs assumption of jurisdiction
over Rodrigos complaint on the basis of Section 5(a) of P.D. No. 902-A.[18]
Intra-Corporate Controversy
A review of relevant jurisprudence shows a development in the Courts approach in classifying what constitutes an intra-corporate
controversy. Initially, the main consideration in determining whether a dispute constitutes an intra-corporate controversy was limited to a
consideration of the intra-corporate relationship existing between or among the parties. [19] The types of relationships embraced under
Section 5(b), as declared in the case of Union Glass & Container Corp. v. SEC,[20] were as follows:
a) between the corporation, partnership, or association and the public;
b) between the corporation, partnership, or association and its stockholders, partners,
members, or officers;
c) between the corporation, partnership, or association and the State as far as its franchise,
permit or license to operate is concerned; and
d) among the stockholders, partners, or associates themselves. [Emphasis supplied.]
The existence of any of the above intra-corporate relations was sufficient to confer jurisdiction to the SEC, regardless of the
subject matter of the dispute. This came to be known as the relationship test.
However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve, Inc.,[21] the Court introduced the nature of the
controversy test. We declared in this case that it is not the mere existence of an intra-corporate relationship that gives rise to an intra-
corporate controversy; to rely on the relationship test alone will divest the regular courts of their jurisdiction for the sole reason that the
dispute involves a corporation, its directors, officers, or stockholders. We saw that there is no legal sense in disregarding or minimizing the
value of the nature of the transactions which gives rise to the dispute.
Under the nature of the controversy test, the incidents of that relationship must also be considered for the purpose of ascertaining whether
the controversy itself is intra-corporate.[22] The controversy must not only be rooted in the existence of an intra-corporate relationship, but
must as well pertain to the enforcement of the parties correlative rights and obligations under the Corporation Code and the internal and
intra-corporate regulatory rules of the corporation. If the relationship and its incidents are merely incidental to the controversy or if there
will still be conflict even if the relationship does not exist, then no intra-corporate controversy exists.
The Court then combined the two tests and declared that jurisdiction should be determined by considering not only the status or
relationship of the parties, but also the nature of the question under controversy. [23] This two-tier test was adopted in the recent case
of Speed Distribution, Inc. v. Court of Appeals:[24]
To determine whether a case involves an intra-corporate controversy, and is to
be heard and decided by the branches of the RTC specifically designated by the Court to
try and decide such cases, two elements must concur: (a) the status or relationship of the
parties; and (2) the nature of the question that is the subject of their controversy.
The first element requires that the controversy must arise out of intra-corporate
or partnership relations between any or all of the parties and the corporation,
partnership, or association of which they are stockholders, members or associates;
between any 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 franchises. The second element requires that the dispute among the parties be
intrinsically connected with the regulation of the corporation. If the nature of the
 controversy involves matters that are purely civil in character, necessarily, the case does
not involve an intra-corporate controversy.
Given these standards, we now tackle the question posed for our determination under the specific circumstances of this case:
Application of the Relationship Test
Is there an intra-corporate relationship between the parties that would characterize the case as an intra-corporate dispute?
We point out at the outset that while Rodrigo holds shares of stock in Zenith, he holds them in two capacities: in his own right with respect
to the 4,250 shares registered in his name, and as one of the heirs of Anastacia Reyes with respect to the 136,598 shares registered in her
name. What is material in resolving the issues of this case under the allegations of the complaint is Rodrigos interest as an heir since the
subject matter of the present controversy centers on the shares of stocks belonging to Anastacia, not on Rodrigos personally-owned shares
nor on his personality as shareholder owning these shares. In this light, all reference to shares of stocks in this case shall pertain to the
shareholdings of the deceased Anastacia and the parties interest therein as her heirs.
Article 777 of the Civil Code declares that the successional rights are transmitted from the moment of death of the decedent. Accordingly,
upon Anastacias death, her children acquired legal title to her estate (which title includes her shareholdings in Zenith), and they are, prior to
the estates partition, deemed co-owners thereof. [25] This status as co-owners, however, does not immediately and necessarily make them
stockholders of the corporation. Unless and until there is compliance with Section 63 of the Corporation Code on the manner of transferring
shares, the heirs do not become registered stockholders of the corporation. Section 63 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 stock so
issued are personal property and may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the corporation so as
to show the names of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates, and the number of shares
transferred. [Emphasis supplied.]
No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation.
Simply stated, the transfer of title by means of succession, though effective and valid between the parties involved (i.e., between the
decedents estate and her heirs), does not bind the corporation and third parties. The transfer must be registered in the books of the
corporation to make the transferee-heir a stockholder entitled to recognition as such both by the corporation and by third parties. [26]
We note, in relation with the above statement, that in Abejo v. Dela Cruz[27] and TCL Sales Corporation v. Court of Appeals[28] we did not
require the registration of the transfer before considering the transferee a stockholder of the corporation (in effect upholding the existence
of an intra-corporate relation between the parties and bringing the case within the jurisdiction of the SEC as an intra-corporate
controversy). A marked difference, however, exists between these cases and the present one.
In Abejo and TCL Sales, the transferees held definite and uncontested titles to a specific number of shares of the
corporation; after the transferee had established prima facie ownership over the shares of stocks in question, registration became a mere
formality in confirming their status as stockholders. In the present case, each of Anastacias heirs holds only an undivided interest in the
shares. This interest, at this point, is still inchoate and subject to the outcome of a settlement proceeding; the right of the heirs to specific,
distributive shares of inheritance will not be determined until all the debts of the estate of the decedent are paid. In short, the heirs are
only entitled to what remains after payment of the decedents debts;[29] whether there will be residue remains to be seen. Justice Jurado
aptly puts it as follows:
No succession shall be declared unless and until a liquidation of the assets and debts left
by the decedent shall have been made and all his creditors are fully paid. Until a final
liquidation is made and all the debts are paid, the right of the heirs to inherit remains
inchoate. This is so because under our rules of procedure, liquidation is necessary in
order to determine whether or not the decedent has left any liquid assets which may
be transmitted to his heirs.[30] [Emphasis supplied.]
Rodrigo must, therefore, hurdle two obstacles before he can be considered a stockholder of Zenith with respect to the shareholdings
originally belonging to Anastacia. First, he must prove that there are shareholdings that will be left to him and his co-heirs, and this can be
determined only in a settlement of the decedents estate. No such proceeding has been commenced to date. Second, he must register the
transfer of the shares allotted to him to make it binding against the corporation. He cannot demand that this be done unless and until he
has established his specific allotment (and prima facie ownership) of the shares. Without the settlement of Anastacias estate, there can be
no definite partition and distribution of the estate to the heirs. Without the partition and distribution, there can be no registration of the
transfer. And without the registration, we cannot consider the transferee-heir a stockholder who may invoke the existence of an intra-
corporate relationship as premise for an intra-corporate controversy within the jurisdiction of a special commercial court.
In sum, we find that insofar as the subject shares of stock (i.e., Anastacias shares) are concerned Rodrigo cannot be considered a
stockholder of Zenith. Consequently, we cannot declare that an intra-corporate relationship exists that would serve as basis to bring this
case within the special commercial courts jurisdiction under Section 5(b) of PD 902-A, as amended. Rodrigos complaint, therefore, fails the
relationship test.
Application of the Nature of Controversy Test
The body rather than the title of the complaint determines the nature of an action.[31] Our examination of the complaint yields the
conclusion that, more than anything else, the complaint is about the protection and enforcement of successional rights. The controversy it
presents is purely civil rather than corporate, although it is denominated as a complaint for accounting of all corporate funds and assets.
Contrary to the findings of both the trial and appellate courts, we read only one cause of action alleged in the complaint. The derivative suit
for accounting of the funds and assets of the corporation which are in the control, custody, and/or possession of the respondent [herein
petitioner Oscar] does not constitute a separate cause of action but is, as correctly claimed by Oscar, only an incident to the action for
determination of the shares of stock of deceased spouses Pedro and Anastacia Reyes allegedly taken by respondent, its accounting and the
corresponding delivery of these shares to the parties brothers and sisters. There can be no mistake of the relationship between the
accounting mentioned in the complaint and the objective of partition and distribution when Rodrigo claimed in paragraph 10.1 of the
complaint that:
10.1 By refusal of the respondent to account of [sic] his shareholdings in the company,
he illegally and fraudulently transferred solely in his name wherein [sic] the shares of
stock of the deceased Anastacia C. Reyes [which] must be properly collated and/or
distributed equally amongst the children including the complainant Rodrigo C. Reyes
herein to their damage and prejudice.
We particularly note that the complaint contained no sufficient allegation that justified the need for an accounting other than to determine
the extent of Anastacias shareholdings for purposes of distribution.
Another significant indicator that points us to the real nature of the complaint are Rodrigos repeated claims of illegal and fraudulent
transfers of Anastacias shares by Oscar to the prejudice of the other heirs of the decedent; he cited these allegedly fraudulent acts as basis
for his demand for the collation and distribution of Anastacias shares to the heirs.These claims tell us unequivocally that the present
controversy arose from the parties relationship as heirs of Anastacia and not as shareholders of Zenith. Rodrigo, in filing the complaint, is
enforcing his rights as a co-heir and not as a stockholder of Zenith. The injury he seeks to remedy is one suffered by an heir (for the
impairment of his successional rights) and not by the corporation nor by Rodrigo as a shareholder on record.
More than the matters of injury and redress, what Rodrigo clearly aims to accomplish through his allegations of illegal acquisition by Oscar
is the distribution of Anastacias shareholdings without a prior settlement of her estate an objective that, by law and established
jurisprudence, cannot be done. The RTC of Makati, acting as a special commercial court, has no jurisdiction to settle, partition, and
distribute the estate of a deceased. A relevant provision Section 2 of Rule 90 of the Revised Rules of Court that contemplates properties of
the decedent held by one of the heirs declares:
Questions as to advancement made or alleged to have been made by the deceased to
any heir may be heard and determined by the court having jurisdiction of the estate
proceedings; and the final order of the court thereon shall be binding on the person
raising the questions and on the heir. [Emphasis supplied.]
Worth noting are this Courts statements in the case of Natcher v. Court of Appeals:[32]
Matters which involve settlement and distribution of the estate of the decedent fall
within the exclusive province of the probate court in the exercise of its limited
jurisdiction.
xxxx
It is clear that trial courts trying an ordinary action cannot resolve to perform acts
pertaining to a special proceeding because it is subject to specific prescribed rules.
[Emphasis supplied.]
That an accounting of the funds and assets of Zenith to determine the extent and value of Anastacias shareholdings will be undertaken by a
probate court and not by a special commercial court is completely consistent with the probate courts limited jurisdiction. It has the power
to enforce an accounting as a necessary means to its authority to determine the properties included in the inventory of the estate to be
administered, divided up, and distributed. Beyond this, the determination of title or ownership over the subject shares (whether belonging
to Anastacia or Oscar) may be conclusively settled by the probate court as a question of collation or advancement. We had occasion to
recognize the courts authority to act on questions of title or ownership in a collation or advancement situation in Coca v.
Pangilinan[33] where we ruled:
 It should be clarified that whether a particular matter should be resolved by the Court of First Instance in the
exercise of its general jurisdiction or of its limited probate jurisdiction is in reality not a jurisdictional
question. In essence, it is a procedural question involving a mode of practice "which may be waived."

As a general rule, the question as to title to property should not be passed upon in the testate or intestate
proceeding. That question should be ventilated in a separate action. That general rule has qualifications or
exceptions justified by expediency and convenience.

Thus, the probate court may provisionally pass upon in an intestate or testate proceeding the question of
inclusion in, or exclusion from, the inventory of a piece of property without prejudice to its final determination
in a separate action.

Although generally, a probate court may not decide a question of title or ownership, yet if the interested
parties are all heirs, or the question is one of collation or advancement, or the parties consent to the
assumption of jurisdiction by the probate court and the rights of third parties are not impaired, the probate
court is competent to decide the question of ownership. [Citations omitted. Emphasis supplied.]

In sum, we hold that the nature of the present controversy is not one which may be classified as an intra-corporate dispute and is beyond
the jurisdiction of the special commercial court to resolve. In short, Rodrigos complaint also fails the nature of the controversy test.

DERIVATIVE SUIT

Rodrigos bare claim that the complaint is a derivative suit will not suffice to confer jurisdiction on the RTC (as a special commercial court) if
he cannot comply with the requisites for the existence of a derivative suit. These requisites are:

a. the party bringing suit should be a shareholder during the time of the act or transaction
complained of, the number of shares not being material;
b. the party has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief, but the latter has failed or refused to heed
his plea; and
c. the cause of action actually devolves on the corporation; the wrongdoing or harm having
been or being caused to the corporation and not to the particular stockholder bringing
the suit.[34]

Based on these standards, we hold that the allegations of the present complaint do not amount to a derivative suit.

First, as already discussed above, Rodrigo is not a shareholder with respect to the shareholdings originally belonging to Anastacia; he only
stands as a transferee-heir whose rights to the share are inchoate and unrecorded. With respect to his own individually-held shareholdings,
Rodrigo has not alleged any individual cause or basis as a shareholder on record to proceed against Oscar.

Second, in order that a stockholder may show a right to sue on behalf of the corporation, he must allege with some particularity in his
complaint that he has exhausted his remedies within the corporation by making a sufficient demand upon the directors or other officers for
appropriate relief with the expressed intent to sue if relief is denied.[35]Paragraph 8 of the complaint hardly satisfies this requirement since
what the rule contemplates is the exhaustion of remedies within the corporate setting:
8. As members of the same family, complainant Rodrigo C. Reyes has
resorted [to] and exhausted all legal means of resolving the dispute with the end view of
amicably settling the case, but the dispute between them ensued.

Lastly, we find no injury, actual or threatened, alleged to have been done to the corporation due to Oscars acts. If indeed he illegally and
fraudulently transferred Anastacias shares in his own name, then the damage is not to the corporation but to his co-heirs; the wrongful
transfer did not affect the capital stock or the assets of Zenith. As already mentioned, neither has Rodrigo alleged any particular cause or
wrongdoing against the corporation that he can champion in his capacity as a shareholder on record. [36]

In summary, whether as an individual or as a derivative suit, the RTC sitting as special commercial court has no jurisdiction to hear Rodrigos
complaint since what is involved is the determination and distribution of successional rights to the shareholdings of Anastacia
Reyes. Rodrigos proper remedy, under the circumstances, is to institute a special proceeding for the settlement of the estate of the
deceased Anastacia Reyes, a move that is not foreclosed by the dismissal of his present complaint.

WHEREFORE, we hereby GRANT the petition and REVERSE the decision of the Court of Appeals dated May 26, 2004 in CA-G.R. SP No.
74970. The complaint before the Regional Trial Court, Branch 142, Makati, docketed as Civil Case No. 00-1553, is ordered DISMISSED for
lack of jurisdiction.

SO ORDERED.
G.R. No. 126891. August 5, 1998.*
LIM TAY, petitioner, vs. COURT OF APPEALS, GO FAY AND CO., INC., SY GUIOK, and THE ESTATE OF ALFONSO LIM, respondents.
Corporation Law; Securities and Exchange Commission; Jurisdiction; The registration of shares in a stockholder’s name, the issuance of stock
certificates, and the right to receive dividends fall within the jurisdiction of the SEC.—The registration of shares in a stockholder’s name, the
issuance of stock certificates, and the right to receive dividends which pertain to the said shares are all rights that flow from ownership. The
determination of whether or not a shareholder is entitled to exercise the above-mentioned rights falls within the jurisdiction of the SEC.
However, if ownership of the shares is not clearly established and is still unresolved at the time the action for mandamus is filed, then
jurisdiction lies with the regular courts.
Same; Same; Same; The controversy “among stockholders, partners or associates themselves” is intra-corporate in nature and falls within
the jurisdiction of the SEC.—A controversy “among stockholders, partners or associates themselves” is intra-corporate in nature and falls
within the jurisdiction of the SEC. As a general rule, the jurisdiction of a court or tribunal over the subject matter is determined by the
allegations in the complaint. In the present case, however, petitioner’s claim that he was the owner of the shares of stock in question has
no prima facie basis.
Civil Law; Contracts; Pledge; Petitioner’s status as a mere pledgee does not, under civil law, entitle him to ownership of the subject
shares.—This contractual stipulation, which was part of the Complaint, shows that plaintiff was merely authorized to foreclose the pledge
upon maturity of the loans, not to own them. Such foreclosure is not automatic, for it must be done in a public or private sale. Nowhere did
the Complaint mention that petitioner had in fact foreclosed the pledge and purchased the shares after such foreclosure. His status as a
mere pledgee does not, under civil law, entitle him to ownership of the subject shares. It is also noteworthy that petitioner’s Complaint did
not aver that said shares were acquired through extraordinary prescription, novation or laches. Moreover, petitioner’s claim, subsequent to
the filing of the Complaint, that he acquired ownership of the said shares through these three modes is not indubitable and still has to be
resolved. In fact, as will be shown, such allegation has no merit. Manifestly, the Complaint by itself did not contain any prima facie showing
that petitioner was the owner of the shares of stocks. Quite the contrary, it demonstrated that he was merely a pledgee, not an owner.
Accordingly, it failed to lay down a sufficient basis for the SEC to exercise jurisdiction over the controversy. In fact, the very allegations of
the Complaint and its annexes negated the jurisdiction of the SEC.
Same; Same; Same; The effects of an annulment of a contract of sale operate prospectively and do not, as a rule, retroact to the time the
sale was made.—At the time the Bragas questioned the validity of the sale, the contract had already been perfected, thereby demonstrating
that Telectronic Systems, Inc. was already the prima facie owner of the shares and, consequently, a stockholder of Pocket Bell Philippines,
Inc. Even if the sale were to be annulled later on, Telectronic Systems, Inc. had, in the meantime, title over the shares from the time the sale
was perfected until the time such sale was annulled. The effects of an annulment operate prospectively and do not, as a rule, retroact to the
time the sale was made. Therefore, at the time the Bragas questioned the validity of the transfer made by the Abejos, Telectronic Systems,
Inc. was already a prima facie shareholder of the corporation, thus making the dispute between the Bragas and the Abejos “intra-
corporate” in nature. Hence, the Court held that “the issue is not on ownership of shares but rather the non-performance by the corporate
secretary of the ministerial duty of recording transfers of shares of stock of the corporation of which he is secretary.”
Actions; Contracts; Mandamus; In order that a writ of mandamus may issue, it is essential that the person petitioning for the same has a
clear legal right to the thing demanded and that it is the imperative duty of the respondent to perform the act required.—“In order that a
writ of mandamus may issue, it is essential that the person petitioning for the same has a clear legal right to the thing demanded and that it
is the imperative duty of the respondent to perform the act required. It neither confers powers nor imposes duties and is never issued in
doubtful cases. It is simply a command to exercise a power already possessed and to perform a duty already imposed.”
Same; Same; Same; Mandamus will not issue to establish a legal right, but only to enforce one that is already clearly established.—In the
present case, petitioner has failed to establish a clear legal right. Petitioner’s contention that he is the owner of the said shares is
completely without merit. Quite the contrary and as already shown, he does not have any ownership rights at all. At the time petitioner
instituted his suit at the SEC, his ownership claim had no prima facie leg to stand on. At best, his contention was disputable and uncertain.
Mandamus will not issue to establish a legal right, but only to enforce one that is already clearly established.
Same; Same; Same; Pledge; There is no showing that petitioner made any attempt to foreclose or sell the shares through public or private
auction, as stipulated in the contracts of pledge and as required by Article 2112 of the Civil Code.—There is no showing that petitioner
made any attempt to foreclose or sell the shares through public or private auction, as stipulated in the contracts of pledge and as required
by Article 2112 of the Civil Code. Therefore, ownership of the shares could not have passed to him. The pledgor remains the owner during
the pendency of the pledge and prior to foreclosure and sale, as explicitly provided by Article 2103 of the same Code: “Unless the thing
pledged is expropriated, the debtor continues to be the owner thereof. Nevertheless, the creditor may bring the actions which pertain to
the owner of the thing pledged in order to recover it from, or defend it against a third person.”
Same; Same; Same; Same; Prescription; The period of prescription of any cause of action is reckoned only from the date the cause of action
accrued. Accordingly, a cause of action on a written contract accrues when a breach or violation thereof occurs.—Petitioner did not acquire
the shares by prescription either. The period of prescription of any cause of action is reckoned only from the date the cause of action
accrued. “Since a cause of action requires as an essential element not only a legal right of the plaintiff and a correlative obligation of the
defendant, but also an act or omission of the defendant in violation of said legal right, the cause of action does not accrue until the party
obligated refuses, expressly or impliedly, to comply with its duty.” Accordingly, a cause of action on a written contract accrues when a
breach or violation thereof occurs.
Same; Same; Same; Same; Same; The prescriptive period within which to demand the return of the thing pledged should begin to run only
after the payment of the loan and a demand for the thing has been made, because it is only then that respondents acquire a cause of action
for the return of the thing pledged.—Under the contracts of pledge, private respondents would have a right to ask for the redelivery of their
certificates of stock upon payment of their debts to petitioner, consonant with Article 2105 of the Civil Code, which reads: “The debtor
cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest, with
expenses in a proper case.”
Same; Same; Same; Same; Same; Prescription should not begin to run on the action to demand the return of the thing pledged while the
loan still exists.—Prescription should not begin to run on the action to demand the return of the thing pledged while the loan still exists.
This is because the right to ask for the return of the thing pledged will not arise so long as the loan subsists. In the present case, the
prescriptive period did not begin to run when the loan became due. On the other hand, it is petitioner’s right to demand payment that may
be in danger of prescription.
Same; Same; Same; Same; Same; Petitioner’s possession of the stock certificates came about because they were delivered to him pursuant
to the contracts of pledge. His possession as a pledgee cannot ripen into ownership by prescription.—In the present case, petitioner’s
possession of the stock certificates came about because they were delivered to him pursuant to the contracts of pledge. His possession as a
pledgee cannot ripen into ownership by prescription. As aptly pointed out by Justice Jose C. Vitug: “Acquisitive prescription is a mode of
acquiring ownership by a possessor through the requisite lapse of time. In order to ripen into ownership, possession must be in the concept
of an owner, public, peaceful and uninterrupted. Thus, possession with a juridical title, such as by a usufructory, a trustee, a lessee, agent or
a pledgee, not being in the concept of an owner, cannot ripen into ownership by acquisitive prescription unless the juridical relation is first
expressly repudiated and such repudiation has been communicated to the other party.” Petitioner expressly repudiated the pledge, only
when he filed his Complaint and claimed that he was not a mere pledgee, but that he was already the owner of the shares. Based on the
foregoing, petitioner has not acquired the certificates of stock through extraordinary prescription.
Same; Same; Same; Same; Novation; Novation of a contract must not be presumed. “In the absence of an express agreement, novation
takes place only when the old and the new obligations are incompatible on every point.”—Neither did petitioner acquire the shares by
virtue of a novation of the contract of pledge. Novation is defined as “the extinguishment of an obligation by a subsequent one which
terminates it, either by changing its object or principal conditions, by substituting a new debtor in place of the old one, or by subrogating a
third person to the rights of the creditor.” Novation of a contract must not be presumed. “In the absence of an express agreement, novation
takes place only when the old and the new obligations are incompatible on every point.”
Same; Same; Same; Same; Same; Article 2095 states that if the thing pledged are shares of stock, then the “instrument proving the right
pledged” must be delivered to the creditor.—Respondents’ indorsement and delivery of the certificates of stock were pursuant to
paragraph 2 of the contract of pledge which reads: “2. The said certificates had been delivered by the PLEDGOR endorsed in blank to be
held by the PLEDGEE under the pledge as security for the payment of the aforementioned sum and interest thereon accruing.” This
stipulation did not effect the transfer of ownership to petitioner. It was merely in compliance with Article 2093 of the Civil Code, which
requires that the thing pledged be placed in the possession of the creditor or a third person of common agreement; and Article 2095, which
states that if the thing pledged are shares of stock, then the “instrument proving the right pledged” must be delivered to the creditor.
Same; Same; Same; Same; Same; Dacion en pago is a form of novation in which a change takes place in the object involved in the original
contract. Absent an explicit agreement, petitioner cannot simply presume dacion en pago.—Neither can there be dacion en pago, in which
the certificates of stock are deemed sold to petitioner, the consideration for which is the extinguishment of the loans and the accrued
interests thereon. Dacion en pago is a form of novation in which a change takes place in the object involved in the original contract. Absent
an explicit agreement, petitioner cannot simply presume dacion en pago.
Same; Laches Defined; Words and Phrases.—Petitioner submits that “the inaction of the individual respondents with respect to the
recovery of the shares of stock serves to bar them from asserting rights over said shares on the basis of laches.” Laches has been defined as
“the failure or neglect, for an unreasonable length of time, to do that which by exercising due diligence could or should have been done
earlier; it is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it
either has abandoned it or declined to assert it.”
The duty of a corporate secretary to record transfers of stocks is ministerial. However, he cannot be compelled to do so when the
transferee's title to said shares has no prima facie validity or is uncertain. More specifically, a pledgor, prior to foreclosure and sale, does
not acquire ownership rights over the pledged shares and thus cannot compel the corporate secretary to record his alleged ownership of
such shares on the basis merely of the contract of pledge. Similarly, the SEC does not acquire jurisdiction over a dispute when a party's
claim to being a shareholder is, on the face of the complaint, invalid or inadequate or is otherwise negated by the very allegations of such
complaint. Mandamus will not issue to establish a right, but only to enforce one that is already established.
Statement of the Case
There are the principles, used by this Court in resolving this Petition for Review on Certiorari before us, assailing the October 24, 1996
Decision 1 of the Court of Appeals 2 in CA-GR SP No. 40832, the dispositive portion of which reads:
IN THE LIGHT OF ALL THE FOREGOING, the Petition at bench is DENIED DUE COURSE and is hereby DISMISSED.
With costs against the [p]etitioner. 3
By the foregoing disposition, the Court of Appeals effectively affirmed the March 7, 1996 Decision 4 of the Securities and Exchange
Commission (SEC) en banc:
 WHEREFORE, in view of all the foregoing, judgment is hereby rendered dismissing the appeal on the ground
that mandamus will only issue upon a clear showing of ownership over the assailed shares of stock, [t]he
determination of which, on the basis of the foregoing facts, is within the jurisdiction of the regular courts and
not with the SEC. 5
6
The SEC en banc upheld the August 16, 1993 Decision of SEC Hearing Officer Rolando C. Malabonga, which dismissed the action for
mandamus filed by petitioner.
The Facts
As found by the Court of Appeals, the facts of the case are as follows:
. . . On January 8, 1980, Respondent-Appellee Sy Guiok secured a loan from the [p]etitioner in the amount of
P40,000 payable within six (6) months. To secure the payment of the aforesaid loan and interest thereon,
Respondent Guiok executed a Contract of Pledge in favor of the [p]etitioner whereby he pledged his three
hundred (300) shares of stock in the Go Fay & Company Inc., Respondent Corporation, for brevity's sake.
Respondent Guiok obliged himself to pay interest on said loan at the rate of 10% per annum from the date of
said contract of pledge. On the same date, Alfonso Sy Lim secured a loan from the [p]etitioner in the amount
of P40,000 payable in six (6) months. To secure the payment of his loan, Sy Lim executed a "Contract of
Pledge" covering his three hundred (300) shares of stock in Respondent Corporation. Under said contract, Sy
Lim obliged himself to pay interest on his loan at the rate of 10% per annum from the date of the execution of
said contract.
Under said "Contracts of Pledge," Respondent[s] Guiok and Sy Lim covenanted, inter alia, that:
3. In the event of the failure of the PLEDGOR to pay the amount within a period
of six (6) months from the date hereof, the PLEDGEE is hereby authorized to
foreclose the pledge upon the said shares of stock hereby created by selling the
same at public or private sale with or without notice to the PLEDGOR, at which
sale the PLEDGEE may be the purchaser at his option; and the PLEDGEE is hereby
authorized and empowered at his option to transfer the said shares of stock on
the books of the corporation to his own name and to hold the certificate issued
in lieu thereof under the terms of this pledge, and to sell the said shares to issue
to him and to apply the proceeds of the sale to the payment of the said sum and
interest, in the manner hereinabove provided;
4. In the event of the foreclosure of this pledge and the sale of the pledged
certificate, any surplus remaining in the hands of the PLEDGEE after the payment
of the said sum and interest, and the expenses, if any, connected with the
foreclosure sale, shall be paid by the PLEDGEE to the PLEDGOR;
5. Upon payment of the said amount and interest in full, the PLEDGEE will, on
demand of the PLEDGOR, redeliver to him the said shares of stock by
surrendering the certificate delivered to him by the PLEDGOR or by
retransferring each share to the PLEDGOR, in the event that the PLEDGEE, under
the option hereby granted, shall have caused such shares to be transferred to
him upon the books of the issuing company."(idem, supra)
Respondent Guiok and Sy Lim endorsed their respective shares of stock in blank and delivered the same to the
[p]etitioner. 7
However, Respondent Guiok and Sy Lim failed to pay their respective loans and the accrued interests thereon
to the [p]etitioner. In October, 1990, the [p]etitioner filed a "Petition for Mandamus" against Respondent
Corporation, with the SEC entitled "Lim Tay versus Go Fay & Company. Inc., SEC Case No. 03894", praying that:
PRAYER
WHEREFORE, premises considered, it is respectfully prayed that an order be
issued directing the corporate secretary of [R]espondent Go Fay & Co., Inc. to
register the stock transfers and issue new certificates in favor of Lim Tay. It is
likewise prayed that [R]espondent Go Fay & Co., Inc[.] be ordered to pay all
dividends due and unclaimed on the said certificates to [P]laintiff Lim Tay.
Plaintiff further prays for such other relief just and equitable in the premises.
( page 34, Rollo)
The [p]etitioner alleged, inter alia, in his Petition that the controversy between him as stockholder and the
Respondent Corporation was intra-corporate in view of the obstinate refusal of the corporate secretary of
Respondent Corporation to record the transfer of the shares of stock of Respondent Guiok and Sy Lim in favor
of and under the name of the [p]etitioner and to issue new certificates of stock to the [p]etitioner.
The Respondent Corporation filed its Answer to the Complaint and alleged, as Affirmative Defense, that:
AFFIRMATIVE DEFENSE
7. Respondent repleads and incorporates herein by reference the foregoing
allegations.
8. The Complaint states no cause of action against [r]espondent.
9. Complainant is not a stockholder of [r]espondent. Hence, the Honorable
Commission has no jurisdiction to enter the present controversy since their [sic]
is no intracorporate relationship between complainant and respondent.
10. Granting arguendo that a pledge was constituted over the shareholdings of
Sy Guiok in favor of the complainant and that the former defaulted in the
payment of his obligations to the latter, the same did not automatically vest [i]n
complainant ownership of the pledged shares. ( pace 37, Rollo)
In the interim, Sy Lim died. Respondents Guiok and the Intestate Estate of Alfonso Sy Lim, represented by
Conchita Lim, filed their Answer-In-Intervention with the SEC alleging, inter alia, that:
xxx xxx xxx
3. Deny specifically the allegation under paragraph 5 of the Complaint that,
failure to pay the loan within the contract period automatically foreclosed the
pledged shares of stocks and that the share of stocks are automatically
purchased by the plaintiff, for being false and distorted, the truth being that
pursuant to the [sic] paragraph 3 of the contract of pledges, Annexes "A" and
"B", it is clear that upon failure to pay the amount within the stipulated period,
the pledgee is authorized to foreclose the pledge and thereafter, to sell the same
to satisfy the loan. [H]owever, to this point in time, plaintiff has not performed
any operative act of foreclosing the shares of stocks of [i]ntervenors in
accordance with the Chattel Mortgage law, [n]either was there any sale of stocks
— by way of public or private auction — made after foreclosure in favor of the
plaintiff to speak about, and therefore, the respondent company could not be
force[d] to [sic] by way of mandamus, to transfer the subject shares of stocks
from the name of your [i]ntervenors to that of the plaintiff in the absence of
clear and legal basis for such;
4. DENY specifically the allegations under paragraphs 6, 7 and 8 of the complaint
as to the existence of the alleged intracorporate dispute between plaintiff and
company for being without proper and legal basis. In the first place, plaintiff is
not a stockholder of the respondent corporation; there was no foreclosure of
shares executed in accordance with the Chattel Mortgage Law whatsoever; there
were no sales consummated that would transfer to the plaintiff the subject
shares of stocks and therefore, any demand to transfer the shares of stocks to
the name of the plaintiff has no legal basis. In the second place, [i]ntervenors
had been in the past negotiating possible compromise and at the same time, had
tendered payment of the loan secured by the subject pledges but plaintiff
refused unjustifiably to oblige and accept payment o[r] even agree on the
computation of the principal amount of the loan and interest on top of a
substantial amount offered just to settle and compromise the indebtedness of
[i]ntervenors;
 II. SPECIAL AFFIRMATIVE DEFENSES
Intervenors replead by way of reference all the foregoing allegations to form
part of the special affirmative defenses;
5. This Honorable Commission has no jurisdiction over the person of the
respondent and nature of the action, plaintiff having no personality at all to
compel respondent by way of mandamus to perform certain corporate
function[s];
6. The complaint states no cause of action;
7. That respondent is not [a] real party in interest;
8. The appropriation of the subject shares of stocks by plaintiff, without
compliance with the formality of law, amounted to "[p]actum commis[s]orium"
therefore, null and void;
9. Granting for the sake of argument only that there was a valid foreclosure and
sale of the subject st[o]cks in favor of the plaintiff — which [i]ntervenors deny —
still paragraph 5 of the contract allows redemption, for which intervenors are
willing to redeem the share of stocks pledged;
10. Even the Chattel Mortgage law allowed redemption of the [c]hattel
foreclosed;
11. As a matter of fact, on several occasions, [i]ntervenors had made
representations with the plaintiff for the compromise and settlement of all the
obligations secured by the subject pledges — even offering to pay compensation
over and above the value of the obligations, interest[s] and dividends accruing to
the share of stocks but, plaintiff unjustly refused to accept the offer of payment;
( pages 39-42, Rollo)
The [r]espondents-[i]ntervenors prayed the SEC that judgment be rendered in their favor, as follows:
IV. PRAYER
It is respectfully prayed to this Honorable Commission after due hearing, to
dismiss the case for lack of merit, ordering plaintiff to accept payment for the
loans secured by the subject shares of stocks and to pay plaintiff:
1. The sum of P50,000.00, as moral damages;
2. the sum of P50,000.00, as attorneys fees; and,
3. costs of suit.
Other reliefs just and equitable [are] likewise prayed for.
( pages 42-43, Rollo)
After due proceedings, the [h]earing [o]fficer promulgated a Decision dismissing [p]etitioner's Complaint on
the ground that although the SEC had jurisdiction over the action, pursuant to the Decision of the Supreme
Court in the case of "Rural Bank of Salinas, et al. vs. Court of Appeals, et al., 210 SCRA 510", he failed to prove
the legal basis for the secretary of the Respondent Corporation to be compelled to register stock transfers in
favor of the [p]etitioner and to issue new certificates of stock under his name ( pages 67-77, Rollo). The
[p]etitioner appealed the Decision of the [h]earing [o]fficer to the SEC, but, on March 7, 1996, the SEC
promulgated a Decision, dismissing [p]etitioner's appeal on the grounds that: (a) the issue between the
[p]etitioner and the [r]espondents being one involving the ownership of the shares of stock pledged by
Respondent Guiok and Sy Lim, the SEC had no jurisdiction over the action filed by the [p]etitioner; (b) the
latter had no cause of action for mandamus against the Respondent Corporation, the right of ownership of the
[p]etitioner over the 300 shares of stock pledged by Respondent Guiok and Sy Lim not having been as yet,
established, preparatory to the institution of said Petition for Mandamus with the SEC.
Ruling of the Court of Appeals
On the issue of jurisdiction, the Court of Appeals ruled:
In ascertaining whether or not the SEC had exclusive jurisdiction over [p]etitioner's action, the [a]ppellate
[c]ourt must delve into and ascertain: (a) whether or not there is a need to enlist the expertise and technical
know-how of the SEC in resolving the issue of the ownership of the shares of stock; (b) the status of the
relationships of the parties; [and] (c) the nature of the question that is the subject of the controversy. Where
the controversy is purely a civil matter resoluble by civil law principles and there is no need for the application
of the expertise and technical know-how of the SEC, then the regular courts have jurisdiction over the
action. 8 [citations omitted]
On the issue of whether mandamus can be availed of by the petitioner, the Court of Appeals agreed with the SEC, viz.:
. . . [T]he [p]etitioner failed to establish a clear and legal right to the writ of mandamus prayed for by him. . . .
Mandamus will not issue to enforce a right which is in substantial dispute or to which a substantial doubt
exists . . . . The principal function of the writ of mandamus is to command and expedite, and not to inquire and
adjudicate and, therefore it is not the purpose of the writ to establish a legal right, but to enforce one which
has already been established. 9 [citations omitted]
The Court of Appeals debunked petitioner's claim that he had acquired ownership over the shares by virtue of novation, holding that
respondents' indorsement and delivery of the shares were pursuant to Articles 2093 and 2095 of the Civil Code and that petitioner's receipt
of dividends was in compliance with Article 2102 of the same Code. Petitioner's claim that he had acquired ownership of the shares by
virtue of prescription was likewise dismissed by Respondent Court in this wise:
The prescriptive period for the action of Respondent[s] Guiok and Sy Lim to recover the shares of stock from
the [p]etitioner accrued only from the time they paid their loans and the interests thereon and [made] a
demand for their return. 10
Hence, the petitioner brought before us this Petition for Review on Certiorari in accordance with Rule 45 of the Rules of Court. 11
Assignment of Errors
Petitioner submits, for the consideration of this Court, these issues: 12
(a) Whether the Securities and Exchange Commission had jurisdiction over the complaint filed by the
petitioner; and
(b) Whether the petitioner is entitled to the relief of mandamus as against the respondent Go Fay & Co., Inc.
In addition, petitioner contends that it has acquired ownership of the shares "through extraordinary prescription," pursuant to Article 1132
of the Civil Code, and through respondents' subsequent acts, which amounted to a novation of the contracts of pledge. Petitioner also
claims that there was dacion en pago, in which the shares of stock were deemed sold to petitioner, the consideration for which was the
extinguishment of the loans and the interests thereon. Petitioner likewise claims that laches bars respondents from recovering the subject
shares.
The Court's Ruling
The petition has no merit.
First Issue: Jurisdiction of the SEC
Claiming that the present controversy is intra-corporate and falls within the exclusive jurisdiction of the SEC, petitioner relies heavily
on Abejo v. De la Cruz, 13 which upheld the jurisdiction of the SEC over a suit filed by an unregistered stockholder seeking to enforce his
rights. He also seeks support from Rural Bank of Salinas, Inc. v. Court of Appeals, 14 which ruled that the right of a transferee or an assignee
to have stocks transferred to his name was an inherent right flowing from his ownership of the said stocks.
The registration of shares in a stockholder's name, the issuance of stock certificates, and the right to receive dividends which pertain to the
said shares are all rights that flow from ownership. The determination of whether or not a shareholder is entitled to exercise the above-
mentioned rights falls within the jurisdiction of the SEC. However, if ownership of the shares is not clearly established and is still unresolved
at the time the action for mandamus is filed, then jurisdiction lies with the regular courts.
Sec. 5 of Presidential Decree No. 902-A sets forth the jurisdiction of the SEC as follows:
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission
over corporations, partnerships and other forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving:
(a) Devices or schemes employed by or any acts of the board of directors, business associates, its officers or
partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public
and/or of stockholders, partners, members of associations or organizations registered with the Commission;
(b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders,
members, or associates; between any or all of them and the corporation, partnership or 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;
(c) Controversies in the election or appointment of directors, trustees, officers or managers of such
corporations, partnerships or associations.
(d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of
payments in cases where the corporation, partnership or association possesses property to cover all its debts
but foresees the impossibility of meeting them when they respectively fall due or in cases where the
corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the
Management Committee created pursuant to this decree. 15
Thus, a controversy "among stockholders, partners or associates themselves" 16 is intra-corporate in nature and falls within the jurisdiction
of the SEC.
As a general rule, the jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the complaint. 17 In the
present case, however, petitioner's claim that he was the owner of the shares of stock in question has no prima facie basis.
In his Complaint, petitioner alleged that, pursuant to the contracts of pledge, he became the owner of the shares when the term for the
loans expired. The Complaint contained the following pertinent averments:
xxx xxx xxx
3. On [J]anuary 8, 1990, under a Contract of Pledge, Lim Tay received three hundred (300) shares of stock of
Go Fay & Co., Inc., from Sy Guiok as security for the payment of a loan of [f]orty [t]housand [p]esos
(P40,000.00) Philippine currency, the sum of which was payable within six (6) months [with interest] at ten
percentum (10%) per annum from the date of the execution of the contract; a copy of this Contract of Pledge
is attached as Annex "A" and made part hereof;
4. On the same date January 8, 1980, under a similar Contract of Pledge, Lim Tay received three hundred (300)
shares of stock of Go Pay & Co., Inc. from Alfonso Sy Lim as security for the payment of a loan of [f]orty
[t]housand [p]esos (P40,000.00) Philippine currency, the sum of which was payable within six (6) months [with
interest] at ten percentum (10%) per annum from the date of the execution of the contract; a copy of this
Contract of Pledge is attached as Annex "B" and made part hereof;
5. By the express terms of the agreements, upon failure of the borrowers to pay the stated amounts within
the contract period, the pledge is foreclosed and the shares of stock are purchased by [p]laintiff, who is
expressly authorized and empowered to transfer the duly endorsed shares of stock on the books of the
corporation to his own name; . . . 18 (emphasis supplied)
However, the contracts of pledge, which were made integral parts of the Complaint, contain this common proviso:
3. In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the
date hereof, the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock hereby
created by selling the same at public or private sale with or without notice to the PLEDGOR, at which sale the
PLEDGEE may be the purchaser at his option; and the PLEDGEE is hereby authorized and empowered at his
option, to transfer the said shares of stock on the books of the corporation to his own name and to hold the
certificate issued in lieu thereof under the terms of this pledge, and to sell the said shares to issue to him and
to apply the proceeds of the sale to the payment of the said sum and interest, in the manner hereinabove
provided;
This contractual stipulation, which was part of the Complaint, shows that plaintiff was merely authorized to foreclosethe pledge upon
maturity of the loans, not to own them. Such foreclosure is not automatic, for it must be done in a public or private sale. Nowhere did the
Complaint mention that petitioner had in fact foreclosed the pledge and purchased the shares after such foreclosure. His status as a mere
pledgee does not, under civil law, entitle him to ownership of the subject shares. It is also noteworthy that petitioner's Complaint did not
aver that said shares were acquired through extraordinary prescription, novation or laches. Moreover, petitioner's claim, subsequent to the
filing of the Complaint, that he acquired ownership of the said shares through these three modes is not indubitable and still has to be
resolved. In fact, as will be shown, such allegation-has no merit. Manifestly, the Complaint by itself did not contain any prima facie showing
that petitioner was the owner of the shares of stocks. Quite the contrary, it demonstrated that he was merely a pledgee, not an owner.
Accordingly, it failed to lay down a sufficient basis for the SEC to exercise jurisdiction over the controversy. In fact, the very allegations of
the Complaint and its annexes negated the jurisdiction of the SEC.
Petitioner's reliance on the doctrines set forth in Abejo v. De la Cruz and Rural Bank of Salinas, Inc. v. Court of Appeals is misplaced. In Abejo,
he Abejo spouses sold to Telectronic Systems, Inc. shares of stock in Pocket Bell Philippines, Inc. Subsequent to such contract of sale, the
corporate secretary, Norberto Braga, refused to record the transfer of the shares in the corporate books and instead asked for the
annulment of the sale, claiming that he and his wife had a preemptive right over some of the shares, and that his wife's shares were sold
without consideration or consent.
At the time the Bragas questioned the validity of the sale, the contract had already been perfected, thereby demonstrating that Telectronic
Systems, Inc. was already the prima facie owner of the shares and, consequently, a stockholder of Pocket Bell Philippines, Inc. Even if the
sale were to be annulled later on, Telectronic Systems, Inc. had, in the meantime, title over the shares from the time the sale was perfected
until the time such sale was annulled. The effects of an annulment operate prospectively and do not, as a rule, retroact to the time the sale
was made. Therefore, at the time the Bragas questioned the validity of the tranfers made by the Abejos, Telectronic Systems, Inc. was
already a prima facie shareholder of the corporation, thus making the dispute between the Bragas and the Abejos "intra-corporate" in
nature. Hence, the Court held that "the issue is not on ownership of shares but rather the non-performance by the corporate secretary of
the ministerial duty of recording transfers of shares of stock of the corporation of which he is secretary." 19
Unlike Abejo, however, petitioner's ownership over the shares in this case was not yet perfected when the Complaint was filed. The
contract of pledge certainly does not make him the owner of the shares pledged. Further, whether prescription effectively transferred
ownership of the shares, whether there was a novation of the contracts of pledge, and whether laches had set in were difficult legal issues,
which were unpleaded and unresolved when herein petitioner asked the corporate secretary of Go Fay to effect the transfer, in his favor, of
the shares pledged to him.
In Rural Bank of Salinas, Melenia Guerrero executed deeds of assignment for the shares in favor of the respondents in that case. When the
corporate secretary refused to register the transfer, an action for mandamus was instituted. Subsequently, a motion for intervention was
filed, seeking the annulment of the deeds of assignment on the grounds that the same were fictitious and antedated, and that they were in
fact donations because the considerations therefor were below the book value of the shares.
Like the Abejo spouses, the respondents in Rural Bank of Salinas were already prima facie shareholders when the deeds of assignment were
questioned. If the said deeds were to be annulled later on, respondents would still be considered shareholders of the corporation from the
time of the assignment until the annulment of such contracts.
Second Issue: Mandamus Will Not
Issue to Establish a Right
Petitioner prays for the issuance of a writ of mandamus, directing the corporate secretary of respondent corporation to have the shares
transferred to his name in the corporate books, to issue new certificates of stock and to deliver the corresponding dividends to him. 20
In order that a writ of mandamus may issue, it is essential that the person petitioning for the same has a clear legal right to the thing
demanded and that it is the imperative duty of the respondent to perform the act required. It neither confers powers nor imposes duties
and is never issued in doubtful cases. It is simply a command to exercise a power already possessed and to perform a duty already
imposed. 21
In the present case, petitioner has failed to establish a clear legal right. Petitioner's contention that he is the owner of the said shares is
completely without merit. Quite the contrary and as already shown, he does not have any ownership rights at all. At the time petitioner
instituted his suit at the SEC, his ownership claim had no prima facieleg to stand on. At best, his contention was disputable and uncertain
Mandamus will not issue to establish a legal right, but only to enforce one that is already clearly established.
Without Foreclosure and
Purchase at Auction, Pledgor
Is Not the Owner of Pledged Shares
Petitioner initially argued that ownership of the shares pledged had passed to him, upon Respondents Sy Guiok and Sy Lim's failure to pay
their respective loans. But on appeal, petitioner claimed that ownership over the shares had passed to him, not via the contracts of pledge,
but by virtue of prescription and by respondents' subsequent acts which amounted to a novation of the contracts of pledge. We do not
agree.
At the outset, it must be underscored that petitioner did not acquire ownership of the shares by virtue of the contracts of pledge. Article
2112 of the Civil Code states:
The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the
sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and
the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at
the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the
second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be
obliged to give an acquittance for his entire claim.
Furthermore, the contracts of pledge contained a common proviso, which we quote again for the sake of clarity:
3. In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the
date hereof, the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock hereby
created by selling the same at public or private sale with or without notice to the PLEDGOR, at which sale the
PLEDGEE may be the purchaser at his option; and "the PLEDGEE is hereby authorized and empowered at his
option to transfer the said shares of stock on the books of the corporation to his own name, and to hold the
certificate issued in lieu thereof under the terms of this pledge, and to sell the said shares to issue to him and
to apply the proceeds of the sale to the payment of the said sum and interest, in the manner hereinabove
provided; 22
There is no showing that petitioner made any attempt to foreclose or sell the shares through public or private auction, as stipulated in the
contracts of pledge and as required by Article 2112 of the Civil Code. Therefore, ownership of the shares could not have passed to him. The
pledgor remains the owner during the pendency of the pledge and prior to foreclosure and sale, as explicitly provided by Article 2103 of the
same Code:
Unless the thing pledged is expropriated, the debtor continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to
recover it from, or defend it against a third person.
No Ownership
by Prescription
Petitioner did not acquire the shares by prescription either. The period of prescription of any cause of action is reckoned only from the date
the cause of action accrued.
Since a cause of action requires as an essential element not only a legal right of the plaintiff and a correlative obligation of the defendant,
but also an act or omission of the defendant in violation of said legal right, the cause of action does not accrue until the party obligated
refuses, expressly or impliedly, to comply with its duty." 23Accordingly, a cause of action on a written contract accrues when a breach or
violation thereof occurs.
Under the contracts of pledge, private respondents would have a right to ask for the redelivery of their certificates of stock upon payment
of their debts to petitioner, consonant with Article 2105 of the Civil Code, which reads:
The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he
has paid the debt and its interest, with expenses in a proper case. 24
Thus, the right to recover the shares based on the written contract of pledge between petitioner and respondents would arise only upon
payment of their respective loans. Therefore, the prescriptive period within which to demand the return of the thing pledged should begin
to run only after the payment of the loan and a demand for the thing has been made, because it is only then that respondents acquire a
cause of action for the return of the thing pledged.
Prescription should not begin to run on the action to demand the return of the thing pledged while the loan still exists. This is because the
right to ask for the return of the thing pledged will not arise so long as the loan subsists. In the present case, the prescriptive period did not
begin to run when the loan became due. On the other hand, it is petitioner's right to demand payment that may be in danger of
prescription.
Petitioner contends that he can be deemed to have acquired ownership over the certificates of stock through extraordinary prescription, as
provided for in Article 1132 of the Civil Code which states:
Art. 1132. The ownership of movables prescribes through uninterrupted possession for four years in good
faith.
The ownership of personal property also prescribes through uninterrupted possession for eight years, without
need of any other condition. . . . .
Petitioner's argument is untenable. What is required by Article 1132 is possession in the concept of an owner. In the present case,
petitioner's possession of the stock certificates came about because they were delivered to him pursuant to the contracts of pledge. His
possession as a pledgee cannot ripen into ownership by prescription. As aptly pointed out by Justice Jose C. Vitug:
Acquisitive prescription is a mode of acquiring ownership by a possessor through the requisite lapse of time. In
order to ripen into ownership, possession must be in the concept of an owner, public, peaceful and
uninterrupted. Thus, possession with a juridical title, such as by a usufructory, a trustee, a lessee, agent or a
pledgee, not being in the concept of an owner, cannot ripen into ownership by acquisitive prescription unless
the juridical relation is first expressly repudiated and such repudiation has been communicated to the other
party. 25
Petitioner expressly repudiated the pledge, only when he filed his Complaint and claimed that he was not a mere pledgee, but that he was
already the owner of the shares. Based on the foregoing, petitioner has not acquired the certificates of stock through extraordinary
prescription.
No Novation
in Favor of Petitioner
Neither did petitioner acquire the shares by virtue of a novation of the contract of pledge. Novation is defined as "the extinguishment of an
obligation by a subsequent one which terminates it, either by changing its object or principal conditions, by substituting a new debtor in
place of the old one, or by subrogating a third person to the rights of the creditor." 26 Novation of a contract must not be presumed. "In the
absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point." 27
In the present case, novation cannot be presumed by (a) respondents' indorsement and delivery of the certificates of stock covering the 600
shares, (b) petitioner's receipt of dividends from 1980 to 1983, and (c) the fact that respondents have not instituted any action to recover
the shares since 1980.
Respondents' indorsement and delivery of the certificates of stock were pursuant to paragraph 2 of the contract of pledge which reads:
2. The said certificates had been delivered by the PLEDGOR endorsed in blank to be held by the PLEDGEE
under the pledge as security for the payment of the aforementioned sum and interest thereon
accruing. 28
This stipulation did not effect the transfer of ownership to petitioner. It was merely in compliance with Article 2093 of the Civil
Code, 29 which requires that the thing pledged be placed in the possession of the creditor or a third person of common agreement; and
Article 2095, 30 which states that if the thing pledged are shares of stock, then the "instrument proving the right pledged" must be delivered
to the creditor.
Moreover, the fact that respondents allowed the petitioner to receive dividends pertaining to the shares was not meant to relinquish
ownership thereof. As stated by respondent corporation, the same was done pursuant to an agreement between the petitioner and
Respondents Sy Guiok and Sy Lim, following Article 2102 of the civil Code which provides:

It the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he
receives with those which are owing him; but if none are owing him, or insofar as the amount may exceed that
which is due, he shall apply it to the principal. Unless there is a stipulation to the contrary, the pledge shall
extend to the interest and the earnings of the right pledged.

Novation cannot be inferred from the mere fact that petitioner has not, since 1980, instituted any action to recover the shares. Such action
is in fact premature, as the loan is still outstanding. Besides, as already pointed out, novation is never presumed or inferred.

No Dacion en Pago
in Favor of Petitioner

Neither can there be dacion en pago, in which the certificates of stock are deemed sold to petitioner, the consideration for which is the
extinguishment of the loans and the accrued interests thereon. Dacion en pago is a form of novation in which a change takes place in the
object involved in the original contract. Absent an explicit agreement, petitioner cannot simply presume dacion en pago.

Laches Not
a Bar to Petitioner

Petitioner submits that "the inaction of the individual respondents with respect to the recovery of the shares of stock serves to bar them
from asserting rights over said shares on the basis of laches." 31

Laches has been defined as "the failure or neglect, for an unreasonable length of time, to do that which by exercising due diligence could or
should have been done earlier; it is negligence or omission to assert a right within a reasonable time, warranting a presumption that the
party entitled to assert it either has abandoned it or declined to assert it." 32

In this case, it is in fact petitioner who may be guilty of laches. Petitioner had all the time to demand payment of the debt. More important,
under the contracts of pledge, petitioner could have foreclosed the pledges as soon as the loans became due. But for still unknown or
unexplained reasons, he failed to do so, preferring instead to pursue his baseless claim to ownership.

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

SO ORDERED.
G.R. No. 153468. August 17, 2006.*
PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN CO, JAMES TAN, JUDITH TAN, ERNESTO TANCHI, JR., EDWIN NGO, VIRGINIA
KHOO, SABINO PADILLA, JR., EDUARDO P. LIZARES and GRACE CHRISTIAN HIGH SCHOOL, petitioners, vs. PAUL SYCIP and MERRITTO LIM,
respondents.
Actions; Pleadings and Practice; Forum Shopping; The need for proper verification and certification against forum shopping are aimed at
assuring the truthfulness and correctness of the allegations in the Petition and at discouraging forum shopping.—The Petition before the CA
was initially flawed, because the Verification and Certification of Non-Forum Shopping were signed by only one, not by all, of the
petitioners; further, it failed to show proof that the signatory was authorized to sign on behalf of all of them. Subsequently, however,
petitioners submitted a Special Power of Attorney, at-testing that Atty. Padilla was authorized to file the action on their behalf. In the
interest of substantial justice, this initial procedural lapse may be excused. There appears to be no intention to circumvent the need for
proper verification and certification, which are aimed at assuring the truthfulness and correctness of the allegations in the Petition for
Review and at discouraging forum shopping. More important, the substantial merits of petitioners’ case and the purely legal question
involved in the Petition should be considered special circumstances or compelling reasons that justify an exception to the strict
requirements of the verification and the certification of non-forum shopping.
Corporation Law; Acts of management pertain to the board of directors, and those of ownership, to the stockholders or members.—Under
the Corporation Code, stockholders or members periodically elect the board of directors or trustees, who are charged with the
management of the corporation. The board, in turn, periodically elects officers to carry out management functions on a day-to-day basis. As
owners, though, the stockholders or members have residual powers over fundamental and major corporate changes. While stockholders
and members (in some instances) are entitled to receive profits, the management and direction of the corporation are lodged with their
representatives and agents—the board of directors or trustees. In other words, acts of management pertain to the board; and those of
ownership, to the stockholders or members. In the latter case, the board cannot act alone, but must seek approval of the stockholders or
members.
Same; One of the most important rights of a qualified shareholder or member is the right to vote—either personally or by proxy—for the
directors or trustees who are to manage the corporate affairs.—Conformably with the foregoing principles, one of the most important
rights of a qualified shareholder or member is the right to vote—either personally or by proxy—for the directors or trustees who are to
manage the corporate affairs. The right to choose the persons who will direct, manage and operate the corporation is significant, because it
is the main way in which a stockholder can have a voice in the management of corporate affairs, or in which a member in a nonstock
corporation can have a say on how the purposes and goals of the corporation may be achieved. Once the directors or trustees are elected,
the stockholders or members relinquish corporate powers to the board in accordance with law.
Same; Quorum; In stock corporations, the presence of a quorum is ascertained and counted on the basis of the outstanding capital stock.—
In stock corporations, the presence of a quorum is ascertained and counted on the basis of the outstanding capital stock, as defined by the
Code thus: “SEC-TION 137. Outstanding capital stock defined.—The term ‘outstanding capital stock’ as used in this Code, means the total
shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except
treasury shares.”
Same; Same; Only stock actually issued and outstanding may be voted—neither the stockholders nor the corporation can vote or represent
shares that have never passed to the ownership of stockholders, or, having so passed, have again been purchased by the corporation.—The
right to vote is inherent in and incidental to the ownership of corporate stocks. It is settled that unis-sued stocks may not be voted or
considered in determining whether a quorum is present in a stockholders’ meeting, or whether a requisite proportion of the stock of the
corporation is voted to adopt a certain measure or act. Only stock actually issued and outstanding may be voted. Under Section 6 of the
Corporation Code, each share of stock is entitled to vote, unless otherwise provided in the articles of incorporation or declared delinquent
under Section 67 of the Code. Neither the stockholders nor the corporation can vote or represent shares that have never passed to the
ownership of stockholders; or, having so passed, have again been purchased by the corporation. These shares are not to be taken into
consideration in determining majorities. When the law speaks of a given proportion of the stock, it must be construed to mean the shares
that have passed from the corporation, and that may be voted.
Same; Same; When the principle for determining the quorum for stock corporations is applied by analogy to nonstock corporations, only
those who are actual members with voting rights should be counted.—In nonstock corporations, the voting rights attach to membership.
Members vote as persons, in accordance with the law and the bylaws of the corporation. Each member shall be entitled to one vote unless
so limited, broadened, or denied in the articles of incorporation or bylaws. We hold that when the principle for determining the quorum for
stock corporations is applied by analogy to non-stock corporations, only those who are actual members with voting rights should be
counted. Under Section 52 of the Corporation Code, the majority of the members representing the actual number of voting rights, not the
number or numerical constant that may originally be specified in the articles of incorporation, constitutes the quorum.
Same; Same; In stock corporations, shareholders may generally transfer their shares; The determination of whether or not “dead members”
are entitled to exercise their voting rights (through their executor or administrator), depends on the articles of incorporation or bylaws.—In
stock corporations, shareholders may generally transfer their shares. Thus, on the death of a shareholder, the executor or administrator
duly appointed by the Court is vested with the legal title to the stock and entitled to vote it. Until a settlement and division of the estate is
effected, the stocks of the decedent are held by the administrator or executor. On the other hand, membership in and all rights arising from
a nonstock corporation are personal and non-transferable, unless the articles of incorporation or the bylaws of the corporation provide
otherwise. In other words, the determination of whether or not “dead mem-bers” are entitled to exercise their voting rights (through their
executor or administrator), depends on those articles of incorporation or bylaws.
Same; Same; Dead members who are dropped from the membership ros-ter in the manner and for the cause provided for in the By-Laws of
Grace Christian High School, a nonstock corporation, are not to be counted in determining the requisite vote in corporate matters or the
requisite quorum.—Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of the
member. Section 91 of the Corporation Code further provides that termination extinguishes all the rights of a member of the corporation,
unless otherwise provided in the articles of incorporation or the bylaws. Applying Section 91 to the present case, we hold that dead
members who are dropped from the membership roster in the manner and for the cause provided for in the By-Laws of GCHS are not to be
counted in determining the requisite vote in corporate matters or the requisite quorum for the annual members’ meeting. With 11
remaining members, the quorum in the present case should be 6. Therefore, there being a quorum, the annual members’ meeting,
conducted with six members present, was valid.
Same; Same; Words and Phrases; The phrase “may be filled” in Section 29 of the Corporation Code shows that the filling of vacancies in the
board by the remaining directors or trustees constituting a quorum is merely permissive, not mandatory—corporations, therefore, may
choose how vacancies in their respective boards may be filled up.—Undoubtedly, trustees may fill vacancies in the board, provided that
those remaining still constitute a quorum. The phrase “may be filled” in Section 29 shows that the filling of vacancies in the board by the
remaining directors or trustees constituting a quorum is merely permissive, not mandatory. Corporations, therefore, may choose how
vacancies in their respective boards may be filled up—either by the remaining directors constituting a quorum, or by the stockholders or
members in a regular or special meeting called for the purpose. The By-Laws of GCHS prescribed the specific mode of filling up existing
vacancies in its board of directors; that is, by a majority vote of the remaining members of the board.
Same; Same; There is a well-defined distinction between a corporate act to be done by the board and that by the constituent members of
the corpora-tion.—While a majority of the remaining corporate members were present, however, the “election” of the four trustees cannot
be legally upheld for the obvious reason that it was held in an annual meeting of the members, not of the board of trustees. We are not
unmindful of the fact that the members of GCHS themselves also constitute the trustees, but we cannot ignore the GCHS bylaw provision,
which specifically prescribes that vacancies in the board must be filled up by the remaining trustees. In other words, these remaining
member-trustees must sit as a board in order to validly elect the new ones. Indeed, there is a well-defined distinction between a corporate
act to be done by the board and that by the constituent members of the corporation. The board of trustees must act, not individually or
separately, but as a body in a lawful meeting. On the other hand, in their annual meeting, the members may be represented by their
respective proxies, as in the contested annual members’ meeting of GCHS.
For stock corporations, the quorum referred to in Section 52 of the Corporation Code is based on the number of outstanding
voting stocks. For nonstock corporations, only those who are actual, living members with voting rights shall be counted in determining the existence of a
quorum during members meetings.Dead members shall not be counted.
The Case
The present Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court seeks the reversal of the January 23[2] and
May 7, 2002,[3]Resolutions of the Court of Appeals (CA) in CA-GR SP No. 68202. The first assailed Resolution dismissed the appeal filed by
petitioners with the CA.Allegedly, without the proper authorization of the other petitioners, the Verification and Certification of Non-Forum
Shopping were signed by only one of them -- Atty. Sabino Padilla Jr. The second Resolution denied reconsideration.
The Facts
Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation with fifteen (15) regular members, who also
constitute the board of trustees.[4] During the annual members meeting held on April 6, 1998, there were only eleven (11) [5] living member-
trustees, as four (4) had already died. Out of the eleven, seven (7)[6] attended the meeting through their respective proxies. The meeting
was convened and chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who argued that there was no
quorum.[7] In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the four deceased
member-trustees.
When the controversy reached the Securities and Exchange Commission (SEC), petitioners maintained that the deceased member-trustees
should not be counted in the computation of the quorum because, upon their death, members automatically lost all their rights (including
the right to vote) and interests in the corporation.
SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void for lack of quorum. She held that the basis for
determining the quorum in a meeting of members should be their number as specified in the articles of incorporation, not simply the
number of living members.[8] She explained that the qualifying phrase entitled to vote in Section 24[9] of the Corporation Code, which
provided the basis for determining a quorum for the election of directors or trustees, should be read together with Section 89.[10]
The hearing officer also opined that Article III (2)[11] of the By-Laws of GCHS, insofar as it prescribed the mode of filling
vacancies in the board of trustees, must be interpreted in conjunction with Section 29 [12] of the Corporation Code. The SEC en banc denied
the appeal of petitioners and affirmed the Decision of the hearing officer in toto. [13] It found to be untenable their contention that the word
members, as used in Section 52[14] of the Corporation Code, referred only to the living members of a nonstock corporation.[15]
As earlier stated, the CA dismissed the appeal of petitioners, because the Verification and Certification of Non-Forum
Shopping had been signed only by Atty. Sabino Padilla Jr. No Special Power of Attorney had been attached to show his authority to sign for
the rest of the petitioners.
Hence, this Petition.[16]
Issues
Petitioners state the issues as follows:
Petitioners principally pray for the resolution of the legal question of whether or not in NON-STOCK
corporations, dead members should still be counted in determination of quorum for purposed of conducting
the Annual Members Meeting.
 Petitioners have maintained before the courts below that the DEAD members should no longer be counted in
computing quorum primarily on the ground that members rights are personal and non-transferable as In stock corporations, the presence of a quorum is ascertained and counted on the basis of the outstanding capital stock, as defined by the
provided in Sections 90 and 91 of the Corporation Code of the Philippines. Code thus:

The SEC ruled against the petitioners solely on the basis of a 1989 SEC Opinion that did not even involve a non- SECTION 137. Outstanding capital stock defined. The term outstanding capital stock as used in this Code, means the total
stock corporation as petitioner GCHS. shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not
The Honorable Court of Appeals on the other hand simply refused to resolve this question and fully or partially paid, except treasury shares. (Underscoring supplied)
instead dismissed the petition for review on a technicality the failure to timely submit an SPA from the
petitioners authorizing their co-petitioner Padilla, their counsel and also a petitioner before the Court of
Appeals, to sign the petition on behalf of the rest of the petitioners.
The Right to Vote in
Petitioners humbly submit that the action of both the SEC and the Court of Appeals are not in accord with law Stock Corporations
particularly the pronouncements of this Honorable Court in Escorpizo v. University of Baguio (306 SCRA
497), Robern Development Corporation v. Quitain (315 SCRA 150,) and MC Engineering, Inc. v. NLRC, (360 SCRA The right to vote is inherent in and incidental to the ownership of corporate stocks. [33] It is settled that unissued stocks may not be voted or
183). Due course should have been given the petition below and the merits of the case decided in petitioners considered in determining whether a quorum is present in a stockholders meeting, or whether a requisite proportion of the stock of the
favor.[17] corporation is voted to adopt a certain measure or act. Only stock actually issued and outstanding may be voted.[34] Under Section 6 of the
Corporation Code, each share of stock is entitled to vote, unless otherwise provided in the articles of incorporation or declared
delinquent[35] under Section 67 of the Code.
In sum, the issues may be stated simply in this wise: 1) whether the CA erred in denying the Petition below, on the basis of a defective
Verification and Certification; and 2) whether dead members should still be counted in the determination of the quorum, for purposes of Neither the stockholders nor the corporation can vote or represent shares that have never passed to the ownership of stockholders; or,
conducting the annual members meeting. having so passed, have again been purchased by the corporation. [36] These shares are not to be taken into consideration in determining
The Courts Ruling majorities. When the law speaks of a
given proportion of the stock, it must be construed to mean the shares that have passed from the corporation, and that may be voted.[37]
The present Petition is partly meritorious.
Section 6 of the Corporation Code, in part, provides:
Procedural Issue:
Verification and Certification Section 6. Classification of shares. The shares of stock of stock corporations may be divided into classes or series of shares, or
of Non-Forum Shopping both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated
in the articles of incorporation: Provided, That no share may be deprived of voting rights except those
classified and issued as preferred or redeemable shares, unless otherwise provided in this Code: Provided,
The Petition before the CA was initially flawed, because the Verification and Certification of Non-Forum Shopping were further, that there shall always be a class or series of shares which have complete voting rights.
signed by only one, not by all, of the petitioners; further, it failed to show proof that the signatory was authorized to sign on behalf of all of
them. Subsequently, however, petitioners submitted a Special Power of Attorney, attesting that Atty. Padilla was authorized to file the xxxxxxxxx
action on their behalf.[18]
In the interest of substantial justice, this initial procedural lapse may be excused. [19] There appears to be no intention to Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such
circumvent the need for proper verification and certification, which are aimed at assuring the truthfulness and correctness of the shares shall nevertheless be entitled to vote on the following matters:
allegations in the Petition for Review and at discouraging forum shopping. [20] More important, the substantial merits of petitioners case and
the purely legal question involved in the Petition should be considered special circumstances [21] or compelling reasons that justify an 1. Amendment of the articles of incorporation;
exception to the strict requirements of the verification and the certification of non-forum shopping.[22] 2. Adoption and amendment of by-laws;
Main Issue: 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of
Basis for Quorum the corporation property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
[23]
Generally, stockholders or members meetings are called for the purpose of electing directors or trustees and transacting some other 6. Merger or consolidation of the corporation with another corporation or other
business calling for or requiring the action or consent of the shareholders or members,[24] such as the amendment of the articles of corporations;
incorporation and bylaws, sale or disposition of all or substantially all corporate assets, consolidation and merger and the like, or any other 7. Investment of corporate funds in another corporation or business in accordance with this
business that may properly come before the meeting. Code; and
Under the Corporation Code, stockholders or members periodically elect the board of directors or trustees, who are charged with the 8. Dissolution of the corporation.
management of the corporation.[25] The board, in turn, periodically elects officers to carry out management functions on a day-to-day
basis. As owners, though, the stockholders or members have residual powers over fundamental and major corporate changes. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as
While stockholders and members (in some instances) are entitled to receive profits, the management and direction of the corporation are provided in this Code shall be deemed to refer only to stocks with voting rights.
lodged with their representatives and agents -- the board of directors or trustees.[26] In other words, acts of management pertain to the
board; and those of ownership, to the stockholders or members. In the latter case, the board cannot act alone, but must seek approval of Taken in conjunction with Section 137, the last paragraph of Section 6 shows that the intention of the lawmakers was to base
the stockholders or members.[27] the quorum mentioned in Section 52 on the number of outstanding voting stocks.[38]
Conformably with the foregoing principles, one of the most important rights of a qualified shareholder or member is the right
to vote -- either personally or by proxy -- for the directors or trustees who are to manage the corporate affairs. [28] The right to choose the The Right to Vote in
persons who will direct, manage and operate the corporation is significant, because it is the main way in which a stockholder can have a Nonstock Corporations
voice in the management of corporate affairs, or in which a member in a nonstock corporation can have a say on how the purposes and
goals of the corporation may be achieved.[29]Once the directors or trustees are elected, the stockholders or members relinquish corporate
powers to the board in accordance with law. In nonstock corporations, the voting rights attach to membership. [39] Members vote as persons, in accordance with the law and the bylaws
of the corporation. Each member shall be entitled to one vote unless so limited, broadened, or denied in the articles of incorporation or
In the absence of an express charter or statutory provision to the contrary, the general rule is that every member of a nonstock corporation, bylaws.[40] We hold that when the principle for determining the quorum for stock corporations is applied by analogy to nonstock
and every legal owner of shares in a stock corporation, has a right to be present and to vote in all corporate meetings. Conversely, those corporations, only those who are actual members with voting rights should be counted.
who are not stockholders or members have no right to vote. [30] Voting may be expressed personally, or through proxies who vote in their
representative capacities.[31] Generally, the right to be present and to vote in a meeting is determined by the time in which the meeting is Under Section 52 of the Corporation Code, the majority of the members representing the actual number of voting rights, not
held.[32] the number or numerical constant that may originally be specified in the articles of incorporation, constitutes the quorum.[41]

Section 52 of the Corporation Code states:
Section 52. Quorum in Meetings. Unless otherwise provided for in this Code or in the by-laws, a quorum shall
consist of the stockholders representing a majority of the outstanding capital stock or a majority of the
members in the case of non-stock corporations.
The March 3, 1986 SEC Opinion[42] cited by the hearing officer uses the phrase majority vote of the members; likewise
Section 48 of the Corporation Code refers to 50 percent of 94 (the number of registered members of the association mentioned therein)
plus one. The best evidence of who are the present members of the corporation is the membership book; in the case of stock corporations,
it is the stock and transfer book.[43]
Section 25 of the Code specifically provides that a majority of the directors or trustees, as fixed in the articles of incorporation, shall
constitute a quorum for the transaction of corporate business (unless the articles of incorporation or the bylaws provide for a greater
majority). If the intention of the lawmakers was to base the quorum in the meetings of stockholders or members on their
absolute number as fixed in the articles of incorporation, it would have expressly specified so. Otherwise, the only logical conclusion is that
the legislature did not have that intention.

Effect of the Death

of a Member or Shareholder

Having thus determined that the quorum in a members meeting is to be reckoned as the actual number of members of the
corporation, the next question to resolve is what happens in the event of the death of one of them.
In stock corporations, shareholders may generally transfer their shares. Thus, on the death of a shareholder, the executor or administrator
duly appointed by the Court is vested with the legal title to the stock and entitled to vote it. Until a settlement and division of the estate is
effected, the stocks of the decedent are held by the administrator or executor. [44]

On the other hand, membership in and all rights arising from a nonstock corporation are personal and non-transferable, unless the articles
of incorporation or the bylaws of the corporation provide otherwise. [45] In other words, the determination of whether or not dead members
are entitled to exercise their voting rights (through their executor or administrator), depends on those articles of incorporation or bylaws.

Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of the member. [46] Section 91
of the Corporation Code further provides that termination extinguishes all the rights of a member of the corporation, unless otherwise
provided in the articles of incorporation or the bylaws.

Applying Section 91 to the present case, we hold that dead members who are dropped from the membership roster in the manner and for
the cause provided for in the By-Laws of GCHS are not to be counted in determining the requisite vote in corporate matters or the requisite
quorum for the annual members meeting. With 11 remaining members, the quorum in the present case should be 6. Therefore, there being
a quorum, the annual members meeting, conducted with six[47] members present, was valid.

Vacancy in the
Board of Trustees

As regards the filling of vacancies in the board of trustees, Section 29 of the Corporation Code provides:
SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy occurring in the board
of directors or trustees other than by removal by the stockholders or members or by expiration of term, may
be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum;
otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that
purpose. A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his
predecessor in office.

Undoubtedly, trustees may fill vacancies in the board, provided that those remaining still constitute a quorum. The phrase
may be filled in Section 29 shows that the filling of vacancies in the board by the remaining directors or trustees constituting a quorum is
merely permissive, not mandatory.[48]Corporations, therefore, may choose how vacancies in their respective boards may be filled up --
either by the remaining directors constituting a quorum, or by the stockholders or members in a regular or special meeting called for the
purpose.[49]

The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its board of directors; that is, by a majority vote of the
remaining members of the board.[50]

While a majority of the remaining corporate members were present, however, the election of the four trustees cannot be
legally upheld for the obvious reason that it was held in an annual meeting of the members, not of the board of trustees. We are not
unmindful of the fact that the members of GCHS themselves also constitute the trustees, but we cannot ignore the GCHS bylaw provision,
which specifically prescribes that vacancies in the board must be filled up by the remaining trustees. In other words, these remaining
member-trustees must sit as a board in order to validly elect the new ones.
Indeed, there is a well-defined distinction between a corporate act to be done by the board and that by the constituent members of the
corporation. The board of trustees must act, not individually or separately, but as a body in a lawful meeting. On the other hand, in their
annual meeting, the members may be represented by their respective proxies, as in the contested annual members meeting of GCHS.

WHEREFORE, the Petition is partly GRANTED. The assailed Resolutions of the Court of Appeals are hereby REVERSED AND
SET ASIDE. The remaining members of the board of trustees of Grace Christian High School (GCHS) may convene and fill up the vacancies in
the board, in accordance with this Decision. No pronouncement as to costs in this instance.

SO ORDERED.
G.R. No. 131394. March 28, 2005.*
JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL REYES, petitioners, vs. COURT OF APPEALS, SECURITIES AND EXCHANGE
COMMISSION, DOLORES ONRUBIA, ELENITA NOLASCO, JUAN O. NOLASCO III, ESTATE OF FAUSTINA M. ONRUBIA, PHILIPPINE MERCHANT
MARINE SCHOOL, INC., respondents.
Remedial Law; Actions; Judgments; Res Judicata; Res judicata means a matter adjudged, a thing judicially acted upon or decided; a thing or
matter settled by judgment; Elements of Res Judicata.—Res judicata means a matter adjudged, a thing judicially acted upon or decided; a
thing or matter settled by judgment. The doctrine of res judicata provides that a final judgment, on the merits rendered by a court of
competent jurisdiction is conclusive as to the rights of the parties and their privies and constitutes an absolute bar to subsequent actions
involving the same claim, demand, or cause of action. The elements of res judicata are (a) identity of parties or at least such as representing
the same interest in both actions; (b) identity of rights asserted and relief prayed for, the relief being founded on the same facts; and (c) the
identity in the two (2) particulars is such that any judgment which may be rendered in the other action will, regardless of which party is
successful, amount to res judicata in the action under consideration.
Same; Same; Same; Same; The test often used in determining whether causes of action are identical is to ascertain whether the same facts
or evidence would support and establish the former and present causes of action; There is identity of causes of action when the judgment
sought will be inconsistent with the prior judgment.—The test often used in determining whether causes of action are identical is to
ascertain whether the same facts or evidence would support and establish the former and present causes of action. More significantly,
there is identity of causes of action when the judgment sought will be inconsistent with the prior judgment.
Same; Same; Same; Same; Absolute identity of parties is not a condition sine qua non for res judicata to apply—a shared identity of interest
is sufficient to invoke the coverage of the principle.—Absolute identity of parties is not a condition sine qua non for res judicata to apply—a
shared identity of interest is sufficient to invoke the coverage of the principle. However, there is no identity of parties between the two
cases. The parties in the two petitions have their own rights and interests in relation to the subject matter in litigation. As stated by
petitioners in their Reply to Respondents’ Memorandum, there are no two separate actions filed, but rather, two separate petitions for
review on certiorari filed by two distinct parties with the Court and represented by their own counsels, arising from an adverse consolidated
decision promulgated by the Court of Appeals in one action or proceeding. As such, res judicata is not present in the instant case.
Corporation Law; Articles of Incorporation; 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; A review of PMMSI’s articles of incorporation shows that the corporation complied with the requirements
laid down by Act No. 1459.—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. When PMMSI was incorporated, the prevailing law was Act No. 1459, otherwise known as “The Corporation Law.” A review of
PMMSI’s articles of incorporation shows that the corporation complied with the requirements laid down by Act No. 1459.
Same; Same; Stock and Transfer Book; 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; 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.—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. 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. 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. 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, and may be impeached or even contradicted by other competent evidence. Thus,
parol evidence may be admitted to supply omissions in the records or explain ambiguities, or to contradict such records.
Same; Same; Same; 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.—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.
Same; Same; Same; 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.—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.
Presented in the case at bar is the apparently straight-forward but complicated question: What should be the basis of quorum for a
stockholders meetingthe outstanding capital stock as indicated in the articles of incorporation or that contained in the companys stock and
transfer book?
Petitioners seek to nullify the Court of Appeals Decision in CAG.R. SP No. 41473 [1] promulgated on 18 August 1997, affirming the
SEC Order dated 20 June 1996, and the Resolution[2] of the Court of Appeals dated 31 October 1997 which denied petitioners motion for
reconsideration.
The antecedents are not disputed.
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. However, private
respondents and their predecessors who were in control of PMMSI registered the companys 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.
In 1982, 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.
On 06 May 1992, a special stockholders meeting was held to elect a new set of directors. Private respondents thereafter filed a
petition with the SEC questioning the validity of the 06 May 1992 stockholders 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. The petition was dismissed. [4] Appeal was
made to the SEC En Banc, which granted said appeal, holding that the shares of the deceased incorporators should be duly represented by
their respective administrators or heirs concerned. The SEC directed the parties to call 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.[5]
Petitioners, who are PMMSI stockholders, filed a petition for review with the Court of Appeals. [6] Rebecca Acayan, Jayne O. Abuid,
Willie O. Abuid and Renato Cervantes, stockholders and directors of PMMSI, earlier filed another petition for review of the same
SEC En Bancs orders. The petitions were thereafter consolidated.[7] The consolidated petitions essentially raised the following issues, viz: (a)
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; and (b) whether the Court of Appeals gravely erred in
applying the Espejo Decision to the benefit of respondents. [8] The Espejo Decision is the decision of the SEC en banc in SEC Case No. 2289
which ordered the recording of the shares of Jose Acayan 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 the instant petition, petitioners claim that the 1992 stockholders meeting was valid and legal. They submit that reliance on the
1952 articles of incorporation for determining the quorum negates the existence and validity of the stock and transfer book which private
respondents themselves prepared. In addition, they posit that private respondents cannot avail of the benefits secured by the heirs of
Acayan, as private respondents must show and prove entitlement to the founders and common shares in a separate and independent
action/proceeding.
In private respondents Memorandum[11] dated 08 March 2000, they point out that the instant petition raises the same facts and
issues as those raised in G.R. No. 131315 [12], which was denied by the First Division of this Court on 18 January 1999 for failure to show that
the Court of Appeals committed any reversible error. They add that as a logical consequence, the instant petition should be dismissed on
the ground of res judicata. Furthermore, private respondents claim that in view of the applicability of the rule on res judicata, petitioners
counsel should be cited for contempt for violating the rule against forum-shopping.[13]
For their part, petitioners claim that the principle of res judicata does not apply to the instant case. They argue that the 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. For the same reasons, they claim that
counsel for petitioners cannot be found guilty of forum-shopping.[14]
In their Manifestation and Motion[15] dated 22 September 2004, private respondents moved for the dismissal of the instant
petition in view of the dismissal of G.R. No. 131315. Attached to the said manifestation is a copy of the Entry of Judgment[16] issued by the
First Division dated 01 December 1999.
The petition must be denied, not on res judicata, but on the ground that like the petition in G.R. No. 131315 it fails to impute
reversible error to the challenged Court of Appeals Decision.
Res judicata does not apply in
the case at bar.
Res judicata means a matter adjudged, a thing judicially acted upon or decided; a thing or matter settled by judgment. [17] The
doctrine of res judicata provides that a final judgment, on the merits rendered by a court of competent jurisdiction is conclusive as to the
rights of the parties and their privies and constitutes an absolute bar to subsequent actions involving the same claim, demand, or cause of
action.[18] The elements of res judicata are (a) identity of parties or at least such as representing the same interest in both actions; (b)
identity of rights asserted and relief prayed for, the relief being founded on the same facts; and (c) the identity in the two (2) particulars is
such that any judgment which may be rendered in the other action will, regardless of which party is successful, amount to res judicata in the TOTAL ---------------------1,700 shares----------------------------P 90,000.00
action under consideration.[19]

There is no dispute as to the identity of subject matter since the crucial point in both cases is the propriety of including the still ....
unproven shares of respondents for purposes of determining the quorum. Petitioners, however, deny that there is identity of parties and
causes of actions between the two petitions.
8. That the amount of the entire capital stock which has been actually subscribed is TWENTY ONE THOUSAND SIX HUNDRED PESOS
The test often used in determining whether causes of action are identical is to ascertain whether the same facts or evidence would (P21,600.00) and the following persons have subscribed for the number of shares and amount of capital stock set out after their respective
support and establish the former and present causes of action.[20] More significantly, there is identity of causes of action when the judgment names:
sought will be inconsistent with the prior judgment. [21] 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 SUBSCRIBER SUBSCRIBED AMOUNT SUBSCRIBED
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.
No. of Shares Par Value
Absolute identity of parties is not a condition sine qua non for res judicata to applya shared identity of interest is sufficient to
invoke the coverage of the principle.[22] However, there is no identity of parties between the two cases. The parties in the two petitions
have their own rights and interests in relation to the subject matter in litigation. As stated by petitioners in their Reply to Respondents Crispulo J. Onrubia 120 Founders P 2,400.00
Memorandum,[23] there are no two separate actions filed, but rather, two separate petitions for review on certiorari filed by two distinct
parties with the Court and represented by their own counsels, arising from an adverse consolidated decision promulgated by the Court of Juan H. Acayan 120 " 2, 400.00
Appeals in one action or proceeding.[24] As such, res judicata is not present in the instant case.
Martin P. Sagarbarria 100 " 2, 000.00
Likewise, there is no basis for declaring petitioners or their counsel guilty of violating the rules against forum-shopping. In
the Verification/Certification[25] portion of the petition, petitioners clearly stated that there was then a pending motion for reconsideration Mauricio G. Gallaga 50 " 1, 000.00
of the 18 August 1997 Decision of the Court of Appeals in the consolidated cases (CA-G.R. SP No. 41473 and CA-G.R. SP No. 41403) filed by
the Abuids, as well as a motion for clarification. Moreover, the records indicate that petitioners filed their Manifestation[26] dated 20 Luis Renteria 50 " 1, 000.00
January 1998, informing the Court of their receipt of the petition in G.R. No. 131315 in compliance with their duty to inform the Court of the
pendency of another similar petition. The Court finds that petitioners substantially complied with the rules against forum-shopping. Faustina M. de Onrubia 140 " 2, 800.00

The Decision of the Court of

Appeals must be upheld.
Mrs. Ramon Araneta 40 " 800.00
The petition in this case involves the same facts and substantially the same issues and arguments as those in G.R. No. 131315
Carlos M. Onrubia 80 " 1,600.00
which the First Division has long denied with finality. The First Division found the petition before it inadequate in failing to raise any
reversible error on the part of the Court of Appeals. We reach a similar conclusion as regards the present petition.
700 P 14,000.00
The crucial issue in this case is whether it is the companys stock and transfer book, or its 1952 Articles of Incorporation, which
determines stockholders shareholdings, and provides the basis for computing the quorum.
SUBSCRIBER SUBSCRIBED AMOUNT SUBSCRIBED
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 No. of Shares Par Value
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:

Crispulo J. Onrubia 12 Common

Sec. 6. Five or more persons, not exceeding fifteen, a majority of whom are residents of the Philippines, may form a private corporation for P 1,200.00
any lawful purpose or purposes by filing with the Securities and Exchange Commission articles of incorporation duly executed and
acknowledged before a notary public, setting forth: Juan H. Acayan 12 " 1,200.00

Martin P. Sagarbarria 8" 800.00

....
Mauricio G. Gallaga 8" 800.00

(7) If it be a stock corporation, the amount of its capital stock, in lawful money of the Philippines, and the number of shares into which it is Luis Renteria 8" 800.00
divided, and if such stock be in whole or in part without par value then such fact shall be stated; Provided, however, That as to stock without
par value the articles of incorporation need only state the number of shares into which said capital stock is divided. Faustina M. de Onrubia 12 " 1,200.00

(8) If it be a stock corporation, the amount of capital stock or number of shares of no-par stock actually subscribed, the amount or number
of shares of no-par stock subscribed by each and the sum paid by each on his subscription. . . .[28] Mrs. Ramon Araneta 8" 800.00

Carlos M. Onrubia 8" 800.00

A review of PMMSIs articles of incorporation[29] shows that the corporation complied with the requirements laid down by Act No.
1459. It provides in part: 76 P 7,600.00[30]

7. That the capital stock of the said corporation is NINETY THOUSAND PESOS (P90,000.00) divided into two classes, namely: 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
FOUNDERS STOCK - 1,000 shares at P20 par value- P 20,000.00 corporation had 776 issued and outstanding shares.
COMMON STOCK- 700 shares at P 100 par value P 70,000.00
 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]
In 1980, Batas Pambansa Blg. 68, otherwise known as The Corporation Code of the Philippines supplanted Act No. 1459. BP Blg. 68
provides:
respondents as the heirs of the incorporators, and consequently register the founders shares in their name. However, this issue as recast is
not actually determinative of the present controversy as explained below.
Petitioners claim that the Decision of the Court of Appeals unilaterally divested them of their shares in PMMSI as recorded in the
stock and transfer book and instantly created inexistent shares in favor of private respondents. We do not agree.
The assailed Decision merely declared that a separate judicial declaration to recognize the shares of the original incorporators
would entail unnecessary delay and expense on the part of the litigants, considering that the incorporators had already proved ownership
of such shares as shown in the articles of incorporation.[44] There was no declaration of who the individual owners of these shares were on
the date of the promulgation of the Decision. As properly stated by the SEC in its Order dated 20 June 1996, to which the appellate
courts Decision should be related, if at all, the ownership of these shares should only be subjected to the proper judicial (probate) or
extrajudicial proceedings in order to determine the respective shares of the legal heirs of the deceased incorporators. [45]
WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED. Costs against petitioners.

Sec. 24. Election of directors or trustees.At all elections of directors or trustees, there must be present, either in person or by representative SO ORDERED.
authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the
members entitled to vote. . . .

Sec. 52. Quorum in meetings.- Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital stock or majority of the members in the case of non-stock corporation.

Outstanding capital stock, on the other hand, is defined by the Code as:

Sec. 137. Outstanding capital stock defined. The term outstanding capital stock as used in this code, means the total shares of stock issued
to subscribers or stockholders whether or not fully or partially paid (as long as there is binding subscription agreement) except treasury
shares.

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. As aptly stated by the SEC in its Order dated 15 July
1996:[38]

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 corporations 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 ones 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.

Petitioners argue that the Court of Appeals gravely erred in applying the Espejo decision to the benefit of respondents. The Court
believes that the more precise statement of the issue is whether in its assailed Decision, the Court of Appeals can declare private
G.R. Nos. 147062-64. December 14, 2001.*
REPUBLIC OF THE PHILIPPINES, represented by the PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG), petitioner, vs.
COCOFED, et al. and BALLARES, et al.,1 EDUARDO M. COJUANGCO, JR. and the SANDIGANBAYAN (First Division), respondents.
Presidential Commission on Good Government; The government should be allowed to continue voting the sequestered UCPB shares
inasmuch as they were purchased with coconut levy funds—funds that are prima facie public in character or, at the very least, are clearly
affected with public interest.—Simply stated, the gut substantive issue to be resolved in the present Petition is: “Who may vote the
sequestered UCPB shares while the main case for their reversion to the State is pending in the Sandiganbayan?” This Court holds that the
government should be allowed to continue voting those shares inasmuch as they were purchased with coconut levy funds—funds that are
prima facie public in character or, at the very least, are “clearly affected with public interest.”
Same; The general rule is that the registered owner of the shares of a corporation exercises the right and the privilege of voting—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.—At the outset, it is necessary to restate the general rule that 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.
Same; Two clear “public character” exceptions under which the government is granted the authority to vote the shares.—From the
foregoing general principle, the Court in Baseco v. PCGG (hereinafter “Baseco”) and Cojuangco, Jr. v. Roxas (“Cojuangco-Roxas”) has
provided two clear “public character” exceptions under which the government is granted the authority to vote the shares: (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.
Same; The sequestered UCPB shares having been conclusively shown to have been purchased with coconut levies Court holds that these
funds and shares are, at the very least, affected with public interest; Private respondents even if they are the registered shareholders
cannot be accorded voting rights.—Having conclusively shown that the sequestered UCPB shares were purchased with coconut levies, we
hold that these funds and shares are, at the very least, “affected with public interest.” The Resolution issued by the Court on February 16,
1993 in Republic v. Sandiganbayan stated that coconut levy funds were “clearly affected with public interest”; thus, herein private
respondents—even if they are the registered shareholders—cannot be accorded the right to vote them.
Same; The right to vote the UCPB shares is not subject to the “two-tiered test” but to the public character of their acquisition which per
Antiporda v. Sandiganbayan must first be determined.—In the present case, the sequestered UCPB shares are confirmed to have been
acquired with coco levies, not with alleged ill-gotten wealth. Hence, by parity of reasoning, the right to vote them is not subject to the “two-
tiered test” but to the public character of their acquisition, which per Antiporda v. Sandiganbayan cited earlier, must first be determined.
Same; The coconut levy funds are not only affected with public interest they are in fact prima facie public funds.—To avoid
misunderstanding and confusion, this Court will even be more categorical and positive than its earlier pronouncements: the coconut levy
funds are not only affected with public interest; they are, in fact, prima facie public funds.
Same; Coconut levy funds partake of the nature of taxes.—Indeed, coconut levy funds partake of the nature of taxes which, in general, are
enforced proportional contributions from persons and properties, exacted by the State by virtue of its sovereignty for the support of
government and for all public needs.
The right to vote sequestered shares of stock registered in the names of private individuals or entitles and alleged to have been acquired
with ill-gotten wealth shall, as a rule, be exercised by the registered owner. The PCGG may, however, be granted such voting right provided
in can (1) show prima facie evidence that the wealth and/or the shares are indeed ill-gotten; and (2) demonstrate imminent danger of
dissipation of the assets, thus necessitating their continued sequestration and voting by the government until a decision, ruling with finality
on their ownership, is promulgated by the proper court.1âwphi1.nêt
However, the foregoing "two-tiered" test does not apply when the sequestered stocks are acquired with funds that are prima facie public in
character or, at least, are affected with public interest. Inasmuch as the subject UCPB shares in the present case were undisputably acquired
with coco levy funds which are public in character, then the right to vote them shall be exercised by the PCGG. In sum, the "public
character" test, not the "two-tiered" one, applies in the instant controversy.
The Case
Before us is a Petition for Certiorari with a prayer for the issuance of a temporary restraining order and/or a writ of preliminary injunction
under Rule 65 of the Rules of Court, seeking to set aside the February 28, 2001 Order2 of the First Division of the Sandiganbayan3 in Civil
Case Nos. 0033-A, 0033-B and 0033-F. The pertinent portions of the assailed Order read as follows:
"In view hereof, the movants COCOFED, et al. and Ballares, et al. as well as Eduardo Cojuangco, et al., who were
acknowledged to be registered stockholders of the UCPB are authorized, as are all other registered stockholders of the
United Coconut Planters Bank, until further orders from this 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 March
6, 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.
"Since by way of form, the pleadings herein had been labeled as praying for an injunction, the right of the movants to
exercise their right as abovementioned will be subject to the posting of a nominal bond in the amount of FIFTY THOUSAND
PESOS (P50,000.00) jointly for the defendants COCOFED, et al. and Ballares, et al., as well as all other registered stockholders
of sequestered shares in that bank, and FIFTY THOUSAND PESOS (P50,000.00) for Eduardo Cojuangco, Jr., et al., to answer for
any undue damage or injury to the United Coconut Planters Bank as may be attributed to their exercise of their rights as
registered stockholders."4
The Antecedents
The very roots of this case are anchored on the historic events that transpired during the change of government in 1986. Immediately after
the 1986 EDSA Revolution, then President Corazon C. Aquino issued Executive Order (EO) Nos. 1,5 26 and 14.7
"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 No. 1 to assist the President in the recovery of the ill-gotten wealth thus accumulated whether located in the
Philippines or abroad."8
Executive Order No. 2 states 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.9
Executive Order No. 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 EO Nos. 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.10
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
Private Respondent Eduardo Cojuangco Jr. (hereinafter "Cojuangco").
In connection with the sequestration of the said UCPB shares, the PCGG, on July 31, 1987, instituted an action for reconveyance, reversion,
accounting, restitution and damages docketed as Case No. 0033 in the Sandiganbayan.
On November 15, 1990, upon Motion11 of Private Respondent COCOFED, the Sandiganbayan issued a Resolution12 lifting the sequestration
of the subject UCPB shares on the ground that herein private respondents – in particular, COCOFED and the so-called CIIF companies – had
not been impleaded by the PCGG as parties-defendants in its July 31, 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 August 2, 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.
This Sandiganbayan Resolution was challenged by the PCGG in a Petition for Certiorari docketed as GR No. 96073 in this 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 February 16, 1993, declaring that "the right of petitioners [herein private respondents]
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."13 The dispositive portion of the said Resolution reads as follows:
"IN VIEW OF THE FOREGOING, the Court recalls and sets aside the Resolution dated March 3, 1992 and, pending resolution
on the merits of the action at bar, and until further orders, suspends the effectivity of the lifting of the sequestration decreed
 by the Sandiganbayan on November 15, 1990, and directs the restoration of the status quo ante, so as to allow the PCGG to
continue voting the shares of stock under sequestration at the meetings of the United Coconut Planters Bank." 14
On January 23, 1995, the Court rendered its final Decision in GR No. 96073, nullifying and setting aside the November 15, 1990 Resolution
of the Sandiganbayan which, as earlier stated, lifted the sequestration of the subject UCPB shares. The express impleading of herein
Respondents COCOFED et al. was deemed unnecessary because "the judgment may simply be directed against the shares of stock shown to
have been issued in consideration of ill-gotten wealth."15 Furthermore, the companies "are simply the res in the actions for the recovery of
illegally acquires wealth, and there is, in principle, no cause of action against them and no ground to implead them as defendants in said
case."16
A month thereafter, the PCGG – pursuant to an Order of the Sandiganbayan – subdivided Case No. 0033 into eight Complaints and docketed
them as Case Nos. 0033-A to 0033-H.
Six years later, on February 13, 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 March 6,
2001 at three o'clock in the afternoon.
On February 23, 2001, "COCOFED, et al. and Ballares, et al." filed the "Class Action Omnibus Motion" 17 referred to earlier in Sandiganbayan
Civil Case Nos. 0033-A, 0033-B and 0033-F, asking the court a quo:
"1. 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
"2. 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."18
On February 28, 2001, respondent court, after hearing the parties on oral argument, issued the assailed Order.
Hence, this Petition by the Republic of the Philippines represented by the PCGG. 19
The case had initially been raffled to this Court's Third Division which, by a vote of 3-2,20 issued a Resolution21requiring the parties to
maintain the status quo existing before the issuance of the questioned Sandiganbayan Order dated February 28, 2001. On March 7, 2001,
Respondent COCOFED et al. moved that the instant Petition be heard by the Court en banc. 22 The Motion was unanimously granted by the
Third Division.
On March 13, 2001, the Court en banc resolved to accept the Third Division's referral. 23 It heard the case on Oral Argument in Baguio City on
April 17, 2001. During the hearing, it admitted the intervention of a group of coconut farmers and farm worker organizations,
the Pambansang Koalisyon ng mga Samahang Magsasaka at Manggagawa ng Niyugan (PKSMMN). The coalition claims that its members
have been excluded from the benefits of the coconut levy fund. Inter alia, it joined petitioner in praying for the exclusion of private
respondents in voting the sequestered shares.
Issues
Petitioner submits the following issues for our consideration:24
"A.
Despite the fact that the subject sequestered shares were purchased with coconut levy funds (which were declared public in
character) and the continuing effectivity of Resolution dated February 16, 1993 in G.R. No. 96073 which allows the PCGG to
vote said sequestered shares, Respondent Sandiganbayan, with grave abuse of discretion, issued its Order dated February
20, 2001 enjoining PCGG from voting the sequestered shares of stock in UCPB.
"B.
The Respondent Sandiganbayan violated petitioner's right to due process by taking cognizance of the Class Action Omnibus
Motion dated 23 February 2001 despite gross lack of sufficient notice and by issuing the writ of preliminary injunction
despite the obvious fact that there was no actual pressing necessity or urgency to do so."
In its Resolution dated April 17, 2001, the Court defined the issue to be resolved in the instant case simply as follows:
This Court's Ruling
The Petition is impressed with merit.
Main Issue:
Who May Vote the Sequestered Shares of Stock?
Simply stated, the gut substantive issue to be resolved in the present Petition is: "Who may vote the sequestered UCPB shares while the
main case for their reversion to the State is pending in the Sandiganbayan?"
This Court holds that the government should be allowed to continue voting those shares inasmuch as they were purchased with coconut
levy funds – that are prima facie public in character or, at the very least, are "clearly affected with public interest."
General Rule: Sequestered Shares
Are Voted by the Registered Holder
At the outset, it is necessary to restate the general rule that the registered owner of the shares of a corporation exercises the right and the
privilege of voting.25 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.26On 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. Calpo27 and PCGG v. Cojuangco Jr.,28 as follows:
(1) Is there prima facie evidence showing that the said shares are ill-gotten and thus belong to the State?
(2) Is there an imminent danger of dissipation, thus necessitating their continued sequestration and voting by the PCGG,
while the main issue is pending with the Sandiganbayan?
Sequestered Shares Acquired with Public Funds are an Exception
From the foregoing general principle, the Court in Baseco v. PCGG29 (hereinafter "Baseco") and Cojuangco Jr. v. Roxas30 ("Cojuangco-Roxas")
has provided two clear "public character" exceptions under which the government is granted the authority to vote the shares:
(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 Baseco, a private corporation known as the Bataan Shipyard and Engineering Co. was placed under sequestration by the PCGG. Explained
the Court:
"The facts show that the corporation known as BASECO was owned and controlled by President Marcos 'during his
administration, through nominees, by taking undue advantage of his public office and/or using his powers, authority, or
influence,' and that it was by and through the same means, that BASECO had taken over the business and/or assets of the
National Shipyard and Engineering Co., Inc., and other government-owned or controlled entities."31
Given this factual background, the Court discussed PCGG's right over BASECO in the following manner:
 "Now, in the special instance of a business enterprise shown by evidence to have been 'taken over by the government of the
Marcos Administration or by entities or persons close to former President Marcos,' the PCGG is given power and authority, as
already adverted to, to 'provisionally take (it) over in the public interest or to prevent * * (its) disposal or dissipation;' and
since the term is obviously employed in reference to going concerns, or business enterprises in operation, something more
than mere physical custody is connoted; the PCGG may in this case exercise some measure of control in the operation,
running, or management of the business itself."32
Citing an earlier Resolution, it ruled further:
"Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in respondents' calling and holding of a
stockholders' meeting for the election of directors as authorized by the Memorandum of the President * * (to the PCGG)
dated June 26, 1986, particularly, where as in this case, the government can, through its designated directors, properly
exercise control and management over what appear to be properties and assets owned and belonging to the government
itself and over which the persons who appear in this case on behalf of BASECO have failed to show any right or even any
shareholding in said corporation."33 (Italics supplied)
The Court granted PCGG the right to vote the sequestered shares because they appeared to be "assets belonging to the government itself."
The Concurring Opinion of Justice Ameurfina A. Melencio-Herrera, in which she was joined by Justice Florentino P. Feliciano, explained this
principle as follows:
"I have no objection to according the right to vote sequestered stock in case of a take-over of business actually belonging to
the government or whose capitalization comes from public funds but which, somehow, landed in the hands of private
persons, as in the case of BASECO. To my mind, however, caution and prudence should be exercised in the case of
sequestered shares of an on-going private business enterprise, specially the sensitive ones, since the true and real ownership
of said shares is yet to be determined and proven more conclusively by the Courts." 34 (Italics supplied)
The exception was cited again by the Court in Cojuangco-Roxas35 in this wise:
"The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of strict ownership of sequestered property. It
is a mere conservator. It may not vote the shares in a corporation and elect the members of the board of directors. The only
conceivable exception is in a case of a takeover of a business belonging to the government or whose capitalization comes
from public funds, but which landed in private hands as in BASECO."36 (Italics supplied)
The "public character" test was reiterated in many subsequent cases; most recently, in Antiporda v. Sandiganbayan.37 Expressly
citing Conjuangco-Roxas,38 this Court said that in determining the issue of whether the PCGG should be allowed to vote sequestered shares,
it was crucial to find out first whether these were purchased with public funds, as follows:
"It is thus important to determine first if the sequestered corporate shares came from public funds that landed in private
hands."39
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.
UCPB Shares Were Acquired With Coconut Levy Funds
In the present case before the Court, it is not disputed that the money used to purchase the sequestered UCPB shares came from the
Coconut Consumer Stabilization Fund (CCSF), otherwise known as the coconut levy funds.
This fact was plainly admitted by private respondent's counsel, Atty. Teresita J. Herbosa, during the Oral Arguments held on April 17, 2001
in Baguio City, as follows:
"Justice Panganiban:
"In regard to the theory of the Solicitor General that the funds used to purchase [both] the original 28 million and the
subsequent 80 million came from the CCSF, Coconut Consumers Stabilization Fund, do you agree with that?
"Atty. Herbosa:
"Yes, Your Honor.
xxx xxx xxx
"Justice Panganiban:
"So it seems that the parties [have] agreed up to that point that the funds used to purchase 72% of the former First United
Bank came from the Coconut Consumer Stabilization Fund?
"Atty. Herbosa:
"Yes, Your Honor."40
Indeed in Cocofed v. PCGG,41 this Court categorically declared that the UCPB was acquired "with the use of the Coconut
Consumers Stabilization Fund in virtue of Presidential Decree No. 755, promulgated on July 29, 1975."
Coconut Levy Funds Are Affected With Public Interest
Having conclusively shown that the sequestered UCPB shares were purchased with coconut levies, we hold that these funds and shares are,
at the very least, "affected with public interest."
The Resolution issued by the Court on February 16, 1993 in Republic v. Sandiganbayan42 stated that coconut levy funds were "clearly
affected with public interest"; thus, herein private respondents – even if they are the registered shareholders – cannot be accorded the
right to vote them. We quote the said Resolution in part, as follows:
"The coconut levy funds being 'clearly affected with public interest, it follows that the corporations formed and organized
from those funds, and all assets acquired therefrom should also be regarded as 'clearly affected with public interest.'"43
xxx xxx xxx
"Assuming, however, for purposes of argument merely, the lifting of sequestration to be correct, may it also be assumed that
the lifting of sequestration removed the character of the coconut levy companies of being affected with public interest, so
that they and their stock and assets may now be considered to be of private ownership? May it be assumed that the lifting of
sequestration operated to relieve the holders of stock in the coconut levy companies – affected with public interest – of the
obligation of proving how that stock had been legitimately transferred to private ownership, or that those stockholders who
had had some part in the collection, administration, or disposition of the coconut levy funds are now deemed qualified to
acquire said stock, and freed from any doubt or suspicion that they had taken advantage of their special or fiduciary relation
with the agencies in charge of the coconut levies and the funds thereby accumulated? The obvious answer to each of the
questions is a negative one. It seems plain that the lifting of sequestration has no relevance to the nature of the coconut levy
companies or their stock or property, or to the legality of the acquisition by private persons of their interest therein, or to the
latter's capacity or disqualification to acquire stock in the companies or any property acquired from coconut levy funds.
"This being so, the right of the [petitioners] 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." 44 (Italics supplied)
It is however contended by respondents that this Resolution was in the nature of a temporary restraining order. As such, it was supposedly
interlocutory in character and became functus oficio when this Court decided GR No. 96073 on January 23, 1995.
This argument is aptly answered by petitioner in its Memorandum, which we quote:
"The ruling made in the Resolution dated 16 February 1993 confirming the public nature of the coconut levy funds and
denying claimants their purported right to vote is an affirmation of doctrines laid down in the cases of COCOFED v.
PCGG supra, Baseco v. PCGG, supra, and Cojuangco v. Roxas, supra. Therefore it is of no moment that the Resolution dated
16 February 1993 has not been ratified. Its jurisprudential based remain."45 (Italics supplied)
To repeat, the foregoing juridical situation has not changed. It is still the truth today: "the coconut levy funds are clearly affected with public
interest." Private respondents have not "demonstrated satisfactorily that they have legitimately become private funds."
If private respondents really and sincerely believed that the final Decision of the Court in Republic v. Sandiganbayan(GR No. 96073,
promulgated on January 23, 1995) granted them the right to vote, why did they wait for the lapse of six long years before definitively
asserting it (1) through their letter dated February 13, 2001, addressed to the UCPB Board of Directors, demanding the holding of a
shareholders' meeting on March 6, 2001; and (2) through their Omnibus Motion dated February 23, 2001 filed in the court a quo, seeking to
enjoin PCGG from voting the subject sequestered shares during the said stockholders' meeting? Certainly, if they even half believed their
submission now – that they already had such right in 1995 – why are they suddenly and imperiously claiming it only now?
It should be stressed at this point that the assailed Sandiganbayan Order dated February 28, 2001 – allowing private respondents to vote
the sequestered shares – is not based on any finding that the coconut levies and the shares have "legitimately become private funds."
Neither is it based on the alleged lifting of the TRO issued by this Court on February 16, 1993. Rather, it is anchored on the grossly mistaken
application of the two-tiered test mentioned earlier in this Decision.
To stress, the two-tiered test is applied only when the sequestered asset in the hands of a private person is alleged to have been acquired
with ill-gotten wealth. Hence, in PCGG v. Cojuangco,47 we allowed Eduardo Cojuangco Jr. to vote the sequestered shares of the San Miguel
Corporation (SMC) registered in his name but alleged to have been acquired with ill-gotten wealth. We did so on his representation that he
had acquired them with borrowed funds and upon failure of the PCGG to satisfy the "two-tiered" test. This test was, however, not applied
to sequestered SMC shares that were purchased with coco levy funds.
In the present case, the sequestered UCPB shares are confirmed to have been acquired with coco levies, not with alleged ill-gotten wealth.
Hence, by parity of reasoning, the right to vote them is not subject to the "two-tiered test" but to the public character of their acquisition,
which per Antiporda v. Sandiganbayan cited earlier, must first be determined.
Coconut Levy Funds Are Prima Facie Public Funds
To avoid misunderstanding and confusion, this Court will even be more categorical and positive than its earlier pronouncements: the
coconut levy funds are not only affected with public interest; they are, in fact, prima facie public funds.
Public funds are those moneys belonging to the State or to any political subdivision of the State; more specifically, taxes, customs duties and
moneys raised by operation of law for the support of the government or for the discharge of its obligations. 48 Undeniably, coconut levy
funds satisfy this general definition of public funds, because of the following reasons:
1. Coconut levy funds are raised with the use of the police and taxing powers of the State.
2. They are levies imposed by the State for the benefit of the coconut industry and its farmers.
3. Respondents have judicially admitted that the sequestered shares were purchased with public funds.
4. The Commission on Audit (COA) reviews the use of coconut levy funds.
5. The Bureau of Internal Revenue (BIR), with the acquiescence of private respondents, has treated them as public funds.
6. The very laws governing coconut levies recognize their public character.
We shall now discuss each of the foregoing reasons, any one of which is enough to show their public character.
1. Coconut Levy Funds Are Raised Through the State's Police and Taxing Powers.
Indeed, coconut levy funds partake of the nature of taxes which, in general, are enforced proportional contributions from persons and
properties, exacted by the State by virtue of its sovereignty for the support of government and for all public needs.49
Based on this definition, a tax has three elements, namely: a) it is an enforced proportional contribution from persons and properties; b) it is
imposed by the State by virtue of its sovereignty; and c) it is levied for the support of the government. The coconut levy funds fall squarely
into these elements for the following reasons:
(a) They were generated by virtue of statutory enactments imposed on the coconut farmers requiring the payment of
prescribed amounts. Thus, PD No. 276, which created the Coconut Consumer Stabilization Fund (CCSF), mandated the
following:
"a. A levy, initially, of P15.00 per 100 kilograms of copra resecada or its equivalent in other coconut products, shall be
imposed on every first sale, in accordance with the mechanics established under RA 6260, effective at the start of business
hours on August 10, 1973.
"The proceeds from the levy shall be deposited with the Philippine National Bank or any other government bank to the
account of the Coconut Consumers Stabilization Fund, as a separate trust fund which shall not form part of the general fund
of the government."50
The coco levies were further clarified in amendatory laws, specifically PD No. 96151 and PD No. 146852 – in this wise:
"The Authority (Philippine Coconut Authority) is hereby empowered to impose and collect a levy, to be known as the
Coconut Consumers Stabilization Fund Levy, on every one hundred kilos of copra resecada, or its equivalent in other coconut
products delivered to, and/or purchased by, copra exporters, oil millers, desiccators and other end-users of copra or its
equivalent in other coconut products. The levy shall be paid by such copra exporters, oil millers, desiccators and other end-
users of copra or its equivalent in other coconut products under such rules and regulations as the Authority may prescribe.
Until otherwise prescribed by the Authority, the current levy being collected shall be continued." 53
Like other tax measures, they were not voluntary payments or donations by the people. They were enforced contributions
exacted on pain of penal sanctions, as provided under PD No. 276:
"3. Any person or firm who violates any provision of this Decree or the rules and regulations promulgated thereunder, shall,
in addition to penalties already prescribed under existing administrative and special law, pay a fine of not less than P2,500 or
more than P10,000, or suffer cancellation of licenses to operate, or both, at the discretion of the Court." 54
Such penalties were later amended thus:
"Whenever any person or entity willfully and deliberately violates any of the provisions of this Act, or any rule or regulation
legally promulgated hereunder by the Authority, the person or persons responsible for such violation shall be punished by a
fine of not more than P20,000.00 and by imprisonment of not more than five years. If the offender be a corporation,
partnership or a juridical person, the penalty shall be imposed on the officer or officers authorizing, permitting or tolerating
the violation. Aliens found guilty of any offenses shall, after having served his sentence, be immediately deported and, in the
case of a naturalized citizen, his certificate of naturalization shall be cancelled."55
(b) The coconut levies were imposed pursuant to the laws enacted by the proper legislative authorities of the State. Indeed,
the CCSF was collected under PD No. 276, issued by former President Ferdinand E. Marcos who was then exercising
legislative powers.56
(c) They were clearly imposed for a public purpose. There is absolutely no question that they were collected to advance the
government's avowed policy of protecting the coconut industry. This Court takes judicial notice of the fact that the coconut
industry is one of the great economic pillars of our nation, and coconuts and their byproducts occupy a leading position
among the country's export products; that it gives employment to thousands of Filipinos; that it is a great source of the
state's wealth; and that it is one of the important sources of foreign exchange needed by our country and, thus, pivotal in the
plans of a government committed to a policy of currency stability.
Taxation is done not merely to raise revenues to support the government, but also to provide means for the rehabilitation and the
stabilization of a threatened industry, which is so affected with public interest as to be within the police power of the State, as held in Caltex
Philippines v. COA57 and Osmeña v. Orbos.58
Even if the money is allocated for a special purpose and raised by special means, it is still public in character. In the case before us, the funds
were even used to organize and finance State offices. In Cocofed v. PCGG,59 the Court observed that certain agencies or enterprises "were
organized and financed with revenues derived from coconut levies imposed under a succession of laws of the late dictatorship x x x with
deposed Ferdinand Marcos and his cronies as the suspected authors and chief beneficiaries of the resulting coconut industry
monopoly."60 The Court continued: "x x x. It cannot be denied that the coconut industry is one of the major industries supporting the
national economy. It is, therefore, the State's concern to make it a strong and secure source not only of the livelihood of a significant
segment of the population, but also of export earnings the sustained growth of which is one of the imperatives of economic stability. x x
x."61
2. Coconut Funds Are Levied for the Benefit of the Coconut Industry and Its Farmers.
Just like the sugar levy funds, the coconut levy funds constitute state funds even though they may be held for a special public purpose.
In fact, Executive Order No. 481 dated May 1, 1998 specifically likens the coconut levy funds to the sugar levy funds, both being special
public funds acquired through the taxing and police powers of the State. The sugar levy funds, which are strikingly similar to the coconut
levies in their imposition and purpose, were declared public funds by this Court in Gaston v. Republic Planters Bank,62 from which we quote:
"The stabilization fees collected are in the nature of a tax which is within the power of the state to impose for the promotion
of the sugar industry (Lutz vs. Araneta, 98 Phil. 148). They constitute sugar liens (Sec. 7[b], P.D. No. 388). The collections
made accrue to a 'Special Fund,' a 'Development and Stabilization Fund,' almost identical to the 'Sugar Adjustment and
Stabilization Fund' created under Section 6 of Commonwealth Act 567. The tax collected is not in a pure exercise of the
taxing power. It is levied with a regulatory purpose, to provide means for the stabilization of the sugar industry. The levy is
primarily in the exercise of the police power of the State. (Lutz vs. Araneta, supra.)."63
The Court further explained:64
"The stabilization fees in question are levied by the State upon sugar millers, planters and producers for a special purpose –
that of 'financing the growth and development of the sugar industry and all its components, stabilization of the domestic
market including the foreign market.' The fact that the State has taken possession of moneys pursuant to law is sufficient to
constitute them as state funds, even though they are held for a special purpose (Lawrence v. American Surety Co., 263 Mich
586. 294 ALR 535, cited in 42 Am. Jur., Sec. 2., p. 718). Having been levied for a special purpose, the revenues collected are to
be treated as a special fund, to be, in the language of the statute, 'administered in trust' for the purpose intended. Once the
purpose has been fulfilled or abandoned, the balance, if any, is to be transferred to the general funds of the Government. That
is the essence of the trust intended (see 1987 Constitution, Art. VI, Sec. 29[3], lifted from the 1935 Constitution, Article VI, Sec.
23[1]. (Italics supplied)
"The character of the Stabilization Fund as a special fund is emphasized by the fact that the funds are deposited in the
Philippine National Bank and not in the Philippine Treasury, moneys from which may be paid out only in pursuance of an
appropriation made by law (1987 Constitution, Article VI, Sec. 29[1], 1973 Constitution, Article VIII, Sec. 18[1]).
"That the fees were collected from sugar producers, planters and millers, and that the funds were channeled to the purchase
of shares of stock in respondent Bank do not convert the funds into a trust fund for their benefit nor make them the
beneficial owners of the shares so purchased. It is but rational that the fees be collected from them since it is also they who
are to be benefited from the expenditure of the funds derived from it. The investment in shares of respondent Bank is not
alien to the purpose intended because of the Bank's character as a commodity bank for sugar conceived for the industry's
growth and development. Furthermore, of note is the fact that one-half (1/2) or P0.50 per picul, of the amount levied under
P.D. No. 388 is to be utilized for the 'payment of salaries and wages of personnel, fringe benefits and allowances of officers
and employees of PHILSUCOM' thereby immediately negating the claim that the entire amount levied is in trust for sugar,
producers, planters and millers.
"To rule in petitioners' favor would contravene the general principle that revenues derived from taxes cannot be used for
purely private purposes or for the exclusive benefit of private persons. The Stabilization Fund is to be utilized for the benefit
of the entire sugar industry, 'and all its components, stabilization of the domestic market including the foreign market,' the
industry being of vital importance to the country's economy and to national interest."
In the same manner, this Court has also ruled that the oil stabilization funds were public in character and subject to audit by COA. It ruled in
this wise:
"Hence, it seems clear that while the funds collected may be referred to as taxes, they are exacted in the exercise of the
police power of the State. Moreover, that the OPSF is a special fund is plain from the special treatment given it by E.O. 137. It
is segregated from the general fund; and while it is placed in what the law refers to as a 'trust liability account,' the fund
nonetheless remains subject to the scrutiny and review of the COA. The Court is satisfied that these measures comply with
the constitutional description of a 'special fund.' Indeed, the practice is not without precedent."65
In his Concurring Opinion in Kilosbayan v. Guingona,66 Justice Florentino P. Feliciano explained that the funds raised by the On-line Lottery
System were also public in nature. In his words:
"x x x. In the case presently before the Court, the funds involved are clearly public in nature. The funds to be generated by
the proposed lottery are to be raised from the population at large. Should the proposed operation be as successful as its
proponents project, those funds will come from well-nigh every town and barrio of Luzon. The funds here involved are public
in another very real sense: they will belong to the PCSO, a government owned or controlled corporation and an
instrumentality of the government and are destined for utilization in social development projects which, at least in principle,
are designed to benefit the general public. x x x. The interest of a private citizen in seeing to it that public funds, from
whatever source they may have been derived, go only to the uses directed and permitted by law is as real and personal and
substantial as the interest of a private taxpayer in seeing to it that tax monies are not intercepted on their way to the public
treasury or otherwise diverted from uses prescribed or allowed by law. It is also pertinent to note that the more successful
the government is in raising revenues by non-traditional methods such as PAGCOR operations and privatization measures,
the lesser will be the pressure upon the traditional sources of public revenues, i.e., the pocket books of individual taxpayers
and importers."67
Thus, the coconut levy funds – like the sugar levy and the oil stabilization funds, as well as the monies generated by the On-line Lottery
System – are funds exacted by the State. Being enforced contributions, the are prima faciepublic funds.
3. Respondents Judicially Admit That the Levies Are Government Funds.
Equally important as the fact that the coconut levy funds were raised through the taxing and police powers of the State is respondents'
effective judicial admission that these levies are government funds. As shown by the attachments to their pleadings,68 respondents concede
that the Coconut Consumers Stabilization Fund (CCSF) and the Coconut Investment Development Fund "constitute government funds x x x
for the benefit of coconut farmers."
"Collections on both levies constitute government funds. However, unlike other taxes that the Government levies and
collects such as income tax, tariff and customs duties, etc., the collections on the CCSF and CIDF are, by express provision of
the laws imposing them, for a definite purpose, not just for any governmental purpose. As stated above part of the
collections on the CCSF levy should be spent for the benefit of the coconut farmers. And in respect of the collections on the
CIDF levy, P.D. 582 mandatorily requires that the same should be spent exclusively for the establishment, operation and
maintenance of a hybrid coconut seed garden and the distribution, for free, to the coconut farmers of the hybrid coconut
seednuts produced from that seed garden.
"On the other hand, the laws which impose special levies on specific industries, for example on the mining industry, sugar
industry, timber industry, etc., do not, by their terms, expressly require that the collections on those levies be spent
exclusively for the benefit of the industry concerned. And if the enabling law thus so provide, the fact remains that the
governmental agency entrusted with the duty of implementing the purpose for which the levy is imposed is vested with the
discretionary power to determine when and how the collections should be appropriated."69
4. The COA Audit Shows the Public Nature of the Funds.
Under COA Office Order No. 86-9470 dated April 15, 1986,70 the COA reviewed the expenditure and use of the coconut levies allocated for
the acquisition of the UCPB. The audit was aimed at ascertaining whether these were utilized for the purpose for which they had been
intended.71 Under the 1987 Constitution, the powers of the COA are as follows:
"The Commission on Audit shall have the power, authority, and duty to examine, audit, and settle all accounts pertaining to
the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the
Government, or any of its subdivisions, agencies, or instrumentalities x x x." 72
Because these funds have been subjected to COA audit, there can be no other conclusion than that are prima faciepublic in character.
5. The BIR Has Pronounced That the Coconut Levy Funds Are Taxes.
In response to a query posed by the administrator of the Philippine Coconut Authority regarding the character of the coconut levy funds,
the Bureau of Internal Revenue has affirmed that these funds are public in character. It held as follows: "[T]he coconut levy is not a public
trust fund for the benefit of the coconut farmers, but is in the nature of a tax and, therefore, x x x public funds that are subject to
government administration and disposition."73
Furthermore, the executive branch treats the coconut levies as public funds. Thus, Executive Order No. 277, issued on September 24, 1995,
directed the mode of treatment, utilization, administration and management of the coconut levy funds. It provided as follows:
'(a) The coconut levy funds, which include all income, interests, proceeds or profits derived therefrom, as well as all assets,
properties and shares of stocks procured or obtained with the use of such funds, shall be treated, utilized, administered and
managed as public funds consistent with the uses and purposes under the laws which constituted them and the development
priorities of the government, including the government's coconut productivity, rehabilitation, research extension, farmers
organizations, and market promotions programs, which are designed to advance the development of the coconut industry
and the welfare of the coconut farmers."74 (Italics supplied)
Doctrinally, acts of the executive branch are prima facie valid and binding, unless declared unconstitutional or contrary to law.
6. Laws Governing Coconut Levies Recognize Their Public Nature.
Finally and tellingly, the very laws governing the coconut levies recognize their public character. Thus, the third Whereas clause of PD No.
276 treats them as special funds for a specific public purpose. Furthermore, PD No. 711 transferred to the general funds of the State all
existing special and fiduciary funds including the CCSF. On the other hand, PD No. 1234 specifically declared the CCSF as a special fund for a
special purpose, which should be treated as a special account in the National Treasury.
Moreover, even President Marcos himself, as the sole legislative/executive authority during the martial law years, struck off the
phrase which is a private fund of the coconut farmers from the original copy of Executive Order No. 504 dated May 31, 1978, and we quote:
"WHEREAS, by means of the Coconut Consumers Stabilization Fund ('CCSF'), which is the private fund of the coconut
farmers (deleted), essential coconut-based products are made available to household consumers at socialized prices."
(Emphasis supplied)
The phrase in bold face -- which is the private fund of the coconut farmers – was crossed out and duly initialed by its author, former,
President Marcos. This deletion, clearly visible in "Attachment C" of petitioner's Memorandum,75 was a categorical legislative intent to
regard the CCSF as public, not private, funds.
Having Been Acquired With Public Funds, UCPB Shares Belong, Prima Facie, to the Government
Having shown that the coconut levy funds are not only affected with public interest, but are in fact prima facie public funds, this 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.
As stated at the beginning, voting is an act of dominion that should be exercised by the share owner. One of the recognized rights of an
owner is the right to vote at meetings of the corporation. The right to vote is classified as the right to control.76 Voting rights may be for the
purpose of, among others, electing or removing directors, amending a charter, or making or amending by laws. 77 Because the subject UCPB
shares were acquired with government funds, the government becomes their prima facie beneficial and true owner.
Ownership includes the right to enjoy, dispose of, exclude and recover a thing without limitations other than those established by law or by
the owner.78 Ownership has been aptly described as the most comprehensive of all real rights.79 And the right to vote shares is a mere
incident of ownership. In the present case, the government has been shown to be the prima facie owner of the funds used to purchase the
shares. Hence, it should be allowed the rights and privileges flowing from such fact.
And paraphrasing Cocofed v. PCGG, already cited earlier, the Republic should continue to vote those shares until and unless private
respondents are able to demonstrate, in the main cases pending before the Sandiganbayan, that "they [the sequestered UCPB shares] have
legitimately become private."
Procedural and Incidental Issues:
Grave Abuse of Discretion, Improper Arguments and Intervenors' Relief
Procedurally, respondents argue that petitioner has failed to demonstrate that the Sandiganbayan committed grave abuse of discretion, a
demonstration required in every petition under Rule 65.80
We disagree. We hold that the Sandiganbayan gravely abused its discretion when it contravened the rulings of this Court
in Baseco and Cojuangco-Roxas – thereby unlawfully, capriciously and arbitrarily depriving the government of its right to vote sequestered
shares purchased with coconut levy funds which are prima facie public funds.
Indeed, grave abuse of discretion may arise when a lower court or tribunal violates or contravenes the Constitution, the law or existing
jurisprudence. In one case,81 this Court ruled that the lower court's resolution was "tantamount to overruling a judicial pronouncement of
the highest Court x x x and unmistakably a very grave abuse of discretion."82
The Public Character of Shares Is a Valid Issue
Private respondents also contend that the public nature of the coconut levy funds was not raised as an issue before the Sandiganbayan.
Hence, it could not be taken up before this Court.
Again we disagree. By ruling that the two-tiered test should be applied in evaluating private respondents' claim of exercising voting rights
over the sequestered shares, the Sandiganbayan effectively held that the subject assets were private in character. Thus, to meet this issue,
the Office of the Solicitor General countered that the shares were not private in character, and that quite the contrary, they were and are
public in nature because they were acquired with coco levy funds which are public in character. In short, the main issue of who may vote
the shares cannot be determined without passing upon the question of the public/private character of the shares and the funds used to
acquire them. The latter issue, although not specifically raised in the Court a quo, should still be resolved in order to fully adjudicate the
main issue.
Indeed, this Court has "the authority to waive the lack of proper assignment of errors if the unassigned errors closely relate to errors
properly pinpointed out or if the unassigned errors refer to matters upon which the determination of the questions raised by the errors
properly assigned depend."83
Therefore, "where the issues already raised also rest on other issues not specifically presented as long as the latter issues bear relevance
and close relation to the former and as long as they arise from matters on record, the Court has the authority to include them in its
discussion of the controversy as well as to pass upon them."84
No Positive Relief For Intervenors
Intervenors anchor their interest in this case on an alleged right that they are trying to enforce in another Sandiganbayan case docketed as
SB Case No. 0187.85 In that case, they seek the recovery of the subject UCPB shares from herein private respondents and the corporations
controlled by them. Therefore, the rights sought to be protected and the reliefs prayed for by intervenors are still being litigated in the said
case. The purported rights they are invoking are mere expectancies wholly dependent on the outcome of that case in the Sandiganbayan.
Clearly, we cannot rule on intervenors' alleged right to vote at this time and in this case. That right is dependent upon the Sandiganbayan's
resolution of their action for the recovery of said sequestered shares. Given the patent fact that intervenors are not registered stockholders
of UCPB as of the moment, their asserted rights cannot be ruled upon in the present proceedings. Hence, no positive relief can be given
them now, except insofar as they join petitioner in barring private respondents from voting the subject shares.
Epilogue
In sum, we hold that 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.
In making this ruling, we are in no way preempting the proceedings the Sandiganbayan may conduct or the final judgment it may
promulgate in Civil Case Nos. 0033-A, 0033-B and 0033-F. Our determination here is merely prima facie, and should not bar the anti-graft
court from making a final ruling, after proper trial and hearing, on the issues and prayers in the said civil cases, particularly in reference to
the ownership of the subject shares.
We also lay down the caveat that, in declaring the coco levy funds to be prima facie public in character, we are not ruling in any final
manner on their classification – whether they are general or trust or special funds – since such classification is not at issue here. Suffice it to
say that the public nature of the coco levy funds is decreed by the Court only for the purpose of determining the right to vote the shares,
pending the final outcome of the said civil cases.
Neither are we resolving in the present case the question of whether the shares held by Respondent Cojuangco are, as he claims, the result
of private enterprise. This factual matter should also be taken up in the final decision in the cited cases that are pending in the court a quo.
Again suffice it to say that the only issue settled here is the right of PCGG to vote the sequestered shares, pending the final outcome of said
cases.
This matter involving the coconut levy funds and the sequestered UCPB shares has been straddling the courts for about 15 years. What we
are discussing in the present Petition, we stress, is just an incident of the main cases which are pending in the anti-graft court – the cases for
the reconveyance, reversion and restitution to the State of these UCPB shares.
The resolution of the main cases has indeed been long overdue. Every effort, both by the parties and the Sandiganbayan, should be exerted
to finally settle this controversy.
WHEREFORE, the Petition is hereby GRANTED and the assailed Order SET ASIDE. The PCGG shall continue voting the sequestered shares
until Sandiganbayan Civil Case Nos. 0033-A, 0033-B and 0033-F are finally and completely resolved. Furthermore, the Sandiganbayan
is ORDERED to decide with finality the aforesaid civil cases within a period of six (6) months from notice. It shall report to this Court on the
progress of the said cases every three (3) months, on pain of contempt. The Petition in Intervention is DISMISSED inasmuch as the reliefs
prayed for are not covered by the main issues in this case. No costs.
SO ORDERED.
G.R. No. 183905. April 16, 2009.*
GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner, vs. THE HON. COURT OF APPEALS, (8TH DIVISION), ANTHONY V. ROSETE,
MANUEL M. LOPEZ, FELIPE B. ALFONSO, JESUS F. FRANCISCO, CHRISTIAN S. MONSOD, ELPIDIO L. IBAÑEZ, and FRANCIS GILES PUNO,
respondents.
Appeals; Parties; Under Section 1 of Rule 45, which governs appeals by certiorari, the right to file the appeal is restricted to “a party,”
meaning that only the real parties-in-interest who litigated the petition for certiorari before the Court of Appeals are entitled to appeal the
same under Rule 45—the Securities and Exchange Commission (SEC) and its two officers may have been designated as respondents in the
petition for certiorari filed with the Court of Appeals, but under Section 5 of Rule 65 they are not entitled to be classified as real parties-in-
interest.—The Court, through the Resolution of the Third Division dated 2 September 2008, had resolved to treat the petition in G.R. No.
184275 as a petition for review on certiorari, but withheld giving due course to it. Under Section 1 of Rule 45, which governs appeals by
certiorari, the right to file the appeal is restricted to “a party,” meaning that only the real parties-in-interest who litigated the petition for
certiorari before the Court of Appeals are entitled to appeal the same under Rule 45. The SEC and its two officers may have been designated
as respondents in the petition for certiorari filed with the Court of Appeals, but under Section 5 of Rule 65 they are not entitled to be
classified as real parties-in-interest. Under the provision, the judge, court, quasi-judicial agency, tribunal, corporation, board, officer or
person to whom grave abuse of discretion is imputed (the SEC and its two officers in this case) are denominated only as public respondents.
The provision further states that “public respondents shall not appear in or file an answer or comment to the petition or any pleading
therein.”
Corporation Law; Securities and Exchange Commission; Proxies; Words and Phrases; Proxy solicitation involves the securing and submission
of proxies, while proxy validation concerns the validation of such secured and submitted proxies.—It is plain that proxy solicitation is a
procedure that antecedes proxy validation. The former involves the securing and submission of proxies, while the latter concerns the
validation of such secured and submitted proxies. GSIS raises the sensible point that there was no election yet at the time it filed its petition
with the SEC, hence no proper election contest or controversy yet over which the regular courts may have jurisdiction. And the point ties its
cause of action to alleged irregularities in the proxy solicitation procedure, a process that precedes either the validation of proxies or the
annual meeting itself.
Same; Same; Same; Same; Jurisdiction; It is possible that an intra-corporate controversy may animate a disgruntled shareholder to complain
to the Securities and Exchange Commission (SEC) a corporation’s violations of SEC rules and regulations, but that motive alone should not
be sufficient to deprive the SEC of its investigatory and regulatory powers, especially so since such powers are exercisable on a motu
proprio basis.—Under Section 20.1, the solicitation of proxies must be in accordance with rules and regulations issued by the SEC, such as
AIRR-SRC Rule 4. And by virtue of Section 53.1, the SEC has the discretion “to make such investigations as it deems necessary to determine
whether any person has violated” any rule issued by it, such as AIRR-SRC Rule 4. The investigatory power of the SEC established by Section
53.1 is central to its regulatory authority, most crucial to the public interest especially as it may pertain to corporations with publicly traded
shares. For that reason, we are not keen on pursuing private respondents’ insistence that the GSIS complaint be viewed as rooted in an
intra-corporate controversy solely within the jurisdiction of the trial courts to decide. It is possible that an intra-corporate controversy may
animate a disgruntled shareholder to complain to the SEC a corporation’s violations of SEC rules and regulations, but that motive alone
should not be sufficient to deprive the SEC of its investigatory and regulatory powers, especially so since such powers are exercisable on a
motu proprio basis.
Same; Same; Same; Same; Same; The Securities and Exchange Commission’s (SEC’s) power to pass upon the validity of proxies in relation to
election controversies has effectively been withdrawn, tied as it is to its abrogated jurisdictional powers.—There is an interesting point,
which neither party raises, and it concerns Section 6(g) of Presidential Decree No. 902-A, which states: xxx xxx As promulgated then, the
provision would confer on the SEC the power to adjudicate controversies relating not only to proxy solicitation, but also to proxy validation.
Should the proposition hold true up to the present, the position of GSIS would have merit, especially since Section 6 of Presidential Decree
No. 902-A was not expressly repealed or abrogated by the SRC. Yet a closer reading of the provision indicates that such power of the SEC
then was incidental or ancillary to the “exercise of such jurisdiction.” Note that Section 6 is immediately preceded by Section 5, which
originally conferred on the SEC “original and exclusive jurisdiction to hear and decide cases” involving “controversies in the election or
appointments of directors, trustees, officers or managers of such corporations, partnerships or associations.” The cases referred to in
Section 5 were transferred from the jurisdiction of the SEC to the regular courts with the passage of the SRC, specifically Section 5.2. Thus,
the SEC’s power to pass upon the validity of proxies in relation to election controversies has effectively been withdrawn, tied as it is to its
abrogated jurisdictional powers.
Same; Same; Same; Same; Same; Courts; Evidently, the jurisdiction of the regular courts over so-called election contests or controversies
under Section 5(c) of P.D. No. 902-A does not extend to every potential subject that may be voted on by shareholders, but only to the
election of directors or trustees, in which stockholders are authorized to participate under Section 24 of the Corporation Code; The power
of the Securities and Exchange Commission (SEC) to investigate violations of its rules on proxy solicitation is unquestioned when proxies are
obtained to vote on matters unrelated to the cases enumerated under Section 5 of Presidential Decree No. 902-A, but when proxies are
solicited in relation to the election of corporate directors, the resulting controversy, even if it ostensibly raised the violation of the SEC rules
on proxy solicitation, should be properly seen as an election controversy within the original and exclusive jurisdiction of the trial courts by
virtue of Section 5.2 of the SRC in relation to Section 5(c) of Presidential Decree No. 902-A.—Under Section 5(c) of Presidential Decree No.
902-A, in relation to the SRC, the jurisdiction of the regular trial courts with respect to election-related controversies is specifically confined
to “controversies in the election or appointment of directors, trustees, officers or managers of corporations, partnerships, or associations.”
Evidently, the jurisdiction of the regular courts over so-called election contests or controversies under Section 5(c) does not extend to every
potential subject that may be voted on by shareholders, but only to the election of directors or trustees, in which stockholders are
authorized to participate under Section 24 of the Corporation Code. This qualification allows for a useful distinction that gives due effect to
the statutory right of the SEC to regulate proxy solicitation, and the statutory jurisdiction of regular courts over election contests or
controversies. The power of the SEC to investigate violations of its rules on proxy solicitation is unquestioned when proxies are obtained to
vote on matters unrelated to the cases enumerated under Section 5 of Presidential Decree No. 902-A. However, when proxies are solicited
in relation to the election of corporate directors, the resulting controversy, even if it ostensibly raised the violation of the SEC rules on proxy
solicitation, should be properly seen as an election controversy within the original and exclusive jurisdiction of the trial courts by virtue of
Section 5.2 of the SRC in relation to Section 5(c) of Presidential Decree No. 902-A.
Same; Same; Same; Same; Same; Same; The fact that the jurisdiction of the regular courts under Section 5(c) is confined to the voting on
election of officers, and not on all matters which may be voted upon by stockholders, elucidates that the power of the Securities and
Exchange Commission (SEC) to regulate proxies remains extant and could very well be exercised when stockholders vote on matters other
than the election of directors.—Unlike either Section 20.1 or Section 53.1, which merely alludes to the rule-making or investigatory power
of the SEC, Section 5 of Pres. Decree No. 902-A sets forth a definitive rule on jurisdiction, expressly granting as it does “original and exclusive
jurisdiction” first to the SEC, and now to the regular courts. The fact that the jurisdiction of the regular courts under Section 5(c) is confined
to the voting on election of officers, and not on all matters which may be voted upon by stockholders, elucidates that the power of the SEC
to regulate proxies remains extant and could very well be exercised when stockholders vote on matters other than the election of directors.
Same; Same; Same; Securities Regulation Code (SRC); Cease and Desist Orders (CDOs); There are three distinct bases for the issuance by the
Securities and Exchange Commission (SEC) of the Cease and Desist Order (CDO) under the Securities Regulation Code—the first, allocated
by Section 5(I), is predicated on a necessity “to prevent fraud or injury to the investing public,” the second basis, found in Section 53.3,
involves a determination by the Securities and Exchange Commission (SEC) that “any person has engaged or is about to engage in any act or
practice constituting a violation of any provision of this Code, any rule, regulation or order thereunder, or any rule of an Exchange,
registered securities association, clearing agency or other self-regulatory organization,” and, the third basis for the issuance of a Cease and
Desist Order (CDO) is Section 64, a CDO founded on a determination of an act or practice, which unless restrained, “will operate as a fraud
on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public.”—There are three distinct bases
for the issuance by the SEC of the CDO. The first, allocated by Section 5(i), is predicated on a necessity “to prevent fraud or injury to the
investing public.” No other requisite or detail is tied to this CDO authorized under Section 5(i). The second basis, found in Section 53.3,
involves a determination by the SEC that “any person has engaged or is about to engage in any act or practice constituting a violation of any
provision of this Code, any rule, regulation or order thereunder, or any rule of an Exchange, registered securities association, clearing
agency or other self-regulatory organization.” The provision additionally requires a finding that “there is a reasonable likelihood of
continuing [or engaging in] further or future violations by such person.” The maximum duration of the CDO issued under Section 53.3 is ten
(10) days. The third basis for the issuance of a CDO is Section 64. This CDO is founded on a determination of an act or practice, which unless
restrained, “will operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing
public.” Section 64.1 plainly provides three segregate instances upon which the SEC may issue the CDO under this provision: (1) after proper
investigation or verification, (2) motu proprio, or (3) upon verified complaint by any aggrieved party. While no lifetime is expressly specified
for the CDO under Section 64, the respondent to the CDO may file a formal request for the lifting thereof, which the SEC must hear within
fifteen (15) days from filing and decide within ten (10) days from the hearing.
Same; Same; Same; Same; Same; Notwithstanding the similarities between Section 5(i) and Section 64.1, it remains clear that the Cease and
Desist Order (CDO) issued under Section 53.3 is a distinct creation from that under Section 64.—It appears that the CDO under Section 5(i) is
similar to the CDO under Section 64.1. Both require a common finding of a need to prevent fraud or injury to the investing public. At the
same time, no mention is made whether the CDO defined under Section 5(i) may be issued ex-parte, while the CDO under Section 64.1
requires “grave and irreparable” injury, language absent in Section 5(i). Notwithstanding the similarities between Section 5(i) and Section
64.1, it remains clear that the CDO issued under Section 53.3 is a distinct creation from that under Section 64.
Same; Same; Same; Same; Same; A singular Cease and Desist Order (CDO) could not be founded on Section 5.1, Section 53.3 and Section 64
collectively—at the very least, the CDO under Section 53.3 and under Section 64 have their respective requisites and terms.—Noticeably,
the CDO is not precisely clear whether it was issued on the basis of Section 5.1, Section 53.3 or Section 64 of the SRC. The CDO actually
refers and cites all three provisions, yet it is apparent that a singular CDO could not be founded on Section 5.1, Section 53.3 and Section 64
collectively. At the very least, the CDO under Section 53.3 and under Section 64 have their respective requisites and terms.
Same; Same; Same; Same; Same; Administrative Law; Injunction; Due Process; Considering that injunctive relief generally avails upon the
showing of a clear legal right to such relief, the inability or unwillingness to lay bare the precise statutory basis for
the prayer for injunction is an obvious impediment to a successful application, though, nonetheless, the error of the Securities and
Exchange Commission (SEC) in granting the Cease and Desist Order (CDO) without stating which kind of CDO it was issuing is more
unpardonable, as it is an act that contravenes due process of law; In administrative proceedings, it is required that the body or tribunal “in
all controversial questions, render its decision in such a manner that the parties to the proceeding can know the various issues involved, and
the reason for the decision rendered.”—GSIS was similarly cagey in its petition before the SEC, it demurring to state whether it was seeking
the CDO under Section 5.1, Section 53.3, or Section 64. Considering that injunctive relief generally avails upon the showing of a clear legal
right to such relief, the inability or unwillingness to lay bare the precise statutory basis for the prayer for injunction is an obvious
impediment to a successful application. Nonetheless, the error of the SEC in granting the CDO without stating which kind of CDO it was
issuing is more unpardonable, as it is an act that contravenes due process of law. We have particularly required, in administrative
proceedings, that the body or tribunal “in all controversial questions, render its decision in such a manner that the parties to the proceeding
can know the various issues involved, and the reason for the decision rendered.” This requirement is vital, as its fulfillment would afford the
adverse party the opportunity to interpose a reasoned and intelligent appeal that is responsive to the grounds cited against it. The CDO
extended by the SEC fails to provide the needed reasonable clarity of the rationale behind its issuance.
Same; Same; Same; Same; Same; Same; Same; Same; It is legally impermissible for the Securities and Exchange Commission (SEC) to have
utilized both Section 53.3 and Section 64 as basis for the Cease and Desist Order (CDO) at the same time—any respondent to a CDO which
cites both Section 53.3 and Section 64 would not have an intelligent or adequate basis to respond to the same; The veritable mélange that
the assailed Cease and Desist Order (CDO) is, with its jumbled mixture of premises and conclusions, the antithesis of due process.—The
citation in the CDO of Section 5.1, Section 53.3 and Section 64 together may leave the impression that it is grounded on all three provisions,
and that may very well have been the intention of the SEC. Assuming that is so, it is legally impermissible for the SEC to have utilized both
Section 53.3 and Section 64 as basis for the CDO at the same time. The CDO under Section 53.3 is premised on distinctly different requisites
than the CDO under Section 64. Even more crucially, the lifetime of the CDO under Section 53.3 is confined to a definite span of ten (10)
days, which is not the case with the CDO under Section 64. This CDO under Section 64 may be the object of a formal request for lifting
within five (5) days from its issuance, a remedy not expressly afforded to the CDO under Section 53.3. Any respondent to a CDO which cites
both Section 53.3 and Section 64 would not have an intelligent or adequate basis to respond to the same. Such respondent would not know
whether the CDO would have a determinate lifespan of ten (10) days, as in Section 53.3, or would necessitate a formal request for lifting
within five (5) days, as required under Section 64.1. This lack of clarity is to the obvious prejudice of the respondent, and is in clear defiance
of the constitutional right to due process of law. Indeed, the veritable mélange that the assailed CDO is, with its jumbled mixture of
premises and conclusions, the antithesis of due process.
Same; Same; Same; Same; Same; Same; Same; Same; In view of the statutory differences among the three Cease and Desist Orders (CDOs)
under the Securities Regulation Code (SRC), it is essential that the Securities and Exchange Commission (SEC), in issuing such injunctive
relief, identify the exact provision of the SRC on which the CDO is founded. Only by doing so could the adversely affected party be able to
properly evaluate whatever his responses under the law.—Had the CDO issued by the SEC expressed the length of its term, perhaps greater
clarity would have been offered on what Section of the SRC it is based. However, the CDO is precisely silent as to its lifetime, thereby
precluding much needed clarification. In view of the statutory differences among the three CDOs under the SRC, it is essential that the SEC,
in issuing such injunctive relief, identify the exact provision of the SRC on which the CDO is founded. Only by doing so could the adversely
affected party be able to properly evaluate whatever his responses under the law.
Same; Same; Same; Same; Same; Same; Same; Same; The fact that the Cease and Desist Order (CDO) was signed, much less apparently
deliberated upon, by only by one commissioner likewise renders the order fatally infirm—the Securities and Exchange Commission (SEC) is a
collegial body composed of a Chairperson and four (4) Commissioners, in which the presence of at least three (3) Commissioners is required
to constitute a quorum to conduct business.—To make matters worse for the SEC, the fact that the CDO was signed, much less apparently
deliberated upon, by only by one commissioner likewise renders the order fatally infirm. The SEC is a collegial body composed of a
Chairperson and four (4) Commissioners. In order to constitute a quorum to conduct business, the presence of at least three (3)
Commissioners is required. In the leading case of GMCR v. Bell, 271 SCRA 790 (1997) we definitively explained the nature of a collegial body,
and how the act of one member of such body, even if the head, could not be considered as that of the entire body itself.
Same; Same; Same; Same; Same; Same; Same; Same; If it has not been clear to the Securities and Exchange Commission (SEC) before, it
should be clear now that its power to issue a Cease and Desist Order (CDO) can not, under the Securities Regulation Code (SRC), be
delegated to an individual commissioner.—It is clear under Section 4.6 that the ability to delegate functions to a single commissioner does
not extend to the exercise of the review or appellate of the SEC. The issuance of the CDO is an act of the SEC itself done in the exercise of its
original jurisdiction to review actual cases or controversies. If it has not been clear to the SEC before, it should be clear now that its power
to issue a CDO can not, under the SRC, be delegated to an individual commissioner.
Office of the Government Corporate Counsel (OGCC); Attorneys; Government Service Insurance System (GSIS); The charter of Government
Service Insurance System (GSIS) is unique among government owned or controlled corporations with original charter in that it allocates a
role for its internal legal counsel that is in conjunction with or complementary to the Office of the Government Corporate Counsel (OGCC),
which is the statutory legal counsel for Government-Owned or -Controlled Corporations (GOCCs).—We turn to the sanction on the lawyers
of GSIS imposed by the Court of Appeals. Nonetheless, we find that as a matter of law the sanctions are unwarranted. The charter of GSIS is
unique among government owned or controlled corporations with original charter in that it allocates a role for its internal legal counsel that
is in conjunction with or complementary to the Office of the Government Corporate Counsel (OGCC), which is the statutory legal counsel for
GOCCs.
Same; Same; Same; Irrepealable Laws; Congress is not bound to retain the Office of the Government Corporate Counsel (OGCC) as the
primary or exclusive legal counsel of Government Service Insurance System (GSIS) even if it performs such a role for other Government-
Owned or -Controlled Corporations (GOCCs)—to bind Congress to perform in that manner would be akin to elevating the Office of the
Government Corporate Counsel’s (OGCC’s) statutory role to irrepealable status, and it is basic that Congress is barred from passing
irrepealable laws.—The designation of the OGCC as the legal counsel for GOCCs is set forth by statute, initially by Rep. Act No. 3838, then
reiterated by the Administrative Code of 1987. Given that the designation is statutory in nature, there is no impediment for Congress to
impose a different role for the OGCC with respect to particular GOCCs it may charter. Congress appears to have done so with respect to
GSIS, designating the OGCC as a “legal adviser and consultant,” rather than as counsel to GSIS. Further, the law clearly vests unto GSIS the
discretion, rather than the duty, to assign cases to the OGCC for legal action, while designating the present legal services group of GSIS as
“in-house legal counsel.” This situates GSIS differently from the Land Bank of the Philippines, whose own in-house lawyers have persistently
argued before this Court to no avail on their alleged right to file petitions before us instead of the OGCC. Nothing in the Land Bank charter
vested it with the discretion to choose when to assign cases to the OGCC, notwithstanding the establishment of its own Legal Department.
Congress is not bound to retain the OGCC as the primary or exclusive legal counsel of GSIS even if it performs such a role for other GOCCs.
To bind Congress to perform in that manner would be akin to elevating the OGCC’s statutory role to irrepealable status, and it is basic that
Congress is barred from passing irrepealable laws.
Courts; Judges; While due punishment has been meted on the errant magistrates, the corporate world may very well be reminded that the
members of the judiciary are not to be viewed or treated as mere pawns or puppets in the internecine fights businessmen and their
associates wage against other businessmen in the quest for corporate dominance.—We close by acknowledging that the surrounding
circumstances behind these petitions are unfortunate, given the events as narrated in A.M. No. 08-8-11-CA. While due punishment has
been meted on the errant magistrates, the corporate world may very well be reminded that the members of the judiciary are not to be
viewed or treated as mere pawns or puppets in the internecine fights businessmen and their associates wage against other businessmen in
the quest for corporate dominance. In the end, the petitions did afford this Court to clarify consequential points of law, points rooted in
principles which will endure long after the names of the participants in these cases have been forgotten.
These are the undisputed facts.
The annual stockholders meeting (annual meeting) of the Manila Electric Company (Meralco) was scheduled on 27 May
2008.[1] In connection with the annual meeting, proxies [2] were required to be submitted on or before 17 May 2008, and the proxy
validation was slated for five days later, or 22 May.[3]
In view of the resignation of Camilo Quiason,[4] the position of corporate secretary of Meralco became vacant.[5] On 15 May 2008, the board
of directors of Meralco designated Jose Vitug[6] to act as corporate secretary for the annual meeting. [7] However, when the proxy validation
began on 22 May, the proceedings were presided over by respondent Anthony Rosete (Rosete), assistant corporate secretary and in-house
chief legal counsel of Meralco.[8] Private respondents nonetheless argue that Rosete was the acting corporate secretary of
Meralco.[9] Petitioner Government Service Insurance System (GSIS), a major shareholder in Meralco, was distressed over the proxy
validation proceedings, and the resulting certification of proxies in favor of the Meralco management. [10]
On 23 May 2008, GSIS filed a complaint with the Regional Trial Court (RTC) of Pasay City, docketed as R-PSY-08-05777-C4
seeking the declaration of certain proxies as invalid.[11] Three days
later, on 26 May, GSIS filed a Notice with the RTC manifesting the dismissal of the complaint. [12] On the same day, GSIS filed an Urgent
Petition[13] with the Securities and Exchange Commission (SEC) seeking to restrain Rosete from recognizing, counting and tabulating, directly
or indirectly, notionally or actually or in whatever way, form, manner or means, or otherwise honoring the shares covered by the proxies in
favor of respondents Manuel Lopez,[14] Felipe Alfonso,[15] Jesus Francisco,[16] Oscar Lopez, Christian Monsod,[17] Elpidio Ibaez,[18] Francisco
Giles-Puno[19] or any officer representing MERALCO Management, and to annul and declare invalid said proxies.[20]GSIS also prayed for the
issuance of a Cease and Desist Order (CDO) to restrain the use of said proxies during the annual meeting scheduled for the following
day.[21] A CDO[22] to that effect signed by SEC Commissioner Jesus Martinez was issued on 26 May 2008, the same day the complaint was
filed. During the annual meeting held on the following day, Rosete announced that the meeting would push through, expressing the opinion
that the CDO is null and void.[23]
On 28 May 2008, the SEC issued a Show Cause Order (SCO)[24] against private respondents, ordering them to appear before
the Commission on 30 May 2008 and explain why they should not be cited in contempt. On 29 May 2008, respondents filed a petition for
certiorari with prohibition[25] with the Court of Appeals, praying that the CDO and the SCO be annulled. The petition was docketed as CA-
G.R. SP No. 103692.
Many developments involving the Court of Appeals handling of CA-G.R. SP No. 103692 and the conduct of several of its
individual justices are recounted in our Resolution dated 9 September 2008 in A.M. No. 08-8-11-CA (Re: Letter Of Presiding Justice Conrado
M. Vasquez, Jr. On CA-G.R. SP No. 103692).[26] On 23 July 2008, the Court of Appeals Eighth Division promulgated a decision in the case with
the following dispositive portion:
WHEREFORE, premises considered, the May 26, 2008 complaint filed by GSIS in the SEC is hereby
DISMISSED due to SECs lack of jurisdiction, due to forum shopping by respondent GSIS, and due to splitting of
causes of action by respondent GSIS. Consequently, the SECs undated cease and desist order and the SECs May 28,
2008 show cause order are hereby DECLARED VOID AB INITIO and without legal effect and their implementation
are hereby permanently restrained.
The May 26, 2008 complaint filed by GSIS in the SEC is hereby barred from being considered, out of equitable
considerations, as an election contest in the RTC, because the prescriptive period of 15 days from the May 27,
2008 Meralco election to file an election contest in the RTC had already run its course, pursuant to Sec. 3, Rule 6 of
the interim Rules of Procedure Governing Intra-Corporate Controversies under R.A. No. 8799, due to deliberate act
of GSIS in filing a complaint in the SEC instead of the RTC.
Let seventeen (17) copies of this decision be officially TRANSMITTED to the Office of the Chief Justice and three (3)
copies to the Office of the Court Administrator:
(1) for sanction by the Supreme Court against the GSIS LAW OFFICE for unauthorized practice of law,
(2) for sanction and discipline by the Supreme Court of GSIS lawyers led by Atty. Estrella Elamparo-Tayag,
Atty. Marcial C. Pimentel, Atty. Enrique L. Tandan III, and other GSIS lawyers for violation of Sec. 27
of Rule 138 of the Revised Rules of Court, pursuant to Santayana v. Alampay, A.C. No. 5878, March
 21, 2005 454 SCRA 1, and pursuant to Land Bank of the Philippines v. Raymunda Martinez, G.R. No.
169008, August 14, 2007:
(a) for violating express provisions of law and defying public policy in deliberately displacing
the Office of the Government Corporate Counsel (OGCC) from its duty as the exclusive
lawyer of GSIS, a government owned and controlled corporation (GOCC), by admittedly filing
and defending cases as well as appearing as counsel for GSIS, without authority to do so, the
authority belonging exclusively to the OGCC;
xxx The party interested in sustaining the proceedings in the lower court must be joined as a co-
respondent and he has the duty to defend in his own behalf and in behalf of the court which rendered the
questioned order. While there is nothing in the Rules that prohibit the presiding judge of the court involved from
filing his own answer and defending his questioned order, the Supreme Court has reminded judges of the lower
courts to refrain from doing so unless ordered by the Supreme Court.[[34]] The judicial norm or mode of conduct
to be observed in trial and appellate courts is now prescribed in the second paragraph of this section.
xxx

(b) for violating the lawyers oath for failing in their duty to act as faithful officers of the court by A person not a party to the proceedings in the trial court or in the Court of Appeals cannot
engaging in forum shopping; maintain an action for certiorari in the Supreme Court to have the judgment reviewed. [35]

(c) for violating express provisions of law most especially those on jurisdiction which are
mandatory; and

(d) for violating Sec. 3, Rule 2 of the 1997 Rules of Civil Procedure by deliberately splitting causes
of action in order to file multiple complaints: (i) in the RTC of Pasay City and (ii) in the SEC, in
Rule 65 does recognize that the SEC and its officers should have been designated as public respondents in the petition for
order to ensure a favorable order.[27]
certiorari filed with the Court of Appeals. Yet their involvement in the instant petition is not as original party-litigants, but as the quasi-
judicial agency and officers exercising the adjudicative functions over the dispute between the two contending factions within Meralco.
From the onset, neither the SEC nor Martinez or Guevarra has been considered as a real party-in-interest. Section 2, Rule 3 of the 1997
The promulgation of the said decision provoked a searing controversy, as detailed in our Resolution in A.M. No. 08-8-11-CA.
Rules of Civil Procedure provides that every action must be prosecuted or defended in the name of the real party in interest, that is the
Nonetheless, the appellate courts decision spawned three different actions docketed with their own case numbers before this Court. One of
party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit. It would be facetious
them, G.R. No. 183933, was initiated by a Motion for Extension of Time to File Petition for Review filed by the Office of the Solicitor General
to assume that the SEC had any real interest or stake in the intra-corporate dispute within Meralco.
(OSG) in behalf of the SEC, Commissioner Martinez in his capacity as officer-in-charge of the SEC, and Hubert Guevarra in his capacity as
Director of the Compliance and Enforcement Department of the SEC. [28] However, the OSG did not follow through with the filing of the
petition for review adverted to; thus, on 19 January 2009, the Court resolved to declare G.R. No. 183933 closed and terminated. [29]
We find our ruling in Hon. Santiago v. Court of Appeals[36] quite apposite to the question at hand. Petitioner therein, a trial
court judge, had presided over an expropriation case. The litigants had arrived at an amicable settlement, but the judge refused to approve
the same, even declaring it invalid. The matter was elevated to the Court of Appeals, which promptly reversed the trial court and approved
The two remaining cases before us are docketed as G.R. No. 183905 and 184275. G.R. No. 183905 pertains to a petition for
the amicable settlement. The judge took the extraordinary step of filing in his own behalf a petition for review on certiorari with this Court,
certiorari and prohibition filed by GSIS, against the Court of Appeals, and respondents Rosete, Lopez, Alfonso, Francisco, Monsod, Ibaez and
assailing the decision of the Court of Appeals which had reversed him. In disallowing the judges petition, the Court explained:
Puno, all of whom serve in different corporate capacities with Meralco or First Philippines Holdings Corporation, a major stockholder of
Meralco and an affiliate of the Lopez Group of Companies. This petition seeks of the Court to declare the 23 July 2008 decision of the Court
of Appeals null and void, affirm the SECs jurisdiction over the petition filed before it by GSIS, and pronounce that the CDO and
the SCO orders are valid. This petition was filed in behalf of GSIS by the GSIS Law Office; it was signed by the Chief Legal Counsel and
While the issue in the Court of Appeals and that raised by petitioner now is whether the latter
Assistant Legal Counsel of GSIS, and three self-identified Attorney[s], presumably holding lawyer positions in GSIS. [30]
abused his discretion in nullifying the deeds of sale and in proceeding with the expropriation proceeding, that
question is eclipsed by the concern of whether Judge Pedro T. Santiago may file this petition at all.
The OSG also filed the other petition, docketed as G.R. No. 184275. It identifies as its petitioners the SEC, Commissioner
And the answer must be in the negative, Section 1 of Rule 45 allows a party to appeal
Martinez in his capacity as OIC of the SEC, and Hubert Guevarra in his capacity as Director of the Compliance and Enforcement Department
by certiorari from a judgment of the Court of Appeals by filing with this Court a petition for review on certiorari.
of the SEC the same petitioners in the aborted petition for review initially docketed as G.R. No. 183933. Unlike what was adverted to in the
But petitioner judge was not a party either in the expropriation proceeding or in the certiorari proceeding in the
motion for extension filed by the same petitioners in G.R. No. 183933, the petition in G.R. No. 184275 is one for certiorari under Rule 65 as
Court of Appeals. His being named as respondent in the Court of Appeals was merely to comply with the rule
indicated on page 3 thereof,[31] and not a petition for review. Interestingly, save for the first page which leaves the docket number blank, all
that in original petitions for certiorari, the court or the judge, in his capacity as such, should be named as party
86 pages of this petition for certiorari carry a header wrongly identifying the pleading as the non-existent petition for review under G.R. No.
respondent because the question in such a proceeding is the jurisdiction of the court itself (See Mayol v. Blanco,
183933. This petition seeks the reversal of the assailed decision of the Court of Appeals, the recognition of the jurisdiction of the SEC over
61 Phil. 547 [19351, cited in Comments on the Rules of Court, Moran, Vol. II, 1979 ed., p. 471). "In special
the petition of GSIS, and the affirmation of the CDO and SCO.
proceedings, the judge whose order is under attack is merely a nominal party; wherefore, a judge in his official
capacity, should not be made to appear as a party seeking reversal of a decision that is unfavorable to the action
II. taken by him. A decent regard for the judicial hierarchy bars a judge from suing against the adverse opinion of a
higher court,. . . ." (Alcasid v. Samson, 102 Phil. 785, 740 [1957])

Private respondents seek the expunction of the petition filed by the SEC in G.R. No. 184275. We agree that the petitioners ACCORDINGLY, this petition is DENIED for lack of legal capacity to sue by the petitioner.[37]
therein, namely: the SEC, Commissioner Marquez and Guevarra, are not real parties-in-interest to the dispute and thus bereft of capacity to
file the petition. By way of simple illustration, to argue otherwise is to say that the trial court judge, the National Labor Relations
Commission, or any quasi-judicial agency has the right to seek the review of an appellate court decision reversing any of their rulings. That
prospect, as any serious student of remedial law knows, is zero.
Justice Isagani Cruz added, in a Concurring Opinion in Santiago: The judge is not an active combatant in such proceeding and
The Court, through the Resolution of the Third Division dated 2 September 2008, had resolved to treat the petition in G.R. must leave it to the parties themselves to argue their respective positions and for the appellate court to rule on the matter without his
No. 184275 as a petition for review on certiorari, but withheld giving due course to it. [32] Under Section 1 of Rule 45, which governs appeals participation.[38]
by certiorari, the right to file the appeal is restricted to a party, meaning that only the real parties-in-interest who litigated the petition for
certiorari before the Court of Appeals are entitled to appeal the same under Rule 45. The SEC and its two officers may have been designated
Note that in Santiago, the Court recognized the good faith of the judge, who perceived the amicable settlement as a
as respondents in the petition for certiorari filed with the Court of Appeals, but under Section 5 of Rule 65 they are not entitled to be
manifestly iniquitous and illegal contract.[39] The SEC could have similarly felt in good faith that the assailed Court of Appeals decision had
classified as real parties-in-interest. Under the provision, the judge, court, quasi-judicial agency, tribunal, corporation, board, officer or
unduly impaired its prerogatives or caused some degree of hurt to it. Yet assuming that there are rights or prerogatives peculiar to the SEC
person to whom grave abuse of discretion is imputed (the SEC and its two officers in this case) are denominated only as public respondents.
itself that the appellate court had countermanded, these can be vindicated in the petition for certiorari filed by GSIS, whose legal capacity
The provision further states that public respondents shall not appear in or file an answer or comment to the petition or any pleading
to challenge the Court of Appeals decision is without question. There simply is no plausible reason for this Court to deviate from a time-
therein.[33] Justice Regalado explains:
honored rule that preserves the purity of our judicial and quasi-judicial offices to accommodate the SECs distrust and resentment of the
appellate courts decision. The expunction of the petition in G.R. No. 184275 is accordingly in order.
[R]ule 65 involves an original special civil action specifically directed against the person, court,
agency or party a quo which had committed not only a mistake of judgment but an error of jurisdiction, hence
should be made public respondents in that action brought to nullify their invalid acts. It shall, however be the duty
of the party litigant, whether in an appeal under Rule 45 or in a special civil action in Rule 65, to defend in his
behalf and the party whose adjudication is assailed, as he is the one interested in sustaining the correctness of the
At this point, only one petition remainsthe petition for certiorari filed by GSIS in G.R. No. 183905. Casting off the uncritical and unimportant
disposition or the validity of the proceedings.
aspects, the two main issues for adjudication are as follows: (1) whether the SEC has jurisdiction over the petition filed by GSIS against
private respondents; and (2) whether the CDO and SCO issued by the SEC are valid.
 II. trial court. The two particular classes of cases in the enumeration under Section 5 of Presidential Decree No. 902-A which private
respondents especially refer to are as follows:

It is our resolute inclination that this case, which raises interesting questions of law, be decided solely on the merits, without regard to the
personalities involved or the well-reported drama preceding the petition. To that end, the Court has taken note of reports in the media that xxx
GSIS and the Lopez group have taken positive steps to divest or significantly reduce their respective interests in Meralco. [40] These are
developments that certainly ease the tension surrounding this case, not to mention reason enough for the two groups to make an internal (2) Controversies arising out of intra-corporate, partnership, or association relations, between and among
reassessment of their respective positions and interests in relation to this case. Still, the key legal questions raised in the petition do not stockholders, members, or associates; or association of which they are stockholders, members, or
depend at all on the identity of any of the parties, and would obtain the same denouement even if this case was lodged by unknowns as associates, respectively;
petitioners against similarly obscure respondents.
3) Controversies in the election or appointment of directors, trustees, officers or managers of corporations,
partnerships, or associations;
With the objective to resolve the key questions of law raised in the petition, some of the issues raised diminish as peripheral.
For example, petitioners raise arguments tied to the behavior of individual justices of the Court of Appeals, particularly former Justice
Vicente Roxas, in relation to this case as it was pending before the appellate court. The Court takes cognizance of our Resolution in A.M. No. xxx
08-8-11-CA dated 9 September 2008, which duly recited the various anomalous or unbecoming acts in relation to this case performed by
two of the justices who decided the case in behalf of the Court of Appealsformer Justice Roxas (the ponente) and Justice Bienvenido L.
Reyes (the Chairman of the 8th Division) as well as three other members of the Court of Appeals. At the same time, the consensus of the
Court as it deliberated on A.M. No. 08-8-11-CA was to reserve comment or conclusion on the assailed decision of the Court of Appeals, in
recognition of the reality that however stigmatized the actions and motivations of Justice Roxas are, the decision is still the product of the
Court of Appeals as a collegial judicial body, and not of one or some rogue justices. The penalties levied by the Court on these appellate In addition, private respondents cite the Interim Rules on Intra-Corporate Controversies (Interim Rules) promulgated by this
court justices, in our estimation, redress the unwholesome acts which they had committed. At the same time, given the jurisprudential Court in 2001, most pertinently, Section 2 of Rule 6 (on Election Contests), which defines election contests as follows:
importance of the questions of law raised in the petition, any result reached without squarely addressing such questions would be
unsatisfactory, perhaps derelict even.

III.
We now examine whether the SEC has jurisdiction over the petition filed by GSIS. To recall, SEC has sought to enjoin the use and annul the
validation, of the proxies issued in favor of several of the private respondents, particularly in connection with the annual meeting.
SEC. 2. Definition. An election contest refers to any controversy or dispute involving title or claim to
any elective office in a stock or nonstock corporation, the validation of proxies, the manner and validity of
elections and the qualifications of candidates, including the proclamation of winners, to the office of director,
trustee or other officer directly elected by the stockholders in a close corporation or by members of a nonstock
corporation where the articles of incorporation or bylaws so provide. (emphasis supplied)

A.

Jurisdiction is conferred by no other source but law. Both sides have relied upon provisions of Rep. Act No. 8799, otherwise known as the
Securities Regulation Code (SRC), its implementing rules (Amended Implementing Rules or AIRR-SRC), and other related rules to support
their competing contentions that either the SEC or the trial courts has exclusive original jurisdiction over the dispute.
The correct answer is not clear-cut, but there is one. In private respondents favor, the provisions of law they cite pertain directly and
exclusively to the statutory jurisdiction of trial courts acquired by virtue of the transfer of jurisdiction following the passage of the SRC. In
contrast, the SRC provisions relied upon by GSIS do not immediately or directly establish that bodys jurisdiction over the petition, since it
necessitates the linkage of Section 20 to Section 53.1 of the SRC before the point can bear on us.

GSIS primarily anchors its argument on two correlated provisions of the SRC. These are Section 53.1 and Section 20.1, which we cite:
On the other hand, the distinction between proxy solicitation and proxy validation cannot be dismissed offhand. The right of
a stockholder to vote by proxy is generally established by the
SEC. 53. Investigations, Injunctions and Prosecution of Offenses . - 53.1. The Commission may, in its
discretion, make such investigations as it deems necessary to determine whether any person has violated or is
about to violate any provision of this Code, any rule, regulation or order thereunder, or any rule of an Exchange,
registered securities association, clearing agency, other self-regulatory organization, and may require or permit
any person to file with it a statement in writing, under oath or otherwise, as the Commission shall determine, as to
all facts and circumstances concerning the matter to be investigated. The Commission may publish information
concerning any such violations, and to investigate any fact, condition, practice or matter which it may deem
necessary or proper to aid in the enforcement of the provisions of this Code, in the prescribing of rules and
regulations thereunder, or in securing information to serve as a basis for recommending further legislation Corporation Code,[41] but it is the SRC which specifically regulates the form and use of proxies, more particularly the procedure of proxy
concerning the matters to which this Code relates: xxx (emphasis supplied) solicitation, primarily through Section 20.[42] AIRR-SRC Rule 20 defines the terms solicit and solicitation:
SEC. 20. Proxy Solicitations. 20.1. Proxies must be issued and proxy solicitation must be made in
accordance with rules and regulations to be issued by the Commission;
The terms solicit and solicitation include:

A. any request for a proxy whether or not accompanied by or included in a form of proxy

B. any request to execute or not to execute, or to revoke, a proxy; or

C. the furnishing of a form of proxy or other communication to security holders under circumstance reasonably
calculated to result in the procurement, withholding or revocation of a proxy.
The argument, stripped of extravagance, is that since proxy solicitations following Section 20.1 have to be made in accordance with rules
and regulations issued by the SEC, it is the SEC under Section 53.1 that has the jurisdiction to investigate alleged violations of the rules on
proxy solicitations. The GSIS petition invoked AIRR-AIRR-SRC Rule 20, otherwise known as The Proxy Rule, which enumerates the
requirements as to form of proxy and delivery of information to security holders. According to GSIS, the information statement Meralco had
filed with the SEC in connection with the annual meeting did not contain any proxy form as required under AIRR-SRC Rule 20.
It is plain that proxy solicitation is a procedure that antecedes proxy validation. The former involves the securing and
submission of proxies, while the latter concerns the validation of such secured and submitted proxies. GSIS raises the sensible point that
On the other hand, private respondents argue before us that under Section 5.2 of the SRC, the SECs jurisdiction over all cases there was no election yet at the time it filed its petition with the SEC, hence no proper election contest or controversy yet over which the
enumerated in Section 5 of Presidential Decree No. 902-A was transferred to the courts of general jurisdiction or the appropriate regional regular courts may have jurisdiction. And the point ties its cause of action to alleged irregularities in the proxy solicitation procedure, a
process that precedes either the validation of proxies or the annual meeting itself.
 Under Section 20.1, the solicitation of proxies must be in accordance with rules and regulations issued by the SEC, such as
AIRR-SRC Rule 4. And by virtue of Section 53.1, the SEC has the discretion to make such investigations as it deems necessary to determine
whether any person has violated any rule issued by it, such as AIRR-SRC Rule 4. The investigatory power of the SEC established by Section
53.1 is central to its regulatory authority, most crucial to the public interest especially as it may pertain to corporations with publicly traded
shares. For that reason, we are not keen on pursuing private respondents insistence that the GSIS complaint be viewed as rooted in an
intra-corporate controversy solely within the jurisdiction of the trial courts to decide. It is possible that an intra-corporate controversy may
animate a disgruntled shareholder to complain to the SEC a corporations violations of SEC rules and regulations, but that motive alone
should not be sufficient to deprive the SEC of its investigatory and regulatory powers, especially so since such powers are exercisable on
a motu proprio basis.
At the same time, Meralco raises the substantial point that nothing in the SRC empowers the SEC to annul or invalidate
improper proxies issued in contravention of Section 20. It cites that the penalties defined by the SEC itself for violation of Section 20 or
AIRR-SRC Rule 20 are limited to a reprimand/warning for the first offense, and pecuniary fines for succeeding offenses. [43] Indeed, if the SEC
does not have the power to invalidate proxies solicited in violation of its promulgated rules, serious questions may be raised whether it has
the power to adjudicate claims of violation in the first place, since the relief it may extend does not directly redress the cause of action of
the complainant seeking the exclusion of the proxies.
There is an interesting point, which neither party raises, and it concerns Section 6(g) of Presidential Decree No. 902-A, which
states:
SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following
powers:
xxx
(g) To pass upon the validity of the issuance and use of proxies and voting trust agreements for
absent stockholders or members;
xxx
As promulgated then, the provision would confer on the SEC the power to adjudicate controversies relating not only to proxy solicitation,
but also to proxy validation. Should the proposition hold true up to the present, the position of GSIS would have merit, especially since
Section 6 of Presidential Decree No. 902-A was not expressly repealed or abrogated by the SRC.[44]
Yet a closer reading of the provision indicates that such power of the SEC then was incidental or ancillary to the exercise of
such jurisdiction. Note that Section 6 is immediately preceded by Section 5, which originally conferred on the SEC original and exclusive
jurisdiction to hear and decide cases involving controversies in the election or appointments of directors, trustees, officers or managers of
such corporations, partnerships or associations. The cases referred to in Section 5 were transferred from the jurisdiction of the SEC to the
regular courts with the passage of the SRC, specifically Section 5.2. Thus, the SECs power to pass upon the validity of proxies in relation to
election controversies has effectively been withdrawn, tied as it is to its abrogated jurisdictional powers.
Based on the foregoing, it is evident that the linchpin in deciding the question is whether or not the cause of action of GSIS
before the SEC is intimately tied to an election controversy, as defined under Section 5(c) of Presidential Decree No. 902-A. To answer that,
we need to properly ascertain the scope of the power of trial courts to resolve controversies in corporate elections.
B.
Shares of stock in corporations may be divided into voting shares and non-voting shares, which are generally issued as preferred or
redeemable shares.[45] Voting rights are exercised during regular or special meetings of stockholders; regular meetings to be held annually
on a fixed date, while special meetings may be held at any time necessary or as provided in the by-laws, upon due notice.[46] The
Corporation Code provides for a whole range of matters which can be voted upon by stockholders, including a limited set on which even
non-voting stockholders are entitled to vote on. [47] On any of these matters which may be voted upon by stockholders, the proxy device is
generally available.[48]
Under Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC, the jurisdiction of the regular trial courts with respect to
election-related controversies is specifically confined to controversies in the election or appointment of directors, trustees, officers or
managers of corporations, partnerships, or associations. Evidently, the jurisdiction of the regular courts over so-called election contests or
controversies under Section 5(c) does not extend to every potential subject that may be voted on by shareholders, but only to the
election of directors or trustees, in which stockholders are authorized to participate under Section 24 of the Corporation Code.[49]
This qualification allows for a useful distinction that gives due effect to the statutory right of the SEC to regulate proxy
solicitation, and the statutory jurisdiction of regular courts over election contests or controversies. The power of the SEC to investigate
violations of its rules on proxy solicitation is unquestioned when proxies are obtained to vote on matters unrelated to the cases enumerated
under Section 5 of Presidential Decree No. 902-A. However, when proxies are solicited in relation to the election of corporate directors,
the resulting controversy, even if it ostensibly raised the violation of the SEC rules on proxy solicitation, should be properly seen as an
election controversy within the original and exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to
Section 5(c) of Presidential Decree No. 902-A.
The conferment of original and exclusive jurisdiction on the regular courts over such controversies in the election of corporate directors
must be seen as intended to confine to one body the adjudication of all related claims and controversy arising from the election of such
directors. For that reason, the aforequoted Section 2, Rule 6 of the Interim Rules broadly defines the term election contest as encompassing
all plausible incidents arising from the election of corporate directors, including: (1) any controversy or dispute involving title or claim to any
elective office in a stock or nonstock corporation, (2) the validation of proxies, (3) the manner and validity of elections and (4) the
qualifications of candidates, including the proclamation of winners. If all matters anteceding the holding of such election which affect its
manner and conduct, such as the proxy solicitation process, are deemed within the original and exclusive jurisdiction of the SEC, then the
prospect of overlapping and competing jurisdictions between that body and the regular courts becomes frighteningly real. From the
language of Section 5(c) of Presidential Decree No. 902-A, it is indubitable that controversies as to the qualification of voting shares, or the
validity of votes cast in favor of a candidate for election to the board of directors are properly cognizable and adjudicable by the regular
courts exercising original and exclusive jurisdiction over election cases. Questions relating to the proper solicitation of proxies used in such
election are indisputably related to such issues, yet if the position of GSIS were to be upheld, they would be resolved by the SEC and not the
regular courts, even if they fall within controversies in the election of directors.
The Court recognizes that GSISs position flirts with the abhorrent evil of split jurisdiction, [50] allowing as it does both the SEC and the regular
courts to assert jurisdiction over the same controversies surrounding an election contest. Should the argument of GSIS be sustained, we
would be perpetually confronted with the spectacle of election controversies being heard and adjudicated by both the SEC and the regular
courts, made possible through a mere allegation that the anteceding proxy solicitation process was errant, but the competing cases filed
with one objective in mind to affect the outcome of the election of the board of directors. There is no definitive statutory provision that
expressly mandates so untidy a framework, and we are disinclined to construe the SRC in such a manner as to pave the way for the splitting
of jurisdiction.
Unlike either Section 20.1 or Section 53.1, which merely alludes to the rule-making or investigatory power of the SEC, Section 5 of Pres.
Decree No. 902-A sets forth a definitive rule on jurisdiction, expressly granting as it does original and exclusive jurisdiction first to the SEC,
and now to the regular courts. The fact that the jurisdiction of the regular courts under Section 5(c) is confined to the voting on election of
officers, and not on all matters which may be voted upon by stockholders, elucidates that the power of the SEC to regulate proxies remains
extant and could very well be exercised when stockholders vote on matters other than the election of directors.
That the proxy challenge raised by GSIS relates to the election of the directors of Meralco is undisputed. The controversy was engendered
by the looming annual meeting, during which the stockholders of Meralco were to elect the directors of the corporation. GSIS very well
knew of that fact. On 17 March 2008, the Meralco board of directors adopted a board resolution stating:
RESOLVED that the board of directors of the Manila Electric Company (MERALCO) delegate, as it hereby delegates
to the Nomination & Governance Committee the authority to approve and adopt appropriate rules on:
(1) nomination of candidates for election to the board of directors; (2) appreciation of ballots during the election
of members of the board of directors; and (3) validation of proxies for regular or special meetings of the
stockholders.[51]
In addition, the Information Statement/Proxy form filed by First Philippine Holdings Corporation with the SEC pursuant to Section 20 of the
SRC, states:
REASON FOR SOLICITATION OF VOTES
The Solicitor is soliciting proxies from stockholders of the Company for the purpose of electing the directors
named under the subject headed Directors in this Statement as well as to vote the matters in the agenda of the
meeting as provided for in the Information Statement of the Company. All of the nominees are current directors of
the Company.[52]
Under the circumstances, we do not see it feasible for GSIS to posit that its challenge to the solicitation or validation of proxies bore no
relation at all to the scheduled election of the board of directors of Meralco during the annual meeting. GSIS very well knew that the
controversy falls within the contemplation of an election controversy properly within the jurisdiction of the regular courts. Otherwise, it
would have never filed its original petition with the RTC of Pasay. GSIS may have withdrawn its petition with the RTC on a new assessment
made in good faith that the controversy falls within the jurisdiction of the SEC, yet the reality is that the reassessment is precisely wrong as
a matter of law.
 IV.
The lack of jurisdiction of the SEC over the subject matter of GSISs petition necessarily invalidates the CDO and SDO issued by
that body. However, especially with respect to the CDO, there is need for this Court to squarely rule on the question pertaining to its
validity, if only for jurisprudential value and for the guidance of the SEC.
To recount the facts surrounding the issuance of the CDO, GSIS filed its petition with the SEC on 26 May 2008. The CDO, six
(6) pages in all with three (3) pages devoted to the tenability of granting the injunctive relief, was issued on the very same day, 26 May
2008, without notice or hearing. The CDO bore the signature of Commissioner Jesus Martinez, identified therein as Officer-in-Charge, and
nobody elses.
The provisions of the SRC relevant to the issuance of a CDO are as follows:
SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with transparency
and shall have the powers and functions provided by this Code, Presidential Decree No. 902-A, the Corporation
Code, the Investment Houses Law, the Financing Company Act and other existing laws. Pursuant thereto the
Commission shall have, among others, the following powers and functions:
xxx
(i) Issue cease and desist orders to prevent fraud or injury to the investing public;
xxx
[SEC.] 53.3. Whenever it shall appear to the Commission that any person has engaged or is about to
engage in any act or practice constituting a violation of any provision of this Code, any rule, regulation or order
thereunder, or any rule of an Exchange, registered securities association, clearing agency or other self-regulatory
organization, it may issue an order to such person to desist from committing such act or practice: Provided,
however, That the Commission shall not charge any person with violation of the rules of an Exchange or other self
regulatory organization unless it appears to the Commission that such Exchange or other self-regulatory
organization is unable or unwilling to take action against such person. After finding that such person has engaged
in any such act or practice and that there is a reasonable likelihood of continuing, further or future violations by
such person, the Commission may issue ex-parte a cease and desist order for a maximum period of ten (10) days,
enjoining the violation and compelling compliance with such provision. The Commission may transmit such
evidence as may be available concerning any violation of any provision of this Code, or any rule, regulation or
order thereunder, to the Department of Justice, which may institute the appropriate criminal proceedings under
this Code.
SEC. 64. Cease and Desist Order. 64.1. The Commission, after proper investigation or
verification, motu proprio, or upon verified complaint by any aggrieved party, may issue a cease and desist order
without the necessity of a prior hearing if in its judgment the act or practice, unless restrained, will operate as a
fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public.
64.2. Until the Commission issues a cease and desist order, the fact that an investigation has been
initiated or that a complaint has been filed, including the contents of the complaint, shall be confidential. Upon
issuance of a cease and desist order, the Commission shall make public such order and a copy thereof shall be
immediately furnished to each person subject to the order.
64.3. Any person against whom a cease and desist order was issued may, within five (5) days from
receipt of the order, file a formal request for a lifting thereof. Said request shall be set for hearing by the
Commission not later than fifteen (15) days from its filing and the resolution thereof shall be made not later than
ten (10) days from the termination of the hearing. If the Commission fails to resolve the request within the time
herein prescribed, the cease and desist order shall automatically be lifted.
There are three distinct bases for the issuance by the SEC of the CDO. The first, allocated by Section 5(i), is predicated on a necessity to
prevent fraud or injury to the investing public. No other requisite or detail is tied to this CDO authorized under Section 5(i).
The second basis, found in Section 53.3, involves a determination by the SEC that any person has engaged or is about to engage in any act
or practice constituting a violation of any provision of this Code, any rule, regulation or order thereunder, or any rule of an Exchange,
registered securities association, clearing agency or other self-regulatory organization. The provision additionally requires a finding that
there is a reasonable likelihood of continuing [or engaging in] further or future violations by such person. The maximum duration of
the CDO issued under Section 53.3 is ten (10) days.
The third basis for the issuance of a CDO is Section 64. This CDO is founded on a determination of an act or practice, which unless
restrained, will operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public.
Section 64.1 plainly provides three segregate instances upon which the SEC may issue the CDO under this provision: (1) after proper
investigation or verification, (2) motu proprio, or (3) upon verified complaint by any aggrieved party. While no lifetime is expressly specified
for the CDO under Section 64, the respondent to the CDO may file a formal request for the lifting thereof, which the SEC must hear within
fifteen (15) days from filing and decide within ten (10) days from the hearing.
It appears that the CDO under Section 5(i) is similar to the CDO under Section 64.1. Both require a common finding of a need to prevent
fraud or injury to the investing public. At the same time, no mention is made whether the CDO defined under Section 5(i) may be issued ex-
parte, while the CDO under Section 64.1 requires grave and irreparable injury, language absent in Section 5(i). Notwithstanding the
similarities between Section 5(i) and Section 64.1, it remains clear that the CDO issued under Section 53.3 is a distinct creation from that
under Section 64.
The Court of Appeals cited the CDO as having been issued in violation of the constitutional provision on due process, which requires both
prior notice and prior hearing.[53] Yet interestingly, the CDO as contemplated in Section 53.3 or in Section 64, may be issued ex-parte (under
Section 53.3) or without necessity of hearing (under Section 64.1). Nothing in these provisions impose a requisite hearing before
the CDO may be issued thereunder. Nonetheless, there are identifiable requisite actions on the part of the SEC that must be undertaken
before the CDO may be issued either under Section 53.3 or Section 64. In the case of Section 53.3, the SEC must make two findings: (1) that
such person has engaged in any such act or practice, and (2) that there is a reasonable likelihood of continuing, (or engaging in) further or
future violations by such person. In the case of Section 64, the SEC must adjudge that the act, unless restrained, will operate as a fraud on
investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public.
Noticeably, the CDO is not precisely clear whether it was issued on the basis of Section 5.1, Section 53.3 or Section 64 of the
SRC. The CDO actually refers and cites all three provisions, yet it is apparent that a singular CDO could not be founded on Section
5.1, Section 53.3 and Section 64 collectively. At the very least, the CDO under Section 53.3 and under Section 64 have their respective
requisites and terms.
GSIS was similarly cagey in its petition before the SEC, it demurring to state whether it was seeking the CDO under Section
5.1, Section 53.3, or Section 64. Considering that injunctive relief generally avails upon the showing of a clear legal right to such relief, the
inability or unwillingness to lay bare the precise statutory basis for the prayer forinjunction is an obvious impediment to a successful
application. Nonetheless, the error of the SEC in granting the CDO without stating which kind of CDO it was issuing is more unpardonable, as
it is an act that contravenes due process of law.
We have particularly required, in administrative proceedings, that the body or tribunal in all controversial questions, render
its decision in such a manner that the parties to the proceeding can know the various issues involved, and the reason for the decision
[54]
rendered. This requirement is vital, as its fulfillment would afford the adverse party the opportunity to interpose a reasoned and
intelligent appeal that is responsive to the grounds cited against it. The CDO extended by the SEC fails to provide the needed reasonable
clarity of the rationale behind its issuance.
The subject CDO first refers to Section 64, citing its provisions, then stating: [p]rescinding from the aforequoted, there can be
no doubt whatsoever that the Commission is in fact mandated to take up, if expeditiously, any verified complaint praying for the provisional
remedy of a cease and desist order.[55] The CDO then discusses the nature of the right of GSIS to obtain the CDO, as well as the urgent and
paramount necessity to prevent serious damage because the stockholders meeting is scheduled on May 28, 2008 x x x Had the CDO stopped
there, the unequivocal impression would have been that the order is based on Section 64.
But the CDO goes on to cite Section 5.1, quoting paragraphs (i) and (n) in full, ratiocinating that under these provisions, the
SEC had the power to issue cease and desist orders to prevent fraud or injury to the public and such other measures necessary to carry out
the Commissions role as regulator.[56] Immediately thence, the CDO cites Section 53.3 as providing that whenever it shall appear to the
Commission that nay person has engaged or is about to engage in any act or practice constituting a violation of any provision, any rule,
regulation or order thereunder, the Commission may issue ex-parte a cease and desist order for a maximum period of ten (10) days,
enjoining the violation and compelling compliance therewith.[57]
The citation in the CDO of Section 5.1, Section 53.3 and Section 64 together may leave the impression that it is grounded on
all three provisions, and that may very well have been the intention of the SEC. Assuming that is so, it is legally impermissible for the SEC to
have utilized both Section 53.3 and Section 64 as basis for the CDO at the same time. The CDO under Section 53.3 is premised on distinctly
different requisites than the CDO under Section 64. Even more crucially, the lifetime of the CDO under Section 53.3 is confined to a definite
span of ten (10) days, which is not the case with the CDO under Section 64. This CDO under Section 64 may be the object of a formal
request for lifting within five (5) days from its issuance, a remedy not expressly afforded to the CDO under Section 53.3.
 Any respondent to a CDO which cites both Section 53.3 and Section 64 would not have an intelligent or adequate basis to
respond to the same. Such respondent would not know whether the CDO would have a determinate lifespan of ten (10) days, as in Section
53.3, or would necessitate a formal request for lifting within five (5) days, as required under Section 64.1. This lack of clarity is to the
obvious prejudice of the respondent, and is in clear defiance of the constitutional right to due process of law. Indeed, the veritable mlange
that the assailed CDO is, with its jumbled mixture of premises and conclusions, the antithesis of due process.
Had the CDO issued by the SEC expressed the length of its term, perhaps greater clarity would have been offered on what
Section of the SRC it is based. However, the CDO is precisely silent as to its lifetime, thereby precluding much needed clarification. In view of
the statutory differences among the three CDOs under the SRC, it is essential that the SEC, in issuing such injunctive relief, identify the exact
provision of the SRC on which the CDO is founded. Only by doing so could the adversely affected party be able to properly evaluate
whatever his responses under the law.
To make matters worse for the SEC, the fact that the CDO was signed, much less apparently deliberated upon, by only by one
commissioner likewise renders the order fatally infirm.
[58]
The SEC is a collegial body composed of a Chairperson and four (4) Commissioners. In order to constitute a quorum to
conduct business, the presence of at least three (3) Commissioners is required. [59] In the leading case of GMCR v. Bell,[60] we definitively
explained the nature of a collegial body, and how the act of one member of such body, even if the head, could not be considered as that of
the entire body itself. Thus:
We hereby declare that the NTC is a collegial body requiring a majority vote out of the three
members of the commission in order to validly decide a case or any incident therein. Corollarily, the vote alone of
the chairman of the commission, as in this case, the vote of Commissioner Kintanar, absent the required
concurring vote coming from the rest of the membership of the commission to at least arrive at a majority
decision, is not sufficient to legally render an NTC order, resolution or decision.
Simply put, Commissioner Kintanar is not the National Telecommunications Commission. He alone
does not speak for and in behalf of the NTC. The NTC acts through a three-man body, and the three members of
the commission each has one vote to cast in every deliberation concerning a case or any incident therein that is
subject to the jurisdiction of the NTC. When we consider the historical milieu in which the NTC evolved into the
quasi-judicial agency it is now under Executive Order No. 146 which organized the NTC as a three-man commission
and expose the illegality of all memorandum circulars negating the collegial nature of the NTC under Executive
Order No. 146, we are left with only one logical conclusion: the NTC is a collegial body and was a collegial body
even during the time when it was acting as a one-man regime.[61]
We can adopt a virtually word-for-word observation with respect to former Commissioner Martinez and the SEC. Simply put, Commissioner
Martinez is not the SEC. He alone does not speak for and in behalf of the SEC. The SEC acts through a five-person body, and the five
members of the commission each has one vote to cast in every deliberation concerning a case or any incident therein that is subject to the
jurisdiction of the SEC.
GSIS attempts to defend former Commissioner Martinezs action, but its argument is without merit. It cites SEC Order No. 169, Series of
2008, whereby Martinez was designated as Officer-in-Charge of the Commission for the duration of the official travel of the Chairperson
to Paris, France, to attend the 33rd Annual Conference of the [IOSCO] from May 26-30, 2008.[62] As officer-in-charge (OIC), Martinez was
authorized to sign all documents and papers and perform all other acts and deeds as may be necessary in the day-to-day operation of the
Commission.
It is clear that Martinez was designated as OIC because of the official travel of only one member, Chairperson Fe
Barin. Martinez was not commissioned to act as the SEC itself. At most, he was to act in place of Chairperson Barin in the exercise of her
duties as Chairperson of the SEC. Under Section 4.3 of the SRC, the Chairperson is the chief executive officer of the SEC, and thus
empowered to execute and administer the policies, decisions, orders and resolutions approved by the Commission, as well as to have the
[63]
general executive direction and supervision of the work and operation of the Commission. It is in relation to the exercise of these duties
of the Chairperson, and not to the functions of the Commission, that Martinez was authorized to sign all documents and papers and
perform all other acts and deeds as may be necessary in the day-to-day operation of the Commission.
GSIS likewise cites, as authority for Martinezs unilateral issuance of the CDO, Section 4.6 of the SRC, which states that the SEC
may, for purposes of efficiency, delegate any of its functions to any department or office of the Commission, an individual Commissioner or
staff member of the Commission except its review or appellate authority and its power to adopt, alter and supplement any rule or
regulation. Reliance on this provision is inappropriate. First, there is no convincing demonstration that the SEC had delegated
to Martinez the authority to issue the CDO. The SEC Order designating Martinez as OIC only authorized him to exercise the functions of the
absent Chairperson, and not of the Commission. If the Order is read as enabling Martinez to issue the CDO in behalf of the Commission, it
would be akin to conceding that the SEC Chairperson, acting alone, can issue the CDO in behalf of the SEC itself. That again contravenes our
holding in GMCR v. Bell.
In addition, it is clear under Section 4.6 that the ability to delegate functions to a single commissioner does not extend to the
exercise of the review or appellate authority of the SEC. The issuance of the CDO is an act of the SEC itself done in the exercise of its original
jurisdiction to review actual cases or controversies. If it has not been clear to the SEC before, it should be clear now that its power to issue
a CDO can not, under the SRC, be delegated to an individual commissioner.
V.
In the end, even assuming that the events narrated in our Resolution in A.M. No. 08-8-11-CA constitute sufficient basis to nullify the assailed
decision of the Court of Appeals, still it remains clear that the reliefs GSIS seeks of this Court have no basis in law. Notwithstanding the black
mark that stains the appellate courts decision, the first paragraph of its fallo, to the extent that it dismissed the complaint of GSIS with the
SEC for lack of jurisdiction and consequently nullified the CDO and SDO, defies unbiased scrutiny and deserves affirmation.
A.
In its dispositive portion, the Court of Appeals likewise pronounced that the complaint filed by GSIS with the SEC should be barred from
being considered as an election contest in the RTC, given that the fifteen (15) day prescriptive period to file an election contest with the
RTC, under Section 3, Rule 6 of the Interim Rules, had already run its course. [64] Yet no such relief was requested by private respondents in
their petition for certiorari filed with the Court of Appeals [65]. Without disputing the legal predicates surrounding this pronouncement, we
note that its tenor, if not the text, unduly suggests an unwholesome pre-emptive strike. Given our observations in A.M. No. 08-8-11-CA of
the undue interest exhibited by the author of the appellate court decision, such declaration is best deleted. Nonetheless, we do trust that
any court or tribunal that may be confronted with that premise adverted to by the Court of Appeals would know how to properly treat the
same.
B.
Finally, we turn to the sanction on the lawyers of GSIS imposed by the Court of Appeals.
Nonetheless, we find that as a matter of law the sanctions are unwarranted. The charter of GSIS [66] is unique among government owned or
controlled corporations with original charter in that it allocates a role for its internal legal counsel that is in conjunction with or
complementary to the Office of the Government Corporate Counsel (OGCC), which is the statutory legal counsel for GOCCs. Section 47 of
GSIS charter reads:
SEC. 47. Legal Counsel.The Government Corporate Counsel shall be the legal adviser and consultant of GSIS, but
GSIS may assign to the Office of the Government Corporate Counsel (OGCC) cases for legal action or trial, issues for
legal opinions, preparation and review of contracts/agreements and others, as GSIS may decide or determine from
time to time: Provided, however, That the present legal services group in GSIS shall serve as its in-house legal
counsel.
The GSIS may, subject to approval by the proper court, deputize any personnel of the legal service
group to act as special sheriff in the enforcement of writs and processes issued by the court, quasi-judicial agencies
or administrative bodies in cases involving GSIS.[67]
The designation of the OGCC as the legal counsel for GOCCs is set forth by statute, initially by Rep. Act No. 3838, then reiterated by the
Administrative Code of 1987.[68]Given that the designation is statutory in nature, there is no impediment for Congress to impose a different
role for the OGCC with respect to particular GOCCs it may charter. Congress appears to have done so with respect to GSIS, designating the
OGCC as a legal adviser and consultant, rather than as counsel to GSIS. Further, the law clearly vests unto GSIS the discretion, rather than
the duty, to assign cases to the OGCC for legal action, while designating the present legal services group of GSIS as in-house legal counsel.
This situates GSIS differently from the Land Bank of the Philippines, whose own in-house lawyers have persistently argued before this Court
to no avail on their alleged right
to file petitions before us instead of the OGCC.[69] Nothing in the Land Bank charter[70] vested it with the discretion to choose when to assign
cases to the OGCC, notwithstanding the establishment of its own Legal Department. [71]
Congress is not bound to retain the OGCC as the primary or exclusive legal counsel of GSIS even if it performs such a role for
other GOCCs. To bind Congress to perform in that manner would be akin to elevating the OGCCs statutory role to irrepealable status, and it
is basic that Congress is barred from passing irrepealable laws.[72]
C.
We close by acknowledging that the surrounding circumstances behind these petitions are unfortunate, given the events as
narrated in A.M. No. 08-8-11-CA. While due punishment has been meted on the errant magistrates, the corporate world may very well be
reminded that the members of the judiciary are not to be viewed or treated as
mere pawns or puppets in the internecine fights businessmen and their associates wage against other businessmen in the quest for
corporate dominance. In the end, the petitions did afford this Court to clarify consequential points of law, points rooted in principles which
will endure long after the names of the participants in these cases have been forgotten.

WHEREFORE, the petition in G.R. No. 184275 is EXPUNGED for lack of capacity of the petitioner to bring forth the suit.

The petition in G.R. No. 183905 is DISMISSED for lack of merit except that the second and third paragraphs of the fallo of the assailed
decision dated 23 July 2008 of the Court of Appeals, including subparagraphs (1), (2), 2(a), 2(b), 2(c) and 2(d) under the second paragraph,
are hereby DELETED.

No pronouncements as to costs.

SO ORDERED.
G.R. No. 118043. July 23, 1998.*
LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINE-CMG LIFE INSURANCE CO., INC.), petitioner, vs. COURT OF APPEALS
and COMMISSIONER OF INTERNAL REVENUE, respondents.
Taxation; There is no basis for considering stock dividends as a distinct class from ordinary shares of stock since under the provision only
certificates of stock are required to be distinguished rather than the classes of shares themselves.—Apparently, the Court of Appeals treats
stock dividends as distinct from ordinary shares of stock for purposes of the then §224 of the National Internal Revenue Code. There is,
however, no basis for considering stock dividends as a distinct class from ordinary shares of stock since under this provision only certificates
of stock are required to be distinguished (into either one with par value or one without) rather than the classes of shares themselves.
Same; The documentary stamp tax is not levied upon the shares of stock per se but rather on the privilege of issuing certificates of stock.—
Indeed, a reading of the then §224 of the NIRC as quoted earlier, starting from its heading, will show that the documentary stamp tax is not
levied upon the shares of stock per se but rather on the privilege of issuing certificates of stock.
Same; Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted retained earnings
converted into equity in the corporation’s books.—Stock dividends are in the nature of shares of stock, the consideration for which is the
amount of unrestricted retained earnings converted into equity in the corporation’s books. Thus, A “stock dividend” is any dividend payable
in shares of stock of the corporation declaring or authorizing such dividend. It is, what the term itself implies, a distribution of the shares of
stock of the corporation among the stockholders as dividends. A stock dividend of a corporation is a dividend paid in shares of stock instead
of cash, and is properly payable only out of surplus profits. So, a stock dividend is actually two things: (1) a dividend and (2) the enforced use
of the dividend money to purchase additional shares of stock at par . . .
Same; Settled is the rule that, in case of doubt, tax laws must be construed strictly against the State and liberally in favor of the taxpayer.—
Settled is the rule that, in case of doubt, tax laws must be construed strictly against the State and liberally in favor of the taxpayer. This is
because taxes, as burdens which must be endured by the taxpayer, should not be presumed to go beyond what the law expressly and
clearly declares.
This is a petition for review on certiorari of the decision rendered on November 18, 1994 by the Court of Appeals [1] reversing, in
part, the decision of the Court of Tax Appeals in C.T.A.Case No. 4583.
[2]
The facts are not in dispute. Petitioner, now the Jardine-CMG Life Insurance Company, Inc., is a domestic corporation engaged in
the life insurance business. In 1984, it issued 50,000 shares of stock as stock dividends, with a par value of P100 or a total of P5 million.
Petitioner paid documentary stamp taxes on each certificate on the basis of its par value. The question in this case is whether in
determining the amount to be paid as documentary stamp tax, it is the par value of the certificates of stock or the book value of the shares
which should be considered. The pertinent provision of law, as it stood at the time of the questioned transaction, reads as follows:
SEC. 224. Stamp tax on original issues of certificates of stock. -- On every original issue, whether on organization, reorganization or for any
lawful purpose, of certificates of stock by any association, company or corporation, there shall be collected a documentary stamp tax of one
peso and ten centavos on each two hundred pesos, or fractional part thereof, of the par value of such certificates: Provided, That in the case
of the original issue of stock without par value the amount of the documentary stamp tax herein prescribed shall be based upon the actual
consideration received by the association, company, or corporation for the issuance of such stock, and in the case of stock dividends on the
actual value represented by each share.[3]
The Commissioner of Internal Revenue took the view that the book value of the shares, amounting to P19,307,500.00, should be
used as basis for determining the amount of the documentary stamp tax. Accordingly, respondent Internal Revenue Commissioner issued a
deficiency documentary stamp tax assessment in the amount of P78,991.25 in excess of the par value of the stock dividends.
Together with another documentary stamp tax assessment which it also questioned, petitioner appealed the Commissioners ruling
to the Court of Tax Appeals. On March 30, 1993, the CTA rendered its decision holding that the amount of the documentary stamp tax
should be based on the par value stated on each certificate of stock. The dispositive portion of its decision reads:
WHEREFORE, the deficiency documentary stamp tax assessments in the amount of P464,898.76 and P78,991.25 or a total of P543,890.01
are hereby cancelled for lack of merit.Respondent Commissioner of Internal Revenue is ordered to desist from collecting said deficiency
documentary stamp taxes for the same are considered withdrawn.
SO ORDERED.
In turn, respondent Commissioner of Internal Revenue appealed to the Court of Appeals which, on November 18, 1994, reversed
the CTAs decision and held that, in assessing the tax in question, the basis should be the actual value represented by the subject shares on
the assumption that stock dividends, being a distinct class of shares, are not subject to the qualification in the law as to the type of
certificate of stock used (with or without par value). The appellate court, therefore, ordered:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby REVERSED with respect to the deficiency tax assessment on the
stock dividends, but AFFIRMED with regards to the assessment on the Insurance Policies. Consequently, private respondent is ordered to
pay the petitioner herein the sum of P78,991.25, representing documentary stamp tax on the stock dividends it issued. No costs
pronouncement.
SO ORDERED.
Hence, this petition with the following assignment of error:
RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT STOCK DIVIDENDS INVOLVING SHARES WITH PAR VALUE ARE
SUBJECT TO DOCUMENTARY STAMP TAX BASED ON THE BOOK VALUE OF SAID SHARES WHICH RULING IS CONTRARY TO WHAT IS
CLEARLY PROVIDED FOR BY SECTION 224 (NOW SECTION 175) OF THE TAX CODE.
The petition has merit.
First. In ruling that the book value of the shares should be considered in assessing the documentary stamp tax, the Court of
Appeals stated:
There are three (3) classes of stocks referred to in Section 224 (now 175) of the Internal Revenue Code: (a) Certificate of Stocks with par
value, (b) Certificate of Stock with no par valueand (c) stock dividends. The first two (2) mentioned are original issuances of the corporation,
association or company while the third ones are taken by the corporation, association or company out of or from their unissued shares of
stock, hence are also originals. Undoubtedly, all the three classifications are subject to the documentary stamp tax.
Conformably, in the case of stock certificates with par value, the documentary stamp tax is based on the par value of the stock; for stock
certificates without par value, the same tax is computed from the actual consideration received by the corporation, association or company;
but for stock dividends, documentary stamp tax is to be paid on the actual value represented by each share.
Since in dividends, no consideration is technically received by the corporation, petitioner is correct in basing the assessment on the book
value thereof rejecting the principles enunciated in Commissioner of Internal Revenue vs. Heald Lumber Co. (10 SCRA 372) as the said case
refers to purchases of no-par certificates of stocks and not to stock dividends. [4]
Apparently, the Court of Appeals treats stock dividends as distinct from ordinary shares of stock for purposes of the then 224 of the
National Internal Revenue Code. There is, however, no basis for considering stock dividends as a distinct class from ordinary shares of stock
since under this provision only certificates of stock are required to be distinguished (into either one with par value or one without) rather
than the classes of shares themselves.
Indeed, a reading of the then 224 of the NIRC as quoted earlier, starting from its heading, will show that the documentary stamp
tax is not levied upon the shares of stock per se but rather on the privilege of issuing certificates of stock.
A stock certificate is merely evidence of a share of stock and not the share itself. This distinction is clear in the Corporation Code, to
wit:
SEC. 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates
signed by the president or 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 stock so issued are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer,
however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the
names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares
transferred.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.[5]
Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted retained earnings
converted into equity in the corporations books.[6] Thus,
A stock dividend is any dividend payable in shares of stock of the corporation declaring or authorizing such dividend. It is, what the term
itself implies, a distribution of the shares of stock of the corporation among the stockholders as dividends. A stock dividend of a corporation
is a dividend paid in shares of stock instead of cash, and is properly payable only out of surplus profits. So, a stock dividend is actually two
things: (1) a dividend and (2) the enforced use of the dividend money to purchase additional shares of stock at par...[7]
From the foregoing, it is clear that stock dividends are shares of stock and not certificates of stock which merely represent them.
There is, therefore, no reason for determining the actual value of such dividends for purposes of the documentary stamp tax if the
certificates representing them indicate a par value.
 The Solicitor General himself says that, based on the then 224, there are only two bases for determining the amount of the
documentary stamp tax:

An examination of the structure of the main provision of Sec. [224] of the NIRC will show that it intends to classify the tax bases into two,
either the par value, or the actual consideration or actual value. It specifies in the first part that the basis for the imposition of the
documentary stamp tax on shares of stocks belonging to the first category, discussed in the early part of this comment, shall be the face
value. In contradistinction, the provision specifies in the proviso that for the second and third categories, the basis for the tax shall not be
the face value. Rather, the basis is either the actual consideration received by the corporation for the share or the actual value of the
share.[8]

Apparently, the former tax code sought to distinguish between stock dividends without par value and other transactions involving
ordinary shares of stock without par value in the second clause of the then 224 in order to prevent claims that the former are exempt from
documentary stamp taxes as, unlike in the case of ordinary shares, corporations actually receive nothing from their stockholders in
exchange for such stock dividends. Hence the provision that, in the case of stock dividends, the amount of the documentary stamp tax must
be based on the actual value of each share. This is the only purpose for the distinction in the second clause of the subject provision.

Second. It is error for the Solicitor General to contend that, under the then 224 of the NIRC, the basis for assessment is the actual
value of the business transaction that is the source of the original issuance of stock certificates.[9] To the contrary, the documentary stamp
tax here is not levied upon the specific transaction which gives rise to such original issuance but on the privilege of issuing certificates of
stock. As we have held in several cases:

A documentary stamp tax is in the nature of an excise tax. It is not imposed upon the business transacted but is an excise upon the privilege,
opportunity or facility offered at exchanges for the transaction of the business. It is an excise upon the facilities used in the transaction of
the business separate and apart from the business itself. (Du Pont v. U.S., 300 U.S. 150; Thomas v. U.S., 192 U.S., 363; Nicol v. Ames, 173
U.S. 509). With respect to stock certificates, it is levied upon the privilege of issuing them; not on the money or property received by the
issuing company for such certificates. Neither is it imposed upon the share of stock. As Justice Learned Hand pointed out in one case,
documentary stamp tax is levied on the document and not on the property which it described. (Empire Trust co. v. Hoey, 103 F 2d. 430). . .
.[10]

Third. Settled is the rule that, in case of doubt, tax laws must be construed strictly against the State and liberally in favor of the
taxpayer. This is because taxes, as burdens which must be endured by the taxpayer, should not be presumed to go beyond what the
law expressly and clearly declares.[11] That such strict construction is necessary in this case is evidenced by the change in the subject
provision as presently worded, which now expressly levies the said tax on shares of stock as against the privilege of issuing certificates of
stock as formerly provided:

SEC. 175. Stamp Tax on Original Issue of Shares of Stock. - On every original issue, whether on organization, reorganization or for any lawful
purpose, of shares of stock by any association, company or corporation, there shall be collected a documentary stamp tax of Two pesos
(P2.00) on each Two hundred pesos (P200), or fractional part thereof, of the par value, of such shares of stock: Provided, That in the case of
the original issue of shares of stock without par value the amount of the documentary stamp tax herein prescribed shall be based upon the
actual consideration for the issuance of such shares of stock: Provided, further, That in the case of stock dividends, on the actual value
represented by each share.[12]

WHEREFORE, the decision of the Court of Appeals is REVERSED insofar as the deficiency tax assessment on stock dividends is
concerned and the decision of the Court of Tax Appeals is reinstated.

SO ORDERED.
G.R. No. 177549. June 18, 2009.*
ANTHONY S. YU, ROSITA G. YU and JASON G. YU, petitioners, vs. JOSEPH S. YUKAYGUAN, NANCY L. YUKAYGUAN, JERALD NERWIN L.
YUKAYGUAN, and JILL NESLIE L. YUKAYGUAN, [on their own behalf and on behalf of] WINCHESTER INDUSTRIAL SUPPLY, INC.,
respondents.
Corporation Law; Derivative Suits; Words and Phrases; While the general rule is that where a corporation is an injured party, its power to
sue is lodged with its board of directors or trustees, an individual stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to
sue, or are the ones to be sued, or hold the control of the corporation; A derivative action is a suit by a shareholder to enforce a corporate
cause of action.—In one stroke, with the use of sweeping language, which utterly lacked support, the Court of Appeals converted the
derivative suit between the parties into liquidation proceedings. The general rule is that where a corporation is an injured party, its power
to sue is lodged with its board of directors or trustees. Nonetheless, an individual stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the suing stockholder is regarded as a
nominal party, with the corporation as the real party in interest. A derivative action is a suit by a shareholder to enforce a corporate cause
of action. The corporation is a necessary party to the suit. And the relief which is granted is a judgment against a third person in favor of the
corporation. Similarly, if a corporation has a defense to an action against it and is not asserting it, a stockholder may intervene and defend
on behalf of the corporation. By virtue of Republic Act No. 8799, otherwise known as the Securities Regulation Code, jurisdiction over intra-
corporate disputes, including derivative suits, is now vested in the Regional Trial Courts designated by this Court pursuant to A.M. No. 00-
11-03-SC promulgated on 21 November 2000.
Same; Same; Dissolution of Corporations; Liquidation; Words and Phrases; Following the voluntary or involuntary dissolution of a
corporation, liquidation is the process of settling the affairs of said corporation, which consists of adjusting the debts and claims, that is, of
collecting all that is due the corporation, the settlement and adjustment of claims against it and the payment of its just debts.—Following
the voluntary or involuntary dissolution of a corporation, liquidation is the process of settling the affairs of said corporation, which consists
of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and
the payment of its just debts. More particularly, it entails the following: Winding up the affairs of the corporation means the collection of all
assets, the payment of all its creditors, and the distribution of the remaining assets, if any among the stockholders thereof in accordance
with their contracts, or if there be no special contract, on the basis of their respective interests. The manner of liquidation or winding up
may be provided for in the corporate by-laws and this would prevail unless it is inconsistent with law. It may be undertaken by the
corporation itself, through its Board of Directors; or by trustees to whom all corporate assets are conveyed for liquidation; or by a receiver
appointed by the SEC upon its decree dissolving the corporation.
Same; Same; Same; Same; A derivative suit is fundamentally distinct and independent from liquidation proceedings—they are neither part
of each other nor the necessary consequence of the other.—A derivative suit is fundamentally distinct and independent from liquidation
proceedings. They are neither part of each other nor the necessary consequence of the other. There is totally no justification for the Court
of Appeals to convert what was supposedly a derivative suit instituted by respondents, on their own behalf and on behalf of Winchester,
Inc. against petitioners, to a proceeding for the liquidation of Winchester, Inc.
Same; Same; A stockholder’s right to institute a derivative suit is not based on any express provision of the Corporation Code, or even the
Securities Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers liable for damages suffered
by the corporation and its stockholders for violation of their fiduciary duties.—The Court has recognized that a stockholder’s right to
institute a derivative suit is not based on any express provision of the Corporation Code, or even the Securities Regulation Code, but is
impliedly recognized when the said laws make corporate directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties. 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. 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. 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.
Same; Same; Interim Rules of Procedure Governing Intra-Corporate Controversies; Requisites for Filing of Derivative Suits.—Section 1, Rule
8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies lays down the following requirements which a stockholder
must comply with in filing a derivative suit: Sec. 1. Derivative action.—A stockholder or member may bring an action in the name of a
corporation or association, as the case may be, provided, that: (1) He was a stockholder or member at the time the acts or transactions
subject of the action occurred and at the time the action was filed; (2) He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires; (3) No appraisal rights are available for the act or acts complained of; and (4) The
suit is not a nuisance or harassment suit.
Same; Same; The obvious intent behind the rule requiring the stockholder filing a derivative suit to first exert all reasonable efforts to
exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain
the relief he desires is to make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief sought
had failed.—The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies are simple and do
not leave room for statutory construction. The second paragraph thereof requires that the stockholder filing a derivative suit should have
exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires; and to allege such fact with particularity in the complaint. The obvious intent
behind the rule is to make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief sought had
failed. The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to petitioner Anthony regarding their dispute
hardly constitutes “all reasonable efforts to exhaust all remedies available.” Respondents did not refer to or mention at all any other
remedy under the articles of incorporation or by-laws of Winchester, Inc., available for dispute resolution among stockholders, which
respondents unsuccessfully availed themselves of. And the Court is not prepared to conclude that the articles of incorporation and by-laws
of Winchester, Inc. absolutely failed to provide for such remedies.
Same; Same; The fact that Winchester, Inc. is a family corporation does not in any way exempt a stockholder from complying with the clear
requirements and formalities of the rules for filing a derivative suit—there is nothing in the pertinent laws or rules supporting the
distinction between, and the difference in the requirements for, family corporations vis-à-vis other types of corporations, in the institution
by a stockholder of a derivative suit.—Neither can this Court accept the reasons proffered by respondents to excuse themselves from
complying with the second requirement under Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies.
They are flimsy and insufficient, compared to the seriousness of respondents’ accusations of fraud, misappropriation, and falsification of
corporate records against the petitioners. The fact that Winchester, Inc. is a family corporation should not in any way exempt respondents
from complying with the clear requirements and formalities of the rules for filing a derivative suit. There is nothing in the pertinent laws or
rules supporting the distinction between, and the difference in the requirements for, family corporations vis-à-vis other types of
corporations, in the institution by a stockholder of a derivative suit.
Same; Same; Pleadings and Practice; A party’s Supplemental Affidavit and additional evidence are where they were only appended to his
Memorandum before the Regional Trial Court (RTC)—parties should attach the affidavits of witnesses and other documentary evidence to
the appropriate pleading, which generally should mean the complaint for the plaintiff and the answer for the respondent.—As to
respondents’ second ground in their Motion for Reconsideration, the Court agrees with the ruling of the Court of Appeals, in its 15 February
2006 Decision, that respondent Joseph’s Supplemental Affidavit and additional evidence were inadmissible since they were only appended
by respondents to their Memorandum before the RTC. Section 8, Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies is crystal clear that: x x x According to the afore-quoted provision, the parties should attach the affidavits of witnesses and
other documentary evidence to the appropriate pleading, which generally should mean the complaint for the plaintiff and the answer for
the respondent. Affidavits and documentary evidence not so submitted must already be attached to the respective pre-trial briefs of the
parties.
Same; Same; Same; Cases wherein the court can render judgment prior to pre-trial, do not depart from or constitute an exception to the
requisite that affidavits of witnesses and documentary evidence should be submitted, at the latest, with the parties’ pre-trial briefs.—True,
the parties in the present case agreed to submit the case for judgment by the RTC, even before pre-trial, in accordance with Section 4, Rule
4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies: Sec. 4. Judgment before pre-trial.—If after submission of the
pre-trial briefs, the court determines that, upon consideration of the pleadings, the affidavits and other evidence submitted by the parties, a
judgment may be rendered, the court may order the parties to file simultaneously their respective memoranda within a non-extendible
period of twenty (20) days from receipt of the order. Thereafter, the court shall render judgment, either full or otherwise, not later than
ninety (90) days from the expiration of the period to file the memoranda. Even then, the afore-quoted provision still requires, before the
court makes a determination that it can render judgment before pre-trial, that the parties had submitted their pre-trial briefs and the court
took into consideration the pleadings, affidavits and other evidence submitted by the parties. Hence, cases wherein the court can render
judgment prior to pre-trial, do not depart from or constitute an exception to the requisite that affidavits of witnesses and documentary
evidence should be submitted, at the latest, with the parties’ pre-trial briefs. Taking further into account that under Section 4, Rule 4 of the
Interim Rules of Procedure Governing Intra-Corporate Controversies parties are required to file their memoranda simultaneously, the same
would mean that a party would no longer have any opportunity to dispute or rebut any new affidavit or evidence attached by the other
party to its memorandum. To violate the above-quoted provision would, thus, irrefragably run afoul the former party’s constitutional right
to due process.
Before Us is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court, which seeks to reverse and set aside the
Resolutions dated 18 July 2006[2] and 19 April 2007[3] of the Court of Appeals in CA-G.R. SP No. 00185. Upon herein respondents motion, the
Court of Appeals rendered the assailed Resolution dated 18 July 2006, reconsidering its Decision [4] dated 15 February 2006; and remanding
the case to the Regional Trial Court (RTC) of Cebu City, Branch 11, for necessary proceedings, in effect, reversing the Decision [5] dated 10
November 2004 of the RTC which dismissed respondents Complaint in SRC Case No. 022-CEB. Herein petitioners Motion for
Reconsideration of the Resolution dated 18 July 2006 was denied by the appellate court in the other assailed Resolution dated 19 April
2007.
Herein petitioners are members of the Yu Family, particularly, the father, Anthony S. Yu (Anthony); the wife, Rosita G. Yu
(Rosita); and their son, Jason G. Yu (Jason).
Herein respondents composed the Yukayguan Family, namely, the father, Joseph S. Yukayguan (Joseph); the wife, Nancy L.
Yukayguan (Nancy); and their children Jerald Nerwin L. Yukayguan (Jerald) and Jill Neslie Yukayguan (Jill).
Petitioner Anthony is the older half-brother of respondent Joseph.
 Petitioners and the respondents were all stockholders of Winchester Industrial Supply, Inc. (Winchester, Inc.), a domestic
corporation engaged in the operation of a general hardware and industrial supply and equipment business.
On 30 October 2002, the hearing on the application for the appointment of a Management Committee was
commenced. Respondent Joseph submitted therein, as his direct testimony, the same Affidavit that he executed, which was attached to the
respondents Complaint. On 4 November 2002, respondent Joseph was cross-examined by the counsel for petitioners. Thereafter, the
continuation of the hearing was set for 29 November 2002, in order for petitioners to adduce evidence in support of their opposition to the
application for the appointment of a Management Committee.[17]

On 15 October 2002, respondents filed against petitioners a verified Complaint for Accounting, Inspection of Corporate
Books and Damages through Embezzlement and Falsification of Corporate Records and Accounts [6] before the RTC of Cebu. The said
Complaint was filed by respondents, in their own behalf and as a derivative suit on behalf of Winchester, Inc., and was docketed as SRC Case
No. 022-CEB. The factual background of the Complaint was stated in the attached Affidavit executed by respondent Joseph. During the hearing on 29 November 2002, the parties manifested before the RTC that there was an ongoing mediation
between them, and so the hearing on the appointment of a Management Committee was reset to another date.

According to respondents,[7] Winchester, Inc. was established and incorporated on 12 September 1977, with petitioner
Anthony as one of the incorporators, holding 1,000 shares of stock worth P100,000.00.[8] Petitioner Anthony paid for the said shares of
stock with respondent Josephs money, thus, making the former a mere trustee of the shares for the latter. On 14 November 1984,
petitioner Anthony ceded 800 of his 1,000 shares of stock in Winchester, Inc. to respondent Joseph, as well as Yu Kay Guan,[9] Siao So Lan,
and John S. Yu.[10] Petitioner Anthony remained as trustee for respondent Joseph of the 200 shares of stock in Winchester, Inc., still in
petitioner Anthonys name.
In amicable settlement of their dispute, the petitioners and respondents agreed to a division of the stocks in trade, [18] the
real properties, and the other assets of Winchester, Inc. In partial implementation of the afore-mentioned amicable settlement, the stocks
in trade and real properties in the name of Winchester, Inc. were equally distributed among petitioners and respondents. As a result, the
stockholders and members of the Board of Directors of Winchester, Inc. passed, on 4 January 2003, a unanimous Resolution[19] dissolving
the corporation as of said date.

Respondents then alleged that on 30 June 1985, Winchester, Inc. bought from its incorporators, excluding petitioner On 22 February 2004, respondents filed their pre-trial brief.[20]
Anthony, their accumulated 8,500 shares in the corporation. [11] Subsequently, on 7 November 1995, Winchester, Inc. sold the same 8,500
shares to other persons, who included respondents Nancy, Jerald, and Jill; and petitioners Rosita and Jason. [12]

On 25 June 2004, petitioners filed a Manifestation[21] informing the RTC of the existence of their amicable settlement with
respondents. Respondents, however, made their own manifestation before the RTC that they were repudiating said settlement, in view of
Respondents further averred that although respondent Joseph appeared as the Secretary and Treasurer in the corporate the failure of the parties thereto to divide the remaining assets of Winchester, Inc.Consequently, respondents moved to have SRC Case No.
records of Winchester, Inc., petitioners actually controlled and ran the said corporation as if it were their own family business. Petitioner 022-CEB set for pre-trial.
Rosita handled the money market placements of the corporation to the exclusion of respondent Joseph, the designated Treasurer of
Winchester, Inc. Petitioners were also misappropriating the funds and properties of Winchester, Inc. by understating the sales, charging
their personal and family expenses to the said corporation, and withdrawing stocks for their personal use without paying for the
same. Respondents attached to the Complaint various receipts[13] to prove the personal and family expenses charged by petitioners to
Winchester, Inc. On 23 August 2004, petitioners filed their pre-trial brief.[22]

Respondents, therefore, prayed that respondent Joseph be declared the owner of the 200 shares of stock in petitioner On 26 August 2004, instead of holding a formal pre-trial conference and resuming the hearing on the application for the
Anthonys name. Respondents also prayed that petitioners be ordered to: (1) deposit the corporate books and records of Winchester, Inc. appointment of a Management Committee, petitioners and respondents agreed that the RTC may already render a judgment based on the
with the Branch Clerk of Court of the RTC for respondents inspection; (2) render an accounting of all the funds of Winchester, Inc. which pleadings. In accordance with the agreement of the parties, the RTC issued, on even date, an Order[23] which stated:
petitioners misappropriated; (3) reimburse the personal and family expenses which petitioners charged to Winchester, Inc., as well as the
properties of the corporation which petitioners withheld without payment; and (4) pay respondents attorneys fees and litigation
expenses. In the meantime, respondents sought the appointment of a Management Committee and the freezing of all corporate funds by
the trial court.

On 13 November 2002, petitioners filed an Answer with Compulsory Counterclaim,[14] attached to which was petitioner
ORDER
Anthonys Affidavit.[15] Petitioners vehemently denied the allegation that petitioner Anthony was a mere trustee for respondent Joseph of
the 1,000 shares of stock in Winchester, Inc. in petitioner Anthonys name. For the incorporation of Winchester, Inc., petitioner Anthony
contributed P25,000.00 paid-up capital, representing 25% of the total par value of the 1,000 shares he subscribed to, the said amount being
paid out of petitioner Anthonys personal savings and petitioners Anthony and Rositas conjugal funds. Winchester, Inc. was being co-
managed by petitioners and respondents, and the attached receipts, allegedly evidencing petitioners use of corporate funds for personal During the pre-trial conference held on August 26, 2004, counsels of the parties manifested, agreed and
and family expenses, were in fact signed and approved by respondent Joseph. suggested that a judgment may be rendered by the Court in this case based on the pleadings, affidavits, and
other evidences on record, or to be submitted by them, pursuant to the provision of Rule 4, Section 4 of the
Rule on Intra-Corporate Controversies. The suggestion of counsels was approved by the Court.

By way of special and affirmative defenses, petitioners contended in their Answer with Compulsory Counterclaim that
respondents had no cause of action against them.Respondents Complaint was purely intended for harassment. It should be dismissed under
Section 1(j), Rule 16[16] of the Rules of Court for failure to comply with conditions precedent before its filing. First, there was no allegation in Accordingly, the Court hereby orders the counsels of the parties to file simultaneously their respective
respondents Complaint that earnest efforts were exerted to settle the dispute between the parties. Second, since respondents Complaint memoranda within a non-extendible period of twenty (20) days from notice hereof.Thereafter, the instant
purportedly constituted a derivative suit, it noticeably failed to allege that respondents exerted effort to exhaust all available remedies in case will be deemed submitted for resolution.
the Articles of Incorporation and By-Laws of Winchester, Inc., as well as in the Corporation Code. And third, given that respondents
Complaint was also for inspection of corporate books, it lacked the allegation that respondents made a previous demand upon petitioners
to inspect the corporate books but petitioners refused. Prayed for by petitioners, in addition to the dismissal of respondents Complaint, was
payment of moral and exemplary damages, attorneys fees, litigation expenses, and cost of suit.
xxxx
 As to respondents prayer for the inspection of corporate books and records, the RTC adjudged that they had likewise failed
to comply with the requisites entitling them to the same. Section 2, Rule 7 of the Interim Rules of Procedure Governing Intra-Corporate
Cebu City, August 26, 2004. Controversies requires that the complaint for inspection of corporate books or records must state that:

(signed)

SILVESTRE A. MAAMO, JR. (1) The case is for the enforcement of plaintiff's right of inspection of corporate orders or records and/or to
be furnished with financial statements under Sections 74 and 75 of the Corporation Code of
the Philippines;
Acting Presiding Judge

(2) A demand for inspection and copying of books and records and/or to be furnished with financial
statements made by the plaintiff upon defendant;

Petitioners and respondents duly filed their respective Memoranda,[24] discussing the arguments already set forth in the
pleadings they had previously submitted to the RTC. Respondents, though, attached to their Memorandum a Supplemental Affidavit[25] of
respondent Joseph, containing assertions that refuted the allegations in petitioner Anthonys Affidavit, which was earlier submitted with
petitioners Answer with Compulsory Counterclaim. Respondents also appended to their Memorandum additional documentary (3) The refusal of defendant to grant the demands of the plaintiff and the reasons given for such refusals, if
evidence,[26] consisting of original and duplicate cash invoices and cash disbursement receipts issued by Winchester, Inc., to further any; and
substantiate their claim that petitioners were understating sales and charging their personal expenses to the corporate funds.

(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified and illegal,
The RTC subsequently promulgated its Decision on 10 November 2004 dismissing SRC Case No. 022-CEB. The dispositive stating the law and jurisprudence in support thereof.
portion of said Decision reads:

WHEREFORE, in view of the foregoing premises and for lack of merit, this Court hereby renders
judgment in this case DISMISSING the complaint filed by the [herein respondents]. The RTC further noted that respondent Joseph was the corporate secretary of Winchester, Inc. and, as such, he was
supposed to be the custodian of the corporate books and records; therefore, a court order for respondents inspection of the same was no
longer necessary. The RTC similarly denied respondents demand for accounting as it was clear that Winchester, Inc. had been engaging the
services of an audit firm. Respondent Joseph himself described the audit firm as competent and independent, and believed that the audited
financial statements the said audit firm prepared were true, faithful, and correct.
The Court also hereby dismisses the [herein petitioners] counterclaim because it has not been
indubitably shown that the filing by the [respondents] of the latters complaint was done in bad faith and with
[27]
malice.

Finding the claims of the parties for damages against each other to be unsubstantiated, the RTC thereby dismissed the same.

Respondents challenged the foregoing RTC Decision before the Court of Appeals via a Petition for Review under Rule 43 of
the Rules of Court, docketed as CA-G.R. SP No. 00185.

The RTC declared that respondents failed to show that they had complied with the essential requisites for filing a derivative
suit as set forth in Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies:

On 15 February 2006, the Court of Appeals rendered its Decision, affirming the 10 December 2004 Decision of the RTC. Said
the appellate court:

(1) He was a stockholder or member at the time the acts or transactions subject of the action occurred and at
the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all After a careful and judicious scrutiny of the extant records of the case, together with the
remedies available under the articles of incorporation, by-laws, laws or rules governing the applicable laws and jurisprudence, WE see no reason or justification for granting the present appeal.
corporation or partnership to obtain the relief he desires;

xxxx
(3) No appraisal rights are available for the act or acts complained of; and

x x x [T]his Court sees that the instant petition would still fail taking into consideration all the pleadings and
(4) The suit is not a nuisance or harassment suit. evidence of the parties except the supplemental affidavit of [herein respondent] Joseph and its corresponding
annexes appended in [respondents] memorandum before the Court a quo. The Court a quo have (sic)
outrightly dismissed the complaint for its failure to comply with the mandatory provisions of the Interim Rules
of Procedure for Intra-Corporate Controversies particularly Rule 2, Section 4(3), Rule 8, Section [1(2)] and Rule
7, Section 2 thereof, which reads as follows:
 (3) The refusal of the defendant to grant the demands of the plaintiff and the reasons given for
such refusal, if any; and
RULE 2

COMMENCEMENT OF ACTION AND PLEADINGS (4) The reasons why the refusal of defendant to grant the demands of the plaintiff is
unjustified and illegal, stating the law and jurisprudence in support thereof.

xxxx
Sec. 4. Complaint. The complaint shall state or contain:

A perusal of the extant record shows that [herein respondents] have not complied with the above quoted
xxxx provisions. [Respondents] should be mindful that in filing their complaint which, as admitted by them, is a
derivative suit, should have first exhausted all available remedies under its (sic) Articles of Incorporation, or its
by-laws, or any laws or rules governing the corporation.The contention of [respondent Joseph] that he had
indeed made several talks to (sic) his brother [herein petitioner Anthony] to settle their differences is not
tantamount to exhaustion of remedies. What the law requires is to bring the grievance to the Board of
(3) the law, rule, or regulation relied upon, violated, or sought to be enforced;
Directors or Stockholders for the latter to take the opportunity to settle whatever problem in its regular
meeting or special meeting called for that purpose which [respondents] failed to do. x x x The requirements
laid down by the Interim Rules of Procedure for Intra-Corporate Controversies are mandatory which cannot be
dispensed with by any stockholder of a corporation before filing a derivative suit. [28] (Emphasis ours.)
xxxx

RULE 8

DERIVATIVE SUITS
The Court of Appeals likewise sustained the refusal by the RTC to consider respondent Josephs Supplemental Affidavit and
other additional evidence, which respondents belatedly submitted with their Memorandum to the said trial court. The appellate court
ratiocinated that:
Sec. 1. Derivative action. x x x
With regard to the claim of [herein respondents] that the supplemental affidavit of [respondent] Joseph and
its annexes appended to their memorandum should have been taken into consideration by the Court a quo to
xxxx
support the reliefs prayed [for] in their complaint. (sic) This Court rules that said supplemental affidavit and
its annexes is (sic) inadmissible.

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all
remedies available under the articles of incorporation, by-laws, laws or rules governing the
A second hard look of (sic) the extant records show that during the pre-trial conference conducted on August
corporation or partnership to obtain the relief he desires.
26, 2004, the parties through their respective counsels had come up with an agreement that the lower court
would render judgment based on the pleadings and evidence submitted. This agreement is in accordance with
Rule 4, Sec. 4 of the Interim Rules of Procedure for Intra-Corporate Controversies which explicitly states:

xxxx

RULE 7 SECTION. 4. Judgment before pre-trial. If, after submission of the pre-trial briefs,
the court determines that, upon consideration of the pleadings, the affidavits
INSPECTION OF CORPORATE BOOKS AND RECORDS and other evidence submitted by the parties, a judgment may be rendered, the
court may order the parties to file simultaneously their respective memoranda
within a non-extendible period of twenty (20) days from receipt of the order.
Thereafter, the court shall render judgment, either full or otherwise, not later
than ninety (90) days from the expiration of the period to file the memoranda.
Sec. 2. Complaint In addition to the requirements in section 4, Rule 2 of these Rules, the complaint must state
the following:

xxxx

(1) The case is set (sic) for the enforcement of plaintiffs right of inspection of corporate orders
or records and/or to be furnished with financial statements under Section 74 and 75 of the
Corporation Code of the Philippines;
Clearly, the supplemental affidavit and its appended documents which were submitted only upon the filing of
the memorandum for the [respondents] were not submitted in the pre-trial briefs for the stipulation of the
parties during the pre-trial, hence, it cannot be accepted pursuant to Rule 2, Sec. 8 of the same rules which
reads as follows:
(2) A demand for inspection and copying of books [and/or] to be furnished with financial
statements made by the plaintiffs upon defendant;
SEC. 8. Affidavits, documentary and other evidence. Affidavits shall be based on
personal knowledge, shall set forth such facts as would be admissible in
 evidence, and shall show affirmatively that the affiant is competent to testify on
the matters stated therein. The affidavits shall be in question and answer form,
and shall comply with the rules on admissibility of evidence.
Affidavits of witnesses as well as documentary and other evidence shall be
attached to the appropriate pleading; Provided, however, that affidavits,
documentary and other evidence not so submitted may be attached to the pre-
trial brief required under these Rules. Affidavits and other evidence not so
submitted shall not be admitted in evidence, except in the following cases:
(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is
presumed prima facie hostile if he fails or refuses to execute an affidavit after a
written request therefor;
(2) If the failure to submit the evidence is for meritorious and compelling
reasons; and
(3) Newly discovered evidence.
In case of (2) and (3) above, the affidavit and evidence must be submitted not
later than five (5) days prior to its introduction in evidence.
There is no showing in the case at bench that the supplemental affidavit and its annexes falls (sic) within one
of the exceptions of the above quoted proviso, hence, inadmissible.
It must be noted that in the case at bench, like any other civil cases, the party making an allegation in a civil
case has the burden of proving it by preponderance of evidence. Differently stated, upon the plaintiff in [a]
civil case, the burden of proof never parts. That is, appellants must adduce evidence that has greater weight or
is more convincing that (sic) which is offered to oppose it. In the case at bar, no one should be blamed for the
dismissal of the complaint but the [respondents] themselves for their lackadaisical attitude in setting forth and
appending their defences belatedly. To admit them would be a denial of due process for the opposite party
which this Court cannot allow.[29]
Ultimately, the Court of Appeals decreed:
WHEREFORE, judgment is hereby rendered DISMISSING the instant petition and the assailed
Decision of the Regional Trial Court (RTC), 7 th Judicial Region, Branch II, CebuCity, dated November 10, 2004, in
SRC Case No. 022-CEB is AFFIRMED in toto. Cost against the [herein respondents].[30]
Unperturbed, respondents filed before the Court of Appeals, on 23 February 2006, a Motion for Reconsideration and Motion
to Set for Oral Arguments the Motion for Reconsideration,[31] invoking the following grounds:
(1) The [herein respondents] have sufficiently exhausted all remedies before filing the present action;
and
(2) [The] Honorable Court erred in holding that the supplemental affidavit and its annexes is (sic)
inadmissible because the rules and the lower court expressly allowed the submission of the
same in its order dated August 26, 2004 x x x.[32]
In a Resolution[33] dated 8 March 2006, the Court of Appeals granted respondents Motion to Set for Oral Arguments the Motion for
Reconsideration.
On 4 April 2006, the Court of Appeals issued a Resolution[34] setting forth the events that transpired during the oral arguments, which took
place on 30 March 2006. Counsels for the parties manifested before the appellate court that they were submitting respondents Motion for
Reconsideration for resolution. Justice Magpale, however, still called on the parties to talk about the possible settlement of the case
considering their familial relationship. Independent of the resolution of respondents Motion for Reconsideration, the parties were
agreeable to pursue a settlement for the dissolution of the corporation, which they had actually already started.
In a Resolution[35] dated 11 April 2006, the Court of Appeals ordered the parties to submit, within 10 days from notice, their intended
amicable settlement, since the same would undeniably affect the resolution of respondents pending Motion for Reconsideration. If the said
period should lapse without the parties submitting an amicable settlement, then they were directed by the appellate court to file within 10
days thereafter their position papers instead.
On 5 May 2006, respondents submitted to the Court of Appeals their Position Paper, [36] stating that the parties did not reach an amicable
settlement. Respondents informed the appellate court that prior to the filing with the Securities and Exchange Commission (SEC) of a
petition for dissolution of Winchester, Inc., the parties already divided the stocks in trade and the real assets of the corporation among
themselves. Respondents posited, though, that the afore-mentioned distribution of the assets of Winchester, Inc. among the parties was
null and void, as it violated the last paragraph of Section 122 of the Corporation Code, which provides that, [e]xcept by a decrease of capital
stock and as otherwise allowed by the Corporation Code, no corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities. At the same time, however, respondents brought to the attention of the Court
of Appeals that the parties did eventually file with the SEC a petition for dissolution of Winchester, Inc., which the SEC approved.[37]
Respondents no longer discussed in their Position Paper the grounds they previously invoked in their Motion for Reconsideration of the
Court of Appeals Decision dated 15 February 2006, affirming in toto the RTC Decision dated 10 November 2004. They instead argued that
the RTC Decision in question was null and void as it did not clearly state the facts and the law on which it was based. Respondents sought
the remand of the case to the RTC for further proceedings on their derivative suit and completion of the dissolution of Winchester, Inc.,
including the legalization of the prior partial distribution among the parties of the assets of said corporation.
Petitioners filed their Position Paper[38] on 23 May 2006, wherein they accused respondents of attempting to incorporate extraneous
matters into the latters Motion for Reconsideration. Petitioners pointed out that the issue before the Court of Appeals was not the
dissolution and division of assets of Winchester, Inc., thus, a remand of the case to the RTC was not necessary.
On 18 July 2006, the Court of Appeals rendered the assailed Resolution, granting respondents Motion for Reconsideration. The Court of
Appeals reasoned in this wise:
After a second look and appreciation of the facts of the case, vis--vis the issues raised by the [herein
respondents] motion for reconsideration and in view of the formal dissolution of the corporation which leaves
unresolved up to the present the settlement of the properties and assets which are now in danger of
dissipation due to the unending litigation, this Court finds the need to remand the instant case to the lower
court (commercial court) as the proper forum for the adjudication, disposition, conveyance and distribution of
said properties and assets between and amongst its stockholders as final settlement pursuant to Sec. 122 of
the Corporation Code after payment of all its debts and liabilities as provided for under the same proviso. This
is in accord with the pronouncement of the Supreme Court in the case of Clemente et. al. vs. Court of
Appeals, et. al. where the high court ruled and which WE quote, viz:
the corporation continues to be a body corporate for three (3) years after its
dissolution for purposes of prosecuting and defending suits by and against it and
for enabling it to settle and close its affairs, culminating in the disposition and
 distribution of its remaining assets. It may, during the three-year term, appoint a
trustee or a receiver who may act beyond that period. The termination of the life
of a juridical entity does not by itself cause the extinction or diminution of the
rights and liabilities of such entity x x x nor those of its owners and creditors. If
the three-year extended life has expired without a trustee or receiver having
been expressly designated by the corporation within that period, the board of
directors (or trustees) xxx may be permitted to so continue as "trustees" by legal
implication to complete the corporate liquidation. Still in the absence of a board
of directors or trustees, those having any pecuniary interest in the assets,
including not only the shareholders but likewise the creditors of the corporation,
acting for and in its behalf, might make proper representation with the
Securities and Exchange Commission, which has primary and sufficiently broad
jurisdiction in matters of this nature, for working out a final settlement of the
corporate concerns.
In the absence of a trustee or board of director in the case at bar for purposes above mentioned, the lower
court under Republic Act No. [8799] (otherwise known as the Securities and Exchange Commission) as
implemented by A.M. No. 00-8-10-SC (Transfer of Cases from the Securities and Exchange Commission to the
Regional Trial Courts) which took effect on October 1, 2001, is the proper forum for working out the final
settlement of the corporate concern.[39]
Hence, the Court of Appeals ruled:
WHEREFORE, premises considered, the motion for reconsideration is GRANTED. The order dated February 15,
2006 is hereby SET ASIDE and the instant case is REMANDED to the lower court to take the necessary
proceedings in resolving with deliberate dispatch any and all corporate concerns towards final settlement. [40]
Petitioners filed a Motion for Reconsideration[41] of the foregoing Resolution, but it was denied by the Court of Appeals in its other assailed
Resolution dated 19 April 2007.
In the Petition at bar, petitioners raise the following issues:
I.
WHETHER OR NOT THE ASSAILED RESOLUTIONS[,] WHICH VIOLATED THE CONSTITUTION OF THE PHILIPPINES,
JURISPRUDENCE AND THE LAW[,] ARE NULL AND VOID[.]
II.
WHETHER OR NOT THE ASSAILED RESOLUTIONS WAS (sic) ISSUED WITHOUT JURISDICTION[.]
III.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN REMANDING THIS CASE TO
THE LOWER COURT FOR THE REASON CITED IN THE ASSAILED RESOLUTIONS, AND WITHOUT RESOLVING THE
GROUNDS FOR THE [RESPONDENTS] MOTION FOR RECONSIDERATION. (sic) INASMUCH AS [THE] REASON
CITED WAS A NON-ISSUE IN THE CASE.
IV.
WHETHER OR NOT REMANDING THIS CASE TO THE REGIONAL TRIAL COURT VIOLATES THE SUMMARY
PROCEDURE FOR INTRA-CORPORATE CASES.[42]
The crux of petitioners contention is that the Court of Appeals committed grievous error in reconsidering its Decision dated 15 February
2006 on the basis of extraneous matters, which had not been previously raised in respondents Complaint before the RTC, or in their Petition
for Review and Motion for Reconsideration before the appellate court; i.e., the adjudication, disposition, conveyance, and distribution of
the properties and assets of Winchester, Inc. among its stockholders, allegedly pursuant to the amicable settlement of the parties. The fact
that the parties were able to agree before the Court of Appeals to submit for resolution respondents Motion for Reconsideration of the 15
February 2006 Decision of the same court, independently of any intended settlement between the parties as regards the dissolution of the
corporation and distribution of its assets, only proves the distinction and independence of these matters from one another. Petitioners also
contend that the assailed Resolution dated 18 July 2006 of the Court of Appeals, granting respondents Motion for Reconsideration, failed to
clearly and distinctly state the facts and the law on which it was based. Remanding the case to the RTC, petitioners maintain, will violate the
very essence of the summary nature of the Interim Rules of Procedure Governing Intra-Corporate Controversies, as this will just entail
delay, protract litigation, and revert the case to square one.
The Court finds the instant Petition meritorious.
To recapitulate, the case at bar was initiated before the RTC by respondents as a derivative suit, on their own behalf and on
behalf of Winchester, Inc., primarily in order to compel petitioners to account for and reimburse to the said corporation the corporate
assets and funds which the latter allegedly misappropriated for their personal benefit.During the pendency of the proceedings before the
court a quo, the parties were able to reach an amicable settlement wherein they agreed to divide the assets of Winchester, Inc. among
themselves. This amicable settlement was already partially implemented by the parties, when respondents repudiated the same, for which
reason the RTC proceeded with the case on its merits. On 10 November 2004, the RTC promulgated its Decision dismissing respondents
Complaint for failure to comply with essential pre-requisites before they could avail themselves of the remedies under the Interim Rules of
Procedure Governing Intra-Corporate Controversies; and for inadequate substantiation of respondents allegations in said Complaint after
consideration of the pleadings and evidence on record.
In its Decision dated 15 February 2006, the Court of Appeals affirmed, on appeal, the findings of the RTC that respondents
did not abide by the requirements for a derivative suit, nor were they able to prove their case by a preponderance of
evidence. Respondents filed a Motion for Reconsideration of said judgment of the appellate court, insisting that they were able to meet all
the conditions for filing a derivative suit. Pending resolution of respondents Motion for Reconsideration, the Court of Appeals urged the
parties to again strive to reach an amicable settlement of their dispute, but the parties were unable to do so. The parties were not able to
submit to the appellate court, within the given period, any amicable settlement; and filed, instead, their Position Papers. This effectively
meant that the parties opted to submit respondents Motion for Reconsideration of the 15 February 2006 Decision of the Court of Appeals,
and petitioners opposition to the same, for resolution by the appellate court on the merits.
It was at this point that the case took an unexpected turn.
 In accordance with respondents allegation in their Position Paper that the parties subsequently filed with the SEC, and the
SEC already approved, a petition for dissolution of Winchester, Inc., the Court of Appeals remanded the case to the RTC so that all the
corporate concerns between the parties regarding Winchester, Inc. could be resolved towards final settlement.
In one stroke, with the use of sweeping language, which utterly lacked support, the Court of Appeals converted the
derivative suit between the parties into liquidation proceedings.
The general rule is that where a corporation is an injured party, its power to sue is lodged with its board of directors or
trustees. Nonetheless, an individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds
stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued,
or hold the control of the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real
party in interest. A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to
the suit. And the relief which is granted is a judgment against a third person in favor of the corporation. Similarly, if a corporation has a
defense to an action against it and is not asserting it, a stockholder may intervene and defend on behalf of the corporation.[43] By virtue of
Republic Act No. 8799, otherwise known as the Securities Regulation Code, jurisdiction over intra-corporate disputes, including derivative
suits, is now vested in the Regional Trial Courts designated by this Court pursuant to A.M. No. 00-11-03-SC promulgated on21 November
2000.
In contrast, liquidation is a necessary consequence of the dissolution of a corporation. It is specifically governed by Section
122 of the Corporation Code, which reads:
SEC. 122. Corporate liquidation. Every corporation whose charter expires by its own limitation or
is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any
other manner, shall nevertheless be continued as a body corporate for three (3) years after the time when it
would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling
it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for
the purpose of continuing the business for which it was established.
At any time during said three (3) years, said corporation is authorized and empowered to convey
all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in
interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its
stockholders, members, creditors and others in interest, all interest which the corporation had in the property
terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members,
creditors or other persons in interest.
Upon winding up of the corporate affairs, any asset distributable to any creditor or stockholder
or member who is unknown or cannot be found shall be escheated to the city or municipality where such
assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and
liabilities.
Following the voluntary or involuntary dissolution of a corporation, liquidation is the process of settling the affairs of said
corporation, which consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and
adjustment of claims against it and the payment of its just debts.[44] More particularly, it entails the following:
Winding up the affairs of the corporation means the collection of all assets, the payment of all
its creditors, and the distribution of the remaining assets, if any among the stockholders thereof in
accordance with their contracts, or if there be no special contract, on the basis of their respective
interests. The manner of liquidation or winding up may be provided for in the corporate by-laws and this
would prevail unless it is inconsistent with law.[45]
It may be undertaken by the corporation itself, through its Board of Directors; or by trustees to whom all corporate assets are
conveyed for liquidation; or by a receiver appointed by the SEC upon its decree dissolving the corporation. [46]
Glaringly, a derivative suit is fundamentally distinct and independent from liquidation proceedings. They are neither part of each other nor
the necessary consequence of the other. There is totally no justification for the Court of Appeals to convert what was supposedly a
derivative suit instituted by respondents, on their own behalf and on behalf of Winchester, Inc. against petitioners, to a proceeding for the
liquidation of Winchester, Inc.
While it may be true that the parties earlier reached an amicable settlement, in which they agreed to already distribute the assets of
Winchester, Inc., and in effect liquidate said corporation, it must be pointed out that respondents themselves repudiated said amicable
settlement before the RTC, even after the same had been partially implemented; and moved that their case be set for pre-trial. Attempts to
again amicably settle the dispute between the parties before the Court of Appeals were unsuccessful.
Moreover, the decree of the Court of Appeals to remand the case to the RTC for the final settlement of corporate concerns was solely
grounded on respondents allegation in its Position Paper that the parties had already filed before the SEC, and the SEC approved, the
petition to dissolve Winchester, Inc. The Court notes, however, that there is absolute lack of evidence on record to prove said
allegation. Respondents failed to submit copies of such petition for dissolution of Winchester, Inc. and the SEC Certification approving the
same. It is a basic rule in evidence that each party must prove his affirmative allegation. Since it was respondents who alleged the voluntary
dissolution of Winchester, Inc., respondents must, therefore, prove it. [47] This respondents failed to do.
Even assuming arguendo that the parties did submit a petition for the dissolution of Winchester, Inc. and the same was
approved by the SEC, the Court of Appeals was still without jurisdiction to order the final settlement by the RTC of the remaining corporate
concerns. It must be remembered that the Complaint filed by respondents before the RTC essentially prayed for the accounting and
reimbursement by petitioners of the corporate funds and assets which they purportedly misappropriated for their personal use; surrender
by the petitioners of the corporate books for the inspection of respondents; and payment by petitioners to respondents of damages. There
was nothing in respondents Complaint which sought the dissolution and liquidation of Winchester, Inc. Hence, the supposed dissolution of
Winchester, Inc. could not have resulted in the conversion of respondents derivative suit to a proceeding for the liquidation of said
corporation, but only in the dismissal of the derivative suit based on either compromise agreement or mootness of the issues.
Clearly, in issuing its assailed Resolutions dated 18 July 2006 and 19 April 2007, the Court of Appeals already went beyond
the issues raised in respondents Motion for Reconsideration. Instead of focusing on whether it erred in affirming, in its 15 February 2006
Decision, the dismissal by the RTC of respondents Complaint due to respondents failure to comply with the requirements for a derivative
suit and submit evidence to support their allegations, the Court of Appeals unduly concentrated on respondents unsubstantiated allegation
that Winchester, Inc. was already dissolved and speciously ordered the remand of the case to the RTC for proceedings so vitally different
from that originally instituted by respondents.
Despite the foregoing, the Court still deems it appropriate to already look into the merits of respondents Motion for
Reconsideration of the 15 February 2006 Decision of the Court of Appeals, for the sake of finally putting an end to the case at bar.
In their said Motion for Reconsideration, respondents argued that: (1) they had sufficiently exhausted all remedies before
filing the derivative suit; and (2) respondent Josephs Supplemental Affidavit and its annexes should have been taken into consideration,
since the submission thereof was allowed by the rules of procedure, as well as by the RTC in its Order dated 26 August 2004.

As regards the first ground of sufficient exhaustion by respondents of all remedies before filing a derivative suit, the Court
subscribes to the ruling to the contrary of the Court of Appeals in its Decision dated 16 February 2006.
The Court has recognized that a stockholders right to institute a derivative suit is not based on any express provision of the
Corporation Code, or even the Securities Regulation Code, but is impliedly recognized when the said laws make corporate directors or
officers liable for damages suffered by the corporation and its stockholders for violation of their fiduciary duties. 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. 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. The basis of a stockholders suit is always one in equity. However, it cannot prosper without first complying with
the legal requisites for its institution.[48]
Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies lays down the following
requirements which a stockholder must comply with in filing a derivative suit:
Sec. 1. Derivative action. A stockholder or member may bring an action in the name of a corporation or
association, as the case may be, provided, that:
(1) He was a stockholder or member at the time the acts or transactions subject
of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in
the complaint, to exhaust all remedies available under the articles
of incorporation, by-laws, laws or rules governing the corporation
or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
A perusal of respondents Complaint before the RTC would reveal that the same did not allege with particularity that
respondents exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing Winchester, Inc. to obtain the relief they desire.
Respondents assert that their compliance with said requirement was contained in respondent Josephs Affidavit, which was
attached to respondents Complaint. Respondent Joseph averred in his Affidavit that he tried for a number of times to talk to petitioner
Anthony to settle their differences, but the latter would not listen. Respondents additionally claimed that taking further remedies within the
corporation would have been idle ceremony, considering that Winchester, Inc. was a family corporation and it was impossible to expect
petitioners to take action against themselves who were the ones accused of wrongdoing.
The Court is not persuaded.
The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies are simple and
do not leave room for statutory construction.The second paragraph thereof requires that the stockholder filing a derivative suit should
have exerted all reasonable efforts to exhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the relief he desires; and to allege such fact with particularity in the complaint. The obvious intent
behind the rule is to make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief sought had
failed.
The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to petitioner Anthony regarding their
dispute hardly constitutes all reasonable efforts to exhaust all remedies available. Respondents did not refer to or mention at all any other
remedy under the articles of incorporation or by-laws of Winchester, Inc., available for dispute resolution among stockholders, which
respondents unsuccessfully availed themselves of. And the Court is not prepared to conclude that the articles of incorporation and by-laws
of Winchester, Inc. absolutely failed to provide for such remedies.
Neither can this Court accept the reasons proffered by respondents to excuse themselves from complying with the second
requirement under Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies. They are flimsy and
insufficient, compared to the seriousness of respondents accusations of fraud, misappropriation, and falsification of corporate records
against the petitioners. The fact that Winchester, Inc. is a family corporation should not in any way exempt respondents from complying
with the clear requirements and formalities of the rules for filing a derivative suit. There is nothing in the pertinent laws or rules supporting
the distinction between, and the difference in the requirements for, family corporations vis--vis other types of corporations, in the
institution by a stockholder of a derivative suit.
The Court further notes that, with respect to the third and fourth requirements of Section 1, Rule 8 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies, the respondents Complaint failed to allege, explicitly or otherwise, the fact that there
were no appraisal rights available for the acts of petitioners complained of, as well as a categorical statement that the suit was not a
nuisance or a harassment suit.
As to respondents second ground in their Motion for Reconsideration, the Court agrees with the ruling of the Court of
Appeals, in its 15 February 2006 Decision, that respondent Josephs Supplemental Affidavit and additional evidence were inadmissible since
they were only appended by respondents to their Memorandum before the RTC.Section 8, Rule 2 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies is crystal clear that:
Sec. 8. Affidavits, documentary and other evidence. Affidavits shall be based on personal knowledge, shall set
forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent
to testify on the matters stated therein. The affidavits shall be in question and answer form, and shall comply
with the rules on admissibility of evidence.
Affidavits of witnesses as well as documentary and other evidence shall be attached to the
appropriate pleading, Provided, however, that affidavits, documentary and other evidence not so
submitted may be attached to the pre-trial brief required under these Rules. Affidavits and other evidence
not so submitted shall not be admitted in evidence, except in the following cases:
(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness
is presumed prima facie hostile if he fails or refuses to execute an
affidavit after a written request therefor;
(2) If the failure to submit the evidence is for meritorious and compelling
reasons; and
(3) Newly discovered evidence.
 In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five (5) days prior to
its introduction in evidence. (Emphasis ours.)
According to the afore-quoted provision, the parties should attach the affidavits of witnesses and other documentary
evidence to the appropriate pleading, which generally should mean the complaint for the plaintiff and the answer for the
respondent. Affidavits and documentary evidence not so submitted must already be attached to the respective pre-trial briefs of the
parties. That the parties should have already identified and submitted to the trial court the affidavits of their witnesses and documentary
evidence by the time of pre-trial is strengthened by the fact that Section 1, Rule 4 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies require that the following matters should already be set forth in the parties pre-trial briefs:
Section 1. Pre-trial conference, mandatory nature. Within five (5) days after the period for availment of, and
compliance with, the modes of discovery prescribed in Rule 3 hereof, whichever comes later, the court shall
issue and serve an order immediately setting the case for pre-trial conference, and directing the parties to
submit their respective pre-trial briefs. The parties shall file with the court and furnish each other copies of
their respective pre-trial brief in such manner as to ensure its receipt by the court and the other party at least
five (5) days before the date set for the pre-trial.
The parties shall set forth in their pre-trial briefs, among other matters, the following:
xxxx
(4) Documents not specifically denied under oath by either or both
parties;
xxxx
(7) Names of witnesses to be presented and the summary of their
testimony as contained in their affidavits supporting their positions on each of
the issues;
(8) All other pieces of evidence, whether documentary or
otherwise and their respective purposes.
Also, according to Section 2, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies,[49] it is the
duty of the court to ensure during the pre-trial conference that the parties consider in detail, among other things, objections to the
admissibility of testimonial, documentary, and other evidence, as well as objections to the form or substance of any affidavit, or part
thereof.
Obviously, affidavits of witnesses and other documentary evidence are required to be attached to a partys pre-trial brief, at
the very last instance, so that the opposite party is given the opportunity to object to the form and substance, or the admissibility
thereof. This is, of course, to prevent unfair surprises and/or to avoid the granting of any undue advantage to the other party to the case.
True, the parties in the present case agreed to submit the case for judgment by the RTC, even before pre-trial, in accordance
with Section 4, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate Controversies:
Sec. 4. Judgment before pre-trial. If after submission of the pre-trial briefs, the court
determines that, upon consideration of the pleadings, the affidavits and other evidence submitted by the
parties, a judgment may be rendered, the court may order the parties to file simultaneously their respective
memoranda within a non-extendible period of twenty (20) days from receipt of the order. Thereafter, the
court shall render judgment, either full or otherwise, not later than ninety (90) days from the expiration of the
period to file the memoranda.
Even then, the afore-quoted provision still requires, before the court makes a determination that it can render judgment
before pre-trial, that the parties had submitted their pre-trial briefs and the court took into consideration the pleadings, affidavits and other
evidence submitted by the parties. Hence, cases wherein the court can render judgment prior to pre-trial, do not depart from or constitute
an exception to the requisite that affidavits of witnesses and documentary evidence should be submitted, at the latest, with the parties pre-
trial briefs. Taking further into account that under Section 4, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies parties are required to file their memoranda simultaneously, the same would mean that a party would no longer have any
opportunity to dispute or rebut any new affidavit or evidence attached by the other party to its memorandum. To violate the above-quoted
provision would, thus, irrefragably run afoul the former partys constitutional right to due process.
In the instant case, therefore, respondent Josephs Supplemental Affidavit and the additional documentary evidence,
appended by respondents only to their Memorandum submitted to the RTC, were correctly adjudged as inadmissible by the Court of
Appeals in its 15 February 2006 Decision for having been belatedly submitted. Respondents neither alleged nor proved that the documents
in question fall under any of the three exceptions to the requirement that affidavits and documentary evidence should be attached to the
appropriate pleading or pre-trial brief of the party, which is particularly recognized under Section 8, Rule 2 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies.
WHEREFORE, premises considered, the Petition for Review under Rule 45 of the Rules of Court is hereby GRANTED. The
assailed Resolutions dated 18 July 2006and 19 April 2007 of the Court of Appeals in CA-G.R. SP No. 00185 are hereby REVERSED AND SET
ASIDE. The Decision dated 15 February 2006 of the Court of Appeals is hereby AFFIRMED. No costs.
SO ORDERED.
G.R. No. 161886. March 16, 2007.*
FILIPINAS PORT SERVICES, INC., represented by stockholders, ELIODORO C. CRUZ and MINDANAO TERMINAL AND BROKERAGE SERVICES,
INC., petitioners, vs. VICTORIANO S. GO, ARSENIO LOPEZ CHUA, EDGAR C. TRINIDAD, HERMENEGILDO M. TRINIDAD, JESUS SYBICO,
MARY JEAN D. CO, HENRY CHUA, JOSELITO S. JAYME, ERNESTO S. JAYME, and ELIEZER B. DE JESUS, respondents.
Corporation Law; Section 23 of the Corporation Code explicitly provides that unless otherwise provided therein, the corporate powers of all
corporations formed under the Code shall be exercised, all business conducted and all property of the corporation shall be controlled and
held by a board of directors.—The governing body of a corporation is its board of directors. Section 23 of the Corporation Code explicitly
provides that unless otherwise provided therein, the corporate powers of all corporations formed under the Code shall be exercised, all
business conducted and all property of the corporation shall be controlled and held by a board of directors. Thus, with the exception only of
some powers expressly granted by law to stockholders (or members, in case of non-stock corporations), the board of directors (or trustees,
in case of non-stock corporations) has the sole authority to determine policies, enter into contracts, and conduct the ordinary business of
the corporation within the scope of its charter, i.e., its articles of incorporation, by-laws and relevant provisions of law. Verily, the authority
of the board of directors is restricted to the management of the regular business affairs of the corporation, unless more extensive power is
expressly conferred.
Same; The raison d’être behind the conferment of corporate powers on the board of directors is not lost on the Court—indeed, the
concentration in the board of the powers of control of corporate business and of appointment of corporate officers and managers is
necessary for efficiency in any large organization.—The raison d’être behind the conferment of corporate powers on the board of directors
is not lost on the Court. Indeed, the concentration in the board of the powers of control of corporate business and of appointment of
corporate officers and managers is necessary for efficiency in any large organization. Stockholders are too numerous, scattered and
unfamiliar with the business of a corporation to conduct its business directly. And so the plan of corporate organization is for the
stockholders to choose the directors who shall control and supervise the conduct of corporate business.
Same; Notwithstanding the silence of Filport’s bylaws on the matter, we cannot rule that the creation of the executive committee by the
board of directors is illegal or unlawful.—Notwithstanding the silence of Filport’s bylaws on the matter, we cannot rule that the creation of
the executive committee by the board of directors is illegal or unlawful. One reason is the absence of a showing as to the true nature and
functions of said executive committee considering that the “executive committee,” referred to in Section 35 of the Corporation Code which
is as powerful as the board of directors and in effect acting for the board itself, should be distinguished from other committees which are
within the competency of the board to create at anytime and whose actions require ratification and confirmation by the board. Another
reason is that, ratiocinated by both the two (2) courts below, the Board of Directors has the power to create positions not provided for in
Filport’s bylaws since the board is the cor-poration’s governing body, clearly upholding the power of its board to exercise its prerogatives in
managing the business affairs of the corporation.
Same; If the cause of the losses is merely error in judgment, not amounting to bad faith or negligence, directors and/or officers are not
liable.—If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence, directors and/or officers
are not liable. For them to be held accountable, the mismanagement and the resulting losses on account thereof are not the only matters to
be proven; it is likewise necessary to show that the direc-tors and/or officers acted in bad faith and with malice in doing the assailed acts.
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing
of a wrong, a breach of a known duty through some motive or interest or ill-will partaking of the nature of fraud. We have searched the
records and nowhere do we find a “dishonest purpose” or “some moral obliquity,” or “conscious doing of a wrong” on the part of the
respondents that “partakes of the nature of fraud.”
Same; Management Prerogatives; The determination of the necessity for additional offices and/or positions in a corporation is a
management prerogative which courts are not wont to review in the absence of any proof that such prerogative was exercised in bad faith
or with malice.—The determination of the necessity for additional offices and/or positions in a corporation is a management prerogative
which courts are not wont to review in the absence of any proof that such prerogative was exercised in bad faith or with malice.
Same; Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of directors or
trustees.—Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of directors or
trustees. But an individual stockholder may be permitted to institute a derivative suit in behalf of the corporation in order to protect or
vindicate corporate rights whenever the officials of the corporation refuse to sue, or when a demand upon them to file the necessary action
would be futile because they are the ones to be sued, or because they hold control of the corporation. In such actions, the corporation is
the real party-in-interest while the suing stockholder, in behalf of the corporation, is only a nominal party.
Same; Derivative Suits; Since the ones to be sued are the directors/officers of the corporation itself, a stockholder, like petitioner Cruz, may
validly institute a “derivative suit” to vindicate the alleged corporate injury, in which case Cruz is only a nominal party while Filport is the
real party-in-interest.—The action below is principally for damages resulting from alleged mismanagement of the affairs of Filport by its
directors/officers, it being alleged that the acts of mismanagement are detrimental to the interests of Filport. Thus, the injury complained of
primarily pertains to the corporation so that the suit for relief should be by the corporation. However, since the ones to be sued are the
directors/officers of the corporation itself, a stockholder, like petitioner Cruz, may validly institute a “derivative suit” to vindicate the
alleged corporate injury, in which case Cruz is only a nominal party while Filport is the real party-in-interest. For sure, in the prayer portion
of petitioners’ petition before the SEC, the reliefs prayed were asked to be made in favor of Filport.
Assailed and sought to be set aside in this petition for review on certiorari is the Decision [1] dated 19 January 2004 of the
Court of Appeals (CA) in CA-G.R. CV No. 73827, reversing an earlier decision of the Regional Trial Court (RTC) of Davao City and accordingly
dismissing the derivative suit instituted by petitioner Eliodoro C. Cruz for and in behalf of the stockholders of co-petitioner Filipinas Port
Services, Inc. (Filport, hereafter).
The case is actually an intra-corporate dispute involving Filport, a domestic corporation engaged in stevedoring services with
principal office in Davao City. It was initially instituted with the Securities and Exchange Commission (SEC) where the case hibernated and
remained unresolved for several years until it was overtaken by the enactment into law, on 19 July 2000, of Republic Act (R.A.) No. 8799,
otherwise known as the Securities Regulation Code. From the SEC and consistent with R.A. No. 8799, the case was transferred to the RTC of
Manila, Branch 14, sitting as a corporate court. Subsequently, upon respondents motion, the case eventually landed at the RTC of Davao
City where it was docketed as Civil Case No. 28,552-2001. RTC-Davao City, Branch 10, ruled in favor of the petitioners prompting
respondents to go to the CA in CA-G.R. CV No. 73827. This time, the respondents prevailed, hence, this petition for review by the
petitioners.
The relevant facts:
On 4 September 1992, petitioner Eliodoro C. Cruz, Filports president from 1968 until he lost his bid for reelection as Filports president
during the general stockholders meeting in 1991, wrote a letter[2] to the corporations Board of Directors questioning the boards creation of
the following positions with a monthly remuneration of P13,050.00 each, and the election thereto of certain members of the board, to wit:
Asst. Vice-President for Corporate Planning - Edgar C. Trinidad (Director)
Asst. Vice-President for Operations - Eliezer B. de Jesus (Director)
Asst. Vice-President for Finance - Mary Jean D. Co (Director)
Asst. Vice-President for Administration - Henry Chua (Director)
Special Asst. to the Chairman - Arsenio Lopez Chua (Director)
Special Asst. to the President - Fortunato V. de Castro
In his aforesaid letter, Cruz requested the board to take necessary action/actions to recover from those elected to the
aforementioned positions the salaries they have received.
On 15 September 1992, the board met and took up Cruzs letter. The records do not show what specific action/actions the
board had taken on the letter. Evidently, whatever action/actions the board took did not sit well with Cruz.
On 14 June 1993, Cruz, purportedly in representation of Filport and its stockholders, among which is herein co-petitioner
Mindanao Terminal and Brokerage Services, Inc. (Minterbro), filed with the SEC a petition [3] which he describes as a derivative suit against
the herein respondents who were then the incumbent members of Filports Board of Directors, for alleged acts of mismanagement
detrimental to the interest of the corporation and its shareholders at large, namely:
1. creation of an executive committee in 1991 composed of seven (7) members of the board with
compensation of P500.00 for each member per meeting, an office which, to Cruz, is not
provided for in the by-laws of the corporation and whose function merely duplicates those of
the President and General Manager;
2. increase in the emoluments of the Chairman, Vice-President, Treasurer and Assistant General Manager
which increases are greatly disproportionate to the volume and character of the work of the
directors holding said positions;
3. re-creation of the positions of Assistant Vice-Presidents (AVPs) for Corporate Planning, Operations, Finance
and Administration, and the election thereto of board members Edgar C. Trinidad, Eliezer de
Jesus, Mary Jean D. Co and Henry Chua, respectively; and
4. creation of the additional positions of Special Assistants to the President and the Board Chairman, with
Fortunato V. de Castro and Arsenio Lopez Chua elected to the same, the directors
elected/appointed thereto not doing any work to deserve the monthly remuneration
of P13,050.00 each.
In the same petition, docketed as SEC Case No. 06-93-4491, Cruz alleged that despite demands made upon the respondent members of the
board of directors to desist from creating the positions in question and to account for the amounts incurred in creating the same, the
demands were unheeded. Cruz thus prayed that the respondent members of the board of directors be made to pay Filport, jointly and
severally, the sums of money variedly representing the damages incurred as a result of the creation of the offices/positions complained of
and the aggregate amount of the questioned increased salaries.
In their common Answer with Counterclaim,[4] the respondents denied the allegations of mismanagement and materially averred as follows:
1. the creation of the executive committee and the grant of per diems for the attendance of each member are
allowed under the by-laws of the corporation;
2. the increases in the salaries/emoluments of the Chairman, Vice-President, Treasurer and Assistant General
Manager were well within the financial capacity of the corporation and well-deserved by the
officers elected thereto; and
3. the positions of AVPs for Corporate Planning, Operations, Finance and Administration were already in
existence during the tenure of Cruz as president of the corporation, and were merely recreated
by the Board, adding that all those appointed to said positions of Assistant Vice Presidents, as
well as the additional position of Special Assistants to the Chairman and the President,
rendered services to deserve their compensation.
In the same Answer, respondents further averred that Cruz and his co-petitioner Minterbro, while admittedly stockholders of Filport, have
no authority nor standing to bring the so-called derivative suit for and in behalf of the corporation; that respondent Mary Jean D. Co has
already ceased to be a corporate director and so with Fortunato V. de Castro, one of those holding an assailed position; and that no demand
to cease and desist from further committing the acts complained of was made upon the board. By way of affirmative defenses, respondents
asserted that (1) the petition is not duly verified by petitioner Filport which is the real party-in-interest; (2) Filport, as represented by Cruz
and Minterbro, failed to exhaust remedies for redress within the corporation before bringing the suit; and (3) the petition does not show
that the stockholders bringing the suit are joined as nominal parties. In support of their counterclaim, respondents averred that Cruz filed
the alleged derivative suit in bad faith and purely for harassment purposes on account of his non-reelection to the board in the 1991
general stockholders meeting.
As earlier narrated, the derivative suit (SEC Case No. 06-93-4491) hibernated with the SEC for a long period of time. With the
enactment of R.A. No. 8799, the case was first turned over to the RTC of Manila, Branch 14, sitting as a corporate court. Thereafter, on
respondents motion, it was eventually transferred to the RTC of Davao City whereat it was docketed as Civil Case No. 28,552-
2001 and raffled to Branch 10 thereof.
On 10 December 2001, RTC-Davao City rendered its decision[5] in the case. Even as it found that (1) Filports Board of Directors
has the power to create positions not provided for in the by-laws of the corporation since the board is the governing body; and (2) the
increases in the salaries of the board chairman, vice-president, treasurer and assistant general manager are reasonable, the trial court
nonetheless rendered judgment against the respondents by ordering the directors holding the positions of Assistant Vice President for
Corporate Planning, Special Assistant to the President and Special Assistant to the Board Chairman to refund to the corporation the salaries
they have received as such officers considering that Filipinas Port Services is not a big corporation requiring multiple executive positions and
that said positions were just created for accommodation.We quote the fallo of the trial courts decision.
WHEREFORE, judgment is rendered ordering:
Edgar C. Trinidad under the third and fourth causes of action to restore to the corporation the total amount of
salaries he received as assistant vice president for corporate planning; and likewise ordering Fortunato V. de
Castro and Arsenio Lopez Chua under the fourth cause of action to restore to the corporation the salaries they
each received as special assistants respectively to the president and board chairman. In case of insolvency of
any or all of them, the members of the board who created their positions are subsidiarily liable.
The counter claim is dismissed.
From the adverse decision of the trial court, herein respondents went on appeal to the CA in CA-G.R. CV No. 73827.
In its decision[6] of 19 January 2004, the CA, taking exceptions to the findings of the trial court that the creation of the positions of Assistant
Vice President for Corporate Planning, Special Assistant to the President and Special Assistant to the Board Chairman was merely for
accommodation purposes, granted the respondents appeal, reversed and set aside the appealed decision of the trial court and accordingly
dismissed the so-called derivative suit filed by Cruz, et al., thus:
IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged decision is REVERSED and SET
ASIDE, and a new one entered DISMISSING Civil Case No. 28,552-2001 with no pronouncement as to costs.
SO ORDERED.
Intrigued, and quite understandably, by the fact that, in its decision, the CA, before proceeding to address the merits of the appeal,
prefaced its disposition with the statement reading [T]he appeal is bereft of merit,[7] thereby contradicting the very fallo of its own decision
and the discussions made in the body thereof, respondents filed with the appellate court a Motion For Nunc Pro Tunc Order,[8] thereunder
praying that the phrase [T]he appeal is bereft of merit, be corrected to read [T]he appeal is impressed with merit. In its resolution[9] of 23
April 2004, the CA granted the respondents motion and accordingly effected the desired correction.
Hence, petitioners present recourse.
Petitioners assigned four (4) errors allegedly committed by the CA. For clarity, we shall formulate the issues as follows:
1. Whether the CA erred in holding that Filports Board of Directors acted within its powers in creating the
executive committee and the positions of AVPs for Corporate Planning, Operations, Finance and
Administration, and those of the Special Assistants to the President and the Board Chairman,
each with corresponding remuneration, and in increasing the salaries of the positions of Board
Chairman, Vice-President, Treasurer and Assistant General Manager; and
2. Whether the CA erred in finding that no evidence exists to prove that (a) the positions of AVP for Corporate
Planning, Special Assistant to the President and Special Assistant to the Board Chairman were
created merely for accommodation, and (b) the salaries/emoluments corresponding to said
positions were actually paid to and received by the directors appointed thereto.
For their part, respondents, aside from questioning the propriety of the instant petition as the same allegedly raises only questions of fact
and not of law, also put in issue the purported derivative nature of the main suit initiated by petitioner Eliodoro C. Cruz allegedly in
representation of and in behalf of Filport and its stockholders.
The petition is bereft of merit.
It is axiomatic that in petitions for review on certiorari under Rule 45 of the Rules of Court, only questions of law may be raised and passed
upon by the Court. Factual findings of the CA are binding and conclusive and will not be reviewed or disturbed on appeal. [10] Of course, the
rule is not cast in stone; it admits of certain exceptions, such as when the findings of fact of the appellate court are at variance with those of
the trial court,[11] as here. For this reason, and for a proper and complete resolution of the case, we shall delve into the records and
reexamine the same.
The governing body of a corporation is its board of directors. Section 23 of the Corporation Code [12] explicitly provides that unless otherwise
provided therein, the corporate powers of all corporations formed under the Code shall be exercised, all business conducted and all
property of the corporation shall be controlled and held by a board of directors. Thus, with the exception only of some powers expressly
granted by law to stockholders (or members, in case of non-stock corporations), the board of directors (or trustees, in case of non-stock
corporations) has the sole authority to determine policies, enter into contracts, and conduct the ordinary business of the corporation within
the scope of its charter, i.e., its articles of incorporation, by-laws and relevant provisions of law. Verily, the authority of the board of
directors is restricted to the management of the regular business affairs of the corporation, unless more extensive power is expressly
conferred.
The raison detre behind the conferment of corporate powers on the board of directors is not lost on the Court. Indeed, the concentration in
the board of the powers of control of corporate business and of appointment of corporate officers and managers is necessary for efficiency
in any large organization. Stockholders are too numerous, scattered and unfamiliar with the business of a corporation to conduct its
business directly. And so the plan of corporate organization is for the stockholders to choose the directors who shall control and supervise
the conduct of corporate business.[13]
In the present case, the boards creation of the positions of Assistant Vice Presidents for Corporate Planning, Operations, Finance and
Administration, and those of the Special Assistants to the President and the Board Chairman, was in accordance with the regular business
operations of Filport as it is authorized to do so by the corporations by-laws, pursuant to the Corporation Code.
The election of officers of a corporation is provided for under Section 25 of the Code which reads:
Sec. 25. Corporate officers, quorum. Immediately after their election, the directors of a corporation must
formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a
director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be
provided for in the by-laws. (Emphasis supplied.)
In turn, the amended Bylaws of Filport[14] provides the following:
Officers of the corporation, as provided for by the by-laws, shall be elected by the board of
directors at their first meeting after the election of Directors. xxx
The officers of the corporation shall be a Chairman of the Board, President, a Vice-President, a
Secretary, a Treasurer, a General Manager and such other officers as the Board of Directors may from time to
time provide, and these officers shall be elected to hold office until their successors are elected and
qualified. (Emphasis supplied.)
Likewise, the fixing of the corresponding remuneration for the positions in question is provided for in the same by-laws of the
corporation, viz:
xxx The Board of Directors shall fix the compensation of the officers and agents of the
corporation. (Emphasis supplied.)
Unfortunately, the bylaws of the corporation are silent as to the creation by its board of directors of an executive committee. Under
Section 35[15] of the Corporation Code, the creation of an executive committee must be provided for in the bylaws of the corporation.
Notwithstanding the silence of Filports bylaws on the matter, we cannot rule that the creation of the executive committee by
the board of directors is illegal or unlawful. One reason is the absence of a showing as to the true nature and functions of said executive
committee considering that the executive committee, referred to in Section 35 of the Corporation Code which is as powerful as the board of
directors and in effect acting for the board itself, should be distinguished from other committees which are within the competency of the
board to create at anytime and whose actions require ratification and confirmation by the board. [16] Another reason is that, ratiocinated by
both the two (2) courts below, the Board of Directors has the power to create positions not provided for in Filports bylaws since the board is
the corporations governing body, clearly upholding the power of its board to exercise its prerogatives in managing the business affairs of
the corporation.
As well, it may not be amiss to point out that, as testified to and admitted by petitioner Cruz himself, it was during his incumbency as Filport
president that the executive committee in question was created, and that he was even the one who moved for the creation of the positions
of the AVPs for Operations, Finance and Administration. By his acquiescence and/or ratification of the creation of the aforesaid offices, Cruz
is virtually precluded from suing to declare such acts of the board as invalid or illegal. And it makes no difference that he sues in behalf of
himself and of the other stockholders. Indeed, as his voice was not heard in protest when he was still Filports president, raising a hue and
cry only now leads to the inevitable conclusion that he did so out of spite and resentment for his non-reelection as president of the
corporation.
With regard to the increased emoluments of the Board Chairman, Vice-President, Treasurer and Assistant General Manager which are
supposedly disproportionate to the volume and nature of their work, the Court, after a judicious scrutiny of the increase vis--vis the value of
the services rendered to the corporation by the officers concerned, agrees with the findings of both the trial and appellate courts as to the
reasonableness and fairness thereof.
Continuing, petitioners contend that the CA did not appreciate their evidence as to the alleged acts of mismanagement by the then
incumbent board. A perusal of the records, however, reveals that petitioners merely relied on the testimony of Cruz in support of their bold
claim of mismanagement. To the mind of the Court, Cruz testimony on the matter of mismanagement is bereft of any foundation. As it
were, his testimony consists merely of insinuations of alleged wrongdoings on the part of the board. Without more, petitioners posture of
mismanagement must fall and with it goes their prayer to hold the respondents liable therefor.
But even assuming, in gratia argumenti, that there was mismanagement resulting to corporate damages and/or business losses, still the
respondents may not be held liable in the absence, as here, of a showing of bad faith in doing the acts complained of.
If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence, directors and/or officers are not
liable.[17] For them to be held accountable, the mismanagement and the resulting losses on account thereof are not the only matters to be
proven; it is likewise necessary to show that the directors and/or officers acted in bad faith and with malice in doing the assailed acts. Bad
faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of a
wrong, a breach of a known duty through some motive or interest or ill-will partaking of the nature of fraud. [18] We have searched the
records and nowhere do we find a dishonest purpose or some moral obliquity, or conscious doing of a wrong on the part of the respondents
that partakes of the nature of fraud.
We thus extend concurrence to the following findings of the CA, affirmatory of those of the trial court:
xxx As a matter of fact, it was during the term of appellee Cruz, as president and director, that
the executive committee was created. What is more, it was appellee himself who moved for the creation of
the positions of assistant vice presidents for operations, for finance, and for administration. He should not be
heard to complain thereafter for similar corporate acts.
The increase in the salaries of the board chairman, president, treasurer, and assistant general manager are
indeed reasonable enough in view of the responsibilities assigned to them, and the special knowledge
required, to be able to effectively discharge their respective functions and duties.
Surely, factual findings of trial courts, especially when affirmed by the CA, are binding and conclusive on this Court.
There is, however, a factual matter over which the CA and the trial court parted ways. We refer to the accommodation angle.
The trial court was with petitioner Cruz in saying that the creation of the positions of the three (3) AVPs for Corporate Planning, Special
Assistant to the President and Special Assistant to the Board Chairman, each with a salary of P13,050.00 a month, was merely for
accommodation purposes considering that Filport is not a big corporation requiring multiple executive positions. Hence, the trial courts
order for said officers to return the amounts they received as compensation.
On the other hand, the CA took issue with the trial court and ruled that Cruzs accommodation theory is not based on facts and without any
evidentiary substantiation.
We concur with the line of the appellate court. For truly, aside from Cruzs bare and self-serving testimony, no other evidence was presented
to show the fact of accommodation. By itself, the testimony of Cruz is not enough to support his claim that accommodation was the
underlying factor behind the creation of the aforementioned three (3) positions.
It is elementary in procedural law that bare allegations do not constitute evidence adequate to support a conclusion. It is basic in the rule of
evidence that he who alleges a fact bears the burden of proving it by the quantum of proof required. Bare allegations, unsubstantiated by
evidence, are not equivalent to proof under the Rules of Court. [19] The party having the burden of proof must establish his case by a
preponderance of evidence.[20]
would be futile because they are the ones to be sued, or because they hold control of the corporation. [22] In such actions, the corporation is
the real party-in-interest while the suing stockholder, in behalf of the corporation, is only a nominal party. [23]
Here, the action below is principally for damages resulting from alleged mismanagement of the affairs of Filport by its directors/officers, it
being alleged that the acts of mismanagement are detrimental to the interests of Filport. Thus, the injury complained of primarily pertains
to the corporation so that the suit for relief should be by the corporation. However, since the ones to be sued are the directors/officers of
the corporation itself, a stockholder, like petitioner Cruz, may validly institute a derivative suit to vindicate the alleged corporate injury, in
which case Cruz is only a nominal party while Filport is the real party-in-interest. For sure, in the prayer portion of petitioners petition
before the SEC, the reliefs prayed were asked to be made in favor of Filport.
Besides, the requisites before a derivative suit can be filed by a stockholder are present in this case, to wit:
a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the
number of his shares not being material;
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the
appropriate relief but the latter has failed or refused to heed his plea; and
c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being
caused to the corporation and not to the particular stockholder bringing the suit. [24]
Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he sought without success to have its board of directors
remedy what he perceived as wrong when he wrote a letter requesting the board to do the necessary action in his complaint; and (3) the
alleged wrong was in truth a wrong against the stockholders of the corporation generally, and not against Cruz or Minterbro, in particular.
In the end, it is Filport, not Cruz which directly stands to benefit from the suit. And while it is true that the complaining stockholder must
show to the satisfaction of the court that he has exhausted all the means within his reach to attain within the corporation itself the redress
for his grievances, or actions in conformity to his wishes, nonetheless, where the corporation is under the complete control of the principal
defendants, as here, there is no necessity of making a demand upon the directors. The reason is obvious: a demand upon the board to
institute an action and prosecute the same effectively would have been useless and an exercise in futility. In fine, we rule and so hold that
the petition filed with the SEC at the instance of Cruz, which ultimately found its way to the RTC of Davao City as Civil Case No. 28,552-2001,
is a derivative suit of which Cruz has the necessary legal standing to institute.
WHEREFORE, the petition is DENIED and the challenged decision of the CA is AFFIRMED in all respects.
No pronouncement as to costs.
SO ORDERED.

Besides, the determination of the necessity for additional offices and/or positions in a corporation is a management prerogative which
courts are not wont to review in the absence of any proof that such prerogative was exercised in bad faith or with malice.
Indeed, it would be an improper judicial intrusion into the internal affairs of Filport were the Court to determine the propriety or
impropriety of the creation of offices therein and the grant of salary increases to officers thereof. Such are corporate and/or business
decisions which only the corporations Board of Directors can determine.
So it is that in Philippine Stock Exchange, Inc. v. CA,[21] the Court unequivocally held:
Questions of policy or of management are left solely to the honest decision of the board as the
business manager of the corporation, and the court is without authority to substitute its judgment for that of
the board, and as long as it acts in good faith and in the exercise of honest judgment in the interest of the
corporation, its orders are not reviewable by the courts.
In a last-ditch attempt to salvage their cause, petitioners assert that the CA went beyond the issues raised in the court of origin when it
ruled on the absence of receipt of actual payment of the salaries/emoluments pertaining to the positions of Assistant Vice-President for
Corporate Planning, Special Assistant to the Board Chairman and Special Assistant to the President. Petitioners insist that the issue of
nonpayment was never raised by the respondents before the trial court, as in fact, the latter allegedly admitted the same in their Answer
With Counterclaim.
We are not persuaded.

By claiming that Filport suffered damages because the directors appointed to the assailed positions are not doing anything to deserve their
compensation, petitioners are saddled with the burden of proving that salaries were actually paid. Since the trial court, in effect, found that
the petitioners successfully proved payment of the salaries when it directed the reimbursements of the same, respondents necessarily have
to raise the issue on appeal. And the CA rightly resolved the issue when it found that no evidence of actual payment of the salaries in
question was actually adduced. Respondents alleged admission of the fact of payment cannot be inferred from a reading of the pertinent
portions of the parties respective initiatory pleadings. Respondents allegations in their Answer With Counterclaim that the officers
corresponding to the positions created performed the work called for in their positions or deserve their compensation, cannot be
interpreted to mean that they were actually paid such compensation. Directly put, the averment that one deserves ones compensation
does not necessarily carry the implication that such compensation was actually remitted or received. And because payment was not duly
proven, there is no evidentiary or factual basis for the trial court to direct respondents to make reimbursements thereof to the corporation.
This brings us to the respondents claim that the case filed by the petitioners before the SEC, which eventually landed in RTC-
Davao City as Civil Case No. 28,552-2001, is not a derivative suit, as maintained by the petitioners.

We sustain the petitioners.

Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of directors or
trustees. But an individual stockholder may be permitted to institute a derivative suit in behalf of the corporation in order to protect or
vindicate corporate rights whenever the officials of the corporation refuse to sue, or when a demand upon them to file the necessary action
G.R. No. 85339. August 11, 1989.*
SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS ANGELES, petitioners, vs. ERNEST KAHN, ANDRES SORIANO III, BENIGNO
TODA, JR., ANTONIO ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO, RALPH KARR and RAMON DEL ROSARIO,
JR., respondents.
Actions; Jurisdiction; De los Angeles’ complaint does not involve any property illegally acquired or misappropriated by Marcos, et al., or “any
incidents arising from, incidental to or related to” any case involving such property but assets indisputably belonging to San Miguel
Corporation.—The subject matter of his complaint in the SEC does not therefore fall within the ambit of this Court’s Resolution of August
10, 1988 on the cases just mentioned, to the effect that, citing PCGG v. Peña, et al, “all cases of the Commission regarding ‘the funds,
moneys, assets, and properties illegally acquired or misappropriated by former President Ferdinand Marcos, Mrs. Imelda Romualdez
Marcos, their close relatives, Subordinates, Business Associates, Dummies, Agents, or Nominees, whether civil or criminal, are lodged within
the exclusive and original jurisdiction of the Sandiganbayan,’ and all incidents arising from, incidental to, or related to, such cases
necessarily fall likewise under the Sandiganbayan’s exclusive and original jurisdiction, subject to review on certiorari exclusively by the
Supreme Court.” His complaint does not involve any property illegally acquired or misappropriated by Marcos, et al., or “any incidents
arising from, incidental to, or related to” any case involving such property, but assets indisputably belonging to San Miguel Corporation
which were, in his (de los Angeles’) view, being illicitly committed by a majority of its board of directors to answer for loans assumed by a
sister corporation, Neptunia Co., Ltd.
Same; Same; Same; The contention therefore that in view of this Court’s ruling as regards the sequestered SMC stock, the SEC has no
jurisdiction over the de los Angeles complaint cannot be sustained and must be rejected.—De los Angeles’ complaint, in fine, is confined to
the issue of the validity of the assumption by the corporation of the indebtedness of Neptunia Co., Ltd., allegedly for the benefit of certain
of its officers and stockholders, an issue evidently distinct from, and not even remotely requiring inquiry into the matter of whether or not
the 33,133,266 SMC shares sequestered by the PCGG belong to Marcos and his cronies or dummies (on which issue, as already pointed out,
de los Angeles, in common with the PCGG, had in fact espoused the affirmative). De los Angeles’ dispute, as stockholder and director of
SMC, with other SMC directors, an intra-corporate one, to be sure, is of no concern to the Sandiganbayan, having no relevance whatever to
the ownership of the sequestered stock. The contention, therefore, that in view of this Court’s ruling as regards the sequestered SMC stock
above adverted to, the SEC has no jurisdiction over the de los Angeles complaint, cannot be sustained and must be rejected. The dispute
concerns acts of the board of directors claimed to amount to fraud and misrepresentation which may be detrimental to the interest of the
stockholders, or is one arising out of intra-corporate relations between and among stockholders, or between any or all of them and the
corporation of which they are stockholders.
Corporation Law; Derivative Suit; Theory that de los Angeles has no personality to bring suit in behalf of the corporation cannot be
sustained.—The theory that de los Angeles has no personality to bring suit in behalf of the corporation—because his stockholding is
minuscule, and there is a “conflict of interest” between him and the PCGG—cannot be sustained, either.
Same; Same; Same; The implicit argument that a stockholder to be considered as qualified to bring a derivative suit must hold a substantial
or significant block of stock finds no support whatever in the law; Requisites for a derivative suit.—It is claimed that since de los Angeles’ 20
shares (owned by him since 1977) represent only .00001644% of the total number of outstanding shares (121,645,860), he cannot be
deemed to fairly and adequately represent the interests of the minority stockholders. The implicit argument—that a stockholder, to be
considered as qualified to bring a derivative suit, must hold a substantial or significant block of stock—finds no support whatever in the law.
The requisites for a derivative suit are as follows: a) the party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material; b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand
on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and c) the cause of action actually
devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder
bringing the suit.
Same; Same; Same; Same; Bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to bring a
derivative action for the benefit of the corporation; Number of shares is immaterial.—The bona fide ownership by a stockholder of stock in
his own right suffices to invest him with standing to bring a derivative action for the benefit of the corporation. The number of his shares is
immaterial since he is not suing in his own behalf, or for the protection or vindication of his own particular right, or the redress of a wrong
committed against him, individually, but in behalf and for the benefit of the corporation.
Same; Same; Same; Theory of conflict-of-interest cannot be upheld.—Neither can the “conflict-of-interest” theory be upheld. From the
conceded premise that de los Angeles now sits in the SMC Board of Directors by the grace of the PCGG, it does not follow that he is legally
obliged to vote as the PCGG would have him do, that he cannot legitimately take a position inconsistent with that of the PCGG, or that, not
having been elected by the minority stockholders, his vote would necessarily never consider the latter’s interests. The proposition is not
only logically indefensible, non sequitur, but also constitutes an erroneous conception of a director’s role and function, it being plainly a
director’s duty to vote according to his own independent judgment and his own conscience as to what is in the best interests of the
company. Moreover, it is undisputed that apart from the qualifying shares given to him by the PCGG, he owns 20 shares in his own right, as
regards which he cannot from any aspect be deemed to be “beholden” to the PCGG, his ownership of these shares being precisely what he
invokes as the source of his authority to bring the derivative suit.
Same; Same; Same; Argument that the PCGG has no power to vote sequestered shares of stock as an act of dominion but only in pursuance
of its power of administration is strained and of no merit.—It is also theorized, on the authority of the BASECO decision, that the PCGG has
no power to vote sequestered shares of stock as an act of dominion but only in pursuance to its power of administration. The inference is
that the PCGG’s act of voting the stock to elect de los Angeles to the SMC Board of Directors was unauthorized and void; hence, the latter
could not bring suit in the corporation’s behalf. The argument is strained and obviously of no merit. As already more than plainly indicated,
it was not necessary for de los Angeles to be a director in order to bring a derivative action; all he had to be was a stockholder, and that he
was—owning in his own right 20 shares of stock, a fact not disputed by the respondents.
Same; Same; Same; Same; Nothing in the Baseco decision which can be interpreted as ruling that sequestered stock may not under any
circumstances be voted by the PCGG to elect a director in the company in which such stock is held.—Nor is there anything in the Baseco
decision which can be interpreted as ruling that sequestered stock may not under any circumstances be voted by the PCGG to elect a
director in the company in which such stock is held. On the contrary, that it held such act permissible is evident from the context of its
reference to the Presidential Memorandum of June 26, 1986 authorizing the PCGG, “pending the outcome of proceedings to determine the
ownership of x x sequestered shares of stock,” “to vote such shares x x at all stockholders’ meetings called for the election of directors x x”
the only caveat being that the stock is not to be voted simply because the power to do so exists, whether it be to oust and replace directors
or to effect substantial changes in corporate policy, programs or practice, but only “for demonstrably weighty and defensible grounds” or
“when essential to prevent disappearance or wastage of corporate property.”
On December 15, 1983, 33,133,266 shares of the outstanding capital stock of the San Miguel Corporation were acquired 1 by fourteen (14)
other corporations, 2 and were placed under a Voting Trust Agreement in favor of the late Andres Soriano, Jr. When the latter died, Eduardo
M. Cojuangco, Jr. was elected Substitute Trustee on April 9, 1984 with power to delegate the trusteeship in writing to Andres Soriano
III. 3 Shortly after the Revolution of February, 1986, Cojuangco left the country amid "persistent reports" that "huge and unusual cash
disbursements from the funds of SMC" had been irregularly made, and the resources of the firm extensively used in support of the
candidacy of Ferdinand Marcos during the snap elections in February, 1986 . 4
On March 26, 1986, an "Agreement" was executed between Andres Soriano III, as "Buyer," and the 14 corporations, as "Sellers," for the
purchase by Soriano, "for himself and as agent of several persons," of the 33,133,266 shares of stock at the price of P100.00 per share, or
"an aggregate sum of Three Billion Three Hundred Thirteen Million Three Hundred Twenty Six Thousand Six Hundred (P3,313,326,600.00)
Pesos payable in specified installments. 5 The Agreement revoked the voting trust above mentioned, and expressed the desire of the 14
corporations to sell the shares of stock "to pay certain outstanding and unpaid debts," and Soriano's own wish to purchase the same "in
order to institutionalize and stabilize the management of the COMPANY in .. (himself) and the professional officer corps, mandated by the
COMPANY's By- laws, and to direct the COMPANY towards giving the highest priority to its principal products and extensive support to
agriculture programme of' the Government ... 6 Actually, according to Soriano and the other private respondents, the buyer of the shares
was a foreign company, Neptunia Corporation Limited (of Hongkong, a wholly owned subsidiary of San Miguel International which is, in
turn, a wholly owned subsidiary of San Miguel Corporation; 7 and it was Neptunia which on or about April 1, 1986 had made the down
payment of P500,000,000.00, "from the proceeds of certain loans". 8
At this point the 33,133,266 SMC shares were sequestered by the Presidential Commission on Good Government (PCGG), on the ground
that the stock belonged to Eduardo Cojuangco, Jr., allegedly a close associate and dummy of former President Marcos, and the sale thereof
was "in direct contravention of .. Executive Orders Numbered 1 and 2 (.. dated February 28, 1986 and March 12, 1986, respectively) which
prohibit .. the transfer, conveyance, encumbrance, concealment or liquidation of assets and properties acquired by former President
Ferdinand Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates. 9 The
sequestration was subsequently lifted, and the sale allowed to proceed, on representations by San Miguel Corporation x x that the shares
were 'owned by 1.3 million coconut farmers;' the seller corporations were 'fully owned' by said farmers and Cojuangco owned only 2 shares
in one of the companies, etc. However, the sequestration was soon re-imposed by Order of the PCGG dated May 19, 1986 .. The same order
forbade the SMC corporate Secretary to register any transfer or encumbrance of any of the stock without the PCGG's prior written
authority. 10
San Miguel promptly suspended payment of the other installments of the price to the fourteen (14) seller corporations. The latter as
promptly sued for rescission and damages.11
On June 4,1986, the PCGG directed San Miguel Corporation"to issue qualifying shares" in the corporation to seven (7) individuals, including
Eduardo de los Angeles, "from the sequestered shares registered as street certificates under the control of Anscor- Hagedorn Securities,
Inc.," to "be held in trust by .. (said seven [7] persons) for the benefit of Anscor-Hagedom Securities, Inc. and/or whoever shall finally be
determined to be the owner/owners of said shares. 12
In December, 1986, the SMC Board, by Resolution No. 86-122, "decided to assume the loans incurred by Neptunia for the down payment
((P500M)) on the 33,133,266 shares." The Board opined that there was "nothing illegal in this assumption (of liability for the loans)," since
Neptunia was "an indirectly wholly owned subsidiary of SMC," there "was no additional expense or exposure for the SMC Group, and there
were tax and other benefits which would redound to the SMC group of companies. 13
However, at the meeting of the SMC Board on January 30, 1987, Eduardo de los Angeles, one of the PCGG representatives in the SMC
board, impugned said Resolution No. 86-12-2, denying that it was ever adopted, and stating that what in truth was agreed upon at the
meeting of December 4, 1986 was merely a "further study" by Director Ramon del Rosario of a plan presented by him for the assumption of
the loan. De los Angeles also pointed out certain "deleterious effects" thereof. He was however overruled by private respondents. 14 When
his efforts to obtain relief within the corporation and later the PCGG proved futile, he repaired to the Securities and Exchange Commission
(SEC).lâwphî1.ñèt
He filed with the SEC in April, 1987, what he describes as a derivative suit in behalf of San Miguel Corporation, against ten (10) of the
fifteen-member Board of Directors who had "either voted to approve and/or refused to reconsider and revoke Board Resolution No. 86-12-
2." 15 His Amended Petition in the SEC recited substantially the foregoing antecedents and the following additional facts, to wit:
a) On April 1, 1986 Soriano, Kahn and Roxas, as directors of' Neptunia Corporation, Ltd., had met and passed a
resolution authorizing the company to borrow up to US $26,500,000.00 from the Hongkong & Shanghai
Banking Corporation, Hongkong "to enable the Soriano family to initiate steps and sign an agreement for the
purchase of some 33,133,266 shares of San ,Miguel Corporation. 16
 b) The loan of $26,500,000.00 was obtained on the same day, the corresponding loan agreement having been
signed for Neptunia by Ralph Kahn and Carl Ottiger. At the latter's request, the proceeds of the loan were
deposited in different banks 17 for the account of "Eduardo J. Soriano".
c) Three (3) days later, on April 4, 1986, Soriano III sent identical letters to the stockholders of San Miguel
Corporation, 18 inter alia soliciting their proxies and announcing that "the Soriano family, friends and affiliates
acquired a considerable block of San Miguel Corporation shares only a few days ago .., the transaction ..
(having been) made through the facilities of the Manila Stock Exchange, and 33,133,266 shares .. (having
thereby been) purchased for the aggregate price of' P3,313,326,600.00." The letters also stated that the
purchase was "an exercise of the Sorianos' right to buy back the same number of shares purchased in 1983 by
the .. (14 seller corporations)."
d) In implementing the assumption of the Neptunia loan and the purchase agreement for which said loan was
obtained, which assumption constituted an improper use of corporate funds to pay personal obligations of
Andres Soriano III, enabling him; to purchase stock of the corporation using funds of' the corporation itself,
the respondents, through various subsequent machinations and manipulations, for interior motives and in
breach of fiduciary duty, compound the damages caused San Miguel Corporation by, among other things: (1)
agreeing to pay a higher price for the shares than was originally covenanted in order to prevent a rescission of
the purchase agreement by the sellers; (2) urging UCPB to accept San Miguel Corporation and Neptunia as
buyers of the shares, thereby committing the former to the purchase of its own shares for at least 25% higher
than the price at which they were fairly traded in the stock exchanges, and shifting to said corporations the
personal obligations of Soriano III under the purchase agreement; and (3) causing to be applied to the part
payment of P1,800,000.00 on said purchase, various assets and receivables of San Miguel Corporation.
The complaint closed with a prayer for injunction against the execution or consummation of any agreement causing San Miguel Corporation
to purchase the shares in question or entailing the use of its corporate funds or assets for said purchase, and against Andres Soriano III from
further using or disposing of the funds or assets of the corporation for his obligations; for the nullification of the SMC Board's resolution of
April 2, 1987 making San Miguel Corporation a party to the purchase agreement; and for damages.
Ernest Kahn moved to dismiss de los Angeles' derivative suit on two grounds, to wit:
1 De los Angeles has no legal capacity to sue because —
a) having been merely imposed by the PCGG as a
director on San Miguel, he has no standing to bring
a minority derivative suit;
b) he personally holds only 20 shares and hence
cannotfairly and adequately represent the minority
stockholders of the corporation;
c) he has not come to court with clean hands; and
2. The Securities & Exchange Commission has no jurisdiction over the controversy because the matters
involved are exclusively within the business judgment of the Board of Directors. 19
Kahn's motion to dismiss was subsequently adopted by his correspondents . 20
The motion to dismiss was denied by SEC Healing Officer Josefina L. Pasay Paz, by order dated September 4, 1987. 21 In her view —
1) the fact that de los Angeles was a PCGG nominee was irrelevant because in law, ownership of even one
share only, sufficed to qualify a person to bring a derivative suit;
2) it is indisputable that the action had been brought by de los Angeles for the benefit of the corporation and
all the other stockholders;
3) he was a stockholder at the time of the commission of the acts complained of, the number of shares owned
by him being to repeat, immaterial;
4) there is no merit in the assertion that he had come to Court with unclean hands, it not having been shown
that he participated in the act complained of or ratified the same; and
5) where business judgment transgresses the law, the securities and Exchange Commission always has
competence to inquire thereinto.
Kahn filed a petition for certiorari and prohibition with the Court of Appeals, seeking the annulment of this adverse resolution of the SEC
Hearing Officer and her perpetual inhibition from proceeding with SEC Case No. 3152.
A Special Division of that Court sustained him, upon a vote of three-to-two. The majority 22 ruled that de los Angeles had no egal capacity to
institute the derivative suit, a conclusion founded on the following propositions:
1) a party "who files a derivative suit should adequately represent the interests of the minority stockholders;"
since "De los Angeles holds 20 shares of stock out of 121,645,860 or 0.00001644% (appearing to be
undisputed), (he) cannot even be remotely said to adequately represent the interests of the minority
stockholders, (e)specially so when .. de los Angeles was put by the PCGG to vote the majority stock," a
situation generating "a genuine conflict of interest;"
2) de los Angeles has not met this conflict-of-interest argument, i.e., that his position as PCGG-nominated
director is inconsistent with his assumed role of representative of minority stockholders; not having been
elected by the minority, his voting would expectedly consider the interest of the entity which placed him in
the board of directors;
3) Baseco v. PCGG, May 27,1987, 23 has laid down the principle that the (a) PCGG cannot exercise acts of
dominion over sequestered property, (b) it has only powers of administration, and (c) its voting of sequestered
stock must be done only pursuant to its power of administration; and
4) de los Angeles' suit is not a derivative suit, a derivative suit being one brought for the benefit of the
corporation.
The dissenting Justices, 24 on the other hand, were of the opinion that the suit had been properly brought by de los Angeles because —
1) the number of shares owned by him was immaterial, he being a stockholder in his own right;
2) he had not voted in favor of the resolution authorizing the purchase of the shares; and
3) even if PCGG was not the owner of the sequestered shares, it had the right to seek the protection of the
interest of the corporation, it having been held that even an unregistered shareholder or an equitable owner
of shares and pledgees of shares may be deemed a shareholder for purposes of instituting a derivative suit.
De los Angeles has appealed to this Court. He prays for reversal of the judgment of the Court of Appeals, imputing to the latter the following
errors:
1) having granted the writ of certiorari despite the fact that Kahn had not first resorted to the plain remedy
available to him, i.e., appeal to the SEC en banc and despite the fact that no question of jurisdiction was
involved;
2) having ruled on Kahn's petition on the basis merely of his factual allegations, although he (de los Angeles)
had disputed them and there had been no trial in the SEC; and
3) having held that he (de los Angeles) could not file a derivative suit as stockholder and/or director of the San
Miguel Corporation.
For their part, and in this Court, the respondents make the following assertions:
1) SEC has no jurisdiction over the dispute at bar which involves the ownership of the 33,133,266 shares of
SMC stock, in light of this Court's Resolution in G.R. Nos. 74910, 5075, 75094, 76397, 79459 and 79520,
promulgated on August 10, 1988; 25
 2) de los Angeles was beholden to the controlling stockholder in the corporation (PCGG), which had "imposed"
him on the corporation; since the PCGG had a clear conflict of interest with the minority, de los Angeles, as
director of the former, had no legal capacity to sue on behalf of the latter;
3) even assuming absence of conflict of interest, de los Angeles does not fairly and adequately represent the
interest of the minority stockholders;
4) the respondents had properly applied for certiorari with the Court of Appeals because —
a) that Court had, by law, exclusive appellate jurisdiction over officers and agencies exercising quasi-judicial
functions, and hence file competence to issue the writ of certiorari;
b) the principle of exhaustion of administrative remedies does not apply since the issue involved is one of law;
c) said respondents had no plain, speedy and adequate remedy within SEC;
d) the Order of the SEC Investigating Officer — denying the motion to dismiss — was issued without or in
excess of jurisdiction, hence was correctly nullified by the Court of Appeals; and
e) de los Angeles had not raised the issue of absence of a motion for reconsideration by respondents in the
SEC case; in any event, such a motion was unnecessary in the premises.
De los Angeles' Reply seeks to make the following points:
1) since the law lays down three (3) requisites for a derivative suit, viz:
a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of,
b) he has exhausted intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to
heed his plea; and
c) c)the cause of action actually devolves on the corporation, the ,wrongdoing or
harm having been caused to the corporation and not to .the particular
stockholder bringing the suit;
and since (1) he is admittedly the owner of 20 shares of SMC stock in his own right, having acquired those shares as early as 1977, (2) he
had sought without success to have the board of' directors remedy with wrong, and (3) that wrong was in truth a 'wrong against the
stockholders of the corporation, generally, ,and not against him individually — and it was the corporation, and not he, particularly, that
would be entitled to the appropriate' relief — the propriety of his suit cannot be gainsaid;
2) Kahn had not limited himself to questions of law in the proceedings in the Court of Appeals and hence could
not claim exclusion from the scope of the doctrine of exhaustion of remedies; moreover, Rule 65, invoked by
him, bars a resort to certiorari. where a plain, speedy and accurate remedy was available to him in this case, to
wit, a motion for reconsideration before the Sec en banc and, contrary to the respondent's claim, De Los
Angeles had in fact asserted to this propositions before the Appellate Tribunal; and
3) the respondent had not raised the issue of jurisdiction before the Court of Appeals; indeed, they admit to
their Comment that that
issue has not yet been resolved by the SEC," be this as it may, the derivative suit does not fall within the
BASECO doctrine since it does not involve any question of ownership of the 33,133,266 sequestered SMC
shares but rather, the validity of the resolution of the board of directors for the assumption by the
corporation, for the benefit of certain of its officers and stockholders, of liability for loans contracted by
another corporation, which is an intra-corporate dispute within the exclusive jurisdiction of the SEC.
1. De los Angeles is not opposed to the asserted position of the PCGG that the sequestered SMC shares of
stock belong to Ferdinand Marcos and/or his dummies and/or cronies. His consent to sit in the board as
nominee of PCGG unquestionably indicates his advocacy of the PCGG position. He does not here seek, and his
complaint in the SEC does not pray for, the annulment of the purchase by SMC of the stock in question, or
even the subsequent purchase of the same stock by others 26 which proposition was challenged by (1) one
Evio, in SEC Case No. 3000; (2) by the 14 corporations which sold the stock to SMC, in Civil Case No. 13865 of
the Manila RTC, said cases having later become subject of G.R. No. 74910 of this Court; (3) by Neptunia, SMC,
and others, in G.R. No. 79520 of this Court; and (4) by Eduardo Cojuangco and others in Civil Case No. 16371 of
the RTC, Makati, [on the theory that the sequestered stock in fact belonged to coconut planters and oil
millers], said case later having become subject of G.R. No. 79459 of this court .27 Neither does de los Angeles
impugn, obviously, the right of the PCGG to vote the sequestered stock thru its nominee directors — as was
done by United Coconut Planters Bank and the 14 seller corporations (in SEC Case No. 3005, later consolidated
with SEC Case No. 3000 above mentioned, these two (2) cases later having become subject of G.R.No. 76397)
as well as by one Clifton Ganay, a UCPB stockholder (in G.R. No. 75094 of this Court).lâwphî1.ñèt 28
The subject matter of his complaint in the SEC does not therefore fall within the ambit of this Court's Resolution of August 10, 1988 on the
cases just mentioned, to the effect that, citing PCGG v. Pena, et al 29 an cases of the Commission regarding 'the funds, moneys, assets, and
properties illegally acquired or misappropriated by former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their close
relatives, Subordinates, Business Associates, Dummies, Agents, or Nominees, whether civil or criminal, are lodged within the exclusive and
original jurisdiction of the Sandiganbayan,' and all incidents arising from, incidental to, or related to, such cases necessarily fall likewise
under the Sandiganbayan's exclusive and original jurisdiction, subject to review on certiorari exclusively by the Supreme Court." His
complaint does not involve any property illegally acquired or misappropriated by Marcos, et al., or "any incidents arising from, incidental to,
or related to" any case involving such property, but assets indisputably belonging to San Miguel Corporation which were, in his (de los
Angeles') view, being illicitly committed by a majority of its board of directors to answer for loans assumed by a sister corporation, Neptunia
Co., Ltd.
De los Angeles' complaint, in fine, is confined to the issue of the validity of the assumption by the corporation of the indebtedness of
Neptunia Co., Ltd., allegedly for the benefit of certain of its officers and stockholders, an issue evidently distinct from, and not even
remotely requiring inquiry into the matter of whether or not the 33,133,266 SMC shares sequestered by the PCGG belong to Marcos and his
cronies or dummies (on which- issue, as already pointed out, de los Angeles, in common with the PCGG, had in fact espoused the
affirmative). De los Angeles' dispute, as stockholder and director of SMC, with other SMC directors, an intra-corporate one, to be sure, is of
no concern to the Sandiganbayan, having no relevance whatever to the ownership- of the sequestered stock. The contention, therefore,
that in view of this Court's ruling as regards the sequestered SMC stock above adverted to, the SEC has no jurisdiction over the de los
Angeles complaint, cannot be sustained and must be rejected. The dispute concerns acts of the board of directors claimed to amount to
fraud and misrepresentation which may be detrimental to the interest of the stockholders, or is one arising out of intra-corporate relations
between and among stockholders, or between any or all of them and the corporation of which they are stockholders .30
2. The theory that de los Angeles has no personality to bring suit in behalf of the corporation — because his
stockholding is minuscule, and there is a "conflict of interest" between him and the PCGG — cannot be
sustained, either.
It is claimed that since de los Angeles 20 shares (owned by him since 1977) represent only. 00001644% of the total number of outstanding
shares (1 21,645,860), he cannot be deemed to fairly and adequately represent the interests of the minority stockholders. The implicit
argument — that a stockholder, to be considered as qualified to bring a derivative suit, must hold a substantial or significant block of stock
— finds no support whatever in the law. The requisites for a derivative suit 31 are as follows:
a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the
number of his shares not being material; 32
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the
appropriate relief but the latter has failed or refused to heed his plea; 33 and
c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being
caused to the corporation and not to the particular stockholder bringing the suit. 34
The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to bring a derivative action for the
benefit of the corporation. The number of his shares is immaterial since he is not suing in his own behalf, or for the protection or vindication
of his own particular right, or the redress of a wrong committed against him, individually, but in behalf and for the benefit of the
corporation.
3. Neither can the "conflict-of-interest" theory be upheld. From the conceded premise that de los Angeles now
sits in the SMC Board of Directors by the grace of the PCGG, it does not follow that he is legally obliged to vote
as the PCGG would have him do, that he cannot legitimately take a position inconsistent with that of the
PCGG, or that, not having been elected by the minority stockholders, his vote would necessarily never
consider the latter's interests. The proposition is not only logically indefensible, non sequitur, but also
 constitutes an erroneous conception of a director's role and function, it being plainly a director's duty to vote
according to his own independent judgment and his own conscience as to what is in the best interests of the
company. Moreover, it is undisputed that apart from the qualifying shares given to him by the PCGG, he owns
20 shares in his own right, as regards which he cannot from any aspect be deemed to be "beholden" to the
PCGG, his ownership of these shares being precisely what he invokes as the source of his authority to bring the
derivative suit.

4. It is also theorized, on the authority of the BASECO decision, that the PCGG has no power to vote
sequestered shares of stock as an act of dominion but only in pursuance — to its power of administration. The
inference is that the PCGG's act of voting the stock to elect de los Angeles to the SMC Board of Directors was
unauthorized and void; hence, the latter could not bring suit in the corporation's behalf. The argument is
strained and obviously of no merit. As already more than plainly indicated, it was not necessary for de los
Angeles to be a director in order to bring a derivative action; all he had to be was a stockholder, and that he
was owning in his own right 20 shares of stock, a fact not disputed by the respondents.

Nor is there anything in the Baseco decision which can be interpreted as ruling that sequestered stock may not under any circumstances be
voted by the PCGG to elect a director in the company in which such stock is held. On the contrary, that it held such act permissible is
evident from the context of its reference to the Presidential Memorandum of June 26, 1986 authorizing the PCGG, "pending the outcome of
proceedings to determine the ownership of .. sequestered shares of stock,"'to vote such shares .. at all stockholders' meetings called for the
election of directors ..," the only caveat being that the stock is not to be voted simply because the power to do so exists, whether it be to
oust and replace directors or to effect substantial changes in corporate policy, programs or practice, but only "for demonstrably weighty
and defensible grounds" or "when essential to prevent disappearance or wastage of corporate property."

The issues raised here do not peremptorily call for a determination of whether or not in voting petitioner de los Angeles to the San Miguel
Board, the PCGG kept within the parameters announced in Baseco; and absent any showing to the contrary, consistently with the
presumption that official duty is regularly performed, it must be assumed to have done so.

WHEREFORE, the petition is GRANTED. The appealed decision of the Court of Appeals in CA- G.R. SP No. 12857 — setting aside the order of
September 4, 1987 issued in SEC Case No. 3153 and dismissing said case — is REVERSED AND SET ASIDE. The further disposition in the
appealed decision for the issuance of a writ of preliminary injunction upon the filing and approval of a bond of P500,000.00 by respondent
Ernest Kahn (petitioner in the Appellate Court) is also SET ASIDE, and any writ of injunction issued pursuant thereto is lifted. Costs against
private respondents.

SO ORDERED.
G.R. No. 168863. June 23, 2009.*
HI-YIELD REALTY, INCORPORATED, petitioner, vs. HON. COURT OF APPEALS, HON. CESAR O. UNTALAN, in his capacity as PRESIDING
JUDGE OF RTC-MAKATI, BRANCH 142, HONORIO TORRES & SONS, INC., and ROBERTO H. TORRES, respondents.
Remedial Law; Certiorari; Instances when a Petition for Certiorari is Proper.—A petition for certiorari is proper if a tribunal, board or officer
exercising judicial or quasi-judicial functions acted without or in excess of jurisdiction or with grave abuse of discretion amounting to lack or
excess of jurisdiction and there is no appeal, or any plain, speedy and adequate remedy in the ordinary course of law.
Same; Same; Distinction between a Petition for Certiorari and a Special Civil Action for Certiorari.—In rendering the assailed decision and
resolution, the Court of Appeals was acting under its concurrent jurisdiction to entertain petitions for certiorari under paragraph 2, Section
4 of Rule 65 of the Rules of Court. Thus, if erroneous, the decision and resolution of the appellate court should properly be assailed by
means of a petition for review on certiorari under Rule 45 of the Rules of Court. The distinction is clear: a petition for certiorari seeks to
correct errors of jurisdiction while a petition for review on certiorari seeks to correct errors of judgment committed by the court a quo.
Indeed, this Court has often reminded members of the bench and bar that a special civil action for certiorari under Rule 65 lies only when
there is no appeal nor plain, speedy and adequate remedy in the ordinary course of law.
Same; Same; Circumstances for the extraordinary remedy of certiorari to lie by reason of grave abuse of discretion.—For the extraordinary
remedy of certiorari to lie by reason of grave abuse of discretion, the abuse of discretion must be so patent and gross as to amount to an
evasion of positive duty, or a virtual refusal to perform the duty enjoined or to act in contemplation of law, or where the power is exercised
in an arbitrary and despotic manner by reason of passion and personal hostility.
Corporation Law; Derivative Suits; A derivative action is a suit by a shareholder to enforce a corporate cause of action; In such actions, the
corporation is the real party-in-interest while the suing stockholder, on behalf of the corporation, is only a nominal party.—A derivative
action is a suit by a shareholder to enforce a corporate cause of action. Under the Corporation Code, where a corporation is an injured
party, its power to sue is lodged with its board of directors or trustees. But an individual stockholder may be permitted to institute a
derivative suit on behalf of the corporation in order to protect or vindicate corporate rights whenever the officials of the corporation refuse
to sue, or are the ones to be sued, or hold control of the corporation. In such actions, the corporation is the real party-in-interest while the
suing stockholder, on behalf of the corporation, is only a nominal party.
Same; Same; Requisites Before a Stockholder can File a Derivative Suit.—In the case of Filipinas Port Services, Inc. v. Go, 518 SCRA 453
(2007), we enumerated the foregoing requisites before a stockholder can file a derivative suit: a) the party bringing suit should be a
shareholder as of the time of the act or transaction complained of, the number of his shares not being material; b) he has tried to exhaust
intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to
heed his plea; and, c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the
corporation and not to the particular stockholder bringing the suit.
Same; Same; Not every suit filed on behalf of the corporation is a derivative suit; Requisites for a Derivative Suit to Prosper.—Not every suit
filed on behalf of the corporation is a derivative suit. For a derivative suit to prosper, the minority stockholder suing for and on behalf of the
corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other
stockholders similarly situated who may wish to join him in the suit.
Same; Same; Venue; Venue of Derivative Suits.—As regards the venue of derivative suits, Section 5, Rule 1 of A.M. No. 01-2-04-SC states:
SEC. 5. Venue.—All actions covered by these Rules shall be commenced and tried in the Regional Trial Court which has jurisdiction over the
principal office of the corporation, partnership, or association concerned. Where the principal office of the corporation, partnership or
association is registered in the Securities and Exchange Commission as Metro Manila, the action must be filed in the city or municipality
where the head office is located.
[1] [2]
This is a special civil action for certiorari seeking to nullify and set aside the Decision dated March 10, 2005 and Resolution dated May
26, 2005 of the Court of Appeals in CA-G.R. SP. No. 83919. The appellate court had dismissed the petition for certiorari and prohibition filed
by petitioner and denied its reconsideration.
The antecedent facts of the case are undisputed.
On July 31, 2003, Roberto H. Torres (Roberto), for and on behalf of Honorio Torres & Sons, Inc. (HTSI), filed a Petition for Annulment of Real
Estate Mortgage and Foreclosure Sale[3] over two parcels of land located in Marikina and Quezon City. The suit was filed against Leonora,
Ma. Theresa, Glenn and Stephanie, all surnamed Torres, the Register of Deeds of Marikina and Quezon City, and petitioner Hi-Yield Realty,
Inc. (Hi-Yield). It was docketed as Civil Case No. 03-892 with Branch 148 of the Regional Trial Court (RTC) of Makati City.
On September 15, 2003, petitioner moved to dismiss the petition on grounds of improper venue and payment of insufficient docket
fees. The RTC denied said motion in an Order[4] dated January 22, 2004. The trial court held that the case was, in nature, a real action in the
form of a derivative suit cognizable by a special commercial court pursuant to Administrative Matter No. 00-11-03-SC.[5] Petitioner sought
reconsideration, but its motion was denied in an Order[6] dated April 27, 2004.
Thereafter, petitioner filed a petition for certiorari and prohibition before the Court of Appeals. In a Decision dated March 10, 2005, the
appellate court agreed with the RTC that the case was a derivative suit. It further ruled that the prayer for annulment of mortgage and
foreclosure proceedings was merely incidental to the main action. The dispositive portion of said decision reads:
WHEREFORE, premises considered, this Petition is hereby DISMISSED. However, public
respondent is hereby DIRECTED to instruct his Clerk of Court to compute the properdocket fees and
thereafter, to order the private respondent to pay the same IMMEDIATELY.
SO ORDERED.[7]
Petitioners motion for reconsideration[8] was denied in a Resolution dated May 26, 2005.
Hence, this petition which raises the following issues:
I.
WHETHER THE HONORABLE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION IN NOT DISMISSING THE
CASE AGAINST HI-YIELD FOR IMPROPER VENUE DESPITE FINDINGS BY THE TRIAL COURT THAT THE ACTION IS A
REAL ACTION.
II.
WHETHER THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING THE COMPLAINT AS AGAINST HI-
YIELD EVEN IF THE JOINDER OF PARTIES IN THE COMPLAINT VIOLATED THE RULES ON VENUE.
III.
WHETHER THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE ANNULMENT OF REAL ESTATE
MORTGAGE AND FORECLOSURE SALE IN THE COMPLAINT IS MERELY INCIDENTAL [TO] THE DERIVATIVE SUIT.[9]
The pivotal issues for resolution are as follows: (1) whether venue was properly laid; (2) whether there was proper joinder of parties; and
(3) whether the action to annul the real estate mortgage and foreclosure sale is a mere incident of the derivative suit.
Petitioner imputes grave abuse of discretion on the Court of Appeals for not dismissing the case against it even as the trial court found the
same to be a real action. It explains that the rule on venue under the Rules of Court prevails over the rule prescribing the venue for intra-
corporate controversies; hence, HTSI erred when it filed its suit only in Makati when the lands subjects of the case are
in Marikina and Quezon City. Further, petitioner argues that the appellate court erred in ruling that the action is mainly a derivative suit and
the annulment of real estate mortgage and foreclosure sale is merely incidental thereto. It points out that the caption of the case,
substance of the allegations, and relief prayed for revealed that the main thrust of the action is to recover the lands. Lastly, petitioner
asserts that it should be dropped as a party to the case for it has been wrongly impleaded as a non-stockholder defendant in the intra-
corporate dispute.
On the other hand, respondents maintain that the action is primarily a derivative suit to redress the alleged unauthorized acts of its
corporate officers and major stockholders in connection with the lands. They postulate that the nullification of the mortgage and
foreclosure sale would just be a logical consequence of a decision adverse to said officers and stockholders.
After careful consideration, we are in agreement that the petition must be dismissed.
A petition for certiorari is proper if a tribunal, board or officer exercising judicial or quasi-judicial functions acted without or in excess of
jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction and there is no appeal, or any plain, speedy and
adequate remedy in the ordinary course of law.[10]
Petitioner sought a review of the trial courts Orders dated January 22, 2004 and April 27, 2004 via a petition for certiorari before
the Court of Appeals. In rendering the assailed decision and resolution, the Court of Appeals was acting under its concurrent jurisdiction to
entertain petitions for certiorari under paragraph 2,[11] Section 4 of Rule 65 of the Rules of Court. Thus, if erroneous, the decision and resolution of
the appellate court should properly be assailed by means of a petition for review on certiorari under Rule 45 of the Rules of Court. The distinction
is clear: a petition for certiorari seeks to correct errors of jurisdiction while a petition for review on certiorari seeks to correct errors of judgment
committed by the court a quo.[12] Indeed, this Court has often reminded members of the bench and bar that a special civil action for certiorari
under Rule 65 lies only when there is no appeal nor plain, speedy and adequate remedy in the ordinary course of law.[13] In the case at hand,
petitioner impetuously filed a petition for certiorari before us when a petition for review was available as a speedy and adequate remedy.
Notably, petitioner filed the present petition 58[14] days after it received a copy of the assailed resolution dated May 26, 2005. To our mind, this
belated action evidences petitioners effort to substitute for a lost appeal this petition for certiorari.
 For the extraordinary remedy of certiorari to lie by reason of grave abuse of discretion, the abuse of discretion must be so in the Securities and Exchange Commission as Metro Manila, the action must be filed in the city or
patent and gross as to amount to an evasion of positive duty, or a virtual refusal to perform the duty enjoined or to act in contemplation of municipality where the head office is located.
law, or where the power is exercised in an arbitrary and despotic manner by reason of passion and personal hostility. [15] We find no grave
abuse of discretion on the part of the appellate court in this case.

Thus, the Court of Appeals did not commit grave abuse of discretion when it found that respondents correctly filed the derivative suit
Simply, the resolution of the issues posed by petitioner rests on a determination of the nature of the petition filed by respondents in the
before the Makati RTC where HTSI had its principal office.
RTC. Both the RTC and Court of Appeals ruled that the action is in the form of a derivative suit although captioned as a petition for
annulment of real estate mortgage and foreclosure sale.

A derivative action is a suit by a shareholder to enforce a corporate cause of action.[16] Under the Corporation Code, where a corporation is an injured party, its There being no showing of any grave abuse of discretion on the part of the Court of Appeals the other alleged errors will no longer be
power to sue is lodged with its board of directors or trustees. But an individual stockholder may be permitted to institute a derivative suit on behalf of the passed upon as mere errors of judgment are not proper subjects of a petition for certiorari.
corporation in order to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold control
of the corporation. In such actions, the corporation is the real party-in-interest while the suing stockholder, on behalf of the corporation, is only a nominal
party.[17]
WHEREFORE, the instant petition is hereby DISMISSED. The Decision dated March 10, 2005 and the Resolution dated May 26, 2005 of the
Court of Appeals in CA-G.R. SP. No. 83919 are AFFIRMED.
In the case of Filipinas Port Services, Inc. v. Go,[18] we enumerated the foregoing requisites before a stockholder can file a derivative suit:

No pronouncement as to costs.
a) the party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material;

SO ORDERED.
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of
directors for the appropriate relief but the latter has failed or refused to heed his plea; and

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having
been, or being caused to the corporation and not to the particular stockholder bringing the suit. [19]

Even then, not every suit filed on behalf of the corporation is a derivative suit. For a derivative suit to prosper, the minority stockholder
suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the
corporation and all other stockholders similarly situated who may wish to join him in the suit. [20] The Court finds that Roberto had satisfied
this requirement in paragraph five (5) of his petition which reads:

5. Individual petitioner, being a minority stockholder, is instituting the instant proceeding by

way of a derivative suit to redress wrongs done to petitioner corporation and vindicate corporate rights due to
the mismanagement and abuses committed against it by its officers and controlling stockholders, especially by
respondent Leonora H. Torres (Leonora, for brevity) who, without authority from the Board of Directors,
arrogated upon herself the power to bind petitioner corporation from incurring loan obligations and later
allow company properties to be foreclosed as hereinafter set forth;[21]

Further, while it is true that the complaining stockholder must satisfactorily show that he has exhausted all means to redress his grievances
within the corporation; such remedy is no longer necessary where the corporation itself is under the complete control of the person against
whom the suit is being filed. The reason is obvious: a demand upon the board to institute an action and prosecute the same effectively
would have been useless and an exercise in futility.[22]

Here, Roberto alleged in his petition that earnest efforts were made to reach a compromise among family members/stockholders before he
filed the case. He also maintained that Leonora Torres held 55% of the outstanding shares while Ma. Theresa, Glenn and
Stephanie excluded him from the affairs of the corporation. Even more glaring was the fact that from June 10, 1992, when the first
mortgage deed was executed until July 23, 2002, when the properties mortgaged were foreclosed, the Board of Directors of HTSI did
nothing to rectify the alleged unauthorized transactions of Leonora. Clearly, Roberto could not expect relief from the board.

Derivative suits are governed by a special set of rules under A.M. No. 01-2-04-SC[23] otherwise known as the Interim Rules of Procedure
Governing Intra-Corporate Controversies under Republic Act No. 8799.[24] Section 1,[25] Rule 1 thereof expressly lists derivative suits among
the cases covered by it.

As regards the venue of derivative suits, Section 5, Rule 1 of A.M. No. 01-2-04-SC states:

SEC. 5. Venue. - All actions covered by these Rules shall be commenced and tried in the
Regional Trial Court which has jurisdiction over the principal office of the corporation, partnership, or
association concerned. Where the principal office of the corporation, partnership or association is registered
[No. L-1721. May 19, 1950]
JUAN D. EVANGELISTA ET AL., plaintiffs and appellants, vs. RAFAEL SANTOS, defendant and appellee.
1.PLEADING AND PRACTICE; VENUE; MERE SOJOURNING IN A PLACE DOES NOT MAKE THE LATTER A RESIDENT FOR PURPOSES OF VENUE—
The facts in this case show that the objection to the venue is well-founded. The fact that defendant was sojourning in Pasay at the time he
was served with summons does not make him a resident of that place for purposes of venue.
2.PARTIES; CORPORATION; MISMANAGEMENT BY ITS OFFICER; RIGHT OF STOCKHOLDERS TO BRING SUIT.—The plaintiff stockholders have
brought the action not for the benefit of the corporation but f or their own benefit, since they ask that the def endant make good the losses
occasioned by his mismanagement and pay to them the value of their respective participation in the corporate assets on the basis of their
respective holdings. Clearly, this cannot be, done until all corporate debts, if there be any, are paid and the existence of the corporation
terminated by the limitation of its charter or by lawful dissolution in view of the provisions of section 16 of the Corporation Law.
This is an action by the minority stockholders of a corporation against its principal officer for damages resulting from his mismanagement of
its affairs and misuse of its assets.
The complaint alleges that plaintiffs are minority stockholders of the Vitali Lumber Company, Inc., a Philippine corporation organized for the
exploitation of a lumber concession in Zamboanga, Philippines; that defendant holds more than 50 per cent of the stocks of said
corporation and also is and always has been the president, manager, and treasurer thereof; and that defendant, in such triple capacity,
through fault, neglect, and abandonment allowed its lumber concession to lapse and its properties and assets, among them machineries,
buildings, warehouses, trucks, etc., to disappear, thus causing the complete ruin of the corporation and total depreciation of its stocks. The
complaint therefore prays for judgment requiring defendant: (1) to render an account of his administration of the corporate affairs and
assets: (2) to pay plaintiffs the value of t heir respective participation in said assets on the basis of the value of the stocks held by each of
them; and (3) to pay the costs of suit. Plaintiffs also ask for such other remedy as may be and equitable.
The complaint does not give plaintiffs' residence, but, but purposes of venue, alleges that defendant resides at 2112 Dewey Boulevard,
corner Libertad Street, Pasay, province of Rizal. Having been served with summons at that place, defendant filed a motion for the dismissal
of the complaint on the ground of improper venue and also on the ground that the complaint did not state a cause of action in favor of
plaintiffs.
In support of the objection to the venue, the motion, which is under oath, states that defendant is a resident of Iloilo City and not of Pasay,
and at the hearing of the motion defendant also presented further affidavit to the effect that while he has a house in Pasay, where
members of his family who are studying in Manila live and where he himself is sojourning for the purpose of attending to his interests in
Manila, yet he has permanent residence in the City of Iloilo where he is registered as a voter for election purposes and has been paying his
residence certificate. Plaintiffs opposed the motion for dismissal but presented no counter proof and merely called attention to the Sheriff's
return showing service of summons on defendant personally at his alleged residence at No. 2112 Dewey Boulevard, Pasay.
After hearing, the lower court rendered its order, granting the motion for dismissal upon the two grounds alleged by defendant, and
reconsideration of this order having been denied, plaintiffs have appealed to this Court.
The appeal presents two questions. The first refers to venue and the second, to the right of the plaintiffs to bring this action for their
benefit.
As to the first question, it is important to remember that the laying of the venue of an action is not left to plaintiff's caprice. The matter is
regulated by the Rules of Court. And in actions like the present, which is one in personam, the regulation applicable is that contained in
section 1 of Rule 5, which provides:
Civil actions in Courts of First Instance may be commenced and tried where the defendant or any of the defendant resides or
may be found, or where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff.
Objection to improper venue may be interposed at any time prior to the trial. (Moran's Comments on the Rules of Court, Vol. I, 2nd ed., p.
108.)
Believing that defendant resided in the province of Rizal, herein plaintiffs brought their action in the Court of First Instance of that province.
But that belief proved erroneous, for the lower court found after hearing that defendant had his residence in Iloilo. The finding is based on
defendant's sworn statement not rebutted by any proof to the contrary.
There is nothing to the contention that defendant's motion to dismiss necessarily presupposes a hypothetical admission of the allegations
of the complaint, among them the averment that defendant is a resident of Rizal province, for the motion precisely denies that averment
and alleges that his real residence is in Iloilo City. This, defendant had the right to do in objecting to the court's jurisdiction on the ground of
improper venue.
Section 1 of Rule 5 may seem, at first blush, to authorize the laying of the venue in the province where the defendant "may be found." But
this phrase has already been held to have a limited application. It is the same phrase used in section 377 of Act 190 from which section 1 of
Rule 5 was taken, and as construed by this Court it applies only to cases where defendant has no residence in the Philippine Islands. This
was the construction adopted in the case of Cohen vs. Benguet Commercial Co., Ltd., 34 Phil. 526, which was an action brought in Manila by
a nonresident against a corporation which had its residence for legal purposes in Baguio but whose President was found in Manila and there
served with summons. This Court there said:
Section 377 provides that actions of this character "may be brought in any province where the defendants or any necessary
party defendant may reside or be found, or in any province where the plaintiff or one of the plaintiffs resides, at the election
of the plaintiff." The plaintiff in this action has no residence in the Philippine Islands. Only one of the parties to the action
resides here. There can be, therefore, no election by plaintiff as to the trial. It must be in the province where the defendant
resides. The defendant resides, in the eye of the law, in Baguio. Was it "found" in the city of Manila under section 377, its
president being in that city where the service of summons was made? We think not. The word "found" as used section 377
has a different meaning that belongs to it as used in section 394, which refers exclusively to the place where the summons
may be served. As we have said a summons may be legally served on a defendant wherever he may be "found," i. e.,
wherever he may be, provided he be in the Philippine Islands; but the venue cannot be laid wherever the defendant may be
"found." There is an element entering in section 377 which is not present in section 394, that is a residence. Residence of the
plaintiff or defendant does not affect the place where a summons may be served; but residence is the vital thing when we
deal with venue. The venue must be laid in the province where one of the parties resides. If the plaintiff is a nonresident the
venue must laid in the province of the defendant's residence. The venue can be laid in the province where defendant is
"found" only when defendant has no residence in the Philippine Islands. A defendant can not have a residence in one
province and be "found" in another. As long as he has a residence in the Philippine Islands he can be "found," for the
purposes of section 377, only in the province of his residence. In such case the words "residence" and "found" are
synonymous. If he is a nonresident then the venue may laid in the province where he is "found" at the time venue the action
is commenced or in the province of plaintiff's residence. This applies also to a domestic corporation.
While the service of the summons was good in either Baguio or Manila we are of the opinion that the objection of the
defendant to the place of trial was proper in both cases and that the trial court should have held that the venue was
improperly laid.
And elaborating on the point when the case came up for reconsideration, the Court further said:
The moving party contends that the venue was properly laid under section 377 in that was laid in the province where the
defendant was found at the time summons was served on its president, he having been found and served with process in the
city of Manila. for the purpose of the discussion we assumed in the main case, as the plaintiff claimed, that the defendant
was in fact and in law found in the city of Manila; and proceeded to decide the cause upon the theory that, even if the
defendant were found in the city of Manila, that did not justify, under the facts of the case, the laying of the venue in the city
of Manila.
We do not believe that the moving party's objection that our construction deprives the word "found" of all significance and
results, in effect, in eliminating it from the statue, is sound. We do not deprive it of all significance and effect and do not
eliminate it from the statue. We give it the only effect which can be given it and still accord with the other provisions of the
section which give defendant the right to have the venue laid in the province of his residence, the effect which it was
intended by the legislature they should have. We held that the word "found" was applicable in certain cases, and in such
cases gave it full significance and effect. We declared that it was applicable and effective in cases where the defendant is a
nonresident. In such cases where the defendant is a nonresident. In such cases the venue may be laid wherever he may be
found in the Philippine Islands at the time of the service of the process, but we also held that where he is a resident of the
Philippine Islands the word "found" has no application and the venue must be laid in the province where he resides.
The construction which the moving party asks us to place on that provision of section 377 above quoted would result in the
destruction of the privilege conferred by the section upon a resident defendant which requires the venue to be laid in the
province where he resides. This is clear; for, if the venue may be laid in any province where the defendant, although a
resident of some other province, any be found at the time process is served on him, then the provision that it shall be laid in
the province where he resides is no value to him. If a defendant residing in the province of Rizal is helpless when the venue is
laid in the province of Mindoro in an action in which the plaintiff is a nonresident or resides in Manila, what is the value of a
residence in Rizal? If a defendant residing in Jolo is without remedy when a nonresident plaintiff or a plaintiff residing in Jolo
lays the venue in Bontoc because the defendant happens to be found there, of what significance is a residence in Jolo? The
phrases "where the defendant ... may reside" and "or be found" must be construed together and in such manner that both
may be given effect. The construction asked for by the moving party would deprive the phrase "where the defendant ... may
reside" of all significance, as the plaintiff could always elect to lay the venue in the province where the defendant was
"found" and not where he resided; whereas the construction which we place upon these phrases permits both to have
effect. We declare that, when the defendant is a resident of the Philippine Islands, the venue must be laid either in the
province where the plaintiff resides or in the province where the defendant resides, and in no other province. Where,
however, the defendant is a nonresident the venue may be laid wherever defendant may be found in the Philippine Islands.
This construction gives both phrases their proper and legitimate effect without doing violence to the spirit which informs all
laws relating to venue and which insists always that the action shall tried in the place where the greater convenience of the
parties will be served. Ordinarily a defendant's witness are found where the defendant resides; and plaintiff's witnesses are
generally found where he resides or where the defendant resides. It is, therefore, generally desirable to have the action tried
 where on of the resides. Where the plaintiff is a nonresident and the contract upon which suit is brought was made in the
Philippine Islands it may safely be asserted that the convenience of the defendant would be best served by a trial in the
province where he resides.

The fact that defendant was sojourning in Pasay t the time he was served with summons does not make him a resident of that place for
purposes of venue. Residence is "the permanent home, the place to which, whenever absent for business or pleasure, one intends to
return, ..." (67 C.J., pp. 123-124.) A man can have but one domicile at a time (Alcantara vs. Secretary of Interior, 61 Phil., 459), and residence
is anonymous with domicile under section 1 of Rule 5 (Moran's Comments, supra, p. 104).

In view of the foregoing, we hold that the objection to the venue was correctly sustained by the lower court.

As to the second question, the complaint shows that the action is for damages resulting from mismanagement of the affairs and assets of
the corporation by its principal officer, it being alleged that defendant's maladministration has brought about the ruin of the corporation
and the consequent loss of value of its stocks. The injury complained of is thus primarily to the corporation, so that the suit for the damages
claimed should be by the corporation rather than by the stockholders (3 Fletcher, Cyclopedia of Corporation pp. 977-980). The stockholders
may not directly claim those damages for themselves for that would result in the appropriation by, and the distribution among them of part
of the corporate assets before the dissolution of the corporation and the liquidation of its debts and liabilities, something which cannot be
legally done in view of section 16 of the Corporation Law, which provides:

No shall corporation shall make or declare any stock or bond dividend or any dividend whatsoever from the profits arising
from its business, or divide or distribute its capital stock or property other than actual profits among its members or
stockholders until after the payment of its debts and the termination of its existence by limitation or lawful dissolution.

But while it is to the corporation that the action should pertain in cases of this nature, however, if the officers of the corporation, who are
the ones called upon to protect their rights, refuse to sue, or where a demand upon them to file the necessary suit would be futile because
they are the very ones to be sued or because they hold the controlling interest in the corporation, then in that case any one of the
stockholders is allowed to bring suit (3 Fletcher's Cyclopedia of Corporations, pp. 977-980). But in that case it is the corporation itself and
not the plaintiff stockholder that is the real property in interest, so that such damages as may be recovered shall pertain to the corporation
(Pascual vs. Del Saz Orosco, 19 Phil. 82, 85). In other words, it is a derivative suit brought by a stockholder as the nominal party plaintiff for
the benefit of the corporation, which is the real property in interest (13 Fletcher, Cyclopedia of Corporations, p. 295).

In the present case, the plaintiff stockholders have brought the action not for the benefit of the corporation but for their own benefit, since
they ask that the defendant make good the losses occasioned by his mismanagement and pay to them the value of their respective
participation in the corporate assets on the basis of their respective holdings. Clearly, this cannot be done until all corporate debts, if there
be any, are paid and the existence of the corporation terminated by the limitation of its charter or by lawful dissolution in view of the
provisions of section 16 of the Corporation Law.

It results that plaintiff's complaint shows no cause of action in their favor so that the lower court did not err in dismissing the complaint on
that ground.

While plaintiffs ask for remedy to which they are not entitled unless the requirement of section 16 of the Corporation Law be first complied
with, we note that the action stated in their complaint is susceptible of being converted into a derivative suit for the benefit of the
corporation by a mere change in the prayer. Such amendment, however, is not possible now, since the complaint has been filed in the
wrong court, so that the same last to be dismissed.

The order appealed from is therefore affirmed, but without prejudice to the filing of the proper action in which the venue shall be laid in the
proper province. Appellant's shall pay costs. So ordered.
G.R. No. 170783. June 18, 2012.*
LEGASPI TOWERS 300, INC., LILIA MARQUINEZ PALANCA, ROSANNA D. IMAI, GLORIA DOMINGO and RAY VINCENT, petitioners, vs.
AMELIA P. MUER, SAMUEL M. TANCHOCO, ROMEO TANKIANG, RUDEL PANGANIBAN, DOLORES AGBAYANI, ARLENEDAL A. YASUMA,
GODOFREDO M. CAGUIOA and EDGARDO M. SALANDANAN, respondents.
Judges; Judgments; A judge has an inherent right, while his judgment is still under his control, to correct errors, mistakes, or injustices.—The
courts have the inherent power to amend and control their processes and orders so as to make them conformable to law and justice. A
judge has an inherent right, while his judgment is still under his control, to correct errors, mistakes, or injustices.
Corporation Law; Derivative Suits; Since it is the corporation that is the real party-in-interest in a derivative suit, then the reliefs prayed for
must be for the benefit or interest of the corporation.—Since it is the corporation that is the real party-in-interest in a derivative suit, then
the reliefs prayed for must be for the benefit or interest of the corporation. When the reliefs prayed for do not pertain to the corporation,
then it is an improper derivative suit. The requisites for a derivative suit are as follows: a) the party bringing suit should be a shareholder as
of the time of the act or transaction complained of, the number of his shares not being material; b) he has tried to exhaust intra-corporate
remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea;
and c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation
and not to the particular stockholder bringing the suit.
Same; Same; The stockholder’s right to file 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.—The
stockholder’s right to file 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, which is not the issue in this case.
This is a petition for review on certiorari of the Court of Appeals Decision[1] dated July 22, 2005 in CA-G.R. CV No. 87684, and
its Resolution[2] dated November 24, 2005, denying petitioners motion for reconsideration.
The Court of Appeals held that Judge Antonio I. De Castro of the Regional Trial Court (RTC) of Manila, Branch 3, did not
commit grave abuse of discretion in issuing the Orders dated July 21, 2004 and September 24, 2004 in Civil Case No. 04-109655, denying
petitioners Motion to Admit Second Amended Complaint.
The facts, as stated by the Court of Appeals, are as follows:
Pursuant to the by-laws of Legaspi Towers 300, Inc., petitioners Lilia Marquinez Palanca, Rosanna D. Imai, Gloria Domingo
and Ray Vincent, the incumbent Board of Directors, set the annual meeting of the members of the condominium corporation and the
election of the new Board of Directors for the years 2004-2005 on April 2, 2004 at 5:00 p.m. at the lobby of Legaspi Towers 300, Inc.
Out of a total number of 5,723 members who were entitled to vote, 1,358 were supposed to vote through their respective
proxies and their votes were critical in determining the existence of a quorum, which was at least 2,863 (50% plus 1). The Committee on
Elections of Legaspi Towers 300, Inc., however, found most of the proxy votes, at its face value, irregular, thus, questionable; and for lack of
time to authenticate the same, petitioners adjourned the meeting for lack of quorum.
However, the group of respondents challenged the adjournment of the meeting. Despite petitioners' insistence that no
quorum was obtained during the annual meeting held on April 2, 2004, respondents pushed through with the scheduled election and were
elected as the new Board of Directors and officers of Legaspi Towers 300, Inc. Subsequently, they submitted a General Information Sheet to
the Securities and Exchange Commission (SEC) with the following new set of officers: Amelia P. Muer, President; Samuel M. Tanchoco,
Internal Vice President; Romeo V. Tankiang, External Vice-President; Rudel H. Panganiban, Secretary; Dolores B. Agbayani, Assistant
Secretary; Arlenedal A. Yasuma, Treasurer; Godofredo M. Caguioa, Assistant Treasurer; and Edgardo M. Salandanan, Internal Auditor.
On April 13, 2004, petitioners filed a Complaint for the Declaration of Nullity of Elections with Prayers for the lssuance of
Temporary Restraining Orders and Writ of Preliminary Injunction and Damages against respondents with the RTC of Manila. Before
respondents could file an Answer to the original Complaint, petitioners filed an Amended Complaint, which was admitted by the RTC in
an Order dated April 14, 2004.
On April 20, 2004, before respondents could submit an Answer to the Amended Complaint, petitioners again filed an Urgent
Ex-Parte Motion to Admit Second Amended Complaint and for the lssuance of Ex-Parte Temporary Restraining Order Effective only for
Seventy-Two (72) Hours. It was stated in the said pleading that the case was raffled to Branch 24, but Presiding Judge Antonio Eugenio, Jr.
inhibited himself from handling the case; and when the case was assigned to Branch 46, Presiding Judge Artemio S. Tipon also inhibited
himself from the case.
On April 21, 2004, Executive Judge Enrico A. Lanzanas of the RTC of Manila acted on the Motion for the Issuance of an Ex
Parte Temporary Restraining Order, and issued an Order disposing, thus:
WHEREFORE, pursuant to administrative Circular No. 20-95 of the Supreme Court, a seventy-
two (72) hour Temporary Restraining Order is hereby issued, enjoining defendants from taking over
management, or to maintain a status quo, in order to prevent further irreparable damages and prejudice to
the corporation, as day-to-day activities will be disrupted and will be paralyzed due to the legal controversy. [3]
On the same date, April 21, 2004, respondents filed their Answer[4] to the Amended Complaint, alleging that the election
on April 2, 2004 was lawfully conducted. Respondents cited the Report[5] of SEC Counsel Nicanor P. Patricio, who was ordered by the SEC to
attend the annual meeting of Legaspi Towers 300, Inc. on April 2, 2004. Atty. Patricio stated in his Report that at 5:40 p.m. of April 2, 2004, a
representative of the Board of the condominium corporation stated that the scheduled elections could not proceed because the Election
Committee was not able to validate the authenticity of the proxies prior to the election due to limited time available as the submission was
made only the day before. Atty. Patricio noted that the Board itself fixed the deadline for submission of proxies at 5:00 p.m. of April 1, 2004.
One holder of proxy stood up and questioned the motives of the Board in postponing the elections. The Board objected to this and moved
for a declaration of adjournment. There was an objection to the adjournment, which was ignored by the Board. When the Board adjourned
the meeting despite the objections of the unit owners, the unit owners who objected to the adjournment gathered themselves at the same
place of the meeting and proceeded with the meeting. The attendance was checked from among the members who stayed at the
meeting. Proxies were counted and recorded, and there was a declaration of a quorum out of a total of 5,721 votes, 2,938 were present
either in person or proxy. Thereafter, ballots were prepared, proxies were counterchecked with the number of votes entitled to each unit
owner, and then votes were cast. At about 9:30 p.m., canvassing started, and by 11:30 p.m., the newly-elected members of the Board of
Directors for the years 2004-2005 were named.
Respondents contended that from the proceedings of the election reported by SEC representative, Atty. Patricio, it was clear
that the election held on April 2, 2004 was legitimate and lawful; thus, they prayed for the dismissal of the complaint for lack cause of
action against them.
This case was scheduled to be re-raffled to regular courts on April 22, 2004, and was assigned to Judge Antonio I. De Castro
of the RTC of Manila, Branch 3 (trial court).
On April 26, 2004, the trial court conducted a hearing on the injunction sought by petitioners, and issued an Order clarifying
that the TRO issued by Executive Judge Enrico A. Lanzanas, enjoining respondents from taking over management, was not applicable as the
current Board of Directors (respondents) had actually assumed management of the corporation. The trial court stated that the status
quo mentioned in the said TRO shall mean that the current board of directors shall continue to manage the affairs of the condominium
corporation, but the court shall monitor all income earned and expenses incurred by the corporation. The trial court stated:
Precisely this complaint seeks to annul the election of the Board due to alleged questionable
proxy votes which could not have produced a quorum. As such, there is nothing to enjoin and so injunction
shall fail. As an answer has been filed, the case is ripe for pre-trial and the parties are directed to file their pre-
trial briefs by May 3, 2004.
As plaintiffs second amended complaint is admitted by the Court, defendants are given up
to May 3, 2004 to file a comment thereto. In the meantime, the banks and other persons & entities are
advised to recognize the Board headed by its president, Amelia Muer. All transactions made by the Board and
its officers for the corporation are considered legal for all intents and purposes. [6]
On May 3, 2004, respondents filed a Comment on the Motion to Amend Complaint, praying that the name of Legaspi Towers
300, Inc., as party-plaintiff in the Second Amended Complaint, be deleted as the said inclusion by petitioners was made without the
authority of the current Board
of Directors, which had been recognized by the trial court in its Order dated April 26, 2004.
During the pre-trial conference held on July 21, 2004, the trial court resolved various incidents in the case and other issues
raised by the contending parties. One of the incidents acted upon by the trial court was petitioners' motion to amend complaint to implead
Legaspi Towers 300, Inc. as plaintiff, which motion was denied with the issuance of two Orders both dated July 21, 2004. The first
Order[7] held that the said motion could not be admitted for being improper, thus:
xxxx
On plaintiffs motion to admit amended complaint (to include Legaspi Towers 300, Inc. as
plaintiff), the Court rules to deny the motion for being improper. (A separate Order of even date is issued.) As
prayed for, movants are given 10 days from today to file a motion for reconsideration thereof, while
defendants are given 10 days from receipt thereof to reply.[8]
The second separate Order,[9] also dated July 21, 2004, reads:
This resolves plaintiffs motion to amend complaint to include Legaspi Towers 300, Inc. as party-
plaintiff and defendants comment thereto. Finding no merit therein and for the reasons stated in the
comment, the motion is hereby DENIED.
Petitioners filed a Motion for Reconsideration of the Orders dated July 21, 2004. In the Order[10] dated September 24, 2004, the trial court
denied the motion for reconsideration for lack of merit.
Petitioners filed a petition for certiorari with the Court of Appeals alleging that the trial court gravely abused its discretion
amounting to lack or excess of jurisdiction in issuing the Orders dated July 21, 2004 and September 24, 2004, and praying that judgment be
rendered annulling the said Orders and directing RTC Judge De Castro to admit their Second Amended Complaint.
In a Decision dated July 22, 2005, the Court of Appeals dismissed the petition for lack of merit. It held that RTC Judge De
Castro did not commit grave abuse of discretion in denying petitioners' Motion To Admit Second Amended Complaint.
 The Court of Appeals stated that petitioners complaint sought to nullify the election of the Board of Directors held on April 2,
2004, and to protect and enforce their individual right to vote. The appellate court held that as the right to vote is a personal right of a
stockholder of a corporation, such right can only be enforced through a direct action; hence, Legaspi Towers 300, Inc. cannot be impleaded
as plaintiff in this case.
Petitioners motion for reconsideration was denied by the Court of Appeals in a Resolution dated November 24, 2005.
Petitioners filed this petition raising the following issues:
I
THE HONORABLE COURT OF APPEALS ERRED IN RESOLVING THAT PUBLIC RESPONDENT-
APPELLEE DID NOT COMMIT ANY WHIMSICAL, ARBITRARY AND OPPRESSIVE EXERCISE OF JUDICIAL AUTHORITY
WHEN THE LATTER REVERSED HIS EARLIER RULING ALREADY ADMITTING THE SECOND AMENDED COMPLAINT
OF PETITIONERS-APPELLANTS.
II
THERE IS NO LEGAL BASIS FOR THE HONORABLE COURT OF APPEALS TO RESOLVE THAT
PETITIONERS-APPELLANTS HAVE NO RIGHT AS BOARD OF DIRECTORS TO BRING AN ACTION IN BEHALF OF
LEGASPI TOWERS 300, INC.
III
THERE IS NO LEGAL BASIS FOR THE HONORABLE COURT OF APPEALS TO RESOLVE THAT THE
ELECTIONS CONDUCTED IN LEGASPI TOWERS 300, INC. FOR THE PERIOD OF 2005 TO 2006 HAVE RENDERED
THE ISSUE IN CIVIL CASE NO. 04-10655 MOOT AND ACADEMIC.[11]
Petitioners contend that the Court of Appeals erred in not finding that RTC Judge Antonio I. De Castro committed grave
abuse of discretion amounting to lack or excess of jurisdiction in denying the admission of the Second Amended Complaint in the Orders
dated July 21, 2004 and September 24, 2004, despite the fact that he had already ordered its admission in a previous Order dated April 26,
2004.
Petitioners contention is unmeritorious.
It is clear that in the Orders dated July 21, 2004, the trial court did not admit the Second Amended Complaint wherein
petitioners made the condominium corporation, Legaspi Towers 300, Inc., the party-plaintiff. In the Order dated September 24, 2004,
denying petitioners motion for reconsideration of the Orders dated July 21, 2004, the RTC explained its action, thus:
x x x The word admitted in the 3rd paragraph of the Order dated April 26, 2004 should read received for which
defendants were told to comment thereon as an answer has been filed. It was an oversight of the clerical error
in said Order.
The Order of July 21, 2004 states amended complaint in the 3rd paragraph thereof and so it
does not refer to the second amended complaint. The amended complaint was admitted by the court of origin
Br. 24 in its Order of April 14, 2004 as there was no responsive pleading yet.
Nonetheless, admission of the second amended complaint is improper. Why should Legaspi
Towers 300, Inc. x x x be included as party-plaintiff when defendants are members thereof too like plaintiffs.
Both parties are deemed to be acting in their personal capacities as they both claim to be the lawful board of
directors. The motion for reconsideration for the admission of the second amended complaint is hereby
DENIED.[12]
The courts have the inherent power to amend and control their processes and orders so as to make them conformable to law
and justice.[13] A judge has an inherent right, while his judgment is still under his control, to correct errors, mistakes, or injustices. [14]
Next, petitioners state that the Court of Appeals seems to be under the impression that the action instituted by them is one
brought forth solely by way of a derivative suit. They clarified that the inclusion of Legaspi Towers 300, Inc. as a party-plaintiff in the Second
Amended Complaint was, first and foremost, intended as a direct action by the corporation acting through them (petitioners) as the
reconstituted Board of Directors of Legaspi Towers 300, Inc. Petitioners allege that their act of including the corporation as party-plaintiff is
consistent with their position that the election conducted by respondents was invalid; hence, petitioners, under their by-laws, could
reconstitute themselves as the Board of Directors of Legaspi Towers 300, Inc. in a hold-over capacity for the succeeding term. By so doing,
petitioners had the right as the rightful Board of Directors to bring the action in representation of Legaspi Towers 300, Inc. Thus, the
Second Amended Complaint was intended by the petitioners as a direct suit by the corporation joined in by the petitioners to protect and
enforce their common rights.
Petitioners contend that Legaspi Towers 300, Inc. is a real party-in- interest as it stands to be affected the most by the
controversy, because it involves the determination of whether or not the corporations by-laws was properly carried out in the meeting held
on April 2, 2004, when despite the adjournment of the meeting for lack of quorum, the elections were still conducted. Although petitioners
admit that the action involves their right to vote, they argue that it also involves the right of the condominium corporation to be managed
and run by the duly-elected Board of Directors, and to seek redress against those who wrongfully occupy positions of the corporation and
who may mismanage the corporation.
Petitioners argument is unmeritorious.
The Court notes that in the Amended Complaint, petitioners as plaintiffs stated that they are the incumbent reconstituted
Board of Directors of Legaspi Towers 300, Inc., and that defendants, herein respondents, are the newly-elected members of the Board of
Directors; while in the Second Amended Complaint, the plaintiff is Legaspi Towers 300, Inc., represented by petitioners as the allegedly
incumbent reconstituted Board of Directors of Legaspi Towers 300, Inc.
The Second Amended Complaint states who the plaintiffs are, thus:
1. That the plaintiffs are: LEGASPI TOWERS 300, INC., non-stock corporation xxx duly represented by the
incumbent reconstituted Board of Directors of Legaspi Towers 300, Inc., namely: ELIADORA FE BOTE
VERA xxx, as President; BRUNO C. HAMAN xxx, as Director; LILY MARQUINEZ PALANCA xxx, as
Secretary; ROSANNA DAVID IMAI xxx, as Treasurer; and members of the Board of Directors, namely:
ELIZABETH GUERRERO xxx, GLORIA DOMINGO xxx, and RAY VINCENT. [15]
The Court agrees with the Court of Appeals that the Second Amended Complaint is meant to be a derivative suit filed by
petitioners in behalf of the corporation. The Court of Appeals stated in its Decision that petitioners justified the inclusion of Legaspi Towers
300, Inc. as plaintiff in Civil Case No. 0410655 by invoking the doctrine of derivative suit, as petitioners specifically argued, thus:
xxxx
x x x [T]he sudden takeover by private respondents of the management of Legaspi Towers 300, Inc. has only
proven the rightfulness of petitioners move to include Legaspi Towers 300, Inc. as party-plaintiff. This is
because every resolution passed by private respondents sitting as a board result[s] in violation of Legaspi
Towers 300, Inc.s right to be managed and represented by herein petitioners.
In short, the amendment of the complaint [to include] Legaspi Towers 300, Inc. was done in
order to protect the interest and enforce the right of the Legaspi [Towers 300,] Inc. to be administered and
managed [by petitioners] as the duly constituted Board of Directors. This is no different from and may in fact
be considered as a DERIVATIVE SUIT instituted by an individual stockholder against those controlling the
corporation but is being instituted in the name of and for the benefit of the corporation whose right/s are
being violated.[16]
Is a derivative suit proper in this case?
Cua, Jr. v. Tan[17] differentiates a derivative suit and an individual/class suit as follows:
A derivative suit must be differentiated from individual and representative or class suits, thus:
Suits by stockholders or members of a corporation based on
wrongful or fraudulent acts of directors or other persons may be classified into
individual suits, class suits, and derivative suits. Where a stockholder or member
is denied the right of inspection, his suit would be individual because the wrong
is done to him personally and not to the other stockholders or the corporation.
Where the wrong is done to a group of stockholders, as where preferred
stockholders' rights are violated, a class or representative suit will be proper for
the protection of all stockholders belonging to the same group. But where
the acts complained of constitute a wrong to the corporation itself, the cause
of action belongs to the corporation and not to the individual stockholder or
member. Although in most every case of wrong to the corporation, each
stockholder is necessarily affected because the value of his interest therein
would be impaired, this fact of itself is not sufficient to give him an individual
cause of action since the corporation is a person distinct and separate from him,
and can and should itself sue the wrongdoer. Otherwise, not only would the
theory of separate entity be violated, but there would be multiplicity of suits as
well as a violation of the priority rights of creditors. Furthermore, there is the
difficulty of determining the amount of damages that should be paid to each
individual stockholder.
However, in cases of mismanagement where the wrongful acts are committed
by the directors or trustees themselves, a stockholder or member may find that
he has no redress because the former are vested by law with the right to decide
whether or not the corporation should sue, and they will never be willing to sue
themselves. The corporation would thus be helpless to seek remedy. Because of
the frequent occurrence of such a situation, the common law gradually
recognized the right of a stockholder to sue on behalf of a corporation in what
eventually became known as a "derivative suit." It has been proven to be an
effective remedy of the minority against the abuses of management. Thus, an
individual stockholder is permitted to institute a derivative suit on behalf of
the corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever officials of the corporation refuse to sue or are the
ones to be sued or hold the control of the corporation. In such actions, the
 suing stockholder is regarded as the nominal party, with the corporation as
the party-in- interest.[18]

Since it is the corporation that is the real party-in-interest in a derivative suit, then the reliefs prayed for must be for the
benefit or interest of the corporation.[19] When the reliefs prayed for do not pertain to the corporation, then it is an improper derivative
[20]
suit.

The requisites for a derivative suit are as follows:

a) the party bringing suit should be a shareholder as of the time of the act or transaction complained of, the
number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the
appropriate relief but the latter has failed or refused to heed his plea; and

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being
caused to the corporation and not to the particular stockholder bringing the suit.[21]

In this case, petitioners, as members of the Board of Directors of the condominium corporation before the election in question, filed a
complaint against the newly-elected members of the Board of Directors for the years 2004-2005, questioning the validity of the election
held on April 2, 2004, as it was allegedly marred by lack of quorum, and praying for the nullification of the said election.

As stated by the Court of Appeals, petitioners complaint seek to nullify the said election, and to protect and enforce their
individual right to vote. Petitioners seek the nullification of the election of the Board of Directors for the years 2004-2005, composed
of herein respondents, who pushed through with the election even if petitioners had adjourned the meeting allegedly due to lack of
quorum. Petitioners are the injured party, whose rights to vote and to be voted upon were directly affected by the election of the new set
of board of directors. The party-in-interest are the petitioners as stockholders, who wield such right to vote. The cause of action devolves on
petitioners, not the condominium corporation, which did not have the right to vote. Hence, the complaint for nullification of the election is
a direct action by petitioners, who were the members of the Board of Directors of the corporation before the election, against respondents,
who are the newly-elected Board of Directors. Under the circumstances, the derivative suit filed by petitioners in behalf of the
condominium corporation in the Second Amended Complaint is improper.

The stockholders right to file 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,[22] which is not the issue in this case.

Further, petitioners change of argument before this Court, asserting that the Second Amended Complaint is a direct action
filed by the corporation, represented by the petitioners as the incumbent Board of Directors, is an
afterthought, and lacks merit, considering that the newly-elected Board of Directors had assumed their function to manage corporate
affairs.[23]
In fine, the Court of Appeals correctly upheld the Orders of the trial court dated July 21, 2004 and September 24,
2004 denying petitioners Motion to Admit Second Amended Complaint.
Lastly, petitioners contend that the Court of Appeals erred in resolving that the recent elections conducted
by Legaspi Towers, 300, Inc. have rendered the issue raised viathe special civil action for certiorari before the appellate court moot and
academic.

The Court of Appeals, in its Resolution dated November 24, 2005, stated:

x x x [T]he election of the corporations new set of directors for the years 2005-2006 has, finally, rendered the
petition at bench moot and academic. As correctly argued by private respondents, the nullification of the
orders assailed by petitioners would, therefore, be of little or no practical and legal purpose. [24]

The statement of the Court of Appeals is correct.

Petitioners question the validity of the election of the Board of Directors for the years 2004-2005, which election they seek to
nullify in Civil Case No. 04-109655.However, the valid election of a new set of Board of Directors for the years 2005-2006 would, indeed,
render this petition moot and academic.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 87684, dated July 22, 2005, and
its Resolution dated November 24, 2005 are AFFIRMED.

Costs against petitioners.

SO ORDERED.
G.R. No. 123553. July 13, 1998.*
(CA-G.R. No. 33291)
NORA A. BITONG, petitioner, vs. COURT OF APPEALS (FIFTH DIVISION), EUGENIA D. APOSTOL, JOSE A. APOSTOL, MR. & MS. PUBLISHING
CO., LETTY J. MAGSANOC, AND ADORACION G. NUYDA, respondents.
Actions; Pleadings and Practice; Evidence; Admissions; A party whose pleading is admitted as an admission against interest is entitled to
overcome by evidence the apparent inconsistency, and it is competent for the party against whom the pleading is offered to show that the
statements were inadvertently made or were made under a mistake of fact.—A party whose pleading is admitted as an admission against
interest is entitled to overcome by evidence the apparent inconsistency, and it is competent for the party against whom the pleading is
offered to show that the statements were inadvertently made or were made under a mistake of fact. In addition, a party against whom a
single clause or paragraph of a pleading is offered may have the right to introduce other paragraphs which tend to destroy the admission in
the paragraph offered by the adversary.
Same; Same; Same; Same; Where the statements of a party were qualified with phrases such as, “insof ar as they are limited, qualified
and/or expanded by,” “the truth be ing as stated in the Affirmative Allegations/Defenses of this Answer” they cannot be considered definite
and certain enough and cannot be construed as judicial admissions.—The answer of private respondents shows that there was no judicial
admission that petitioner was a stockholder of Mr. & Ms. to entitle her to file a derivative suit on behalf of the corporation. Where the
statements of the private respondents were qualified with phrases such as, “insofar as they are limited, qualified and/or expanded by,” “the
truth being as stated in the Affirmative Allegations/Defenses of this Answer” they cannot be considered definite and certain enough, cannot
be construed as judicial admissions.
Same; Same; Same; Same; Where part of a statement of a party is used against him as an admission, the court should weigh any other
portion connected with the statement, which tends to neutralize the portion which is against interest—while admission is admissible in
evidence, its probative value is to be determined from the whole statement and others intimately related to or connected therewith as an
integrated unit.—When taken in its totality, the Amended Answer to the Amended Petition, or even the Answer to the Amended Petition
alone, clearly raises an issue as to the legal personality of petitioner to file the complaint. Every alleged admission is taken as an entirety of
the fact which makes for the one side with the qualifications which limit, modify or destroy its effect on the other side. The reason for this
is, where part of a statement of a party is used against him as an admission, the court should weigh any other portion connected with the
statement, which tends to neutralize or explain the portion which is against interest. In other words, while the admission is admissible in
evidence, its probative value is to be determined from the whole statement and others intimately related or connected therewith as an
integrated unit. Although acts or facts admitted do not require proof and cannot be contradicted, however, evidence aliunde can be
presented to show that the admission was made through palpable mistake. The rule is always in favor of liberality in construction of
pleadings so that the real matter in dispute may be submitted to the judgment of the court.
Same; Same; Same; Words and Phrases; Interlocutory Orders; An interlocutory order refers to something between the commencement and
end of the suit which decides some point or matter but it is not the final decision of the whole controversy.—For, an interlocutory order
refers to something between the commencement and end of the suit which decides some point or matter but it is not the final decision of
the whole controversy. Thus, even though the 6 December 1990 Order was adverse to private respondents, they had the legal right and
option not to elevate the same to the SEC En Banc but rather to await the decision which resolves all the issues raised by the parties and to
appeal therefrom by assigning all errors that might have been committed by the Hearing Panel.
Corporation Law; Stock Certificates; A mere typewritten statement advising a stockholder of the extent of his ownership in a corporation
without qualification and/or authentication cannot be considered as a formal certificate of stock.—Section 63 of The Corporation Code
expressly provides—x x x This provision above quoted envisions a formal certificate of stock which can be issued only upon compliance with
certain requisites. First, the 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. A mere typewritten statement advising a stockholder of the extent of his ownership
in a corporation without qualification and/or authentication cannot be considered as a formal certificate of stock. Second, delivery of the
certificate is an essential element of its issuance. Hence, there is no issuance of a stock certificate where it is never detached from the stock
books although blanks therein are properly filled up if the person whose name is inserted therein has no control over the books of the
company. Third, the par value, as to par value shares, or the full subscription as to no par value shares, must first be fully paid. Fourth, the
original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from a stockholder.
Same; Same; Stock and Transfer Books; Evidence; Books and records of a corporation which include even the stock and transfer book are
generally admissible in evidence in favor of or against the corporation and its members to prove the corporate acts, its financial status and
other matters including one’s status as a stockholder.—The certificate of stock itself once issued is a continuing affirmation or
representation that the stock described therein is valid and genuine and is at least prima facie evidence that it was legally issued in the
absence of evidence to the contrary. However, this presumption may be rebutted. Similarly, books and records of a corporation which
include even the stock and transfer book are generally admissible in evidence in favor of or against the corporation and its members to
prove the corporate acts, its financial status and other matters including one’s status as a stockholder. They are ordinarily the best evidence
of corporate acts and proceedings.
Same; Same; Same; Same; Parol Evidence; The books and records of a corporation are not conclusive even against the corporation but are
prima facie evidence only—parol evidence may be admitted to supply omissions in the records, explain ambiguities, or show what
transpired where no records were kept, or in some cases where such records were contradicted.—However, the books and records of a
corporation are not conclusive even against the corporation but are prima facie evidence only. Parol evidence may be admitted to supply
omissions in the records, explain ambiguities, or show what transpired where no records were kept, or in some cases where such records
were contradicted. The effect of entries in the books of the corporation which purport to be regular records of the proceedings of its board
of directors or stockholders can be destroyed by testimony of a more conclusive character than mere suspicion that there was an
irregularity in the manner in which the books were kept.
Same; Same; Same; Stock issued without authority and in violation of law is void and confers no rights on the person to whom it is issued
and subjects him to no liabilities.—The foregoing considerations are founded on the basic principle that stock issued without authority and
in violation of 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.
Same; Same; Same; A formal certificate of stock could not be considered issued in contemplation of law unless signed by the president or
vice-president and countersigned by the secretary or assistant secretary.—Based on the foregoing admission of petitioner, there is no truth
to the statement written in Certificate of Stock No. 008 that the same was issued and signed on 25 July 1983 by its duly authorized officers
specifically the President and Corporate Secretary because the actual date of signing thereof was 17 March 1989. Verily, a formal certificate
of stock could not be considered issued in contemplation of law unless signed by the president or vice-president and countersigned by the
secretary or assistant secretary.
Same; Same; Same; When a Certificate of Stock was admittedly signed and issued only on 17 March 1989 and not on 25 July 1983, the
certificate has no evidentiary value for the purpose of proving that a stockholder was such since 1983 up to 1989.—In this case, contrary to
petitioner’s submission, the Certificate of Stock No. 008 was only legally issued on 17 March 1989 when it was actually signed by the
President of the corporation, and not before that date. While a certificate of stock is not necessary to make one a stockholder, e.g., where
he is an incorporator and listed as stockholder in the articles of incorporation although no certificate of stock has yet been issued, it is
supposed to serve as paper representative of the stock itself and of the owner’s interest therein. Hence, when Certificate of Stock No. 008
was admittedly signed and issued only on 17 March 1989 and not on 25 July 1983, even as it indicates that petitioner owns 997 shares of
stock of Mr. & Ms., the certificate has no evidentiary value for the purpose of proving that petitioner was a stockholder since 1983 up to
1989.
Same; Same; Trusts; It is a settled rule that the trustee should endorse the stock certificate to validate the cancellation of her share and to
have the transfer recorded in the books of the corporation.—And, there is nothing in the records which shows that JAKA had revoked the
trust it reposed on respondent Eugenia D. Apostol. Neither was there any evidence that the principal had requested her to assign and
transfer the shares of stock to petitioner. If it was true that the shares of stock covered by Certificate of Stock No. 007 had been transferred
to petitioner, the person who could legally endorse the certificate was private respondent Eugenia D. Apostol, she being the registered
owner and trustee of the shares of stock covered by Certificate of Stock No. 007. It is a settled rule that the trustee should endorse the
stock certificate to validate the cancellation of her share and to have the transfer recorded in the books of the corporation.
Same; Same; Requirements for a Valid Transfer of Stocks.—Thus, for a valid transfer of stocks, the requirements are as follows: (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. At
most, in the instant case, petitioner has satisfied only the third requirement. Compliance with the first two requisites has not been clearly
and sufficiently shown.
Same; Same; Considering that the requirements provided under Sec. 63 of the Corporation Code should be mandatorily complied with, the
rule on presumption of regularity cannot apply.—Considering that the requirements provided under Sec. 63 of The Corporation Code should
be mandatorily complied with, the rule on presumption of regularity cannot apply. The regularity and validity of the transfer must be
proved. As it is, even the credibility of the stock and transfer book and the entries thereon relied upon by petitioner to show compliance
with the third requisite to prove that she was a stockholder since 1983 is highly doubtful.
Same; Same; Dividends; When a dividend is declared, it belongs to the person who is the substantial and beneficial owner of the stock at
the time regardless of when the distribution profit was earned.—That JAKA retained its ownership of its Mr. & Ms. shares was clearly shown
by its receipt of the dividends issued in December 1986. This only means, very obviously, that Mr. & Ms. shares in question still belonged to
JAKA and not to petitioner. For, dividends are distributed to stockholders pursuant to their right to share in corporate profits. When a
dividend is declared, it belongs to the person who is the substantial and beneficial owner of the stock at the time regardless of when the
distribution profit was earned.
Same; Actions; Derivative Suits; 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.—The admissions of a party against his interest
inscribed upon the record books of a corporation are competent and persuasive evidence against him. 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.
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.
Same; Same; Same; 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.—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. 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.
Same; Same; Same; A stockholder’s suit cannot prosper without first complying with the legal requisites for its institution, the most On 6 December 1990, the SEC Hearing Panel[3] issued a writ of preliminary injunction enjoining private respondents from disbursing
important being the bona fide ownership by a stockholder of a stock in his own right at the time of the transaction complained of which any money except for the payment of salaries and other similar expenses in the regular course of business. The Hearing Panel also enjoined
invests him with standing to institute a derivative action for the benefit of the corporation.—The basis of a stockholder’s suit is always one respondent Apostol spouses, Nuyda and Magsanoc from disposing of their PDI shares, and further ruled -
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. x x x respondents contention that petitioner is not entitled to the provisional reliefs prayed for because she is not the real party in interest x
x x x is bereft of any merit. No less than respondents Amended Answer, specifically paragraph V, No. 8 on Affirmative Allegations/Defenses
states that `The petitioner being herself a minor stockholder and holder-in-trust of JAKAshares represented and continues to
These twin cases originated from a derivative suit[1] filed by petitioner Nora A. Bitong before the Securities and Exchange
represent JAKA in the Board. This statement refers to petitioner sitting in the board of directors of Mr. & Ms. in two capacities, one as a
Commission (SEC hereafter) allegedly for the benefit of private respondent Mr. & Ms. Publishing Co., Inc. (Mr. & Ms. hereafter), among
minor stockholder and the other as the holder in trust of the shares of JAKA in Mr. & Ms. Such reference alluded to by the respondents
others, to hold respondent spouses Eugenia D. Apostol and Jose A. Apostol[2] liable for fraud, misrepresentation, disloyalty, evident bad
indicates an admission on respondents part of the petitioners legal personality to file a derivative suit for the benefit of the respondent Mr.
faith, conflict of interest and mismanagement in directing the affairs of Mr. & Ms. to the damage and prejudice of Mr. & Ms. and its
& Ms. Publishing Co., Inc.
stockholders, including petitioner.

Alleging before the SEC that she had been the Treasurer and a Member of the Board of Directors of Mr. & Ms. from the time it was
The Hearing Panel however denied petitioners prayer for the constitution of a management committee.
incorporated on 29 October 1976 to 11 April 1989, and was the registered owner of 1,000 shares of stock out of the 4,088 total outstanding
shares, petitioner complained of irregularities committed from 1983 to 1987 by Eugenia D. Apostol, President and Chairperson of the Board
On 25 March 1991 private respondents filed a Motion to Amend Pleadings to Conform to Evidence alleging that the issue of
of Directors. Petitioner claimed that except for the sale of the name Philippine Inquirer to Philippine Daily Inquirer (PDI hereafter) all other
whether petitioner is the real party-in-interest had been tried by express or implied consent of the parties through the admission of
transactions and agreements entered into by Mr. & Ms. with PDI were not supported by any bond and/or stockholders resolution. And,
documentary exhibits presented by private respondents proving that the real party-in-interest was JAKA, not petitioner Bitong. As such, No.
upon instructions of Eugenia D. Apostol, Mr. & Ms.made several cash advances to PDI on various occasions amounting to P3.276 million. On
8, par. V (Affirmative Allegations/Defenses), Answer to the Amended Petition, was stipulated due to inadvertence and excusable mistake
some of these borrowings PDI paid no interest whatsoever. Despite the fact that the advances made by Mr. & Ms. to PDI were booked as
and should be amended. On 10 October 1991 the Hearing Panel denied the motion for amendment.
advances to an affiliate, there existed no board or stockholders resolution, contract nor any other document which could legally authorize
the creation of and support to an affiliate.
Petitioner testified at the trial that she became the registered and beneficial owner of 997 shares of stock of Mr. & Ms. out of the
4,088 total outstanding shares after she acquired them from JAKA through a deed of sale executed on 25 July 1983 and recorded in the
Petitioner further alleged that respondents Eugenia and Jose Apostol were stockholders, directors and officers in both Mr. &
Stock and Transfer Book of Mr. & Ms. under Certificate of Shares of Stock No. 008. She pointed out that Senator Enrile decided
Ms.and PDI. In fact on 2 May 1986 respondents Eugenia D. Apostol, Leticia J. Magsanoc and Adoracion G. Nuyda subscribed to PDI shares of
that JAKA should completely divest itself of its holdings in Mr. & Ms. and this resulted in the sale to her of JAKAs interest and holdings in
stock at P50,000.00 each or a total of P150,000.00. The stock subscriptions were paid for by Mr. & Ms. and initially treated as receivables
that publishing firm.
from officers and employees. But, no payments were ever received from respondents, Magsanoc and Nuyda.
Private respondents refuted the statement of petitioner that she was a stockholder of Mr. & Ms. since 25 July 1983 as respondent
The petition principally sought to (a) enjoin respondents Eugenia D. Apostol and Jose A. Apostol from further acting as president-
Eugenia D. Apostol signed Certificate of Stock No. 008 only on 17 March 1989, and not on 25 July 1983. Respondent Eugenia D. Apostol
director and director, respectively, of Mr. & Ms. and disbursing any money or funds except for the payment of salaries and similar
explained that she stopped using her long signature (Eugenia D. Apostol) in 1987 and changed it to E.D. Apostol, the signature which
expenses in the ordinary course of business, and from disposing of their Mr. & Ms. shares; (b) enjoin respondents Apostol spouses,
appeared on the face of Certificate of Stock No. 008 bearing the date 25 July 1983. And, since the Stock and Transfer Book which petitioner
Magsanoc and Nuyda from disposing of the PDI shares of stock registered in their names; (c) compel respondents Eugenia and Jose Apostol
presented in evidence was not registered with the SEC, the entries therein including Certificate of Stock No. 008 were
to account for and reconvey all profits and benefits accruing to them as a result of their improper and fraudulent acts; (d) compel
fraudulent. Respondent Eugenia D. Apostol claimed that she had not seen the Stock and Transfer Book at any time until 21 March 1989
respondents Magsanoc and Nuyda to account for and reconvey to Mr. & Ms. all shares of stock paid from cash advances from it and all
when it was delivered by petitioner herself to the office of Mr. & Ms., and that petitioner repeatedly referred to Senator Enrile as "my
accessions or fruits thereof; (e) hold respondents Eugenia and Jose Apostol liable for damages suffered by Mr. & Ms. and the other
principal" during the Mr. & Ms. board meeting of 22 September 1988, seven (7) times no less.
stockholders, including petitioner, by reason of their improper and fraudulent acts; (f) appoint a management committee for Mr. &
Ms. during the pendency of the suit to preventfurther dissipation and loss of its assets and funds as well as paralyzation of business
On 3 August 1993, after trial on the merits, the SEC Hearing Panel dismissed the derivative suit filed by petitioner and dissolved the
operations; and, (g) direct the management committee for Mr. & Ms. to file the necessary action to enforce its rights against PDI and other
writ of preliminary injunction barring private respondents from disposing of their PDI shares and any of Mr. & Ms. assets. The Hearing Panel
third parties.
ruled that there was no serious mismanagement of Mr. & Ms. which would warrant drastic corrective measures. It gave credence to the
assertion of respondent Eugenia D. Apostol that Mr. & Ms. was operated like a close corporation where important matters were discussed
Private respondents Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms., on the other hand, refuted the allegations of petitioner by
and approved through informal consultations at breakfast conferences. The Hearing Panel also concluded that while the evidence
starting with a narration of the beginnings of Mr. & Ms. They recounted that on 9 March 1976 Ex Libris Publishing Co., Inc. (Ex
presented tended to show that the real party-in-interest indeed was JAKA and/or Senator Enrile, it viewed the real issue to be the alleged
Libris hereafter) was incorporated for the purpose of publishing a weekly magazine. Its original principal stockholders were spouses Senator
mismanagement, fraud and conflict of interest on the part of respondent Eugenia D. Apostol, and allowed petitioner to prosecute the
Juan Ponce Enrile (then Minister of National Defense) and Cristina Ponce Enrile through Jaka Investments Corporation (JAKA hereafter), and
derivative suit if only to resolve the real issues. Hence, for this purpose, the Hearing Panel considered petitioner to be the real party-in-
respondents Eugenia and Jose Apostol. When Ex Libris suffered financial difficulties, JAKA and the Apostols, together with new investors Luis
interest.
Villafuerte and Ramon Siy, restructured ExLibris by organizing a new corporation known as Mr. & Ms.
On 19 August 1993 respondent Apostol spouses sold the PDI shares registered in the name of their holding company, JAED
The original stockholders of Mr. & Ms., i.e., JAKA, Luis Villafuerte, Ramon Siy, the Apostols and Ex Libris continued to be virtually
Management Corporation, to Edgardo B. Espiritu. On 25 August 1993 petitioner Bitong appealed to the SEC En Banc.
the same up to 1989. Thereafter it was agreed among them that, they being close friends, Mr. & Ms. would be operated as a partnership or
a close corporation; respondent Eugenia D. Apostol would manage the affairs of Mr. & Ms.; and, no shares of stock would be sold to third
On 24 January 1994 the SEC En Banc[4] reversed the decision of the Hearing Panel and, among others, ordered private respondents
parties without first offering the shares to the other stockholders so that transfers would be limited to and only among the original
to account for, return and deliver to Mr. & Ms. any and all funds and assets that they disbursed from the coffers of the corporation
stockholders.
including shares of stock, profits, dividends and/or fruits that they might have received as a result of their investment in PDI, including those
arising from the P150,000.00 advanced to respondents Eugenia D. Apostol, Leticia J. Magsanoc and Adoracion G. Nuyda; account for and
Private respondents also asserted that respondent Eugenia D. Apostol had been informing her business partners of her actions as
return any profits and fruits of all amounts irregularly or unlawfully advanced to PDI and other third persons; and, cease and desist from
manager, and obtaining their advice and consent.Consequently the other stockholders consented, either expressly or impliedly, to her
managing the affairs of Mr. & Ms. for reasons of fraud, mismanagement, disloyalty and conflict of interest.
management. They offered no objections. As a result, the business prospered. Thus, as shown in a statement prepared by the accounting
firm Punongbayan and Araullo, there were increases from 1976 to 1988 in the total assets of Mr. & Ms. from P457,569.00 to
The SEC En Banc also declared the 19 August 1993 sale of the PDI shares of JAED Management Corporation to Edgardo B. Espiritu
P10,143,046.00; in the total stockholders equity from P203,378.00 to P2,324,954.00; and, in the net sales, from P301,489.00 to
to be tainted with fraud, hence, null and void, and considered Mr. & Ms. as the true and lawful owner of all the PDI shares acquired by
P16,325,610.00. Likewise, cash dividends were distributed and received by the stockholders.
respondents Eugenia D. Apostol, Magsanoc and Nuyda. It also declared all subsequent transferees of such shares as trustees for the benefit
of Mr. & Ms. and ordered them to forthwith deliver said shares to Mr. & Ms.
Private respondents further contended that petitioner, being merely a holder-in-trust of JAKA shares, only represented and
continued to represent JAKA in the board. In the beginning, petitioner cooperated with and assisted the management until mid-1986 when
Consequently, respondent Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms. filed a petition for review before respondent Court
relations between her and her principals on one hand, and respondent Eugenia D. Apostol on the other, became strained due to political
of Appeals, docketed as CA-GR No. SP 33291, while respondent Edgardo B. Espiritu filed a petition for certiorari and prohibition also before
differences. Hence from mid-1986 to mid-1988 petitioner refused to speak with respondent Eugenia D. Apostol, and in 1988 the former
respondent Court of Appeals, docketed as CA-GR No. SP 33873. On 8 December 1994 the two (2) petitions were consolidated.
became openly critical of the management of the latter. Nevertheless, respondent Eugenia D. Apostol always made available to petitioner
and her representatives all the books of the corporation.
On 31 August 1995 respondent appellate court rendered a decision reversing the SEC En Banc and held that from the evidence on
record petitioner was not the owner of any share of stock in Mr. & Ms. and therefore not the real party-in-interest to prosecute the
Private respondents averred that all the PDI shares owned by respondents Eugenia and Jose Apostol were acquired through their
complaint she had instituted against private respondents. Accordingly, petitioner alone and by herself as an agent could not file a derivative
own private funds and that the loan of P750,000.00 by PDI from Mr. & Ms. had been fully paid with 20% interest per annum. And, it
suit in behalf of her principal. For not being the real party-in-interest, petitioners complaint did not state a cause of action, a defense which
was PDI, not Mr. & Ms., which loaned off P250,000.00 each to respondents Magsanoc and Nuyda. Private respondents further argued that
was never waived; hence, her petition should have been dismissed. Respondent appellate court ruled that the assailed orders of the SEC
petitioner was not the true party to this case, the real party being JAKA which continued to be the true stockholder of Mr. &
were issued in excess of jurisdiction, or want of it, and thus were null and void.[5] On 18 January 1996, petitioner's motion for
Ms.; hence, petitioner did not have the personality to initiate and prosecute the derivative suit which, consequently, must be dismissed.
reconsideration was denied for lack of merit.
 Before this Court, petitioner submits that in paragraph 1 under the caption "I. The Parties" of her Amended Petition before the SEC,
she stated that she was a stockholder and director of Mr. & Ms. In par. 1 under the caption "II. The Facts" she declared that she "is the
registered owner of 1,000 shares of stock of Mr. & Ms. out of the latters 4,088 total outstanding shares" and that she was a member of the
Board of Directors of Mr. & Ms. and treasurer from its inception until 11 April 1989. Petitioner contends that private respondents did not
deny the above allegations in their answer and therefore they are conclusively bound by this judicial admission. Consequently, private
respondents admission that petitioner has 1,000 shares of stock registered in her name in the books of Mr. & Ms. forecloses any question
on her status and right to bring a derivative suit on behalf of Mr. & Ms.
Not necessarily. A party whose pleading is admitted as an admission against interest is entitled to overcome by evidence the
apparent inconsistency, and it is competent for the party against whom the pleading is offered to show that the statements were
inadvertently made or were made under a mistake of fact. In addition, a party against whom a single clause or paragraph of a pleading is
offered may have the right to introduce other paragraphs which tend to destroy the admission in the paragraph offered by the adversary. [6]
The Amended Petition before the SEC alleges -
I. THE PARTIES
1. Petitioner is a stockholder and director of Mr. & Ms. x x x x
II. THE FACTS
1. Petitioner is the registered owner of 1,000 shares of stock of Mr. & Ms. out of the latters 4,088 total outstanding shares. Petitioner, at all
times material to this petition, is a member of the Board of Directors of Mr. & Ms. and from the inception of Mr. & Ms. until 11 April 1989
was its treasurer x x x x
On the other hand, the Amended Answer to the Amended Petition states -
I. PARTIES
1. Respondents admit the allegations contained in Caption I, pars. 1 to 4 of the Petition referring to the personality, addresses and capacity
of the parties to the petition except x x x x but qualify said admission insofar as they are limited, qualified and/or expanded by allegations in
the Affirmative Allegations/Defenses x x x x
II. THE FACTS
1. Respondents admit paragraph 1 of the Petition, but qualify said admission as to the beneficial ownership of the shares of stock registered
in the name of the petitioner, the truth being as stated in the Affirmative Allegations/Defenses of this Answer x x x x
V. AFFIRMATIVE ALLEGATIONS/DEFENSES
Respondents respectfully allege by way of Affirmative Allegations/Defenses, that x x x x
3. Fortunately, respondent Apostol was able to convince Mr. Luis Villafuerte to take interest in the business and he, together with the
original investors, restructured the Ex Libris Publishing Company by organizing a new corporation known as Mr. & Ms. Publishing Co., Inc.x x
x x Mr. Luis Villafuerte contributed his own P100,000.00. JAKA and respondent Jose Z. Apostol, original investors of Ex Libris contributed
P100,000.00 each; Ex Libris Publishing Company was paid 800 shares for the name of Mr. & Ms. magazine and goodwill. Thus, the original
stockholders of respondent Mr. & Ms. were:
Cert./No./Date Name of Stockholder No. of Shares %
001-9-15-76 JAKA Investments Corp. 1,000 21%
002-9-15-76 Luis Villafuerte 1,000 21%
003-9-15-76 Ramon L. Siy 1,000 21%
004-9-15-76 Jose Z. Apostol 1,000 21%
005-9-15-76 Ex Libris Publishing Co. 800 16%
4,800 96%
4. The above-named original stockholders of respondent Mr. & Ms. continue to be virtually the same stockholders up to this date x x x x
8. The petitioner being herself a minor stockholder and holder-in-trust of JAKA shares, represented and continues to represent JAKA in the
Board x x x x
21. Petitioner Nora A. Bitong is not the true party to this case, the true party being JAKA Investments Corporation which continues to be the
true stockholder of respondent Mr. & Ms.Publishing Co., Inc., consequently, she does not have the personality to initiate and prosecute this
derivative suit, and should therefore be dismissed x x x x
The answer of private respondents shows that there was no judicial admission that petitioner was a stockholder of Mr. & Ms. to
entitle her to file a derivative suit on behalf of the corporation. Where the statements of the private respondents were qualified with
phrases such as, "insofar as they are limited, qualified and/or expanded by," "the truth being as stated in the Affirmative
Allegations/Defenses of this Answer" they cannot be considered definite and certain enough, cannot be construed as judicial admissions. [7]
More so, the affirmative defenses of private respondents directly refute the representation of petitioner that she is a true and
genuine stockholder of Mr. & Ms. by stating unequivocally that petitioner is not the true party to the case but JAKA which continues to be
the true stockholder of Mr. & Ms. In fact, one of the reliefs which private respondents prayed for was the dismissal of the petition on the
ground that petitioner did not have the legal interest to initiate and prosecute the same.
When taken in its totality, the Amended Answer to the Amended Petition, or even the Answer to the Amended Petition alone,
clearly raises an issue as to the legal personality of petitioner to file the complaint. Every alleged admission is taken as an entirety of the fact
which makes for the one side with the qualifications which limit, modify or destroy its effect on the other side. The reason for this is, where
part of a statement of a party is used against him as an admission, the court should weigh any other portion connected with the statement,
which tends to neutralize or explain the portion which is against interest.
In other words, while the admission is admissible in evidence, its probative value is to be determined from the whole statement
and others intimately related or connected therewith as an integrated unit. Although acts or facts admitted do not require proof and cannot
be contradicted, however, evidence aliunde can be presented to show that the admission was made through palpable mistake. [8] The rule is
always in favor of liberality in construction of pleadings so that the real matter in dispute may be submitted to the judgment of the court.[9]
Petitioner also argues that since private respondents failed to appeal the 6 December 1990 Order and the 3 August 1993 Decision of the SEC
Hearing Panel declaring that she was the real party-in-interest and had legal personality to sue, they are now estopped from questioning
her personality.
Not quite. The 6 December 1990 Order is clearly an interlocutory order which cannot be considered as having finally resolved on
the merits the issue of legal capacity of petitioner. The SEC Hearing Panel discussed the issue of legal capacity solely for the purpose of
ruling on the application for writ of preliminary injunction as an incident to the main issues raised in the complaint. Being a mere
interlocutory order, it is not appealable.
For, an interlocutory order refers to something between the commencement and end of the suit which decides some point or
matter but it is not the final decision of the whole controversy. [10] Thus, even though the 6 December 1990 Order was adverse to private
respondents, they had the legal right and option not to elevate the same to the SEC En Banc but rather to await the decision which resolves
all the issues raised by the parties and to appeal therefrom by assigning all errors that might have been committed by the Hearing Panel.
On the other hand, the 3 August 1993 Decision of the Hearing Panel dismissing the derivative suit for failure to prove the charges
of mismanagement, fraud, disloyalty and conflict of interest and dissolving the writ of preliminary injunction, was favorable to private
respondents. Hence, they were not expected to appeal therefrom.
In fact, in the 3 August 1993 Decision, the Hearing Panel categorically stated that the evidence presented showed that the real
party-in-interest was not petitioner Bitong but JAKAand/or Senator Enrile. Petitioner was merely allowed to prosecute her complaint so as
not to sidetrack "the real issue to be resolved (which) was the allegation of mismanagement, fraud and conflict of interest allegedly
committed by respondent Eugenia D. Apostol." It was only for this reason that petitioner was considered to be capacitated and competent
to file the petition.
Accordingly, with the dismissal of the complaint of petitioner against private respondents, there was no compelling reason for the
latter to appeal to the SEC En Banc. It was in fact petitioners turn as the aggrieved party to exercise her right to appeal from the decision. It
is worthy to note that even during the appeal of petitioner before the SEC En Banc private respondents maintained their vigorous objection
to the appeal and reiterated petitioners lack of legal capacity to sue before the SEC.
Petitioner then contends that she was a holder of the proper certificates of shares of stock and that the transfer was recorded in
the Stock and Transfer Book of Mr. & Ms. She invokes Sec. 63 of The Corporation Code which provides 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. Petitioner alleges that even in the absence of a stock certificate, a stockholder
solely on the strength of the recording in the stock and transfer book can exercise all the rights as stockholder, including the right to file a
derivative suit in the name of the corporation. And, she need not present a separate deed of sale or transfer in her favor to prove
ownership of stock.
Section 63 of The Corporation Code expressly provides -
Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates
signed by the president or 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 stock so issued are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer
however shall be valid except as between the parties until the transfer is recorded in the books of the corporation showing 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 x x
xx
This provision above quoted envisions a formal certificate of stock which can be issued only upon compliance with certain
requisites. First, the 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. A mere typewritten statement advising a stockholder of the extent of his ownership in a
corporation without qualification and/or authentication cannot be considered as a formal certificate of stock. [11] Second, delivery of the
certificate is an essential element of its issuance. Hence, there is no issuance of a stock certificate where it is never detached from the stock
books although blanks therein are properly filled up if the person whose name is inserted therein has no control over the books of the
company.[12] Third, the par value, as to par value shares, or the full subscription as to no par value shares, must first be fully paid. Fourth,
the original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from a stockholder.
The certificate of stock itself once issued is a continuing affirmation or representation that the stock described therein is valid and
genuine and is at least prima facie evidence that it was legally issued in the absence of evidence to the contrary. However, this presumption
may be rebutted.[13] Similarly, books and records of a corporation which include even the stock and transfer book are generally admissible in
evidence in favor of or against the corporation and its members to prove the corporate acts, its financial status and other matters including
ones status as a stockholder. They are ordinarily the best evidence of corporate acts and proceedings.
However, the books and records of a corporation are not conclusive even against the corporation but are prima facie evidence
only. Parol evidence may be admitted to supply omissions in the records, explain ambiguities, or show what transpired where no records
were kept, or in some cases where such records were contradicted.[14] The effect of entries in the books of the corporation which purport to
be regular records of the proceedings of its board of directors or stockholders can be destroyed by testimony of a more conclusive
character than mere suspicion that there was an irregularity in the manner in which the books were kept. [15]
The foregoing considerations are founded on the basic principle that stock issued without authority and in violation of law is void
and confers no rights on the person to whom it is issued and subjects him to no liabilities.[16] 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. [17]
As found by the Hearing Panel and affirmed by respondent Court of Appeals, there is overwhelming evidence that despite what
appears on the certificate of stock and stock and transfer book, petitioner was not a bona fide stockholder of Mr. & Ms. before March 1989
or at the time the complained acts were committed to qualify her to institute a stockholders derivative suit against private
respondents. Aside from petitioners own admissions, several corporate documents disclose that the true party-in-interest is not petitioner
but JAKA.
Thus, while petitioner asserts in her petition that Certificate of Stock No. 008 dated 25 July 1983 was issued in her name, private
respondents argue that this certificate was signed by respondent Eugenia D. Apostol as President only in 1989 and was fraudulently
antedated by petitioner who had possession of the Certificate Book and the Stock and Transfer Book.Private respondents stress that
petitioners counsel entered into a stipulation on record before the Hearing Panel that the certificate was indeed signed by respondent
Apostol only in 1989 and not in 1983.
In her reply, petitioner admits that while respondent Eugenia D. Apostol signed the Certificate of Stock No. 008 in petitioners name
only in 1989, it was issued by the corporate secretary in 1983 and that the other certificates covering shares in Mr. & Ms. had not yet been
signed by respondent Eugenia D. Apostol at the time of the filing of the complaint with the SEC although they were issued years before.
Based on the foregoing admission of petitioner, there is no truth to the statement written in Certificate of Stock No. 008 that the
same was issued and signed on 25 July 1983 by its duly authorized officers specifically the President and Corporate Secretary because the
actual date of signing thereof was 17 March 1989. Verily, a formal certificate of stock could not be considered issued in contemplation of
law unless signed by the president or vice-president and countersigned by the secretary or assistant secretary.
In this case, contrary to petitioners submission, the Certificate of Stock No. 008 was only legally issued on 17 March 1989 when it
was actually signed by the President of the corporation, and not before that date. While a certificate of stock is not necessary to make one a
stockholder, e.g., where he is an incorporator and listed as stockholder in the articles of incorporation although no certificate of stock has
yet been issued, it is supposed to serve as paper representative of the stock itself and of the owners interest therein. Hence, when
Certificate of Stock No. 008 was admittedly signed and issued only on 17 March 1989 and not on 25 July 1983, even as it indicates that
petitioner owns 997 shares of stock of Mr. & Ms., the certificate has no evidentiary value for the purpose of proving that petitioner was a
stockholder since 1983 up to 1989.
And even the factual antecedents of the alleged ownership by petitioner in 1983 of shares of stock of Mr. & Ms. are indistinctive if
not enshrouded in inconsistencies. In her testimony before the Hearing Panel, petitioner said that early in 1983, to relieve Mr. & Ms. from
political pressure, Senator Enrile decided to divest the family holdings in Mr. & Ms. as he was then part of the government and Mr. &
Ms. was evolving to be an opposition newspaper. The JAKA shares numbering 1,000 covered by Certificate of Stock No. 001 were thus
transferred to respondent Eugenia D. Apostol in trust or in blank.[18]
Petitioner now claims that a few days after JAKAs shares were transferred to respondent Eugenia D. Apostol, Senator Enrile sold to
petitioner 997 shares of JAKA. For this purpose, a deed of sale was executed and antedated to 10 May 1983. [19] This submission of petitioner
is however contradicted by the records which show that a deed of sale was executed by JAKAtransferring 1,000 shares of Mr. & Ms. to
respondent Apostol on 10 May 1983 and not to petitioner.[20]
Then Senator Enrile testified that in May or June 1983 he was asked at a media interview if his family owned shares of stock in Mr.
& Ms. Although he and his family were stockholders at that time he denied it so as not to embarrass the magazine. He called up petitioner
and instructed her to work out the documentation of the transfer of shares from JAKA to respondent Apostol to be covered by a declaration
of trust. His instruction was to transfer the shares of JAKA in Mr. & Ms. and Ex Libris to respondent Apostol as a nominal holder. He then
finally decided to transfer the shareholdings to petitioner.[21]
When asked if there was any document or any written evidence of that divestment in favor of petitioner, Senator Enrile answered
that there was an endorsement of the shares of stock.He said that there was no other document evidencing the assignment to petitioner
because the stocks were personal property that could be transferred even orally. [22] Contrary to Senator Enriles testimony, however,
petitioner maintains that Senator Enrile executed a deed of sale in her favor.
A careful perusal of the records shows that neither the alleged endorsement of Certificate of Stock No. 001 in the name
of JAKA nor the alleged deed of sale executed by Senator Enrile directly in favor of petitioner could have legally transferred or assigned on
25 July 1983 the shares of stock in favor of petitioner because as of 10 May 1983 Certificate of Stock No. 001 in the name of JAKA was
already cancelled and a new one, Certificate of Stock No. 007, issued in favor of respondent Apostol by virtue of a Declaration of Trust and
Deed of Sale.[23]
It should be emphasized that on 10 May 1983 JAKA executed a deed of sale over 1,000 Mr. & Ms. shares in favor of respondent
Eugenio D. Apostol. On the same day, respondent Apostol signed a declaration of trust stating that she was the registered owner of
1,000 Mr. & Ms. shares covered by Certificate of Stock No. 007.
The declaration of trust further showed that although respondent Apostol was the registered owner, she held the shares of stock
and dividends which might be paid in connection therewith solely in trust for the benefit of JAKA, her principal. It was also stated therein
that being a trustee, respondent Apostol agreed, on written request of the principal, to assign and transfer the shares of stock and any and
all such distributions or dividends unto the principal or such other person as the principal would nominate or appoint.
Petitioner was well aware of this trust, being the person in charge of this documentation and being one of the witnesses to the
execution of this document.[24] Hence, the mere alleged endorsement of Certificate of Stock No. 001 by Senator Enrile or by a duly
authorized officer of JAKA to effect the transfer of shares of JAKA to petitioner could not have been legally feasible because Certificate of
Stock No. 001 was already canceled by virtue of the deed of sale to respondent Apostol.
And, there is nothing in the records which shows that JAKA had revoked the trust it reposed on respondent Eugenia D.
Apostol. Neither was there any evidence that the principal had requested her to assign and transfer the shares of stock to petitioner. If it
was true that the shares of stock covered by Certificate of Stock No. 007 had been transferred to petitioner, the person who could legally
endorse the certificate was private respondent Eugenia D. Apostol, she being the registered owner and trustee of the shares of stock
covered by Certificate of Stock No. 007. It is a settled rule that the trustee should endorse the stock certificate to validate the cancellation of
her share and to have the transfer recorded in the books of the corporation. [25]
In fine, the records are unclear on how petitioner allegedly acquired the shares of stock of JAKA. Petitioner being the chief
executive officer of JAKA and the sole person in charge of all business and financial transactions and affairs of JAKA[26] was supposed to be in
the best position to show convincing evidence on the alleged transfer of shares to her, if indeed there was a transfer. Considering
that petitioners status is being questioned and several factual circumstances have been presented by private respondents disproving
petitioners claim, it was incumbent upon her to submit rebuttal evidence on the manner by which she allegedly became a stockholder. Her
failure to do so taken in the light of several substantial inconsistencies in her evidence is fatal to her case.
The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or any other person legally
authorized to make the transfer shall be sufficient to effect the transfer of shares only if the same is coupled with delivery. 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 new transferee.
Thus, for a valid transfer of stocks, the requirements are as follows: (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. [27] At most, in the instant case, petitioner has
satisfied only the third requirement. Compliance with the first two requisites has not been clearly and sufficiently shown.
Considering that the requirements provided under Sec. 63 of The Corporation Code should be mandatorily complied with, the rule
on presumption of regularity cannot apply. The regularity and validity of the transfer must be proved. As it is, even the credibility of the
stock and transfer book and the entries thereon relied upon by petitioner to show compliance with the third requisite to prove that she was
a stockholder since 1983 is highly doubtful.
The records show that the original stock and transfer book and the stock certificate book of Mr. & Ms. were in the possession of
petitioner before their custody was transferred to the Corporate Secretary, Atty. Augusto San Pedro. [28] On 25 May 1988, Assistant
Corporate Secretary Renato Jose Unson wrote Mr. & Ms. about the lost stock and transfer book which was also noted by the corporations
external auditors, Punongbayan and Araullo, in their audit. Atty. Unson even informed respondent Eugenia D. Apostol as President of Mr. &
Ms. that steps would be undertaken to prepare and register a new Stock and Transfer Book with the SEC. Incidentally, perhaps strangely,
upon verification with the SEC, it was discovered that the general file of the corporation with the SEC was missing. Hence, it was even SO ORDERED.
possible that the original Stock and Transfer Book might not have been registered at all.

On 20 October 1988 respondent Eugenia D. Apostol wrote Atty. Augusto San Pedro noting the changes he had made in the Stock
and Transfer Book without prior notice to the corporate officers.[29] In the 27 October 1988 directors' meeting, respondent Eugenia D.
Apostol asked about the documentation to support the changes in the Stock and Transfer Book with regard to the JAKA shares. Petitioner
answered that Atty. San Pedro made the changes upon her instructions conformably with established practice. [30]

This simply shows that as of 1988 there still existed certain issues affecting the ownership of the JAKA shares, thus raising doubts
whether the alleged transactions recorded in the Stock and Transfer Book were proper, regular and authorized. Then, as if to magnify and
compound the uncertainties in the ownership of the shares of stock in question, when the corporate secretary resigned, the Stock and
Transfer Book was delivered not to the corporate office where the book should be kept but to petitioner. [31]

That JAKA retained its ownership of its Mr. & Ms. shares was clearly shown by its receipt of the dividends issued in December
1986.[32] This only means, very obviously, that Mr. & Ms.shares in question still belonged to JAKA and not to petitioner. For, dividends are
distributed to stockholders pursuant to their right to share in corporate profits. When a dividend is declared, it belongs to the person who is
the substantial and beneficial owner of the stock at the time regardless of when the distribution profit was earned. [33]

Finally, this Court takes notice of the glaring and open admissions of petitioner made, not just seven (7) but nine (9) times, during
the 22 September 1988 meeting of the board of directors that the Enriles were her principals or shareholders, as shown by the minutes
thereof which she duly signed[34] -

5. Mrs. E. Apostol explained to the Directors that through her efforts, the asset base of the Company has improved and profits were
realized. It is for this reason that the Company has declared a 100% cash dividend in 1986. She said that it is up for the Board to decide
based on this performance whether she should continue to act as Board Chairman or not. In this regard, Ms. N.A. Bitong expressed her
recollection of how Ex-Libris/Mr. & Ms. were organized and her participation for and on behalf of her principals, as follows: She recalled
that her principals were invited by Mrs. E. Apostol to invest in Ex-Libris and eventually Mr. & Ms. The relationship between her principals
and Mrs. E. Apostol made it possible for the latter to have access to several information concerning certain political events and issues. In
many instances, her principals supplied first hand and newsworthy information that made Mr. & Ms. a popular paper x x x x

6. According to Ms. Bitong, her principals were instrumental in helping Mr. & Ms. survive during those years that it was cash strapped x x x
x Ms. N.A. Bitong pointed out that the practice of using the former Ministers influence and stature in the government is one thing which her
principals themselves are strongly against x x x x

7. x x x x At this point, Ms. N. Bitong again expressed her recollection of the subject matter as follows: (a) Mrs. E. Apostol, she remembers,
brought up the concept of a cooperative-ran newspaper company in one of her breakfast session with her principals sometime during the
end of 1985. Her principals when asked for an opinion, said that they recognized the concept as something very noble and visible x x x
x Then Ms. Bitong asked a very specific question - "When you conceptualized Ex-Libris and Mr. & Ms., did you not think of my shareholders
the Ponce Enriles as liabilities? How come you associated yourself with them then and not now? What is the difference?" Mrs. Apostol did
not answer the question.

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 JAKAto 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 stockholders 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 stockholders 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 B. Espiritu as
well as annulling the 5 November 1993, 24 January 1994 and 18 February 1994 Orders of the SEC En Banc in CA-G.R. No. SP 33873, is
AFFIRMED. Costs against petitioner.