CASE NO.

15
Sarona vs NLRC 2012
Facts: Petitioner, a security guard in Scepter since April 1976, was asked by Scepters operations
manager on June 2003, to submit a resignation letter as a requirement for an application in Royale and to fill up an
employment application form for the said company. He was then assigned at Highlight Metal Craft Inc. from July 29
to August 8, 2003 and was later transferred to Wide Wide World Express Inc. On September 2003, he was informed
that his assignment at WWWE Inc. was withdrawn because Royale has been allegedly replaced by another security
agency which he later discovered to be untrue. Nevertheless, he was once again assigned at Highlight Metal
sometime in September 2003 and when he reported at Royals office on October 1, 2003, he was informed that
he would no longer be given any assignment as instructed by Scepters general manager. He thus filed a complaint
for illegal dismissal. The LA ruled in petitioners favor as he found him illegally dismissed and was
not convinced by the respondents claim on petitioners abandonment. Respondents were ordered to pay back wages
computed from the day he was dismissed up to the promulgation of his decision on May 11, 2005.The LA also
ordered for the payment of separation pay but refused to pierce Royales corporate veil. Respondents appealed to the
NLRC claiming that the LA acted with grave abuse of discretion upon ruling on the illegal dismissal of petitioner.
NLRC partially affirmed the LAs decision with regard to petitioners illegal dismissal and separation pay but
modified the amount of back wages and limited it to only 3 months of his last month salary reducing P95, 600
to P15, 600 since he worked for Royale for only 1 month and 3 days. Petitioner did not appeal to LA but raised the
validity of LAs findings on piercing Royales corporate personality and computation of his separation pay and such
petition was dismissed by the NLRC. Petitioner elevated NLRCs decision to the CA on a petition for certiorari, and
the CA disagreed with the NLRCs decision of not proceeding to review the evidence for determining if Royale is
Scepters alter ego that would warrant the piercing of its corporate veil.
Issue: Whether or not Royales corporate fiction should be pierced for the purpose of compelling it to
recognize the petitioners length of service with Scepter and for holding it liable for the benefits that have accrued to
him arising from his employment with Scepter.
Ruling: The doctrine of piercing the corporate veil is applicable on alter ego cases, where a corporation is
merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized
and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct
of another corporation. The respondents scheme reeks of bad faith and fraud and compassionate justice dictates
that Royale and Scepter be merged as a single entity, compelling Royale to credit and recognize the petitioners
length of service with Scepter. The respondents cannot use the legal fiction of a separate corporate personality for
ends subversive of the policy and purpose behind its creation or which could not have been intended by law to
which it owed its being. Also, Scepter and Royale have the same principal place of business. As early as October 14,
1994, Aida and Wilfredo became the owners of the property used by Scepter as its principal place of business by
virtue of a Deed of Absolute Sale they executed with Roso. Royale, shortly after its incorporation, started to hold

office in the same property. These, the respondents failed to dispute. Royale also claimed a right to the cash bond
which the petitioner posted when he was still with Scepter. If Scepter and Royale are indeed separate entities,
Scepter should have released the petitioners cash bond when he resigned and Royale would have required the
petitioner to post a new cash bond in its favor. The way on how petitioner was made to resign from Scepter then
later on made an employee of Royale, reflects the use of the legal fiction of the separate corporate personality and is
an implication of continued employment. Royale is a continuation or successor or Scepter since the employees of
Scepter and of Royale are the same and said companies have the same principal place of business. Because
petitioners rights were violated and his employer has not changed, he is entitled to separation pay which must be
computed from the time he was hired until the finality of this decision. Royale is also ordered to pay him back
wages from his dismissal on October 1, 2003 until the finality of this decision. However, the amount already
received by petitioner from the respondents shall be deducted. He is also awarded moral and exemplary damages
amounting to P 25, 000.00 each for his dismissal which was tainted with bad faith and fraud. Petition is granted.
CAs decision is reversed and set aside.
CASE NO. 16
GALVEZ VS CA
FACTS:
Radio Marine Network Inc. (RMSI) claiming to do business under the name Smartnet Philippines 6 and/or Smartnet
Philippines, Inc. (SPI),7 applied for an Omnibus Credit Line for various credit facilities with Asia United Bank
(AUB). To induce AUB to extend the Omnibus Credit Line, RMSI, through its directors and officers, presented its
Articles of Incorporation with its 400-peso million capitalization and its congressional telecom franchise. RMSI was
represented by the following officers and directors occupying the following positions:
Gilbert Guy

- Exec. V-Pres./Director

Philip Leung

- Managing Director

Katherine Guy

- Treasurer

Rafael Galvez

- Executive Officer

Eugenio Galvez, Jr.

- Chief Financial
Officer/Comptroller

Satisfied with the credit worthiness of RMSI, AUB granted it a P250 Million Omnibus Credit Line, under the name
of Smartnet Philippines, RMSIs Division. On 1 February 2000, the credit line was increased to P452 Million pesos
after a third-party real estate mortgage by Goodland Company, Inc., an affiliate of Guy Group of Companies, in
favor of Smartnet Philippines, was offered to the bank. Simultaneous to the increase of the Omnibus Credit Line,
RMSI submitted a proof of authority to open the Omnibus Credit Line and peso and dollar accounts in the name of
Smartnet Philippines, Inc., which Gilbert Guy, et al., represented as a division of RMSI, as evidenced by the
letterhead used in its formal correspondences with the bank and the financial audit made by SGV & Co., an
independent accounting firm. Attached to this authority was the Amended Articles of Incorporation of RMSI, doing
business under the name of Smartnet Philippines, and the Secretarys Certificate of SPI authorizing its directors,
Gilbert Guy and Philip Leung to transact with AUB.8 Prior to this major transaction, however, and, unknown to
AUB, while RMSI was doing business under the name of Smartnet Philippines, and that there was a division under
the name Smartnet Philippines, Gilbert Guy, et al. formed a subsidiary corporation, the SPI with a paid-up capital of
only P62,500.00.

Believing that SPI is the same as Smartnet Philippines - the division of RMSI - AUB granted to it, among others,
Irrevocable Letter of Credit No. 990361 in the total sum of $29,300.00 in favor of Rohde & Schwarz Support Centre
Asia Ptd. Ltd., which is the subject of these consolidated petitions. To cover the liability of this Irrevocable Letter of
Credit, Gilbert Guy executed Promissory Note No. 010445 in behalf of SPI in favor of AUB. This promissory note
was renewed twice, once, in the name of SPI (Promissory Note No. 011686), and last, in the name of Smartnet
Philippines under Promissory Note No. 136131, bolstering AUBs belief that RMSIs directors and officers
consistently treated this letter of credit, among others, as obligations of RMSI.
When RMSIs obligations remained unpaid, AUB sent letters demanding payments. RMSI denied liability
contending that the transaction was incurred solely by SPI, a corporation which belongs to the Guy Group of
Companies, but which has a separate and distinct personality from RMSI. RMSI further claimed that while Smartnet
Philippines is an RMSI division, SPI, is a subsidiary of RMSI, and hence, is a separate entity.
Aggrieved, AUB filed a case of syndicated estafa under Article 315 (2)(a) of the Revised Penal Code in relation to
Section 1 of Presidential Decree No. 1689 against the interlocking directors of RMSI and SPI, namely, Gilbert G.
Guy, Rafael H. Galvez, Philip Leung, Katherine L. Guy, and Eugenio H. Galvez, Jr., before the Office of the City
Prosecutor of Pasig City.
AUB alleged that the directors of RMSI deceived it into believing that SPI was a division of RMSI, only to insist on
its separate juridical personality later on to escape from its liabilities with AUB. AUB contended that had it not been
for the fraudulent scheme employed by Gilbert Guy, et al., AUB would not have parted with its money, which,
including the controversy subject of this petition, amounted to hundreds of millions of pesos.
Our Ruling
We already emphasized in the 25 April 2012 Decision that "this controversy could have been just a simple case for
collection of sum of money had it not been for the sophisticated fraudulent scheme which Gilbert Guy, et
al.,employed in inducing AUB to part with its money."9 Our Decision meticulously discussed how we found
probable cause, a finding affirming that of the prosecutor and the Court of Appeals, to indict petitioners for the crime
ofestafa under Article 315 (2)(a) of the Revised Penal Code.10 We noted there and we now reiterate that it was
neither the petitioners act of borrowing money and not paying it, nor their denial thereof, but their very act of
deceiving AUB in order for the latter to part with its money that is sought to be penalized. Thus:
x x x As early as the Penal Code of Spain, which was enforced in the Philippines as early as 1887 until it was
replaced by the Revised Penal Code in 1932, the act of fraud through false pretenses or similar deceit was already
being punished. Article 335 of the Penal code of Spain punished a person who defrauded another by falsely
pretending to possess any power, influence, qualification, property, credit, agency or business, or by means of
similar deceit.11
Under Article 315 (2)(a) of the Revised Penal Code, estafa is committed by any person who shall defraud another
by, among others, false pretenses or fraudulent acts executed prior to or simultaneous with the commission of
fraud, i.e., by using a fictitious name, falsely pretending to possess power, influence, qualifications, property, credit,
agency, business or imaginary transactions; or by means of other similar deceits.
Underscoring the aforesaid discussion, we found that:
First, Gilbert Guy, Philip Leung, Katherine Guy, Rafael Galvez and Eugene Galvez, Jr., interlocking directors of
RMSI and SPI, represented to AUB in their transactions that Smartnet Philippines and SPI were one and the same
entity. While Eugene Galvez, Jr. was not a director of SPI, he actively dealt with AUB in his capacity as RMSIs
Chief Financial Officer/Comptroller by falsely representing that SPI and RMSI were the same entity. Gilbert Guy,
Philip Leung, Katherine Guy, Rafael Galvez, and Eugene Galvez, Jr. used the business names Smartnet Philippines,
RMSI, and SPI interchangeably and without any distinction. They successfully did this by using the confusing
similarity of RMSIs business name, i.e., Smartnet Philippines its division, and, Smartnet Philippines, Inc. the
subsidiary corporation. Further, they were able to hide the identity of SPI, by having almost the same directors as

that of RMSI. In order to let it appear that SPI is the same as that of Smartnet Philippines, they submitted in their
application documents of RMSI, including its Amended Articles of Incorporation, third-party real estate mortgage of
Goodland Company in favor of Smartnet Philippines, and audited annual financial statement of SGV & Co. Gilbert
Guy, et al. also used RMSI letterhead in their official communications with the bank and the contents of these
official communications conclusively pointed to RMSI as the one which transacted with the bank.
These circumstances are all indicia of deceit. Deceit is the false representation of a matter of fact whether by
words or conduct, by false or misleading allegations, or by concealment of that which should have been disclosed
which deceives or is intended to deceive another so that he shall act upon it to his legal injury. [Citation omitted]
Second, the intent to deceive AUB was manifest from the start. Gilbert Guy et al.[,] laid down first all the necessary
materials they need for this deception before defrauding the bank by first establishing Smartnet Philippines as a
division of Radio Marine under which Radio Marine Network Inc. operated its business. Then it organized a
subsidiary corporation, the SPI, with a capital of only P62,000.00. Later, it changed the corporate name of Radio
Marine Network Inc. into RMSI.
Undoubtedly, deceit here was conceived in relation to Gilbert Guy, et al.s transaction with AUB. There was a plan,
documented in corporations papers, that led to the defraudation of the bank. The circumstances of the directors and
officers acts in inserting in Radio Marine the name of Smartnet; the creation of its division Smartnet Philippines;
and its registration as business name as Smartnet Philippines with the Department of Trade and Industry, together
with the incorporation of its subsidiary, the SPI, are indicia of a pre-conceived scheme to create this elaborate fraud,
victimizing a banking institution, which perhaps, is the first of a kind in Philippine business.
xxxx
Third, AUB would not have granted the Irrevocable Letter of Credit No. 990361, among others, had it known that
SPI which had only P62,500.00 paid-up capital and no assets, is a separate entity and not the division or business
name of RMSI. x x x.
xxxx
It is true that ordinarily, in a letter of credit transaction, the bank merely substitutes its own promise to pay for the
promise to pay of one of its customers, who in turn promises to pay the bank the amount of funds mentioned in the
letters of credit plus credit or commitments fees mutually agreed upon. Once the issuing bank shall have paid the
beneficiary after the latters compliance with the terms of the letter of credit, the issuing bank is entitled to
reimbursement for the amount it paid under the letter of credit. [Citation omitted]
In the present case, however, no reimbursement was made outright, precisely because the letter of credit was secured
by a promissory note executed by SPI. The bank would have not agreed to this transaction had it not been deceived
by Gilbert Guy, et al. into believing the RMSI and SPI were one and the same entity. Guy and his cohorts acts in (1)
securing the letter of credit guaranteed by a promissory note in behalf of SPI; and, (2) their act of representing SPI
as RMSIs Division, were indicia of fraudulent acts because they fully well know, even before transacting with the
bank, that: (a) SPI was a separate entity from Smartnet Philippines, the RMSIs Division, which has the Omnibus
Credit Line; and (b) despite this knowledge, they misrepresented to the bank that SPI is RMSIs division. Had it not
[been] for this false representation, AUB would [not] have granted SPIs letter of credit to be secured with a
promissory note because SPI as a corporation has no credit line with AUB and SPI by its own, has no credit
standing.
Fourth, it is not in dispute that the bank suffered damage, which, including this controversy, amounted to hundreds
of millions of pesos.12 (Emphasis supplied)
CASE NO 17
GOLD LINE TOURS, INC., PETITIONER, VS. HEIRS OF MARIA CONCEPCION LACSA, RESPONDENTS

FACTS:
Concepcion, a new graduate of BS Nursing, boarded a bus from Sorsogon to Cubao to take the board exam for
nurses. The bus, a Goldline passenger bus, was operated by William Cheng of Travel and Tours Advisers, Inc.
Somewhere in Pili, Camarines Sur, the bus collided with a passenger jeepney while trying to overtake a bus. The
resulting collision caused a metal part of the jeepney to detach and strike Concepcion, causing her instant death. The
heirs of Concepcion filed a case for damages based on breach of contract of carriage.
After trial, the RTC rendered a decision in favor of the heirs of Concepcion, adjudging Travel And Tours Advisers,
Inc. liable for damages.
The defendant filed their appeal to the Court of Appeals, which was dismissed for non-payment of docket and other
lawful fees within the required period. The heirs of Concepcion then filed a motion for issuance of writ of execution,
which was granted by the lower court. The sheriffs partial return indicated Willim Ching and Travel and Tours, Inc.
failure to satisfy the judgment, hence a passenger bus belonging to the company was taken by the sheriff to satisfy
the judgment.
Comes now, Goldline Travel and Tours, which filed a verified third-party claim on the ground that it owns the
passenger bus taken by the sheriff, it was never served a summons in the civil case, and that it is an entity separate
and distinct from the defendant in the civil case, Travel and Tours Advisers, Inc.
Opposed by the plaintiffs, the RTC denied the third-party claim, on the ground that the two companies are one and
the same companies.
Aggrieved, Goldline Travel and Tours filed a petition for certiorari to question the denial by the RTC of the thirdparty claim, which the CA also denied, holding that petitioner and Travel and Tours Advisers Inc. are the same
company.
Hence, Goldline elevated the case to the Supreme Court:
This Court is not persuaded by the proposition of the third party claimant that a corporation has an existence
separate and/or distinct from its members insofar as this case at bar is concerned, for the reason that whenever
necessary for the interest of the public or for the protection of enforcement of their rights, the notion of legal entity
should not and is not to be used to defeat public convenience, justify wrong, protect fraud or defend crime.
Apposite to the case at bar is the case of Palacio vs. Fely Transportation Co., L-15121, May 31, 1962, 5 SCRA 1011
where the Supreme Court held:Where the main purpose in forming the corporation was to evade ones subsidiary
liability for damages in a criminal case, the corporation may not be heard to say that it has a personality separate and
distinct from its members, because to allow it to do so would be to sanction the use of fiction of corporate entity as a
shield to further an end subversive of justice (La Campana Coffee Factory, et al. v. Kaisahan ng mga Manggagawa,
etc., et al., L-5677, May 25, 1953). The Supreme Court can even substitute the real party in interest in place of the
defendant corporation in order to avoid multiplicity of suits and thereby save the parties unnecessary expenses and
delay. (Alfonso vs. Villamor, 16 Phil. 315).

This is what the third party claimant wants to do including the defendant in this case, to use the separate and distinct
personality of the two corporation as a shield to further an end subversive of justice by avoiding the execution of a
final judgment of the court.
As we see it, the RTC had sufficient factual basis to find that petitioner and Travel and Tours Advisers, Inc. were one
and the same entity, specifically: (a) documents submitted by petitioner in the RTC showing that William Cheng,
who claimed to be the operator of Travel and Tours Advisers, Inc., was also the President/Manager and an
incorporator of the petitioner; and (b) Travel and Tours Advisers, Inc. had been known in Sorsogon as Goldline. On
its part, the CA cogently observed:As stated in the (RTC) decision supra, William Ching disclosed during the trial of
the case that defendant Travel & Tours Advisers, Inc. (Goldline), of which he is an officer, is operating sixty (60)
units of Goldline buses. That the Goldline buses are used in the operations of defendant company is obvious from
Mr. Chengs admission. The Amended Articles of Incorporation of Gold Line Tours, Inc. disclose that the following
persons are the original incorporators thereof: Antonio O. Ching, Maribel Lim Ching, witness William Ching, Anita
Dy Ching and Zosimo Ching. (Rollo, pp. 105-108) We see no reason why defendant company would be using
Goldline buses in its operations unless the two companies are actually one and the same.
Moreover, the name Goldline was added to defendants name in the Complaint. There was no objection from
William Ching who could have raised the defense that Gold Line Tours, Inc. was in no way liable or involved.
Indeed it appears to this Court that rather than Travel & Tours Advisers, Inc. it is Gold Line Tours, Inc., which
should have been named party defendant.
Be that as it may, We concur in the trial courts finding that the two companies are actually one and the same, hence
the levy of the bus in question was proper.
The RTC thus rightly ruled that petitioner might not be shielded from liability under the final judgment through the
use of the doctrine of separate corporate identity. Truly, this fiction of law could not be employed to defeat the ends
of justice.
CASE NO. 18
Juanito Ang vs spouses Ang

Sunrise Marketing (Bacolod), Inc. (SMBI) is a duly registered corporation owned by the Ang family.4 Its
current stockholders and their respective stockholdings are as follows: 5
Stockholder

Number of Shares

Juanito Ang

8,750

Anecita Ang

1,250

Jeannevie Ang

2,500

Roberto Ang

8,750

Rachel Ang

3,750

Total

25,000

Juanito Ang (Juanito) and Roberto Ang (Roberto) are siblings. Anecita Limoco-Ang (Anecita) is Juanitos
wife and Jeannevie is their daughter. Roberto was elected President of SMBI, while Juanito was elected

as its Vice President. Rachel Lu-Ang (Rachel) and Anecita are SMBIs Corporate Secretary and Treasurer,
respectively.
On 31 July 1995, Nancy Ang (Nancy), the sister of Juanito and Roberto, and her husband, Theodore Ang
(Theodore), agreed to extend a loan to settle the obligations of SMBI and other corporations owned by the
Ang family, specifically Bayshore Aqua Culture Corporation, Oceanside Marine Resources and JR Aqua
Venture.6Nancy and Theodore issued a check in the amount of $1,000,000.00 payable to "Juanito Ang
and/or Anecita Ang and/or Roberto Ang and/or Rachel Ang." Nancy was a former stockholder of SMBI,
but she no longer appears in SMBIs General Information Sheets as early as 1996. 7 Nancy and Theodore
are now currently residing in the United States. There was no written loan agreement, in view of the close
relationship between the parties. Part of the loan was also used to purchase real properties for SMBI, for
Juanito, and for Roberto.8
On 22 December 2005, SMBI increased its authorized capital stock to P10,000,000.00. The Certificate of
Increase of Capital Stock was signed by Juanito, Anecita, Roberto, and Rachel as directors of
SMBI.9 Juanito claimed, however, that the increase of SMBIs capital stock was done in contravention of
the Corporation Code.10According to Juanito, when he and Anecita left for Canada:
x x x Sps. Roberto and Rachel Ang took over the active management of [SMBI]. Through the
employment of sugar coated words, they were able to successfully manipulate the stocks sharings
between themselves at 50-50 under the condition that the procedures mandated by the Corporation Code
on increase of capital stock be strictly observed (valid Board Meeting). No such meeting of the Board to
increase capital stock materialized. It was more of an accommodation to buy peace x x x. 11
Juanito claimed that payments to Nancy and Theodore ceased sometime after 2006. On 24 November
2008, Nancy and Theodore, through their counsel here in the Philippines, sent a demand letter to
"Spouses Juanito L. Ang/Anecita L. Ang and Spouses Roberto L. Ang/Rachel L. Ang" for payment of the
principal amounting to $1,000,000.00 plus interest at ten percent (10%) per annum, for a total of
$2,585,577.37 within ten days from receipt of the letter. 12 Roberto and Rachel then sent a letter to Nancy
and Theodores counsel on 5 January 2009, saying that they are not complying with the demand letter
because they have not personally contracted a loan from Nancy and Theodore.
On 8 January 2009, Juanito and Anecita executed a Deed of Acknowledgment and Settlement Agreement
(Settlement Agreement) and an Extra-Judicial Real Estate Mortgage (Mortgage). Under the foregoing
instruments, Juanito and Anecita admitted that they, together with Roberto and Rachel, obtained a loan
from Nancy and Theodore for $1,000,000.00 on 31 July 1995 and such loan shall be secured by:
a) Juanito and Anecitas fifty percent share over a parcel of land registered in the name of SMBI;
b) a parcel of land registered in the name of Juanito Ang;
c) Juanitos fifty percent share in 7 parcels of land registered in his and Robertos name;
d) a parcel of land registered in the name of Roberto;
e) a parcel of land registered in the name of Rachel; and
f) Roberto and Rachels fifty percent share in 2 parcels of land registered in the name of their son,
Livingstone L. Ang (Livingstone), and in another lot registered in the name of Livingstone and
Alvin Limoco Ang.13

A certain Kenneth C. Locsin (Locsin) signed on behalf of Nancy and Theodore, under a Special Power of
Attorney which was not attached as part of the Settlement Agreement or the Mortgage, nor included in the
records of this case.
Thereafter, Juanito filed a "Stockholder Derivative Suit with prayer for an ex-parte Writ of
Attachment/Receivership" (Complaint) before the RTC Bacolod on 29 January 2009. He alleged that "the
intentional and malicious refusal of defendant Sps. Roberto and Rachel Ang to settle their 50% share x x
x of the total obligation x x x will definitely affect the financial viability of plaintiff SMBI." 14 Juanito also
claimed that he has been "illegally excluded from the management and participation in the business of
[SMBI through] force, violence and intimidation" and that Rachel and Roberto have seized and carted
away SMBIs records from its office.15
The Complaint sought the following reliefs:
a) Issuance of an ex-parte Writ of Attachment and/or Garnishment, with a Break Open Order
covering the assets of the spouses Roberto and Rachel Ang, or any interest they may have against
third parties;
b) Placement of SMBI under Receivership pending resolution of the case;
c) Enforcement of Juanitos right to actively participate in the management of SMBI;
d) Issuance of an Order compelling the Spouses Roberto and Rachel Ang to:
i. Render an accounting of the utilization of the loan amounting to $2,585,577.37
orP120,229,347.26;
ii. Pay fifty percent of the aforementioned loan, amounting to 60,114,673.62;
iii. Explain why Nancy was removed as a stockholder as far as SMBIs reportorial
requirements with the SEC are concerned;
iv. Restore Juanitos right to actively manage the affairs of the corporation; and
v. Pay attorneys fees amounting to P20,000.00.
On 29 January 2009, the RTC Bacolod issued an Order16 granting the application for an ex-parte writ of
attachment and break open order. Atty. Jerry Basiao, who filed an application for appointment as Receiver
of SMBI, was directed by the RTC Bacolod to furnish the required Receivership Bond. 17 On the same
date, Roberto and Rachel moved to quash the writ of attachment and set aside the break open order and
appointment of receiver.18 They claimed that these were issued in violation of their right to due process:
Records of this case would show that the complaint was filed before the RTC Bacolod at 2:50 p.m. of
January 29, 2009. x x x Counsel for the defendant-spouses went to the RTC Bacolod at around 3:00 p.m.
on January 29, 2009 to inquire on the status of the case and was informed that the last pleading on record
is his entry of appearance with the conformity of the defendant Rachel Ang. Counsel was however
informed by the clerk of court that the Honorable Judge has already issued an order directing the issuance
of the writ of preliminary attachment, receivership and break open order but said order was not officially
released yet x x x. Due to the undersigned counsels insistence, however, said clerk of court of this

Honorable Court furnished him a copy of said order x x x. The clerk of court and the clerk in charge of
civil cases assured counsel that no writ of preliminary attachment was prepared or issued x x x. Despite
such assurance x x x [and counsels advice that they shall move to quash the order the following
morning], that afternoon, the clerk of court x x x clandestinely, hurriedly and surreptitiously, for reasons
known only to her, x x x prepared the writ of attachment x x x. 19
In her Verified Answer Ad Cautelam which was filed on 10 February 2009, Rachel prayed that the
Complaint be dismissed as it was not a bona fide derivative suit as defined under the Interim Rules of
Procedure for Intra-Corporate Controversies20 (Interim Rules). According to Rachel, the Complaint,
although labelled as a derivative suit, is actually a collection suit since the real party in interest is not
SMBI, but Nancy and Theodore:
The cause of action does not devolve on the corporation as the alleged harm or wrong pertains to the right
of the Sps. Theodore and Nancy Ang, as creditors, to collect the amount allegedly owed to them. x x x
xxxx
That the instant suit is for the benefit of a non-stockholder and not the corporation is obvious when the
primary relief prayed for in the Complaint which is for the defendants "to pay the amount of Php
60,114,673.62 plus interest which is 50% of the loan obligations of plaintff [SMBI] to its creditor Sps.
Theodore and Nancy Ang." Otherwise stated, the instant suit is nothing but a complaint for sum of money
shamelessly masked as a derivative suit. 21
Rachel also argued that the Complaint failed to allege that Juanito "exerted all reasonable efforts to
exhaust all intra-corporate remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation to obtain the relief he desires," as required by the Interim Rules.
During cross-examination, Juanito admitted that there was no prior demand for accounting or liquidation
nor any written objection to SMBIs increase of capital stock. He also conceded that the loan was
extended by persons who are not stockholders of SMBI. Thus, Rachel filed a Motion for Preliminary
Hearing on Affirmative Defenses on 27 November 2009, arguing that in view of Juanitos admissions, the
Complaint should be dismissed pursuant to Section 1 of the Interim Rules. Juanito filed his Opposition
thereto on 8 January 2010,22 arguing that applying this Courts ruling in Hi-Yield Realty, Inc. v. Court of
Appeals,23 the requirement for exhaustion of intra-corporate remedies is no longer needed when the
corporation itself is "under the complete control of the persons against whom the suit is filed." Juanito
also alleged that he and Anecita were deceived into signing checks to pay off bogus loans purportedly
extended by Rachels relatives in favor of SMBI. Some of the checks were payable to cash, and were
allegedly deposited in Rachels personal account. 24 He also claimed that Rachels Motion is disallowed
under the Interim Rules.
On 9 February 2009, Juanito moved that Rachel and her daughter, Em Ang (Em), as well as their counsel,
Atty. Filomeno Tan, Jr. (Atty. Tan) be held in contempt. Juanito claimed that on the date the writ of
attachment and break open order were issued, Atty. Tan, accompanied by Rachel and Em, "arrogantly
demanded from the Clerk in charge of Civil Cases that he be furnished a copy of the [said orders] x x x
otherwise he will tear the records of the subject commercial case." Juanito also accused Atty. Tan of
surreptitiously photocopying the said orders prior to service of the summons, Complaint, Writ of
Attachment and Attachment Bond. According to Juanito, the purpose of obtaning a copy of the orders was
to thwart its implementation. Thus, when the authorities proceeded to the SMBI premises to enforce the
orders, they found that the place was padlocked, and that all corporate documents and records were

missing. On 14 December 2010, the Sheriff and other RTC Bacolod employees then filed a Verified
Complaint against Atty. Tan before this Court, which also contained the foregoing allegations. 25
Rachel then filed a Reply on 27 January 2010, claiming that Juanitos reliance on the Hi-Yield case is
misplaced:
The facts x x x of this case are strikingly different from that in Hi-Yield Realty. In that case, the Supreme
Court noted that the complaining stockholder was a minority stockholder. However, in the case at bar,
Juanito Ang is one of the biggest stockholders of [SMBI]. x x x He is a member of [SMBIs] Board of
Directors and is even the vice-president thereof. Furthermore, in Hi-Yield Realty, the Supreme Court
noted that the complaining stockholder was excluded from the affairs of the corporation. However, the
evidence thus far presented, particularly Juanito Angs admission, show that he and his wife, Anecita,
participate in the disbursement of [SMBIs] funds x x x. 26
Juanito filed his Rejoinder on 2 March 2010.
The Ruling of the RTC Bacolod
On 27 September 2010, the RTC Bacolod issued an Order which stated that:
WHEREFORE, premises considered, the court hereby rules that the present action is a DERIVATIVE
SUIT and the Motion to Dismiss based on Affirmative Defenses raised by defendants is DENIED for lack
of merit.27
The RTC Bacolod found that the issuance of the checks to settle the purported obligations to Rachels
relatives, as well as the removal of Nancy as a stockholder in SMBIs records as filed with the SEC,
shows that Rachel and Roberto committed fraud. The Order likewise stated that the requirement of
exhaustion of intra-corporate remedies is no longer necessary since Rachel and Roberto exercised
complete control over SMBI.
Aggrieved, Rachel filed a Petition for Certiorari with the CA-Cebu.
The Ruling of the CA-Cebu
On 20 September 2011, the CA-Cebu promulgated its Decision which reversed and set aside the Order of
the RTC Bacolod dated 27 September 2010. According to the CA-Cebu, the Complaint filed by Juanito
should be dismissed because it is a harassment suit, and not a valid derivative suit as defined under the
Interim Rules. The CA-Cebu also found that Juanito failed to exhaust intra-corporate remedies and that
the loan extended by Nancy and Theodore was not SMBIs corporate obligation. There is nothing on
record to show that non-payment of the loan will result in any damage or prejudice to SMBI.
Juanito then filed a Motion for Reconsideration with Prayer for Voluntary Inhibition on 28 October 2011.
In his Motion, Juanito pointed out that Rachel filed her Petition for Certiorari without previously filing a
Motion for Reconsideration, warranting the dismissal of the said Petition. The CA-Cebu denied the
Motion.
Hence, this petition.
The Issues

The issues raised in the instant petition are:

Whether based on the allegations of the complaint, the nature of the case is one of a derivative
suit or not.
Corollary to the above, whether the Honorable Court of Appeals erred x x x in ordering the
dismissal of the Complaint on the ground that the case is not a derivative suit.

The Ruling of this Court

The petition has no merit.
We uphold the CA-Cebus finding that the Complaint is not a derivative suit. A derivative suit is an action
brought by a stockholder on behalf of the corporation to enforce corporate rights against the corporations
directors, officers or other insiders.29 Under Sections 2330 and 3631 of the Corporation Code, the directors
or officers, as provided under the by-laws,32 have the right to decide whether or not a corporation should
sue. Since these directors or officers will never be willing to sue themselves, or impugn their wrongful or
fraudulent decisions, stockholders are permitted by law to bring an action in the name of the corporation
to hold these directors and officers accountable. 33 In derivative suits, the real party ininterest is the
corporation, while the stockholder is a mere nominal party.
Section 1, Rule 8 of the Interim Rules imposes the following requirements for derivative suits:
(1) The person filing the suit must be a stockholder or member at the time the acts or transactions
subject of the action occurred and the time the action was filed;
(2) He must have 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.
Applying the foregoing, we find that the Complaint is not a derivative suit. The Complaint failed to show
how the acts of Rachel and Roberto resulted in any detriment to SMBI. The CA-Cebu correctly concluded
that the loan was not a corporate obligation, but a personal debt of the Ang brothers and their spouses.
The check was issued to "Juanito Ang and/or Anecita Ang and/or Roberto Ang and/or Rachel Ang" and
not SMBI. The proceeds of the loan were used for payment of the obligations of the other corporations
owned by the Angs as well as the purchase of real properties for the Ang brothers. SMBI was never a
party to the Settlement Agreement or the Mortgage. It was never named as a co-debtor or guarantor of the
loan. Both instruments were executed by Juanito and Anecita in their personal capacity, and not in their
capacity as directors or officers of SMBI. Thus, SMBI is under no legal obligation to satisfy the
obligation.

The fact that Juanito and Anecita attempted to constitute a mortgage over "their" share in a corporate asset
cannot affect SMBI. The Civil Code provides that in order for a mortgage to be valid, the mortgagor must
be the "absolute owner of the thing x x x mortgaged."35 Corporate assets may be mortgaged by authorized
directors or officers on behalf of the corporation as owner, "as the transaction of the lawful business of the
corporation may reasonably and necessarily require." 36 However, the wording of the Mortgage reveals
that it was signed by Juanito and Anecita in their personal capacity as the "owners" of a pro-indiviso share
in SMBIs land and not on behalf of SMBI:
This Mortgage is made and executed by and between:
Spouses JUANITO and ANECITA ANG, of legal age, Filipino citizens, residents of Sunrise Marketing
Building at Hilado Street, Capitol Shopping Center, Bacolod City, hereinafter referred to as the
MORTGAGORS;
Spouses THEODORE and NANCY ANG, x x x hereinafter referred to as the MORTGAGEES
represented in this instance through their attorney-in-fact, Mr. Kenneth Locsin;
xxxx
In order to ensure payment x x x the MORTGAGORS hereby CONVEY unto the MORTGAGEES by
way of EXTRA-JUDICIAL REAL ESTATE MORTGAGE their 50% rights and interests over the
following real properties to wit:
a. Those registered in the name of SUNRISE MARKETING (BACOLOD), INC. x x x
x x x x37 (Emphasis supplied)
Juanito and Anecita, as stockholders of SMBI, are not co-owners of SMBI assets. They do not own proindiviso shares, and therefore, cannot mortgage the same except in their capacity as directors or officers
of SMBI.
We also find that there is insufficient evidence to suggest that Roberto and Rachel fraudulently and
wrongfully removed Nancy as a stockholder in SMBIs reportorial requirements. As early as 2005, when
SMBI increased its capital stock, Juanito and Anecita already knew that Nancy was not listed as a
stockholder of SMBI. However, they attempted to rectify the error only in 2009, when the Complaint was
filed. That it took four years for them to make any attempt to question Nancys exclusion as stockholder
negates their allegation of fraud.
Since damage to the corporation was not sufficiently proven by Juanito, the Complaint cannot be
considered a bona fide derivative suit. A derivative suit is one that seeks redress for injury to the
corporation, and not the stockholder. No such injury was proven in this case.
The Complaint also failed to allege that all available corporate remedies under the articles of
incorporation, by-laws, laws or rules governing the corporation were exhausted, as required under the
Interim Rules. The CA-Cebu, applying our ruling in the Yu case, pointed out:
x x x No written demand was ever made for the board of directors to address private respondent Juanito
Angs concerns.1wphi1

The fact that [SMBI] is a family corporation does not exempt private respondent Juanito Ang from
complying with the Interim Rules. In the x x x Yu case, the Supreme Court held that a family corporation
is not exempt 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 which state that there is a distinction
between x x x family corporations x x x and other types of corporations in the institution by a stockholder
of a derivative suit.38
Furthermore, there was no allegation that there was an attempt to remove Rachel or Roberto as director or
officer of SMBI, as permitted under the Corporation Code and the by-laws of the corporation. Thus, the
Complaint failed to satisfy the requirements for a derivative suit under the
Interim Rules.
The CA-Cebu correctly ruled that the Complaint should be dismissed since it is a nuisance or harassment
suit under Section 1(b) of the Interim Rules. Section 1(b) thereof provides:
b) Prohibition against nuisance and harassment suits. - Nuisance and harassment suits are prohibited. In
determining whether a suit is a nuisance or harassment suit, the court shall consider, among others, the
following:
(1) The extent of the shareholding or interest of the initiating stockholder or member;
(2) Subject matter of the suit;
(3) Legal and factual basis of the complaint;
(4) Availability of appraisal rights for the act or acts complained of; and
(5) Prejudice or damage to the corporation, partnership, or association in relation to the relief
sought.
In case of nuisance or harassment suits, the court may, motu proprio or upon motion, forthwith dismiss
the case.
Records show that Juanito, apart from being Vice President, owns the highest number of shares, equal to
those owned by Roberto. Also, as explained earlier, there appears to be no damage to SMBI if the loan
extended by Nancy and Theodore remains unpaid. The CA-Cebu correctly concluded that "a plain reading
of the allegations in the Complaint would readily show that the case x x x was mainly filed to collect a
debt allegedly extended by the spouses Theodore and Nancy Ang to [SMBI]. Thus, the aggrieved party is
not SMBI x x x but the spouses Theodore and Nancy Ang, who are not even x x x stockholders." 39
WHEREFORE, we DENY the petition. We AFFIRM the 20 September 2011 Decision of the Court of
Appeals-Cebu in CA-G.R. SP No. 05546.
CASE NO 19

CASE NO 20
CIR VS. CLUB FILIPINO (5 SCRA 321; 1962)
FACTS: Club Filipino owns and operates a club house, a sports complex, and a bar restaurant, which is incident to
the operation of the club and its golf course. The club is operated mainly with funds derived from membership fees
and dues. The BIR seeks to tax the said restaurant as a business.
Issue: Is it a Stock or Non stock corpo?
HELD: The Club was organized to develop and cultivate sports of all class and denomination for the healthful
recreation and entertainment of its stockholders and members. There was in fact, no cash dividend distribution to its
stockholders and whatever was derived on retail from its bar and restaurants used were to defray its overhead
expenses and to improve its golf course.
For a stock corporation to exist, 2 requisites must be complied with:
(1) a capital stock divided into shares
(2) an authority to distribute to the holders of such shares, dividends or allotments
of the surplus profits on the basis of shares held.
In the case at bar, nowhere in the AOI or by-laws of Club Filipino could be found an authority for the distribution of
its dividends or surplus profits.

CASE NO 21
Gonzales vs PNB Case Digest
Facts: Ramon A. Gonzales initially instituted several cases in the Supreme Court questioning different transactions
entered into by the Bank with other parties. First among them is Civil Case 69345 filed on 27 April 1967, by
Gonzales as a taxpayer versus Sec. Antonio Raquiza of Public Works and Communications, the Commissioner of
Public Highways, the Bank, Continental Ore Phil., Inc., Continental Ore, Huber Corporation, Allis Chalmers and
General Motors Corporation. In the course of the hearing of said case on 3 August 1967, the personality of Gonzales
to sue the bank and question the letters of credit it has extended for the importation by the Republic of the
Philippines of public works equipment intended for the massive development program of the President was raised.
In view thereof, he expressed and made known his intention to acquire one share of stock from Congressman
Justiniano Montano which, on the following day, 30 August 1967, was transferred in his name in the books of the
Bank. Subsequent to his aforementioned acquisition of one share of stock of the Bank, Gonzales, in his dual capacity
as a taxpayer and stockholder, filed the following cases involving the bank or the members of its Board of Directors
to wit: (1) On 18 October 1967, Civil Case 71044 versus the Board of Directors of the Bank; the National
Investment and Development Corp., Marubeni Iida Co., Ltd., and Agro-Inc. Dev. Co. or Saravia; (2) On 11 May
1968, Civil Case 72936 versus Roberto Benedicto and other Directors of the Bank, Passi (Iloilo) Sugar Central, Inc.,
Calinog-Lambunao Sugar Mill Integrated Farming, Inc., Talog sugar Milling Co., Inc., Safary Central, Inc., and
Batangas Sugar Central Inc.; and (3) On 8 May 1969, Civil Case 76427 versus Alfredo Montelibano and the
Directors of both the PNB and DBP.
On 11 January 1969, however, Gonzales addressed a letter to the President of the Bank, requesting
submission to look into the records of its transactions covering the purchase of a sugar central by the Southern
Negros Development Corp. to be financed by Japanese suppliers and financiers; its financing of the Cebu-Mactan
Bridge to be constructed by V.C. Ponce, Inc. and the construction of the Passi Sugar Mills in Iloilo. On January 23,
1969, the Asst. Vice President and Legal Counsel of the Bank answered petitioner's letter denying his request for
being not germane to his interest as a one share stockholder and for the cloud of doubt as to his real intention and
purpose in acquiring said share. In view of the Bank's refusal, Gonzales instituted the petition for mandamus. The
Court of First Instance of Manila denied the prayer of Gonzales that he be allowed to examine and inspect the books
and records of PNB regarding the transactions mentioned on the grounds that the right of a stockholder to inspect the
record of the business transactions of a corporation granted under Section 51 of the former Corporation Law (Act
No. 1459, as amended) is not absolute, but is limited to purposes reasonably related to the interest of the
stockholder, must be asked for in good faith for a specific and honest purpose and not gratify curiosity or for
speculative or vicious purposes; that such examination would violate the confidentiality of the records of the bank as
provided in Section 16 of its charter, RA 1300, as amended; and that Gonzales has not exhausted his administrative
remedies. Gonzales filed the petition for review.
Issue:

1.
Whether Gonzales' can ask for an examination of the books and records of PNB, in light of his ownership
of one share in the bank.
2.
Whether the inspection sought to be exercised by Gonzales would be violative of the provisions of PNB's
charter.
Held:

1. The unqualified provision on the right of inspection previously contained in Section 51, Act No. 1459, as
amended, no longer holds true under the provisions of the present law. The argument of Gonzales that the right
granted to him under Section 51 of the former Corporation Law should not be dependent on the propriety of his
motive or purpose in asking for the inspection of the books of PNB loses whatever validity it might have had before
the amendment of the law. If there is any doubt in the correctness of the ruling of the trial court that the right of
inspection granted under Section 51 of the old Corporation Law must be dependent on a showing of proper motive
on the part of the stockholder demanding the same, it is now dissipated by the clear language of the pertinent
provision contained in Section 74 of Batas Pambansa Bilang 68. Although Gonzales has claimed that he has
justifiable motives in seeking the inspection of the books of the PNB, he has not set forth the reasons and the
purposes for which he desires such inspection, except to satisfy himself as to the truth of published reports regarding
certain transactions entered into by the respondent bank and to inquire into their validity. The circumstances under
which he acquired one share of stock in the PNB purposely to exercise the right of inspection do not argue in favor
of his good faith and proper motivation. Admittedly he sought to be a stockholder in order to pry into transactions
entered into by the PNB even before he became a stockholder. His obvious purpose was to arm himself with
materials which he can use against the PNB for acts done by the latter when Gonzales was a total stranger to the
same. He could have been impelled by a laudable sense of civic consciousness, but it could not be said that his
purpose is germane to his interest as a stockholder.
2. Section 15 of the PNB's Charter (RA 1300, as amended) provides that "Inspection by Department of Supervision
and Examination of the Central Bank. The National Bank shall be subject to inspection by the Department of
Supervision and Examination of the Central Bank." Section 16 thereof providest that "Confidential information.
The Superintendent of Banks and the Auditor General, or other officers designated by law to inspect or investigate
the condition of the National Bank, shall not reveal to any person other than the President of the Philippines, the
Secretary of Finance, and the Board of Directors the details of the inspection or investigation, nor shall they give any
information relative to the funds in its custody, its current accounts or deposits belonging to private individuals,
corporations, or any other entity, except by order of a Court of competent jurisdiction." On the other hand, Section
30 of the same provides that "Penalties for violation of the provisions of this Act. Any director, officer, employee,
or agent of the Bank, who violates or permits the violation of any of the provisions of this Act, or any person aiding
or abetting the violations of any of the provisions of this Act, shall be punished by a fine not to exceed ten thousand
pesos or by imprisonment of not more than five years, or both such fine and imprisonment." The Philippine National
Bank is not an ordinary corporation. Having a charter of its own, it is not governed, as a rule, by the Corporation
Code of the Philippines. The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with

respect to the right of a stockholder to demand an inspection or examination of the books of the corporation may not
be reconciled with the above quoted provisions of the charter of the PNB. It is not correct to claim, therefore, that
the right of inspection under Section 74 of the new Corporation Code may apply in a supplementary capacity to the
charter of the PNB.

CASE NO 22
SUNSET VIEW CONDOMINIUM CORPORATION, petitioner, vs. THE HON. JOSE C. CAMPOS, JR. OF THE
COURT OF FIRST INSTANCE, BRANCH XXX, PASAY CITY and AGUILAR-BERNARES REALTY,
respondents. (G.R. No. L-52361 April 27, 1981)

Facts:
The petitioner, Sunset View Condominium Corporationis a condominium corporation within the meaning of
Republic Act No. 4726 in relation to a duly registered Amended Master Deed with Declaration of Restrictions of the
Sunset View Condominium Project located at 2230 Roxas Boulevard, Pasay City of which said petitioner is the
Management Body holding title to all the common and limited common areas.
The private respondent, Aguilar-Bernares Realty, a sole proprietorship owned and operated by the spouses
Emmanuel G. Aguilar and Zenaida B. Aguilar, is the assignee of a unit, Solana, in the Sunset View Condominium
Project with La Perla Commercial, Incorporated, as assignor. The La Perla Commercial, Incorporated bought the
Solana unit on installment from the Tower Builders, Inc. The petitioner, Sunset View Condominium Corporation,
filed for the collection of assessments levied on the unit against Aguilar-Bernares Realty.
The private respondent filed a Motion to Dismiss the complaint on the grounds (1) that the complaint does not state
a cause of action: (2) that the court has no jurisdiction over the subject or nature other action; and (3) that there is
another action pending between the same parties for the same cause. The petitioner filed its opposition.
The motion to dismiss was granted by the respondent Judge, pursuant to Section 2 of Republic Act No. 4726, a
holder of a separate interest and consequently, a shareholder of the plaintiff condominium corporation; and that
the case should be properly filed with the Securities & Exchange Commission which has exclusive original
jurisdiction on controversies arising between shareholders of the corporation. the motion for reconsideration
thereof having been denied, the petitioner, alleging grave abuse of discretion on the part of respondent Judge, filed
the instant petition for certiorari praying that the said orders be set aside.
ISSUE: Whether the CFI or the City Courts have jurisdiction over the claims filed by Sunset View, the
condominium corporation.

Held: Not every purchaser of a condominium unit is a shareholder in the corporation. The Master Deed determines
when ownership of the unit and participation in the corporation vests in the purchaser.
The City Court and the CFI have jurisdiction.
The share of stock appurtenant to the unit will be transferred accordingly to the purchaser of the unit only upon full
payment of the purchase price at which time he will also become the owner of the unit. Consequently, even under

the contract, it is only the owner of a unit who is a shareholder of the Condominium Corporation. Inasmuch as
owners is conveyed only upon full payment of the purchase price, it necessarily follows that a purchaser of a unit
who has not paid the full purchase price thereof is not The owner of the unit and consequently is not a shareholder of
the Condominium Corporation.
In this case, the Master Deed provides that ownership is transferred only upon full payment of the purchase price.
Private respondents have not yet fully paid the purchase price, hence they are not shareholders and the SEC has no
jurisdiction over the claims.
*now, special courts handle intra-corporate disputes
CASE NO 23

CASE NO 24
WILSON P. GAMBOA vs. FINANCE SECRETARY TEVES
G.R. No. 176579, promulgated June 28, 2011(original case.. may motion for recon itong kaso na to basahin n lng
natin full text masyadong mahaba)
I.

THE FACTS
This is a petition to nullify the sale of shares of stock of Philippine Telecommunications Investment
Corporation (PTIC) by the government of the Republic of the Philippines, acting through the Inter-Agency
Privatization Council (IPC), to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company
Limited (First Pacific), a Hong Kong-based investment management and holding company and a shareholder of the
Philippine Long Distance Telephone Company (PLDT).
The petitioner questioned the sale on the ground that it also involved an indirect sale of 12 million shares
(or about 6.3 percent of the outstanding common shares) of PLDT owned by PTIC to First Pacific. With the this
sale, First Pacifics common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing
the total common shareholdings of foreigners in PLDT to about 81.47%. This, according to the petitioner, violates
Section 11, Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public
utility to not more than 40%.

II.

THE ISSUE
Does the term capital in Section 11, Article XII of the Constitution refer to the total common shares only,
or to the total outstanding capital stock (combined total of common and non-voting preferred shares) of PLDT, a
public utility?

III. THE RULING

[The Court partly granted the petition and held that the term capital in Section 11, Article XII of the
Constitution refers only to shares of stock entitled to vote in the election of directors of a public utility, or in the
instant case, to the total common shares of PLDT.]
Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the
Filipinization of public utilities, to wit:
Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility
shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of
the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such
franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by
the Congress when the common good so requires. The State shall encourage equity participation in public utilities
by the general public. The participation of foreign investors in the governing body of any public utility enterprise
shall be limited to their proportionate share in its capital, and all the executive and managing officers of such
corporation or association must be citizens of the Philippines. (Emphasis supplied)
The term capital in Section 11, Article XII of the Constitution refers only to shares of stock entitled to
vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding
capital stock comprising both common and non-voting preferred shares [of PLDT].
xxx

xxx

xxx

Indisputably, one of the rights of a stockholder is the right to participate in the control or management of
the corporation. This is exercised through his vote in the election of directors because it is the board of directors that
controls or manages the corporation. In the absence of provisions in the articles of incorporation denying voting
rights to preferred shares, preferred shares have the same voting rights as common shares. However, preferred
shareholders are often excluded from any control, that is, deprived of the right to vote in the election of directors and
on other matters, on the theory that the preferred shareholders are merely investors in the corporation for income in
the same manner as bondholders. xxx.
Considering that common shares have voting rights which translate to control, as opposed to preferred
shares which usually have no voting rights, the term capital in Section 11, Article XII of the Constitution refers
only to common shares. However, if the preferred shares also have the right to vote in the election of directors, then
the term capital shall include such preferred shares because the right to participate in the control or management
of the corporation is exercised through the right to vote in the election of directors. In short, the term capital in
Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the election of directors.
xxx

xxx

xxx

Mere legal title is insufficient to meet the 60 percent Filipino-owned capital required in the Constitution.
Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights,
is required. The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands
of Filipino nationals in accordance with the constitutional mandate. Otherwise, the corporation is considered as
non-Philippine national[s].
xxx

xxx

xxx

To construe broadly the term capital as the total outstanding capital stock, including both common
and non-voting preferred shares, grossly contravenes the intent and letter of the Constitution that the State shall
develop a self-reliant and independent national economy effectively controlled by Filipinos. A broad definition
unjustifiably disregards who owns the all-important voting stock, which necessarily equates to control of the public
utility.
We shall illustrate the glaring anomaly in giving a broad definition to the term capital. Let us assume that
a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred shares owned by
Filipinos, with both classes of share having a par value of one peso (P1.00) per share. Under the broad definition of
the term capital, such corporation would be considered compliant with the 40 percent constitutional limit on
foreign equity of public utilities since the overwhelming majority, or more than 99.999 percent, of the total
outstanding capital stock is Filipino owned. This is obviously absurd.
In the example given, only the foreigners holding the common shares have voting rights in the election of
directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of less than 0.001 percent,
exercise control over the public utility. On the other hand, the Filipinos, holding more than 99.999 percent of the
equity, cannot vote in the election of directors and hence, have no control over the public utility. This starkly
circumvents the intent of the framers of the Constitution, as well as the clear language of the Constitution, to place
the control of public utilities in the hands of Filipinos. It also renders illusory the State policy of an independent
national economy effectively controlled by Filipinos.
The example given is not theoretical but can be found in the real world, and in fact exists in the present
case.
xxx

xxx

xxx

[O]nly holders of common shares can vote in the election of directors [of PLDT], meaning only common
shareholders exercise control over PLDT. Conversely, holders of preferred shares, who have no voting rights in the
election of directors, do not have any control over PLDT. In fact, under PLDTs Articles of Incorporation, holders of

common shares have voting rights for all purposes, while holders of preferred shares have no voting right for any
purpose whatsoever.
It must be stressed, and respondents do not dispute, that foreigners hold a majority of the common shares of
PLDT. In fact, based on PLDTs 2010 General Information Sheet (GIS), which is a document required to be
submitted annually to the Securities and Exchange Commission, foreigners hold 120,046,690 common shares of
PLDT whereas Filipinos hold only 66,750,622 common shares. In other words, foreigners hold 64.27% of the total
number of PLDTs common shares, while Filipinos hold only 35.73%. Since holding a majority of the common
shares equates to control, it is clear that foreigners exercise control over PLDT. Such amount of control
unmistakably exceeds the allowable 40 percent limit on foreign ownership of public utilities expressly mandated in
Section 11, Article XII of the Constitution.
As shown in PLDTs 2010 GIS, as submitted to the SEC, the par value of PLDT common shares is P5.00
per share, whereas the par value of preferred shares is P10.00 per share. In other words, preferred shares have twice
the par value of common shares but cannot elect directors and have only 1/70 of the dividends of common shares.
Moreover, 99.44% of the preferred shares are owned by Filipinos while foreigners own only a minuscule 0.56% of
the preferred shares. Worse, preferred shares constitute 77.85% of the authorized capital stock of PLDT while
common shares constitute only 22.15%. This undeniably shows that beneficial interest in PLDT is not with the nonvoting preferred shares but with the common shares, blatantly violating the constitutional requirement of 60 percent
Filipino control and Filipino beneficial ownership in a public utility.
The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of
Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights, is constitutionally required for the States grant of
authority to operate a public utility. The undisputed fact that the PLDT preferred shares, 99.44% owned by Filipinos,
are non-voting and earn only 1/70 of the dividends that PLDT common shares earn, grossly violates the
constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership of a public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of the
dividends, of PLDT. This directly contravenes the express command in Section 11, Article XII of the Constitution
that [n]o franchise, certificate, or any other form of authorization for the operation of a public utility shall be
granted except to x x x corporations x x x organized under the laws of the Philippines, at least sixty per centum of
whose capital is owned by such citizens x x x.
To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares exercises
the sole right to vote in the election of directors, and thus exercise control over PLDT; (2) Filipinos own only
35.73% of PLDTs common shares, constituting a minority of the voting stock, and thus do not exercise control over
PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70
of the dividends that common shares earn; (5) preferred shares have twice the par value of common shares; and (6)
preferred shares constitute 77.85% of the authorized capital stock of PLDT and common shares only 22.15%. This
kind of ownership and control of a public utility is a mockery of the Constitution.
Incidentally, the fact that PLDT common shares with a par value of P5.00 have a current stock market value
of P2,328.00 per share, while PLDT preferred shares with a par value of P10.00 per share have a current stock
market value ranging from only P10.92 to P11.06 per share, is a glaring confirmation by the market that control and
beneficial ownership of PLDT rest with the common shares, not with the preferred shares.
xxx

xxx

xxx

WHEREFORE, we PARTLY GRANT the petition and rule that the term capital in Section 11, Article XII
of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the
present case only to common shares, and not to the total outstanding capital stock (common and non-voting
preferred shares). Respondent Chairperson of the Securities and Exchange Commission is DIRECTED to apply this
definition of the term capital in determining the extent of allowable foreign ownership in respondent Philippine
Long Distance Telephone Company, and if there is a violation of Section 11, Article XII of the Constitution, to
impose the appropriate sanctions under the law.

CASE NO 26
Narra Nickel Mining vs Redmont
Case Digest GR 185590, Apr 21 2014
Facts:
Redmont is a domestic corporation interested in the mining and exploration of some areas in Palawan. Upon
learning that those areas were covered by MPSA applications of other three (allegedly Filipino) corporations
Narra, Tesoro, and MacArthur, it filed a petition before the Panel of Arbitrators of DENR seeking to deny their
permits on the ground that these corporations are in reality foreign-owned. MBMI, a 100% Canadian corporation,
owns 40% of the shares of PLMC (which owns 5,997 shares of Narra), 40% of the shares of MMC (which owns
5,997 shares of McArthur) and 40% of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro).
Aside from the MPSA, the three corporations also applied for FTAA with the Office of the President. In their
answer, they countered that (1) the liberal Control Test must be used in determining the nationality of a corporation
as based on Sec 3 of the Foreign Investment Act which as they claimed admits of corporate layering schemes, and
that (2) the nationality question is no longer material because of their subsequent application for FTAA.
FACTS:(MUCH BETTER FACTS ITO PRE)
Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), adomestic corporation
organized and existing under Philippine laws, took interest in mining and exploringcertain areas of the province of
Palawan. After inquiring with the Department of Environment and NaturalResources (DENR), it learned that the
areas where it wanted to undertake exploration and miningactivities where already covered by Mineral Production
Sharing Agreement (MPSA) applications ofpetitioners Narra, Tesoro and McArthur.Petitioner McArthur Narra and
Tesoro, filed an application for an MPSA and Exploration Permit(EP) which was subsequently issued.On January 2,
2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3)separate petitions for the denial of
petit
ioners applications for MPSA
.Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and Narra are ownedand controlled by
MBMI Resources, Inc. (MBMI), a 100% Canadian corporation. Redmont reasoned thatsince MBMI is a
considerable s
tockholder of petitioners, it was the driving force behind petitioners filing
of the MPSAs over the areas covered by applications since it knows that it can only participate in miningactivities
through corporations which are deemed Filipino citizens. Redmont argued that given that
petitioners capital stocks were mostly owned by MBMI, they were likewise disqualified from engaging in
mining activities through MPSAs, which are reserved only for Filipino citizens.Petitioners averred that they were
qualified persons under Section 3(aq) of Republic Act No. (RA)7942 or the Philippine Mining Act of 1995. They
stated that their nationality as applicants is immaterialbecause they also applied for Financial or Technical
Assistance Agreements (FTAA) denominated as AFTA-IVB-09 for McArthur, AFTA-IVB-08 for Tesoro and AFTAIVB-07 for Narra, which are granted to foreign-owned corporations. Nevertheless, they claimed that the issue on
nationality should not be raised sinceMcArthur, Tesoro and Narra are in fact Philippine Nationals as 60% of their
capital is owned by citizens ofthe Philippines.On December 14, 2007, the POA issued a Resolution disqualifying
petitioners from gainingMPSAs. The POA considered petitioners as foreign corporations being "effectively
controlled" by MBMI, a100% Canadian company and declared their MPSAs null and void.Pending the resolution of
the appeal filed by petitioners with the MAB, Redmont filed aComplaint with the Securities and Exchange
Commission (SEC), seeking the revocation of the certificatesfor registration of petitioners on the ground that they
are foreign-owned or controlled corporationsengaged in mining in violation of Philippine laws.CA found that there
was doubt as to the nationality of petitioners when it realized thatpetitioners had a common major investor, MBMI, a
corporation composed of 100% Canadians. Pursuantto the first sentence of paragraph 7 of Department of Justice
(DOJ) Opinion No. 020, Series of 2005,adopting the 1967 SEC Rules which implemented the requirement of the
Constitution and other lawspertaining to the exploitation of natural resources, the CA used the "grandfather rule" to
determine thenationality of petitioners.
2

In determining the nationality of petitioners, the CA looked into their corporate structures andtheir corresponding
common shareholders.
Using the grandfather rule, the CA discovered that MBMI ineffect owned majority of the common stocks of the
petitioners as well as at least 60% equity interest ofother majority shareholders of petitioners through joint venture
agreements. The CA found thatthrough a "web of corporate layering, it is clear that one common controlling investor
in all miningcorporations involved x x x is MBMI."
Thus, it concluded that petitioners McArthur, Tesoro and Narraare also in partnership with, or privies-in-interest of,
MBMI.
Issue : W/N the Grandfather Rule must be applied in this case

RULING:
Yes. It is the intention of the framers of the Constitution to apply the Grandfather Rule in cases where corporate
layering is present.
First, as a rule in statutory construction, when there is conflict between the Constitution and a statute, the
Constitution will prevail. In this instance, specifically pertaining to the provisions under Art. XII of the Constitution
on National Economy and Patrimony, Sec. 3 of the FIA will have no place of application. Corporate layering is
admittedly allowed by the FIA, but if it is used to circumvent the Constitution and other pertinent laws, then it
becomes illegal.
Second, under the SEC Rule1 and DOJ Opinion2 , the Grandfather Rule must be applied when the 60-40 Filipinoforeign equity ownership is in doubt. Doubt is present in the Filipino equity ownership of Narra, Tesoro, and
MacArthur since their common investor, the 100% Canadian-owned corporation MBMI, funded them.
Under the Grandfather Rule, it is not enough that the corporation does have the required 60% Filipino stockholdings
at face value. To determine the percentage of the ultimate Filipino ownership, it must first be traced to the level of
the investing corporation and added to the shares directly owned in the investee corporation. Applying this rule, it
turns out that the Canadian corporation owns more than 60% of the equity interests of Narra, Tesoro and
MacArthur. Hence, the latter are disqualified to participate in the exploration, development and utilization of the
Philippines natural resources.
1 DOJ Opinion No. 020 Series of 2005 (paragraph 7)
2 SEC Opinion May 13, 1990
CASE NO 27
Narra Nickel Mining vs Redmont
G.R. No. 195580, January 28, 2015
Facts:
Narra and its co-petitioner corporations Tesoro and MacArthur, filed a motion before the SC to reconsider its April
21, 2014 Decision which upheld the denial of their MPSA applications. The SC affirmed the CA ruling that there is
a doubt to their nationality, and that in applying the Grandfather Rule, the finding is that MBMI, a 100% Canadianowned corporation, effectively owns 60% of the common stocks of petitioners by owning equity interests of the
petitioners other majority corporate shareholders. Narra, Tesoro and MacArthur argued that the application of the
Grandfather Rule to determine their nationality is erroneous and allegedly without basis in the Constitution, the FIA,
the Philippine Mining Act, and the Rules issued by the SEC. These laws and rules supposedly espouse the
application of the Control Test in verifying the Philippine nationality of corporate entities for purposes of

determining compliance with Sec. 2, Art. XII of the Constitution that only corporations or associations at least 60%
of whose capital is owned by such Filipino citizens may enjoy certain rights and privileges, like the exploration and
development of natural resources.
Issue: W/N the application by the SC of the grandfather resulted to the abandonment of the control test
Held:
No. The control test can be applied jointly with the Grandfather Rule to determine the observance of foreign
ownership restriction in nationalized economic activities. The Control Test and the Grandfather Rule are not
incompatible ownership-determinant methods that can only be applied alternative to each other. Rather, these
methods can, if appropriate, be used cumulatively in the determination of the ownership and control of corporations
engaged in fully or partly nationalized activities, as the mining operation involved in this case or the operation of
public utilities.
The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control in a
corporation, as it could result in an otherwise foreign corporation rendered qualified to perform nationalized or
partly nationalized activities. Hence, it is only when the Control Test is first complied with that the Grandfather Rule
may be applied. Put in another manner, if the subject corporations Filipino equity falls below the threshold 60%,
the corporation is immediately considered foreign-owned, in which case, the need to resort to the Grandfather Rule
disappears.
In this case, using the control test, Narra, Tesoro and MacArthur appear to have satisfied the 60-40 equity
requirement. But the nationality of these corporations and the foreign-owned common investor that funds them was
in doubt, hence, the need to apply the Grandfather Rule. ##
SEC Memo circular 8-13
SEC Guidelines on Compliance with Filipino-Foreign Ownership Requirements
The Securities and Exchange Commission (SEC) issued Memorandum Circular No. 8-2013 on May 20, 2013.
The Circular sets out the guidelines to determine compliance with the required percentage of Filipino-foreign
ownership in corporations engaged in nationalized and partly-nationalized activities.
Nationalized activities refer to those areas of investments which are completely or partly reserved to Philippine
nationals pursuant to the 1987 Constitution, the Foreign Investments Act, as amended (FIA), and other existing
laws such as the Retail Trade Liberalization Act.
The Circular was issued pursuant to the Supreme Courts directive in the case of Gamboa v. Teves, where the Court
interpreted the term capital in Article XII, Section 11 of the 1987 Constitution to refer only to shares of stock
entitled to vote in the election of directors. Under the Circular, for purposes of determining compliance with the
nationality restrictions, the required percentage of Filipino ownership shall be applied to both (a) the total number of
outstanding shares of stock entitled to vote in the election of directors, and (b) the total number of outstanding shares
of stock, whether or not entitled to vote in the election of directors. On the other hand, corporations covered by
special laws providing for specific citizenship requirements shall continue to be guided by the provisions of those
special laws. The corporate secretaries of covered corporations are directed to monitor compliance with the
provisions of the Circular.

The SEC provided for a one-year grace period to enable all corporations to comply with its new Circular, failing
which, the corporation shall be subjected to administrative sanctions under the FIA, as amended.
SEC Memorandum Circular No. 8-2013 took effect immediately after its publication last May 22.