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EN BANC

WILSON P. GAMBOA, G.R. No. 176579

Petitioner,
Present:
- versus -

CORONA, C.J.,

FINANCE SECRETARY CARPIO,


MARGARITO B. TEVES,
FINANCE UNDERSECRETARY VELASCO, JR.,
JOHN P. SEVILLA, AND
COMMISSIONER RICARDO LEONARDO-DE CASTRO,
ABCEDE OF THE PRESIDENTIAL
COMMISSION ON GOOD BRION,
GOVERNMENT (PCGG) IN
THEIR CAPACITIES AS CHAIR PERALTA,
AND MEMBERS,
BERSAMIN,
RESPECTIVELY, OF THE
PRIVATIZATION COUNCIL, DEL CASTILLO,
CHAIRMAN ANTHONI SALIM OF ABAD,
FIRST PACIFIC CO., LTD. IN HIS
CAPACITY AS DIRECTOR OF VILLARAMA, JR.,
METRO PACIFIC ASSET
HOLDINGS INC., CHAIRMAN PEREZ,
MANUEL V. PANGILINAN OF
PHILIPPINE LONG DISTANCE MENDOZA, and
TELEPHONE COMPANY (PLDT)
IN HIS CAPACITY AS SERENO, JJ.
MANAGING DIRECTOR OF
FIRST PACIFIC CO., LTD.,
PRESIDENT NAPOLEON L.
NAZARENO OF PHILIPPINE
LONG DISTANCE TELEPHONE
COMPANY, CHAIR FE BARIN OF
THE SECURITIES EXCHANGE
COMMISSION, and PRESIDENT
FRANCIS LIM OF THE
PHILIPPINE STOCK EXCHANGE,

Respondents.
PABLITO V. SANIDAD and Promulgated:

ARNO V. SANIDAD,

Petitioners-in-Intervention. June 28, 2011

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CARPIO, J.:

The Case

This is an original petition for prohibition, injunction, declaratory relief and declaration of nullity of the sale
of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the government of
the Republic of the Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific
Company Limited (First Pacific).
The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long Distance Telephone
Company (PLDT), are as follows:1

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT a franchise
and the right to engage in telecommunications business. In 1969, General Telephone and Electronics
Corporation (GTE), an American company and a major PLDT stockholder, sold 26 percent of the
outstanding common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by
several persons, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became the owner of
111,415 shares of stock of PTIC by virtue of three Deeds of Assignment executed by PTIC stockholders
Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares of stock of PTIC held by PHI were
sequestered by the Presidential Commission on Good Government (PCGG). The 111,415 PTIC shares,
which represent about 46.125 percent of the outstanding capital stock of PTIC, were later declared by this
Court to be owned by the Republic of the Philippines.2

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the remaining 54
percent of the outstanding capital stock of PTIC. On 20 November 2006, the Inter-Agency Privatization
Council (IPC) of the Philippine Government announced that it would sell the 111,415 PTIC shares, or
46.125 percent of the outstanding capital stock of PTIC, through a public bidding to be conducted on 4
December 2006. Subsequently, the public bidding was reset to 8 December 2006, and only two bidders,
Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio Capital, submitted their bids. Parallax won
with a bid of P25.6 billion or US$510 million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC stockholder and
buy the 111,415 PTIC shares by matching the bid price of Parallax. However, First Pacific failed to do so by
the 1 February 2007 deadline set by IPC and instead, yielded its right to PTIC itself which was then given by
IPC until 2 March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific, through its subsidiary,
MPAH, entered into a Conditional Sale and Purchase Agreement of the 111,415 PTIC shares, or 46.125
percent of the outstanding capital stock of PTIC, with the Philippine Government for the price
of P25,217,556,000 or US$510,580,189. The sale was completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of PTIC
shares is actually an indirect sale of 12 million shares or about 6.3 percent of the outstanding common shares
of PLDT. With the sale, First Pacifics common shareholdings in PLDT increased from 30.7 percent to
37 percent, thereby increasing the common shareholdings of foreigners in PLDT to about 81.47
percent. This violates Section 11, Article XII of the 1987 Philippine Constitution which limits foreign
ownership of the capital of a public utility to not more than 40 percent.3
On the other hand, public respondents Finance Secretary Margarito B. Teves, Undersecretary John
P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the following relevant facts:

On 9 November 1967, PTIC was incorporated and had since engaged in the business of investment holdings.
PTIC held 26,034,263 PLDT common shares, or 13.847 percent of the total PLDT outstanding common
shares. PHI, on the other hand, was incorporated in 1977, and became the owner of 111,415 PTIC shares or
46.125 percent of the outstanding capital stock of PTIC by virtue of three Deeds of Assignment executed by
Ramon Cojuangco and Luis TirsoRivilla. In 1986, the 111,415 PTIC shares held by PHI were sequestered
by the PCGG, and subsequently declared by this Court as part of the ill-gotten wealth of former President
Ferdinand Marcos. The sequestered PTIC shares were reconveyed to the Republic of the Philippines in
accordance with this Courts decision4 which became final and executory on 8 August 2006.

The Philippine Government decided to sell the 111,415 PTIC shares, which represent 6.4 percent of the
outstanding common shares of stock of PLDT, and designated the Inter-Agency Privatization Council (IPC),
composed of the Department of Finance and the PCGG, as the disposing entity. An invitation to bid was
published in seven different newspapers from 13 to 24 November 2006. On 20 November 2006, a pre-bid
conference was held, and the original deadline for bidding scheduled on 4 December 2006 was reset to 8
December 2006. The extension was published in nine different newspapers.

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the highest bidder with
a bid of P25,217,556,000. The government notified First Pacific, the majority owner of PTIC shares, of the
bidding results and gave First Pacific until 1 February 2007 to exercise its right of first refusal in accordance
with PTICs Articles of Incorporation. First Pacific announced its intention to match Parallaxs bid.

On 31 January 2007, the House of Representatives (HR) Committee on Good Government conducted a
public hearing on the particulars of the then impending sale of the 111,415 PTIC shares.
Respondents Teves and Sevilla were among those who attended the public hearing. The HR Committee
Report No. 2270 concluded that: (a) the auction of the governments 111,415 PTIC shares bore due diligence,
transparency and conformity with existing legal procedures; and (b) First Pacifics intended acquisition of
the governments 111,415 PTIC shares resulting in First Pacifics 100% ownership of PTIC will not
violate the 40 percent constitutional limit on foreign ownership of a public utility since PTIC holds
only 13.847 percent of the total outstanding common shares of PLDT.5 On 28 February 2007, First
Pacific completed the acquisition of the 111,415 shares of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public bidding for the
sale of 111,415 PTIC shares or 46 percent of the outstanding capital stock of PTIC (the remaining 54 percent
of PTIC shares was already owned by First Pacific and its affiliates); (b) Parallax offered the highest bid
amounting to P25,217,556,000; (c) pursuant to the right of first refusal in favor of PTIC and its shareholders
granted in PTICs Articles of Incorporation, MPAH, a First Pacific affiliate, exercised its right of first refusal
by matching the highest bid offered for PTIC shares on 13 February 2007; and (d) on 28 February 2007, the
sale was consummated when MPAH paid IPC P25,217,556,000 and the government delivered the
certificates for the 111,415 PTIC shares. Respondent Pangilinan denies the other allegations of facts of
petitioner.

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory relief, and
declaration of nullity of sale of the 111,415 PTIC shares. Petitioner claims, among others, that the sale of the
111,415 PTIC shares would result in an increase in First Pacifics common shareholdings in PLDT from 30.7
percent to 37 percent, and this, combined with Japanese NTT DoCoMos common shareholdings in PLDT,
would result to a total foreign common shareholdings in PLDT of 51.56 percent which is over the 40 percent
constitutional limit.6 Petitioner asserts:

If and when the sale is completed, First Pacifics equity in PLDT will go up from 30.7 percent to 37.0
percent of its common or voting- stockholdings, x x x. Hence, the consummation of the sale will put
the two largest foreign investors in PLDT First Pacific and Japans NTT DoCoMo, which is the worlds
largest wireless telecommunications firm, owning 51.56 percent of PLDT common equity. x x x With
the completion of the sale, data culled from the official website of the New York Stock Exchange
(www.nyse.com) showed that those foreign entities, which own at least five percent of common equity,
will collectively own 81.47 percent of PLDTs common equity. x x x

x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x which
PLDT submitted to the New York Stock Exchange for the period 2003-2005, revealed
that First Pacific and several other foreign entities breached the constitutional limit of 40
percent ownership as early as 2003. x x x7

Petitioner raises the following issues: (1) whether the consummation of the then impending sale of 111,415
PTIC shares to First Pacific violates the constitutional limit on foreign ownership of a public utility; (2)
whether public respondents committed grave abuse of discretion in allowing the sale of the 111,415 PTIC
shares to First Pacific; and (3) whether the sale of common shares to foreigners in excess of 40 percent of
the entire subscribed common capital stock violates the constitutional limit on foreign ownership of a public
utility.8

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to Intervene and
Admit Attached Petition-in-Intervention. In the Resolution of 28 August 2007, the Court granted the motion
and noted the Petition-in-Intervention.

Petitioners-in-intervention join petitioner Wilson Gamboa x x x in seeking, among others, to enjoin and/or
nullify the sale by respondents of the 111,415 PTIC shares to First Pacific or assignee. Petitioners-in-
intervention claim that, as PLDT subscribers, they have a stake in the outcome of the controversy
x x x where the Philippine Government is completing the sale of government owned assets in [PLDT],
unquestionably a public utility, in violation of the nationality restrictions of the Philippine Constitution.
The Issue

This Court is not a trier of facts. Factual questions such as those raised by petitioner,9 which indisputably
demand a thorough examination of the evidence of the parties, are generally beyond this Courts jurisdiction.
Adhering to this well-settled principle, the Court shall confine the resolution of the instant controversy
solely on the threshold and purely legal issue of whether the term capital in Section 11, Article XII of the
Constitution refers to the total common shares only or to the total outstanding capital stock (combined total
of common and non-voting preferred shares) of PLDT, a public utility.

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

At the outset, petitioner is faced with a procedural barrier. Among the remedies petitioner seeks, only the
petition for prohibition is within the original jurisdiction of this court, which however is not exclusive but is
concurrent with the Regional Trial Court and the Court of Appeals. The actions for declaratory
relief,10 injunction, and annulment of sale are not embraced within the original jurisdiction of the Supreme
Court. On this ground alone, the petition could have been dismissed outright.

While direct resort to this Court may be justified in a petition for prohibition,11 the Court shall nevertheless
refrain from discussing the grounds in support of the petition for prohibition since on 28 February 2007, the
questioned sale was consummated when MPAH paid IPC P25,217,556,000 and the government delivered
the certificates for the 111,415 PTIC shares.

However, since the threshold and purely legal issue on the definition of the term capital in Section 11,
Article XII of the Constitution has far-reaching implications to the national economy, the Court treats the
petition for declaratory relief as one for mandamus.12
In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for declaratory relief as one
for mandamus considering the grave injustice that would result in the interpretation of a banking law. In that
case, which involved the crime of rape committed by a foreign tourist against a Filipino minor and the
execution of the final judgment in the civil case for damages on the tourists dollar deposit with a local bank,
the Court declared Section 113 of Central Bank Circular No. 960, exempting foreign currency deposits from
attachment, garnishment or any other order or process of any court, inapplicable due to the peculiar
circumstances of the case. The Court held that injustice would result especially to a citizen aggrieved by a
foreign guest like accused x x x that would negate Article 10 of the Civil Code which provides that in case
of doubt in the interpretation or application of laws, it is presumed that the lawmaking body intended right
and justice to prevail. The Court therefore required respondents Central Bank of the Philippines, the local
bank, and the accused to comply with the writ of execution issued in the civil case for damages and to
release the dollar deposit of the accused to satisfy the judgment.

In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed aside the procedural
infirmity of the petition for declaratory relief and treated the same as one for mandamus. In Alliance, the
issue was whether the government unlawfully excluded petitioners, who were government employees, from
the enjoyment of rights to which they were entitled under the law. Specifically, the question was: Are the
branches, agencies, subdivisions, and instrumentalities of the Government, including government owned or
controlled corporations included among the four employers under Presidential Decree No. 851 which are
required to pay their employees x x x a thirteenth (13th) month pay x x x ? The Constitutional principle
involved therein affected all government employees, clearly justifying a relaxation of the technical rules of
procedure, and certainly requiring the interpretation of the assailed presidential decree.

In short, it is well-settled that this Court may treat a petition for declaratory relief as one for mandamus if the
issue involved has far-reaching implications. As this Court held in Salvacion:

The Court has no original and exclusive jurisdiction over a petition for declaratory relief. However,
exceptions to this rule have been recognized. Thus, where the petition has far-reaching
implications and raises questions that should be resolved, it may be treated as one for
mandamus.15 (Emphasis supplied)

In the present case, petitioner seeks primarily the interpretation of the term capital in Section 11, Article XII
of the Constitution. He prays that this Court declare that the term capital refers to common shares only, and
that such shares constitute the sole basis in determining foreign equity in a public utility. Petitioner further
asks this Court to declare any ruling inconsistent with such interpretation unconstitutional.

The interpretation of the term capital in Section 11, Article XII of the Constitution has far-reaching
implications to the national economy. In fact, a resolution of this issue will determine whether Filipinos are
masters, or second class citizens, in their own country. What is at stake here is whether Filipinos or
foreigners will have effective control of the national economy. Indeed, if ever there is a legal issue that has
far-reaching implications to the entire nation, and to future generations of Filipinos, it is the threshhold legal
issue presented in this case.

The Court first encountered the issue on the definition of the term capital in Section 11, Article XII of the
Constitution in the case of Fernandez v. Cojuangco, docketed as G.R. No. 157360.16That case involved the
same public utility (PLDT) and substantially the same private respondents. Despite the importance and
novelty of the constitutional issue raised therein and despite the fact that the petition involved a purely legal
question, the Court declined to resolve the case on the merits, and instead denied the same for disregarding
the hierarchy of courts.17 There, petitioner Fernandez assailed on a pure question of law the Regional Trial
Courts Decision of 21 February 2003 via a petition for review under Rule 45. The Courts Resolution,
denying the petition, became final on 21 December 2004.

The instant petition therefore presents the Court with another opportunity to finally settle this purely legal
issue which is of transcendental importance to the national economy and a fundamental requirement to a
faithful adherence to our Constitution. The Court must forthwith seize such opportunity, not only for the
benefit of the litigants, but more significantly for the benefit of the entire Filipino people, to ensure, in the
words of the Constitution, a self-reliant and independent national economy effectively controlled by
Filipinos.18 Besides, in the light of vague and confusing positions taken by government agencies on this
purely legal issue, present and future foreign investors in this country deserve, as a matter of basic fairness, a
categorical ruling from this Court on the extent of their participation in the capital of public utilities and
other nationalized businesses.

Despite its far-reaching implications to the national economy, this purely legal issue has remained
unresolved for over 75 years since the 1935 Constitution. There is no reason for this Court to evade this ever
recurring fundamental issue and delay again defining the term capital, which appears not only in Section 11,
Article XII of the Constitution, but also in Section 2, Article XII on co-production and joint venture
agreements for the development of our natural resources,19 in Section 7, Article XII on ownership of private
lands,20 in Section 10, Article XII on the reservation of certain investments to Filipino citizens, 21 in Section
4(2), Article XIV on the ownership of educational institutions,22 and in Section 11(2), Article XVI on the
ownership of advertising companies.23

Petitioner has locus standi

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right to question the subject
sale, which he claims to violate the nationality requirement prescribed in Section 11, Article XII of the
Constitution. If the sale indeed violates the Constitution, then there is a possibility that PLDTs franchise
could be revoked, a dire consequence directly affecting petitioners interest as a stockholder.
More importantly, there is no question that the instant petition raises matters of transcendental importance to
the public. The fundamental and threshold legal issue in this case, involving the national economy and the
economic welfare of the Filipino people, far outweighs any perceived impediment in the legal personality of
the petitioner to bring this action.

In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters of transcendental
importance to the public, thus:

In Taada v. Tuvera, the Court asserted that when the issue concerns a public right and the object of mandamus is to
obtain the enforcement of a public duty, the people are regarded as the real parties in interest; and because it is
sufficient that petitioner is a citizen and as such is interested in the execution of the laws, he need not show that he
has any legal or special interest in the result of the action. In the aforesaid case, the petitioners sought to enforce their
right to be informed on matters of public concern, a right then recognized in Section 6, Article IV of the 1973
Constitution, in connection with the rule that laws in order to be valid and enforceable must be published in the Official
Gazette or otherwise effectively promulgated. In ruling for the petitioners legal standing, the Court declared that the right
they sought to be enforced is a public right recognized by no less than the fundamental law of the land.

Legaspi v. Civil Service Commission, while reiterating Taada, further declared that when a mandamus proceeding
involves the assertion of a public right, the requirement of personal interest is satisfied by the mere fact that
petitioner is a citizen and, therefore, part of the general public which possesses the right.

Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been involved under the
questioned contract for the development, management and operation of the Manila International Container
Terminal, public interest [was] definitely involved considering the important role [of the subject contract] . . . in the
economic development of the country and the magnitude of the financial consideration involved. We concluded that,
as a consequence, the disclosure provision in the Constitution would constitute sufficient authority for upholding the
petitioners standing. (Emphasis supplied)

Clearly, since the instant petition, brought by a citizen, involves matters of transcendental public importance,
the petitioner has the requisite locus standi.

Definition of the Term Capital in

Section 11, Article XII of the 1987 Constitution

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 above provision substantially reiterates Section 5, Article XIV of the 1973 Constitution, thus:

Section 5. 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 the capital
of which 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 National Assembly when the public interest 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 the
capital thereof. (Emphasis supplied)

The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of the 1935
Constitution, viz:

Section 8. 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 other
entities organized under the laws of the Philippines sixty per centum of the capital of which is
owned by citizens of the Philippines, nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. No franchise or right shall be granted to
any individual, firm, or corporation, except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the public interest so requires. (Emphasis supplied)
Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission, reminds us that
the Filipinization provision in the 1987 Constitution is one of the products of the spirit of nationalism which
gripped the 1935 Constitutional Convention.25 The 1987 Constitution provides for the Filipinization of
public utilities by requiring that any form of authorization for the operation of public utilities should be
granted only 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. The provision is [an
express] recognition of the sensitive and vital position of public utilities both in the national economy
and for national security.26 The evident purpose of the citizenship requirement is to prevent aliens from
assuming control of public utilities, which may be inimical to the national interest.27 This specific provision
explicitly reserves to Filipino citizens control of public utilities, pursuant to an overriding economic goal of
the 1987 Constitution: to conserve and develop our patrimony 28 and ensure a self-reliant and independent
national economy effectively controlled by Filipinos.29

Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum
nationality requirement prescribed in Section 11, Article XII of the Constitution. Hence, for a corporation to
be granted authority to operate a public utility, at least 60 percent of its capital must be owned by Filipino
citizens.

The crux of the controversy is the definition of the term capital. Does the term capital in Section 11, Article
XII of the Constitution refer to common shares or to the total outstanding capital stock (combined total of
common and non-voting preferred shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers only to
common shares because such shares are entitled to vote and it is through voting that control over a
corporation is exercised. Petitioner posits that the term capital in Section 11, Article XII of the Constitution
refers to the ownership of common capital stock subscribed and outstanding, which class of shares alone,
under the corporate set-up of PLDT, can vote and elect members of the board of directors. It is undisputed
that PLDTs non-voting preferred shares are held mostly by Filipino citizens.30 This arose from Presidential
Decree No. 217,31 issued on 16 June 1973 by then President Ferdinand Marcos, requiring every applicant of
a PLDT telephone line to subscribe to non-voting preferred shares to pay for the investment cost of installing
the telephone line.32

Petitioners-in-intervention basically reiterate petitioners arguments and adopt petitioners definition of the
term capital.33 Petitioners-in-intervention allege that the approximate foreign ownership of common capital
stock of PLDT x x x already amounts to at least 63.54% of the total outstanding common stock, which
means that foreigners exercise significant control over PLDT, patently violating the 40 percent foreign
equity limitation in public utilities prescribed by the Constitution.
Respondents, on the other hand, do not offer any definition of the term capital in Section 11, Article XII of
the Constitution. More importantly, private respondents Nazareno and Pangilinanof PLDT do not dispute
that more than 40 percent of the common shares of PLDT are held by foreigners.

In particular, respondent Nazarenos Memorandum, consisting of 73 pages, harps mainly on the procedural
infirmities of the petition and the supposed violation of the due process rights of the affected foreign
common shareholders. Respondent Nazareno does not deny petitioners allegation of foreigners dominating
the common shareholdings of PLDT. Nazareno stressed mainly that the petition seeks to divest foreign
common shareholders purportedly exceeding 40% of the total common shareholdings in PLDT of
their ownership over their shares. Thus, the foreign natural and juridical PLDT shareholders must
be impleaded in this suit so that they can be heard.34 Essentially, Nazareno invokes denial of due process on
behalf of the foreign common shareholders.

While Nazareno does not introduce any definition of the term capital, he states that among the factual
assertions that need to be established to counter petitioners allegations is the uniform interpretation
by government agencies (such as the SEC), institutions and corporations (such as the Philippine
National Oil Company-Energy Development Corporation or PNOC-EDC) of including both preferred
shares and common shares in controlling interest in view of testing compliance with the 40%
constitutional limitation on foreign ownership in public utilities.35

Similarly, respondent Manuel V. Pangilinan does not define the term capital in Section 11, Article XII of the
Constitution. Neither does he refute petitioners claim of foreigners holding more than 40 percent of PLDTs
common shares. Instead, respondent Pangilinan focuses on the procedural flaws of the petition and the
alleged violation of the due process rights of foreigners. Respondent Pangilinan emphasizes in his
Memorandum (1) the absence of this Courts jurisdiction over the petition; (2) petitioners lack of standing;
(3) mootness of the petition; (4) non-availability of declaratory relief; and (5) the denial of due process
rights. Moreover, respondent Pangilinanalleges that the issue should be whether owners of shares in PLDT
as well as owners of shares in companies holding shares in PLDT may be required to relinquish their shares
in PLDT and in those companies without any law requiring them to surrender their shares and also without
notice and trial.

Respondent Pangilinan further asserts that Section 11, [Article XII of the Constitution] imposes no
nationality requirement on the shareholders of the utility company as a condition for keeping their
shares in the utility company. According to him, Section 11 does not authorize taking one persons property
(the shareholders stock in the utility company) on the basis of another partys alleged failure to satisfy a
requirement that is a condition only for that other partys retention of another piece of property (the utility
company being at least 60% Filipino-owned to keep its franchise).36

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary John P. Sevilla,
Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise silent on the definition of the term
capital. In its Memorandum37 dated 24 September 2007, the OSG also limits its discussion on the supposed
procedural defects of the petition, i.e. lack of standing, lack of jurisdiction, non-inclusion of interested
parties, and lack of basis for injunction. The OSG does not present any definition or interpretation of the
term capital in Section 11, Article XII of the Constitution. The OSG contends that the petition actually
partakes of a collateral attack on PLDTs franchise as a public utility, which in effect requires a full-blown
trial where all the parties in interest are given their day in court. 38

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of the Philippine Stock
Exchange (PSE), does not also define the term capital and seeks the dismissal of the petition on the
following grounds: (1) failure to state a cause of action against Lim; (2) the PSE allegedly implemented its
rules and required all listed companies, including PLDT, to make proper and timely disclosures; and (3) the
reliefs prayed for in the petition would adversely impact the stock market.

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a stockholder of
record of PLDT, contended that the term capital in the 1987 Constitution refers to shares entitled to vote or
the common shares. Fernandez explained thus:

The forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution
refers to ownership of shares of stock entitled to vote, i.e., common shares, considering that it is
through voting that control is being exercised. x x x

Obviously, the intent of the framers of the Constitution in imposing limitations and restrictions on
fully nationalized and partially nationalized activities is for Filipino nationals to be always in control
of the corporation undertaking said activities. Otherwise, if the Trial Courts ruling upholding
respondents arguments were to be given credence, it would be possible for the ownership structure of
a public utility corporation to be divided into one percent (1%) common stocks and ninety-nine
percent (99%) preferred stocks. Following the Trial Courts ruling adopting respondents arguments,
the common shares can be owned entirely by foreigners thus creating an absurd situation wherein
foreigners, who are supposed to be minority shareholders, control the public utility corporation.

xxxx

Thus, the 40% foreign ownership limitation should be interpreted to apply to both the beneficial
ownership and the controlling interest.

xxxx
Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed by
the Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares.
Furthermore, ownership of record of shares will not suffice but it must be shown that the legal and
beneficial ownership rests in the hands of Filipino citizens. Consequently, in the case of petitioner
PLDT, since it is already admitted that the voting interests of foreigners which would gain entry to
petitioner PLDT by the acquisition of SMART shares through the Questioned Transactions is
equivalent to 82.99%, and the nominee arrangements between the foreign principals and the Filipino
owners is likewise admitted, there is, therefore, a violation of Section 11, Article XII of the
Constitution.

Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the Trial Court to
support the proposition that the meaning of the word capital as used in Section 11, Article XII of the
Constitution allegedly refers to the sum total of the shares subscribed and paid-in by the shareholder
and it allegedly is immaterial how the stock is classified, whether as common or preferred, cannot
stand in the face of a clear legislative policy as stated in the FIA which took effect in 1991 or way
after said opinions were rendered, and as clarified by the above-quoted Amendments. In this regard,
suffice it to state that as between the law and an opinion rendered by an administrative agency, the
law indubitably prevails. Moreover, said Opinions are merely advisory and cannot prevail over the
clear intent of the framers of the Constitution.

In the same vein, the SECs construction of Section 11, Article XII of the Constitution is at best
merely advisory for it is the courts that finally determine what a law means.39

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan, Carlos A. Arellano,
Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-Romulo, Fr. Bienvenido F. Nebres, Ray C. Espinosa,
Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando B. Vea, argued that the term capital in Section
11, Article XII of the Constitution includes preferred shares since the Constitution does not distinguish
among classes of stock, thus:

16. The Constitution applies its foreign ownership limitation on the corporations capital, without
distinction as to classes of shares. x x x

In this connection, the Corporation Code which was already in force at the time the present (1987)
Constitution was drafted defined outstanding capital stock as follows:
Section 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.

Section 137 of the Corporation Code also does not distinguish between common and preferred shares,
nor exclude either class of shares, in determining the outstanding capital stock (the capital) of a
corporation. Consequently, petitioners suggestion to reckon PLDTs foreign equity only on the basis of
PLDTs outstanding common shares is without legal basis. The language of the Constitution should be
understood in the sense it has in common use.

xxxx

17. But even assuming that resort to the proceedings of the Constitutional Commission is necessary, there
is nothing in the Record of the Constitutional Commission (Vol. III) which petitioner misleadingly
cited in the Petition x x x which supports petitioners view that only common shares should form the
basis for computing a public utilitys foreign equity.

xxxx

18. In addition, the SEC the government agency primarily responsible for implementing the Corporation
Code, and which also has the responsibility of ensuring compliance with the Constitutions foreign
equity restrictions as regards nationalized activities x x x has categorically ruled that both common
and preferred shares are properly considered in determining outstanding capital stock and the
nationality composition thereof.40

We agree with petitioner and petitioners-in-intervention. 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,41 and not to the total outstanding capital stock comprising both common and
non-voting preferred shares.

The Corporation Code of the Philippines42 classifies shares as common or preferred, thus:

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share
may be deprived of voting rights except those classified and issued as preferred or redeemable
shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class
or series of shares which have complete voting rights. Any or all of the shares or series of shares may
have a par value or have no par value as may be provided for in the articles of incorporation:
Provided, however, That banks, trust companies, insurance companies, public utilities, and building
and loan associations shall not be permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of the
assets of the corporation in case of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which are not violative of the provisions
of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The
Board of Directors, where authorized in the articles of incorporation, may fix the terms and conditions
of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be
effective upon the filing of a certificate thereof with the Securities and Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the
holder of such shares shall not be liable to the corporation or to its creditors in respect thereto:
Provided; That shares without par value may not be issued for a consideration less than the value of
five (P5.00) pesos per share: Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and shall not be available for
distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each
share shall be equal in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code,
the holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this


Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular
corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.
Indisputably, one of the rights of a stockholder is the right to participate in the control or management of the
corporation.43 This is exercised through his vote in the election of directors because it is the board of
directors that controls or manages the corporation.44 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. 45 In
fact, under the Corporation Code only preferred or redeemable shares can be deprived of the right to
vote.46 Common shares cannot be deprived of the right to vote in any corporate meeting, and any provision
in the articles of incorporation restricting the right of common shareholders to vote is invalid. 47

Considering that common shares have voting rights which translate to control, as opposed to preferred
shares which usually have no voting rights, the term capital in Section 11, Article XII of the Constitution
refers only to common shares. However, if the preferred shares also have the right to vote in the election of
directors, then the term capital shall include such preferred shares because the right to participate in the
control or management of the corporation is exercised through the right to vote in the election of
directors. In short, the term capital in Section 11, Article XII of the Constitution refers only to shares
of stock that can vote in the election of directors.

This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of
Filipino citizens the control and management of public utilities. As revealed in the deliberations of the
Constitutional Commission, capital refers to the voting stock or controlling interest of a corporation, to wit:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law
Center who provided us a draft. The phrase that is contained here which we adopted from the UP
draft is 60 percent of voting stock.
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-
40 percent equity invests in another corporation which is permitted by the Corporation Code, does the
Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes.48

xxxx

MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase voting stock or
controlling interest.

MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
corporations or associations at least sixty percent of whose CAPITAL is owned by such citizens.

MR. VILLEGAS. Yes.


MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be
owned by citizens.

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us
say 40 percent of the capital is owned by them, but it is the voting capital, whereas, the Filipinos
own the nonvoting shares. So we can have a situation where the corporation is controlled by
foreigners despite being the minority because they have the voting capital. That is the anomaly
that would result here.

MR. BENGZON. No, the reason we eliminated the word stock as stated in the 1973 and 1935
Constitutions is that according to Commissioner Rodrigo, there are associations that do not
have stocks. That is why we say CAPITAL.

MR. AZCUNA. We should not eliminate the phrase controlling interest.

MR. BENGZON. In the case of stock corporations, it is assumed.49 (Emphasis supplied)

Thus, 60 percent of the capital assumes, or should result in, controlling interest in the corporation.
Reinforcing this interpretation of the term capital, as referring to controlling interest or shares entitled to
vote, is the definition of a Philippine national in the Foreign Investments Act of 1991, 50 to wit:

SEC. 3. Definitions. - As used in this Act:

a. The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by citizens of the Philippines; or a corporation organized under the laws
of the Philippines of which at least sixty percent (60%) of the capital stock
outstanding andentitled to vote is owned and held by citizens of the Philippines; or a corporation
organized abroad and registered as doing business in the Philippines under the Corporation Code of
which one hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly
owned by Filipinos or a trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund will
accrue to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino
stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at
least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of both
corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of
the members of the Board of Directors of each of both corporations must be citizens of the
Philippines, in order that the corporation, shall be considered a Philippine national. (Emphasis
supplied)

In explaining the definition of a Philippine national, the Implementing Rules and Regulations of the Foreign
Investments Act of 1991 provide:

b. Philippine national shall mean a citizen of the Philippines or a domestic partnership or association
wholly owned by the citizens of the Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty percent [60%] of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty
percent [60%] of the fund will accrue to the benefit of the Philippine nationals; Provided, that where a
corporation its non-Filipino stockholders own stocks in a Securities and Exchange Commission [SEC]
registered enterprise, at least sixty percent [60%] of the capital stock outstanding and entitled to vote
of both corporations must be owned and held by citizens of the Philippines and at least sixty percent
[60%] of the members of the Board of Directors of each of both corporation must be citizens of the
Philippines, in order that the corporation shall be considered a Philippine national. The control test
shall be applied for this purpose.

Compliance with the required Filipino ownership of a corporation shall be determined on the
basis of outstanding capital stock whether fully paid or not, but only such stocks which are
generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere
legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of
which have been assigned or transferred to aliens cannot be considered held by Philippine
citizens or Philippine nationals.

Individuals or juridical entities not meeting the aforementioned qualifications are considered as
non-Philippine nationals. (Emphasis supplied)
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].

Under Section 10, Article XII of the Constitution, Congress may reserve to citizens of the Philippines or to
corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such
higher percentage as Congress may prescribe, certain areas of investments. Thus, in numerous laws
Congress has reserved certain areas of investments to Filipino citizens or to corporations at least sixty
percent of the capital of which is owned by Filipino citizens. Some of these laws are: (1) Regulation of
Award of Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No.
3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas
Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No.
9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or
P.D. No. 1521. Hence, the term capital in Section 11, Article XII of the Constitution is also used in the
same context in numerous laws reserving certain areas of investments to Filipino citizens.

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.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of directors.
PLDTs Articles of Incorporation expressly state that the holders of Serial Preferred Stock shall not be
entitled to vote at any meeting of the stockholders for the election of directors or for any other
purpose or otherwise participate in any action taken by the corporation or its stockholders, or to receive
notice of any meeting of stockholders.51

On the other hand, holders of common shares are granted the exclusive right to vote in the election of
directors. PLDTs Articles of Incorporation52 state that each holder of Common Capital Stock shall have one
vote in respect of each share of such stock held by him on all matters voted upon by the stockholders,
and the holders of Common Capital Stock shall have the exclusive right to vote for the election of
directors and for all other purposes.53

In short, only holders of common shares can vote in the election of directors, 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),54which is a document required to
be submitted annually to the Securities and Exchange Commission,55 foreigners hold 120,046,690 common
shares of PLDT whereas Filipinos hold only 66,750,622 common shares. 56 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.

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC, shows that per share the
SIP58 preferred shares earn a pittance in dividends compared to the common shares. PLDT declared
dividends for the common shares at P70.00 per share, while the declared dividends for the preferred shares
amounted to a measly P1.00 per share.59 So the preferred shares not only cannot vote in the election of
directors, they also have very little and obviously negligible dividend earning capacity compared to common
shares.

As shown in PLDTs 2010 GIS,60 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.61Worse, preferred shares constitute 77.85% of the
authorized capital stock of PLDT while common shares constitute only 22.15%.62 This undeniably shows
that beneficial interest in PLDT is not with the non-voting preferred shares but with the common shares,
blatantly violating the constitutional requirement of 60 percent Filipino control and Filipino beneficial
ownership in a public utility.

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 xx 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;63 (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,64 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,65 is a glaring confirmation by the market
that control and beneficial ownership of PLDT rest with the common shares, not with the preferred shares.
Indisputably, construing the term capital in Section 11, Article XII of the Constitution to include both voting
and non-voting shares will result in the abject surrender of our telecommunications industry to foreigners,
amounting to a clear abdication of the States constitutional duty to limit control of public utilities to Filipino
citizens. Such an interpretation certainly runs counter to the constitutional provision reserving certain areas
of investment to Filipino citizens, such as the exploitation of natural resources as well as the ownership of
land, educational institutions and advertising businesses. The Court should never open to foreign control
what the Constitution has expressly reserved to Filipinos for that would be a betrayal of the Constitution and
of the national interest. The Court must perform its solemn duty to defend and uphold the intent and letter of
the Constitution to ensure, in the words of the Constitution, a self-reliant and independent national
economy effectively controlled by Filipinos.

Section 11, Article XII of the Constitution, like other provisions of the Constitution expressly reserving to
Filipinos specific areas of investment, such as the development of natural resources and ownership of land,
educational institutions and advertising business, is self-executing. There is no need for legislation to
implement these self-executing provisions of the Constitution. The rationale why these constitutional
provisions are self-executing was explained in Manila Prince Hotel v. GSIS,66 thus:

x x x Hence, unless it is expressly provided that a legislative act is necessary to enforce a


constitutional mandate, the presumption now is that all provisions of the constitution are self-
executing. If the constitutional provisions are treated as requiring legislation instead of self-executing,
the legislature would have the power to ignore and practically nullify the mandate of the fundamental
law. This can be cataclysmic. That is why the prevailing view is, as it has always been, that

. . . in case of doubt, the Constitution should be considered self-executing rather than non-self-
executing. . . . Unless the contrary is clearly intended, the provisions of the Constitution should
be considered self-executing, as a contrary rule would give the legislature discretion to
determine when, or whether, they shall be effective. These provisions would be subordinated to the
will of the lawmaking body, which could make them entirely meaningless by simply refusing to pass
the needed implementing statute. (Emphasis supplied)

In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice Reynato S. Puno, later Chief
Justice, agreed that constitutional provisions are presumed to be self-executing. Justice Puno stated:

Courts as a rule consider the provisions of the Constitution as self-executing, rather than as requiring
future legislation for their enforcement. The reason is not difficult to discern. For if they are not
treated as self-executing, the mandate of the fundamental law ratified by the sovereign people
can be easily ignored and nullified by Congress. Suffused with wisdom of the ages is the
unyielding rule that legislative actions may give breath to constitutional rights but congressional
inaction should not suffocate them.

Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests, searches and
seizures, the rights of a person under custodial investigation, the rights of an accused, and the
privilege against self-incrimination. It is recognized that legislation is unnecessary to enable courts to
effectuate constitutional provisions guaranteeing the fundamental rights of life, liberty and the
protection of property. The same treatment is accorded to constitutional provisions forbidding the
taking or damaging of property for public use without just compensation. (Emphasis supplied)

Thus, in numerous cases,67 this Court, even in the absence of implementing legislation, applied directly the
provisions of the 1935, 1973 and 1987 Constitutions limiting land ownership to Filipinos. In Soriano
v. Ong Hoo,68 this Court ruled:

x x x As the Constitution is silent as to the effects or consequences of a sale by a citizen of his land to
an alien, and as both the citizen and the alien have violated the law, none of them should have a
recourse against the other, and it should only be the State that should be allowed to intervene and
determine what is to be done with the property subject of the violation. We have said that what the
State should do or could do in such matters is a matter of public policy, entirely beyond the scope of
judicial authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R. No. L-5996, June 27,
1956.) While the legislature has not definitely decided what policy should be followed in cases of
violations against the constitutional prohibition, courts of justice cannot go beyond by declaring
the disposition to be null and void as violative of the Constitution. x x x (Emphasis supplied)

To treat Section 11, Article XII of the Constitution as not self-executing would mean that since the 1935
Constitution, or over the last 75 years, not one of the constitutional provisions expressly reserving specific
areas of investments to corporations, at least 60 percent of the capital of which is owned by Filipinos, was
enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions miserably failed to effectively
reserve to Filipinos specific areas of investment, like the operation by corporations of public utilities, the
exploitation by corporations of mineral resources, the ownership by corporations of real estate, and the
ownership of educational institutions. All the legislatures that convened since 1935 also miserably failed to
enact legislations to implement these vital constitutional provisions that determine who will effectively
control the national economy, Filipinos or foreigners. This Court cannot allow such an absurd interpretation
of the Constitution.
This Court has held that the SEC has both regulatory and adjudicative functions. 69 Under its regulatory
functions, the SEC can be compelled by mandamus to perform its statutory duty when it unlawfully neglects
to perform the same. Under its adjudicative or quasi-judicial functions, the SEC can be also be compelled by
mandamus to hear and decide a possible violation of any law it administers or enforces when it is mandated
by law to investigate such violation.

Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function to reject or disapprove
the Articles of Incorporation of any corporation where the required percentage of ownership of the
capital stock to be owned by citizens of the Philippines has not been complied with as required by
existing laws or the Constitution. Thus, the SEC is the government agency tasked with the statutory duty
to enforce the nationality requirement prescribed in Section 11, Article XII of the Constitution on the
ownership of public utilities. This Court, in a petition for declaratory relief that is treated as a petition for
mandamus as in the present case, can direct the SEC to perform its statutory duty under the law, a duty that
the SEC has apparently unlawfully neglected to do based on the 2010 GIS that respondent PLDT submitted
to the SEC.

Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the power and function
to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by law. The SEC is
mandated under Section 5(d) of the same Code with the power and function to investigate x x x the
activities of persons to ensure compliance with the laws and regulations that SEC administers or enforces.
The GIS that all corporations are required to submit to SEC annually should put the SEC on guard against
violations of the nationality requirement prescribed in the Constitution and existing laws. This Court can
compel the SEC, in a petition for declaratory relief that is treated as a petition for mandamus as in the
present case, to hear and decide a possible violation of Section 11, Article XII of the Constitution in view of
the ownership structure of PLDTs voting shares, as admitted by respondents and as stated in PLDTs 2010
GIS that PLDT submitted to SEC.

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

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-43350 December 23, 1937

CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant,


vs.
TEODORO SANDIKO, defendant-appellee.

Arsenio P. Dizon for appellant.


Sumulong, Lavides and Sumulong for appellee.

LAUREL, J.:

This is an appeal from a judgment of the Court of First Instance of Manila absolving the defendant from the plaintiff's complaint.

Manuel Tabora is the registered owner of four parcels of land situated in the barrio of Linao, town of Aparri, Province of
Cagayan, as evidenced by transfer certificate of title No. 217 of the land records of Cagayan, a copy of which is in evidence as
Exhibit 1. To guarantee the payment of a loan in the sum of P8,000, Manuel Tabora, on August 14, 1929, executed in favor of
the Philippine National Bank a first mortgage on the four parcels of land above-mentioned. A second mortgage in favor of the
same bank was in April of 1930 executed by Tabora over the same lands to guarantee the payment of another loan amounting
to P7,000. A third mortgage on the same lands was executed on April 16, 1930 in favor of Severina Buzon to whom Tabora
was indebted in the sum of P2,9000. These mortgages were registered and annotations thereof appear at the back of transfer
certificate of title No. 217.

On May 31, 1930, Tabora executed a public document entitled "Escritura de Transpaso de Propiedad Inmueble" (Exhibit A) by
virtue of which the four parcels of land owned by him was sold to the plaintiff company, said to under process of incorporation,
in consideration of one peso (P1) subject to the mortgages in favor of the Philippine National Bank and Severina Buzon and, to
the condition that the certificate of title to said lands shall not be transferred to the name of the plaintiff company until the latter
has fully and completely paid Tabora's indebtedness to the Philippine National Bank.

The plaintiff company filed its article incorporation with the Bureau of Commerce and Industry on October 22, 1930 (Exhibit 2).
A year later, on October 28, 1931, the board of directors of said company adopted a resolution (Exhibit G) authorizing its
president, Jose Ventura, to sell the four parcels of lands in question to Teodoro Sandiko for P42,000. Exhibits B, C and D were
thereafter made and executed. Exhibit B is a deed of sale executed before a notary public by the terms of which the plaintiff
sold ceded and transferred to the defendant all its right, titles, and interest in and to the four parcels of land described in
transfer certificate in turn obligated himself to shoulder the three mortgages hereinbefore referred to. Exhibit C is a promisory
note for P25,300. drawn by the defendant in favor of the plaintiff, payable after one year from the date thereof. Exhibit D is a
deed of mortgage executed before a notary public in accordance with which the four parcels of land were given a security for
the payment of the promissory note, Exhibit C. All these three instrument were dated February 15, 1932.

The defendant having failed to pay the sum stated in the promissory note, plaintiff, on January 25, 1934, brought this action in
the Court of First Instance of Manila praying that judgment be rendered against the defendant for the sum of P25,300, with
interest at legal rate from the date of the filing of the complaint, and the costs of the suits. After trial, the court below, on
December 18, 1934, rendered judgment absolving the defendant, with costs against the plaintiff. Plaintiff presented a motion
for new trial on January 14, 1935, which motion was denied by the trial court on January 19 of the same year. After due
exception and notice, plaintiff has appealed to this court and makes an assignment of various errors.

In dismissing the complaint against the defendant, the court below, reached the conclusion that Exhibit B is invalid because of
vice in consent and repugnancy to law. While we do not agree with this conclusion, we have however voted to affirm the
judgment appealed from the reasons which we shall presently state.

The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff herein, was affected on May 31, 1930
(Exhibit A) and the actual incorporation of said company was affected later on October 22, 1930 (Exhibit 2). In other words, the
transfer was made almost five months before the incorporation of the company. Unquestionably, a duly organized corporation
has the power to purchase and hold such real property as the purposes for which such corporation was formed may permit
and for this purpose may enter into such contracts as may be necessary (sec. 13, pars. 5 and 9, and sec. 14, Act No. 1459).
But before a corporation may be said to be lawfully organized, many things have to be done. Among other things, the law
requires the filing of articles of incorporation (secs. 6 et seq., Act. No. 1459). Although there is a presumption that all the
requirements of law have been complied with (sec. 334, par. 31 Code of Civil Procedure), in the case before us it can not be
denied that the plaintiff was not yet incorporated when it entered into a contract of sale, Exhibit A. The contract itself referred to
the plaintiff as "una sociedad en vias de incorporacion." It was not even a de facto corporation at the time. Not being in legal
existence then, it did not possess juridical capacity to enter into the contract.

Corporations are creatures of the law, and can only come into existence in the manner prescribed by law. As has
already been stated, general law authorizing the formation of corporations are general offers to any persons who may
bring themselves within their provisions; and if conditions precedent are prescribed in the statute, or certain acts are
required to be done, they are terms of the offer, and must be complied with substantially before legal corporate
existence can be acquired. (14 C. J., sec. 111, p. 118.)

That a corporation should have a full and complete organization and existence as an entity before it can enter into any
kind of a contract or transact any business, would seem to be self evident. . . . A corporation, until organized, has no
being, franchises or faculties. Nor do those engaged in bringing it into being have any power to bind it by contract,
unless so authorized by the charter there is not a corporation nor does it possess franchise or faculties for it or others
to exercise, until it acquires a complete existence. (Gent vs. Manufacturers and Merchant's Mutual Insurance
Company, 107 Ill., 652, 658.)

Boiled down to its naked reality, the contract here (Exhibit A) was entered into not between Manuel Tabora and a non-existent
corporation but between the Manuel Tabora as owner of the four parcels of lands on the one hand and the same Manuel
Tabora, his wife and others, as mere promoters of a corporations on the other hand. For reasons that are self-evident, these
promoters could not have acted as agent for a projected corporation since that which no legal existence could have no agent.
A corporation, until organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa mere. This is not
saying that under no circumstances may the acts of promoters of a corporation be ratified by the corporation if and when
subsequently organized. There are, of course, exceptions (Fletcher Cyc. of Corps., permanent edition, 1931, vol. I, secs.
207 et seq.), but under the peculiar facts and circumstances of the present case we decline to extend the doctrine of
ratification which would result in the commission of injustice or fraud to the candid and unwary.(Massachusetts rule, Abbott vs.
Hapgood, 150 Mass., 248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193; citing English cases; Koppel vs.
Massachusetts Brick Co., 192 Mass., 223; 78 N. E., 128; Holyoke Envelope Co., vs. U. S. Envelope Co., 182 Mass., 171; 65
N. E., 54.) It should be observed that Manuel Tabora was the registered owner of the four parcels of land, which he succeeded
in mortgaging to the Philippine National Bank so that he might have the necessary funds with which to convert and develop
them into fishery. He appeared to have met with financial reverses. He formed a corporation composed of himself, his wife,
and a few others. From the articles of incorporation, Exhibit 2, it appears that out of the P48,700, amount of capital stock
subscribed, P45,000 was subscribed by Manuel Tabora himself and P500 by his wife, Rufina Q. de Tabora; and out of the
P43,300, amount paid on subscription, P42,100 is made to appear as paid by Tabora and P200 by his wife. Both Tabora and
His wife were directors and the latter was treasurer as well. In fact, to this day, the lands remain inscribed in Tabora's name.
The defendant always regarded Tabora as the owner of the lands. He dealt with Tabora directly. Jose Ventura, president of the
plaintiff corporation, intervened only to sign the contract, Exhibit B, in behalf of the plaintiff. Even the Philippine National Bank,
mortgagee of the four parcels of land, always treated Tabora as the owner of the same. (See Exhibits E and F.) Two civil suits
(Nos. 1931 and 38641) were brought against Tabora in the Court of First Instance of Manila and in both cases a writ of
attachment against the four parcels of land was issued. The Philippine National Bank threatened to foreclose its mortgages.
Tabora approached the defendant Sandiko and succeeded in the making him sign Exhibits B, C, and D and in making him,
among other things, assume the payment of Tabora's indebtedness to the Philippine National Bank. The promisory note,
Exhibit C, was made payable to the plaintiff company so that it may not attached by Tabora's creditors, two of whom had
obtained writs of attachment against the four parcels of land.

If the plaintiff corporation could not and did not acquire the four parcels of land here involved, it follows that it did not possess
any resultant right to dispose of them by sale to the defendant, Teodoro Sandiko.

Some of the members of this court are also of the opinion that the transfer from Manuel Tabora to the Cagayan Fishing
Development Company, Inc., which transfer is evidenced by Exhibit A, was subject to a condition precedent (condicion
suspensiva), namely, the payment of the mortgage debt of said Tabora to the Philippine National Bank, and that this condition
not having been complied with by the Cagayan Fishing Development Company, Inc., the transfer was ineffective. (Art. 1114,
Civil Code; Wise & Co. vs. Kelly and Lim, 37 Phil., 696; Manresa, vol. 8, p. 141.) However, having arrived at the conclusion
that the transfer by Manuel Tabora to the Cagayan Fishing Development Company, Inc. was null because at the time it was
affected the corporation was non-existent, we deem it unnecessary to discuss this point. lawphil.net

The decision of the lower court is accordingly affirmed, with costs against the appellant. So Ordered.

Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.


Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-28113 March 28, 1969

THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and AMER MACAORAO BALINDONG, petitioners,
vs.
PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI HASAN MACARAMPAD, FREDERICK V. DUJERTE
MONDACO ONTAL, MARONSONG ANDOY, MACALABA INDAR LAO. respondents.

L. Amores and R. Gonzales for petitioners.


Jose W. Diokno for respondents.

CASTRO, J.:

The petitioner Amer Macaorao Balindong is the mayor of Malabang, Lanao del Sur, while the respondent Pangandapun
Bonito is the mayor, and the rest of the respondents are the councilors, of the municipality of Balabagan of the same province.
Balabagan was formerly a part of the municipality of Malabang, having been created on March 15, 1960, by Executive Order
386 of the then President Carlos P. Garcia, out of barrios and sitios1 of the latter municipality.

The petitioners brought this action for prohibition to nullify Executive Order 386 and to restrain the respondent municipal
officials from performing the functions of their respective office relying on the ruling of this Court in Pelaez v. Auditor
General 2 and Municipality of San Joaquin v. Siva. 3

In Pelaez this Court, through Mr. Justice (now Chief Justice) Concepcion, ruled: (1) that section 23 of Republic Act 2370
[Barrio Charter Act, approved January 1, 1960], by vesting the power to create barrios in the provincial board, is a "statutory
denial of the presidential authority to create a new barrio [and] implies a negation of the bigger power to create municipalities,"
and (2) that section 68 of the Administrative Code, insofar as it gives the President the power to create municipalities, is
unconstitutional (a) because it constitutes an undue delegation of legislative power and (b) because it offends against section
10 (1) of article VII of the Constitution, which limits the President's power over local governments to mere supervision. As this
Court summed up its discussion: "In short, even if it did not entail an undue delegation of legislative powers, as it certainly
does, said section 68, as part of the Revised Administrative Code, approved on March 10, 1917, must be deemed repealed by
the subsequent adoption of the Constitution, in 1935, which is utterly incompatible and inconsistent with said statutory
enactment."

On the other hand, the respondents, while admitting the facts alleged in the petition, nevertheless argue that the rule
announced in Pelaez can have no application in this case because unlike the municipalities involved in Pelaez, the municipality
of Balabagan is at least a de facto corporation, having been organized under color of a statute before this was declared
unconstitutional, its officers having been either elected or appointed, and the municipality itself having discharged its corporate
functions for the past five years preceding the institution of this action. It is contended that as a de facto corporation, its
existence cannot be collaterally attacked, although it may be inquired into directly in an action for quo warranto at the instance
of the State and not of an individual like the petitioner Balindong.

It is indeed true that, generally, an inquiry into the legal existence of a municipality is reserved to the State in a proceeding
for quo warranto or other direct proceeding, and that only in a few exceptions may a private person exercise this function of
government. 4 But the rule disallowing collateral attacks applies only where the municipal corporation is at least a de
facto corporations. 5 For where it is neither a corporation de jure nor de facto, but a nullity, the rule is that its existence may be,
questioned collaterally or directly in any action or proceeding by any one whose rights or interests ate affected thereby,
including the citizens of the territory incorporated unless they are estopped by their conduct from doing so. 6

And so the threshold question is whether the municipality of Balabagan is a de facto corporation. As earlier stated, the claim
that it is rests on the fact that it was organized before the promulgation of this Court's decision in Pelaez. 7

Accordingly, we address ourselves to the question whether a statute can lend color of validity to an attempted organization of
a municipality despite the fact that such statute is subsequently declared unconstitutional. lawphi 1.et

This has been a litigiously prolific question, sharply dividing courts in the United States. Thus, some hold that a de
facto corporation cannot exist where the statute or charter creating it is unconstitutional because there can be no de
facto corporation where there can be no de jure one, 8 while others hold otherwise on the theory that a statute is binding until it
is condemned as unconstitutional. 9

An early article in the Yale Law Journal offers the following analysis:

It appears that the true basis for denying to the corporation a de facto status lay in the absence of any legislative act
to give vitality to its creation. An examination of the cases holding, some of them unreservedly, that a de facto office or
municipal corporation can exist under color of an unconstitutional statute will reveal that in no instance did the invalid
act give life to the corporation, but that either in other valid acts or in the constitution itself the office or the corporation
was potentially created....

The principle that color of title under an unconstitutional statute can exist only where there is some other valid law
under which the organization may be effected, or at least an authority in potentia by the state constitution, has its
counterpart in the negative propositions that there can be no color of authority in an unconstitutional statute that plainly
so appears on its face or that attempts to authorize the ousting of a de jure or de facto municipal corporation upon the
same territory; in the one case the fact would imply the imputation of bad faith, in the other the new organization must
be regarded as a mere usurper....

As a result of this analysis of the cases the following principles may be deduced which seem to reconcile the
apparently conflicting decisions:

I. The color of authority requisite to the organization of a de facto municipal corporation may be:

1. A valid law enacted by the legislature.

2. An unconstitutional law, valid on its face, which has either (a) been upheld for a time by the courts or
(b) not yet been declared void; provided that a warrant for its creation can be found in some other valid
law or in the recognition of its potential existence by the general laws or constitution of the state.

II. There can be no de facto municipal corporation unless either directly or potentially, such a de jurecorporation
is authorized by some legislative fiat.

III. There can be no color of authority in an unconstitutional statute alone, the invalidity of which is apparent on
its face.

IV. There can be no de facto corporation created to take the place of an existing de jure corporation, as such
organization would clearly be a usurper.10

In the cases where a de facto municipal corporation was recognized as such despite the fact that the statute creating it was
later invalidated, the decisions could fairly be made to rest on the consideration that there was some other valid law giving
corporate vitality to the organization. Hence, in the case at bar, the mere fact that Balabagan was organized at a time when the
statute had not been invalidated cannot conceivably make it a de factocorporation, as, independently of the Administrative
Code provision in question, there is no other valid statute to give color of authority to its creation. Indeed, in Municipality of San
Joaquin v. Siva, 11 this Court granted a similar petition for prohibition and nullified an executive order creating the municipality
of Lawigan in Iloilo on the basis of thePelaez ruling, despite the fact that the municipality was created in 1961, before section
68 of the Administrative Code, under which the President had acted, was invalidated. 'Of course the issue of de facto municipal
corporation did not arise in that case.

In Norton v. Shelby Count, 12 Mr. Justice Field said: "An unconstitutional act is not a law; it confers no rights; it imposes no
duties; it affords no protection; it creates no office; it is, in legal contemplation, as inoperative as though it had never been
passed." Accordingly, he held that bonds issued by a board of commissioners created under an invalid statute were
unenforceable.

Executive Order 386 "created no office." This is not to say, however, that the acts done by the municipality of Balabagan in
the exercise of its corporate powers are a nullity because the executive order "is, in legal contemplation, as inoperative as
though it had never been passed." For the existence of Executive, Order 386 is "an operative fact which cannot justly be
ignored." As Chief Justice Hughes explained in Chicot County Drainage District v. Baxter State Bank: 13

The courts below have proceeded on the theory that the Act of Congress, having been found to be unconstitutional,
was not a law; that it was inoperative, conferring no rights and imposing no duties, and hence affording no basis for the
challenged decree. Norton v. Shelby County, 118 U.S. 425, 442; Chicago, I. & L. Ry. Co. v. Hackett, 228 U.S. 559,
566. It is quite clear, however, that such broad statements as to the effect of a determination of unconstitutionality must
be taken with qualifications. The actual existence of a statute, prior to such a determination, is an operative fact and
may have consequences which cannot justly be ignored. The past cannot always be erased by a new judicial
declaration. The effect of the subsequent ruling as to invalidity may have to be considered in various aspects with
respect to particular relations, individual and corporate, and particular conduct, private and official. Questions of rights
claimed to have become vested, of status of prior determinations deemed to have finality and acted upon accordingly,
of public policy in the light of the nature both of the statute and of its previous application, demand examination. These
questions are among the most difficult of those which have engaged the attention of courts, state and federal, and it is
manifest from numerous decisions that an all-inclusive statement of a principle of absolute retroactive invalidity cannot
be justified.

There is then no basis for the respondents' apprehension that the invalidation of the executive order creating Balabagan
would have the effect of unsettling many an act done in reliance upon the validity of the creation of that municipality. 14

ACCORDINGLY, the petition is granted, Executive Order 386 is declared void, and the respondents are hereby permanently
restrained from performing the duties and functions of their respective offices. No pronouncement as to costs.

Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez and Capistrano, JJ., concur.
Teehankee and Barredo, JJ., took no part.

Separate Opinions

FERNANDO, J., concurring:

I concur fully with the well-written opinion of Justice Castro. It breaks new ground; it strikes out new paths. It is precisely
because of its impact on the power of judicial review of executive acts that I deem a few additional words would not be amiss.

1. Insofar as the effect of a declaration of unconstitionality is concerned, the latter and more realistic trend reflected in
Chicot County Drainage District v. Baxter State Bank 1 had previously elicited our approval. Thus: "'Rutter vs. Esteban
(93 Phil. 68) may be construed to mean that at the time of the decision the Moratorium law could no longer be validly
applied because of the prevailing circumstances. At any rate, although the general rule is that an unconstitutional
statute 'confers no right, creates no office, affords no protection and justifies no acts performed under it.' ... there are
several instances wherein courts, out of equity, have relaxed its operation ... or qualified its effects 'since the actual
existence of a statute prior to such declaration is an operative fact, and may have consequences which cannot justly
be ignored' ... and a realistic approach is eroding the general doctrine ....'" 2 Also: "We have taken note, of the fact that,
on June 30, 1961, Section 25 of Reorganization Plan No. 20-A had been declared unconstitutional by this Court in the
case of Corominas, et al. v. The Labor Standards Commission, et al., .... It appears, however, that the Plaintiff had filed
his claim before Regional Office No. 4 of the Department of Labor on July 26, 1960, or about one year before said
Section 25 had been declared unconstitutional. The circumstance that Section 25 of Reorganization Plan No. 20-A had
been declared unconstitutional should not be counted against the defendant in the present case. In the case of Manila
Motor Co., Inc. v. Flores, ..., this Court upheld the right of a party under the Moratorium Law which had accrued in his
favor before said law was declared unconstitutional by this Court in the case of Rutter v. Esteban, 93 Phil. 68." 3

2. Nothing can be clearer therefore in the light of the two above cases than that a previous declaration of invalidity of
legislative acts would not be bereft of legal results. Would that view hold true of nullification of executive acts? There
might have been doubts as to the correct answer before. There is none now.

A judicial decision annulling a presidential exercise of authority 4 is not without its effect either. That much is evident
from the holding now reached. The act stricken down, whether proceeding from the legislature or the Executive, could
in the language of the Chicot County case, be considered, prior to the declaration of invalidity, as "an operative fact
and may have consequences which cannot justly be ignored."

Thus the frontiers of the law have been extended, a doctrine which to some may come into play when a statute is
voided is now considered equally applicable to a Presidential act that has met a similar fate. Such a result should not
occasion surprise. That is to be expected.

There would be an unjustified deviation from the doctrine of separation of powers if a consequence attached to the
annulment of a statue is considered as not operative where an executive order is involved. The doctrine of co-equal or
coordinate departments would be meaningless if a discrimination of the above sort were considered permissible. The
cognizance taken of the prior existence of an enactment subsequently declared unconstitutional applies as well as to a
Presidential act thereafter successfully assailed. There was a time when it too did exist and, as such, a fact to be
reckoned with, though an infirm source of a legal right, if, as subsequently held, considered violative of a constitutional
command.

3. Precisionists may cavil at the above view; they may assert, and with some degree of plausibility, that the holding in
the Pelaez case goes no further than to locate a statutory infirmity in the Presidential act there challenged, creating
municipal corporations under what the then Executive considered a grant of authority found in the Revised
Administrative Code. 5 Such a power having been found not to exist, the decision, so it may be asserted, did not reach
the constitutional issue of non-delegation of legislative power. Tersely put, there was no finding of nullity based on a
violation of the Constitution.

To such a claim, it suffices to answer that while the challenged Administrative Code provision was in fact held as not
containing within itself the authority conferred on the President to create municipal corporations, the opinion by the then
Justice, now Chief Justice, Concepcion went further. As was pointed out by him: "Although Congress may delegate to another
branch of the Government the power to fill in the details in the execution, enforcement or administration of a law, it is essential,
to forestall a violation of the principle of separation of powers, that said law: (a) be complete in itself it must set forth therein
the policy to be executed, carried out or implemented by the delegate and (b) fix a standard the limits of which are
sufficiently determinate or determinable to which the delegate must conform in the performance of his functions. Indeed,
without a statutory declaration of policy, the delegate would, in effect, make or formulate such policy, which is the essence of
every law; and without the aforementioned standard, there would be no means to determine, with reasonable certainty,
whether the delegate has acted within or beyond the scope of his authority. Hence, he could thereby arrogate upon himself the
power, not only to make the law, but also and this is worse to unmake it, by adopting measures inconsistent with the end
sought to be attained by the Act of Congress, thus nullifying the principle of separation of powers and the system of checks
and balances, and, consequently, undermining the very foundation of our Republican system." 6

From which, it would follow, in the language of the opinion: "Section 68 of the Revised Administrative Code does not meet
these well-settled requirements for a valid delegation of the power to fix the details in the enforcement of a law. It does not
enunciate any policy to be carried out or implemented by the President. Neither does it give a standard sufficiently precise to
avoid the evil effects above referred to." 7

It is thus clear that while it might not be strictly accurate to advance the view that there was a finding of unconstitutionality of a
challenged statutory norm, there could be no objection to the view that the holding was one of unconstitutional application.

Nor is this all. If there be admission of the force of the assertion that the Pelaez opinion went no further than to locate in the
challenged Executive orders creating municipal corporations an act in excess of statutory authority, then our decision in this
case is all the more noteworthy for the more hospitable scope accorded the Chicot doctrine. For as originally formulated, it
would merely recognize that during its existence, prior to its being declared violative of the constitute, the statute must be
deemed an operative fact. Today we decide that such a doctrine extends to a Presidential act held void not only on the ground
of unconstitutional infirmity but also because in excess of the statutory power conferred. That to me is the more significant
aspect of this decision. To repeat, to that point of view I yield full concurrence.

I do so because it appears to me a logical corollary to the principle of separation of powers. Once we accept the basic
doctrine that each department as a coordinate agency of government is entitled to the respect of the other two, it would seem
to follow that at the very least, there is a presumption of the validity of the act performed by it, unless subsequently declared
void in accordance with legally accepted principles. The rule of law cannot be satisfied with anything less.

Since under our Constitution, judicial review exists precisely to test the validity of executive or legislative acts in an
appropriate legal proceeding, there is always the possibility of their being declared inoperative and void. Realism compels the
acceptance of the thought that there could be a time-lag between the initiation of such Presidential or congressional exercise
of power and the final declaration of nullity. In the meanwhile, it would be productive of confusion, perhaps at times even of
chaos, if the parties affected were left free to speculate as to its fate being one of doom, thus leaving them free to disobey it in
the meanwhile. Since, however, the orderly processes of government not to mention common sense, requires that the
presumption of validity be accorded an act of Congress or an order of the President, it would be less than fair, and it may be
productive of injustice, if no notice of its existence as a fact be paid to it, even if thereafter, it is stricken down as contrary, in
the case of Presidential act, either to the Constitution or a controlling statute.

The far-reaching import in the above sense of the decision we now render calls, to my mind, for an articulation of further
reflection on its varied implications. We have here an illustration to paraphrase Dean Pound, of the law being stable and yet far
from standing still. That is as it ought to be; that is how law grows. It is in that sense that the judicial process is impressed with
creativity, admittedly within limits rather narrowly confined. That in itself is to hold fast to the appropriate role of the judiciary, far
from insignificant as our decision discloses. Hence, this separate concurring opinion, which, I trust, will make manifest why my
agreement with what Justice Castro had so ably expressed in the opinion of the Court is wholehearted and entire.

Concepcion, C.J., concurs.

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-2598 June 29, 1950

C. ARNOLD HALL and BRADLEY P. HALL, petitioners,


vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN, EMMA BROWN, HIPOLITA
CAPUCIONG, in his capacity as receiver of the Far Eastern Lumber and Commercial Co., Inc.,respondents.

Claro M. Recto for petitioners.


Ramon Diokno and Jose W. Diokno for respondents.

BENGZON, J.:

This is petition to set aside all the proceedings had in civil case No. 381 of the Court of First Instance of Leyte and to enjoin the
respondent judge from further acting upon the same.

Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the respondents Fred Brown, Emma Brown,
Hipolita D. Chapman and Ceferino S. Abella, signed and acknowledged in Leyte, the article of incorporation of the Far Eastern
Lumber and Commercial Co., Inc., organized to engage in a general lumber business to carry on as general contractors,
operators and managers, etc. Attached to the article was an affidavit of the treasurer stating that 23,428 shares of stock had
been subscribed and fully paid with certain properties transferred to the corporation described in a list appended thereto.

(2) Immediately after the execution of said articles of incorporation, the corporation proceeded to do business with the adoption
of by-laws and the election of its officers.

(3) On December 2, 1947, the said articles of incorporation were filed in the office of the Securities and Exchange
Commissioner, for the issuance of the corresponding certificate of incorporation.

(4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid governmental office, the respondents
Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed before the Court of First Instance of Leyte the
civil case numbered 381, entitled "Fred Brown et al. vs. Arnold C. Hall et al.", alleging among other things that the Far Eastern
Lumber and Commercial Co. was an unregistered partnership; that they wished to have it dissolved because of bitter
dissension among the members, mismanagement and fraud by the managers and heavy financial losses.

(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to dismiss, contesting the court's
jurisdiction and the sufficiently of the cause of action.

(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company; and at the request of
plaintiffs, appointed of the properties thereof, upon the filing of a P20,000 bond.

(7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge of the receiver, but the
respondent judge refused to accept the offer and to discharge the receiver. Whereupon, the present special civil action was
instituted in this court. It is based upon two main propositions, to wit:

(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company, because it being a de
facto corporation, dissolution thereof may only be ordered in a quo warranto proceeding instituted in accordance with section
19 of the Corporation Law.

(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of incorporation but only a partnership.
Discussion: The second proposition may at once be dismissed. All the parties are informed that the Securities and Exchange
Commission has not, so far, issued the corresponding certificate of incorporation. All of them know, or sought to know, that the
personality of a corporation begins to exist only from the moment such certificate is issued not before (sec. 11, Corporation
Law). The complaining associates have not represented to the others that they were incorporated any more than the latter had
made similar representations to them. And as nobody was led to believe anything to his prejudice and damage, the principle of
estoppel does not apply. Obviously this is not an instance requiring the enforcement of contracts with the corporation through
the rule of estoppel.

The first proposition above stated is premised on the theory that, inasmuch as the Far Eastern Lumber and Commercial Co., is
a de facto corporation, section 19 of the Corporation Law applies, and therefore the court had not jurisdiction to take
cognizance of said civil case number 381. Section 19 reads as follows:

. . . The due incorporation of any corporations claiming in good faith to be a corporation under this Act and its right to
exercise corporate powers shall not be inquired into collaterally in any private suit to which the corporation may be a
party, but such inquiry may be had at the suit of the Insular Government on information of the Attorney-General.

There are least two reasons why this section does not govern the situation. Not having obtained the certificate of incorporation,
the Far Eastern Lumber and Commercial Co. even its stockholders may not probably claim "in good faith" to be a
corporation.

Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of a certificate of incorporation by
the Director of the Bureau of Commerce and Industry which calls a corporation into being. The immunity if collateral
attack is granted to corporations "claiming in good faith to be a corporation under this act." Such a claim is compatible
with the existence of errors and irregularities; but not with a total or substantial disregard of the law. Unless there has
been an evident attempt to comply with the law the claim to be a corporation "under this act" could not be made "in
good faith." (Fisher on the Philippine Law of Stock Corporations, p. 75. See also Humphreys vs. Drew, 59 Fla., 295; 52
So., 362.)

Second, this is not a suit in which the corporation is a party. This is a litigation between stockholders of the alleged corporation,
for the purpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated in a private suit for
its dissolution between stockholders, without the intervention of the state.

There might be room for argument on the right of minority stockholders to sue for dissolution;1 but that question does not affect
the court's jurisdiction, and is a matter for decision by the judge, subject to review on appeal. Whkch brings us to one principal
reason why this petition may not prosper, namely: the petitioners have their remedy by appealing the order of dissolution at the
proper time.

There is a secondary issue in connection with the appointment of a receiver. But it must be admitted that receivership is proper
in proceedings for dissolution of a company or corporation, and it was no error to reject the counter-bond, the court having
declared the dissolution. As to the amount of the bond to be demanded of the receiver, much depends upon the discretion of
the trial court, which in this instance we do not believe has been clearly abused.

Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction heretofore issued will be dissolved.

Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.

SECOND DIVISION

[G.R. No. 125221. June 19, 1997]

REYNALDO M. LOZANO, petitioner, vs. HON. ELIEZER R. DE LOS SANTOS, Presiding


Judge, RTC, Br. 58, Angeles City; and ANTONIO ANDA, respondents.

DECISION
PUNO, J.:

This petition for certiorari seeks to annul and set aside the decision of the Regional Trial Court,
Branch 58, Angeles City which ordered the Municipal Circuit Trial Court, Mabalacat and Magalang,
Pampanga to dismiss Civil Case No. 1214 for lack of jurisdiction.
The facts are undisputed. On December 19, 1995, petitioner Reynaldo M. Lozano filed Civil
Case No. 1214 for damages against respondent Antonio Anda before the Municipal Circuit Trial
Court (MCTC), Mabalacat and Magalang, Pampanga. Petitioner alleged that he was the president
of the Kapatirang Mabalacat-Angeles Jeepney Drivers' Association, Inc. (KAMAJDA) while
respondent Anda was the president of the Samahang Angeles-Mabalacat Jeepney Operators' and
Drivers' Association, Inc. (SAMAJODA); in August 1995, upon the request of the Sangguniang
Bayan of Mabalacat, Pampanga, petitioner and private respondent agreed to consolidate their
respective associations and form the Unified Mabalacat-Angeles Jeepney Operators' and Drivers'
Association, Inc. (UMAJODA); petitioner and private respondent also agreed to elect one set of
officers who shall be given the sole authority to collect the daily dues from the members of the
consolidated association; elections were held on October 29, 1995 and both petitioner and private
respondent ran for president; petitioner won; private respondent protested and, alleging fraud,
refused to recognize the results of the election; private respondent also refused to abide by their
agreement and continued collecting the dues from the members of his association despite several
demands to desist. Petitioner was thus constrained to file the complaint to restrain private
respondent from collecting the dues and to order him to pay damages in the amount of P25,000.00
and attorney's fees of P500.00. [1]

Private respondent moved to dismiss the complaint for lack of jurisdiction, claiming that
jurisdiction was lodged with the Securities and Exchange Commission (SEC). The MCTC denied
the motion on February 9, 1996. It denied reconsideration on March 8, 1996.
[2] [3]

Private respondent filed a petition for certiorari before the Regional Trial Court, Branch 58,
Angeles City. The trial court found the dispute to be intracorporate, hence, subject to the jurisdiction
[4]

of the SEC, and ordered the MCTC to dismiss Civil Case No. 1214 accordingly. It denied [5]

reconsideration on May 31, 1996. [6]

Hence this petition. Petitioner claims that:

"THE RESPONDENT JUDGE ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO


LACK OR EXCESS OF JURISDICTION AND SERIOUS ERROR OF LAW IN CONCLUDING THAT
THE SECURITIES AND EXCHANGE COMMISSION HAS JURISDICTION OVER A CASE OF
DAMAGES BETWEEN HEADS/PRESIDENTS OF TWO (2) ASSOCIATIONS WHO INTENDED TO
CONSOLIDATE/MERGE THEIR ASSOCIATIONS BUT NOT YET [SIC] APPROVED AND
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION." [7]

The jurisdiction of the Securities and Exchange Commission (SEC) is set forth in Section 5 of
Presidential Decree No. 902-A. Section 5 reads as follows:

"Section 5. x x x [T]he Securities and Exchange Commission [has] 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 the stockholders, partners, members of associations or organizations registered with the
Commission.
(b) Controversies arising out of intracorporate 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 sufficient property to cover all
its debts but foresees the impossibility of meeting them when they respect very fall due or in cases where the
corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the
management of a Rehabilitation Receiver or Management Committee created pursuant to this Decree."

The grant of jurisdiction to the SEC must be viewed in the light of its nature and function under the
law. This jurisdiction is determined by a concurrence of two elements: (1) the status or relationship
[8]

of the parties; and (2) the nature of the question that is the subject of their controversy. [9]

The first element requires that the controversy must arise out of intracorporate 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 in so far as it
concerns their individual franchises. The second element requires that the dispute among the
[10]

parties be intrinsically connected with the regulation of the corporation, partnership or association
or deal with the internal affairs of the corporation, partnership or association. After all, the principal
[11]

function of the SEC is the supervision and control of corporations, partnerships and associations
with the end in view that investments in these entities may be encouraged and protected, and their
activities pursued for the promotion of economic development. [12]

There is no intracorporate nor partnership relation between petitioner and private


respondent. The controversy between them arose out of their plan to consolidate their respective
jeepney drivers' and operators' associations into a single common association. This unified
association was, however, still a proposal.It had not been approved by the SEC, neither had its
officers and members submitted their articles of consolidation in accordance with Sections 78 and
79 of the Corporation Code. Consolidation becomes effective not upon mere agreement of the
members but only upon issuance of the certificate of consolidation by the SEC. When the SEC, [13]

upon processing and examining the articles of consolidation, is satisfied that the consolidation of the
corporations is not inconsistent with the provisions of the Corporation Code and existing laws, it
issues a certificate of consolidation which makes the reorganization official. The new consolidated
[14]

corporation comes into existence and the constituent corporations dissolve and cease to exist. [15]

The KAMAJDA and SAMAJODA to which petitioner and private respondent belong are duly
registered with the SEC, but these associations are two separate entities. The dispute between
petitioner and private respondent is not within the KAMAJDA nor the SAMAJODA. It is between
members of separate and distinct associations. Petitioner and private respondent have no
intracorporate relation much less do they have an intracorporate dispute. The SEC therefore has no
jurisdiction over the complaint.
The doctrine of corporation by estoppel advanced by private respondent cannot override
[16]

jurisdictional requirements. Jurisdiction is fixed by law and is not subject to the agreement of the
parties. It cannot be acquired through or waived, enlarged or diminished by, any act or omission of
[17]

the parties, neither can it be conferred by the acquiescence of the court. [18]
Corporation by estoppel is founded on principles of equity and is designed to prevent injustice
and unfairness. It applies when persons assume to form a corporation and exercise corporate
[19]

functions and enter into business relations with third persons. Where there is no third person
involved and the conflict arises only among those assuming the form of a corporation, who therefore
know that it has not been registered, there is no corporation by estoppel. [20]

IN VIEW WHEREOF, the petition is granted and the decision dated April 18, 1996 and the order
dated May 31, 1996 of the Regional Trial Court, Branch 58, Angeles City are set aside. The
Municipal Circuit Trial Court of Mabalacat and Magalang, Pampanga is ordered to proceed with
dispatch in resolving Civil Case No. 1214. No costs.
SO ORDERED.
Regalado, (Chairman), Romero, Mendoza, and Torres, Jr., JJ., concur.

Republic of the Philippines


SUPREME COURT
Manila

EN BANC

G.R. No. L-19118 January 30, 1965

MARIANO A. ALBERT, plaintiff-appellant,


vs.
UNIVERSITY PUBLISHING CO., INC., defendant-appellee.

Uy & Artiaga and Antonio M. Molina for plaintiff-appellant.


Aruego, Mamaril & Associates for defendant-appellees.

BENGZON, J.P., J.:

No less than three times have the parties here appealed to this Court.

In Albert vs. University Publishing Co., Inc., L-9300, April 18, 1958, we found plaintiff entitled to damages (for breach of
contract) but reduced the amount from P23,000.00 to P15,000.00.

Then in Albert vs. University Publishing Co., Inc., L-15275, October 24, 1960, we held that the judgment for P15,000.00 which
had become final and executory, should be executed to its full amount, since in fixing it, payment already made had been
considered.

Now we are asked whether the judgment may be executed against Jose M. Aruego, supposed President of University
Publishing Co., Inc., as the real defendant.

Fifteen years ago, on September 24, 1949, Mariano A. Albert sued University Publishing Co., Inc. Plaintiff alleged inter alia that
defendant was a corporation duly organized and existing under the laws of the Philippines; that on July 19, 1948, defendant,
through Jose M. Aruego, its President, entered into a contract with plaintifif; that defendant had thereby agreed to pay plaintiff
P30,000.00 for the exclusive right to publish his revised Commentaries on the Revised Penal Code and for his share in
previous sales of the book's first edition; that defendant had undertaken to pay in eight quarterly installments of P3,750.00
starting July 15, 1948; that per contract failure to pay one installment would render the rest due; and that defendant had failed
to pay the second installment.

Defendant admitted plaintiff's allegation of defendant's corporate existence; admitted the execution and terms of the contract
dated July 19, 1948; but alleged that it was plaintiff who breached their contract by failing to deliver his manuscript.
Furthermore, defendant counterclaimed for damages. 1w ph1.t

Plaintiff died before trial and Justo R. Albert, his estate's administrator, was substituted for him.
The Court of First Instance of Manila, after trial, rendered decision on April 26, 1954, stating in the dispositive portion

IN VIEW OF ALL THE FOREGOING, the Court renders judgment in favor of the plaintiff and against the defendant the
University Publishing Co., Inc., ordering the defendant to pay the administrator Justo R. Albert, the sum of P23,000.00
with legal [rate] of interest from the date of the filing of this complaint until the whole amount shall have been fully paid.
The defendant shall also pay the costs. The counterclaim of the defendant is hereby dismissed for lack of evidence.

As aforesaid, we reduced the amount of damages to P15,000.00, to be executed in full. Thereafter, on July 22, 1961, the
court a quo ordered issuance of an execution writ against University Publishing Co., Inc. Plaintiff, however, on August 10,
1961, petitioned for a writ of execution against Jose M. Aruego, as the real defendant, stating, "plaintiff's counsel and the
Sheriff of Manila discovered that there is no such entity as University Publishing Co., Inc." Plaintiff annexed to his petition a
certification from the securities and Exchange Commission dated July 31, 1961, attesting: "The records of this Commission do
not show the registration of UNIVERSITY PUBLISHING CO., INC., either as a corporation or partnership." "University
Publishing Co., Inc." countered by filing, through counsel (Jose M. Aruego's own law firm), a "manifestation" stating that "Jose
M. Aruego is not a party to this case," and that, therefore, plaintiff's petition should be denied.

Parenthetically, it is not hard to decipher why "University Publishing Co., Inc.," through counsel, would not want Jose M.
Aruego to be considered a party to the present case: should a separate action be now instituted against Jose M. Aruego, the
plaintiff will have to reckon with the statute of limitations.

The court a quo denied the petition by order of September 9, 1961, and from this, plaintiff has appealed.

The fact of non-registration of University Publishing Co., Inc. in the Securities and Exchange Commission has not been
disputed. Defendant would only raise the point that "University Publishing Co., Inc.," and not Jose M. Aruego, is the party
defendant; thereby assuming that "University Publishing Co., Inc." is an existing corporation with an independent juridical
personality. Precisely, however, on account of the non-registration it cannot be considered a corporation, not even a
corporation de facto (Hall vs. Piccio, 86 Phil. 603). It has therefore no personality separate from Jose M. Aruego; it cannot be
sued independently.

The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is inapplicable here. Aruego represented a
non-existent entity and induced not only the plaintiff but even the court to believe in such representation. He signed the
contract as "President" of "University Publishing Co., Inc.," stating that this was "a corporation duly organized and existing
under the laws of the Philippines," and obviously misled plaintiff (Mariano A. Albert) into believing the same. One who has
induced another to act upon his wilful misrepresentation that a corporation was duly organized and existing under the law,
cannot thereafter set up against his victim the principle of corporation by estoppel (Salvatiera vs. Garlitos, 56 O.G. 3069).

"University Publishing Co., Inc." purported to come to court, answering the complaint and litigating upon the merits. But as
stated, "University Publishing Co., Inc." has no independent personality; it is just a name. Jose M. Aruego was, in reality, the
one who answered and litigated, through his own law firm as counsel. He was in fact, if not, in name, the defendant.

Even with regard to corporations duly organized and existing under the law, we have in many a case pierced the veil of
corporate fiction to administer the ends of justice. * And in Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person acting or
purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and
becomes personally liable for contracts entered into or for other acts performed as such agent." Had Jose M. Aruego been
named as party defendant instead of, or together with, "University Publishing Co., Inc.," there would be no room for debate as
to his personal liability. Since he was not so named, the matters of "day in court" and "due process" have arisen.

In this connection, it must be realized that parties to a suit are "persons who have a right to control the proceedings, to make
defense, to adduce and cross-examine witnesses, and to appeal from a decision" (67 C.J.S. 887) and Aruego was, in
reality, the person who had and exercised these rights. Clearly, then, Aruego had his day in court as the real defendant; and
due process of law has been substantially observed.

By "due process of law" we mean " "a law which hears before it condemns; which proceeds upon inquiry, and renders
judgment only after trial. ... ." (4 Wheaton, U.S. 518, 581.)"; or, as this Court has said, " "Due process of law" contemplates
notice and opportunity to be heard before judgment is rendered, affecting one's person or property" (Lopez vs. Director of
Lands, 47 Phil. 23, 32)." (Sicat vs. Reyes, L-11023, Dec. 14, 1956.) And it may not be amiss to mention here also that the "due
process" clause of the Constitution is designed to secure justice as a living reality; not to sacrifice it by paying undue homage
to formality. For substance must prevail over form. It may now be trite, but none the less apt, to quote what long ago we said
in Alonso vs. Villamor, 16 Phil. 315, 321-322:

A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle art of movement
and position, entraps and destroys the other. It is, rather, a contest in which each contending party fully and fairly lays
before the court the facts in issue and then, brushing side as wholly trivial and indecisive all imperfections of form and
technicalities of procedure, asks that Justice be done upon the merits. Lawsuits, unlike duels, are not to be won by a
rapier's thrust. Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance and
chief enemy, deserves scant consideration from courts. There should be no vested rights in technicalities.

The evidence is patently clear that Jose M. Aruego, acting as representative of a non-existent principal, was the real party to
the contract sued upon; that he was the one who reaped the benefits resulting from it, so much so that partial payments of the
consideration were made by him; that he violated its terms, thereby precipitating the suit in question; and that in the litigation
he was the real defendant. Perforce, in line with the ends of justice, responsibility under the judgment falls on him.

We need hardly state that should there be persons who under the law are liable to Aruego for reimbursement or contribution
with respect to the payment he makes under the judgment in question, he may, of course, proceed against them through
proper remedial measures.

PREMISES CONSIDERED, the order appealed from is hereby set aside and the case remanded ordering the lower court to
hold supplementary proceedings for the purpose of carrying the judgment into effect against University Publishing Co., Inc.
and/or Jose M. Aruego. So ordered.

Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala, Makalintal and Zaldivar, JJ., concur.
Bautista Angelo, J., took no part.

Footnotes

Republic of the Philippines


SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-58028 April 18, 1989

CHIANG KAI SHEK SCHOOL, petitioner,


vs.
COURT OF APPEALS and FAUSTINA FRANCO OH, respondents.

CRUZ, J.:

An unpleasant surprise awaited Fausta F. Oh when she reported for work at the Chiang Kai Shek School in Sorsogon on the
first week of July, 1968. She was told she had no assignment for the next semester. Oh was shocked. She had been teaching
in the school since 1932 for a continuous period of almost 33 years. And now, out of the blue, and for no apparent or given
reason, this abrupt dismissal.

Oh sued. She demanded separation pay, social security benefits, salary differentials, maternity benefits and moral and
exemplary damages. 1 The original defendant was the Chiang Kai Shek School but when it filed a motion to dismiss on the ground that it could not be sued, the
complaint was amended. 2 Certain officials of the school were also impleaded to make them solidarily liable with the school.

The Court of First Instance of Sorsogon dismissed the complaint. 3 On appeal, its decision was set aside by the respondent court, which held the
school suable and liable while absolving the other defendants. 4 The motion for reconsideration having been denied, 5 the school then came to this Court in this petition for
review on certiorari.

The issues raised in the petition are:

1. Whether or not a school that has not been incorporated may be sued by reason alone of its long continued existence and
recognition by the government,

2. Whether or not a complaint filed against persons associated under a common name will justify a judgment against the
association itself and not its individual members.

3. Whether or not the collection of tuition fees and book rentals will make a school profit-making and not charitable.
4. Whether or not the Termination Pay Law then in force was available to the private respondent who was employed on a year-
to-year basis.

5. Whether or not the awards made by the respondent court were warranted.

We hold against the petitioner on the first question. It is true that Rule 3, Section 1, of the Rules of Court clearly provides that
"only natural or juridical persons may be parties in a civil action." It is also not denied that the school has not been
incorporated. However, this omission should not prejudice the private respondent in the assertion of her claims against the
school.

As a school, the petitioner was governed by Act No. 2706 as amended by C.A. No. 180, which provided as follows:

Unless exempted for special reasons by the Secretary of Public Instruction, any private school or college
recognized by the government shall be incorporated under the provisions of Act No. 1459 known as the
Corporation Law, within 90 days after the date of recognition, and shall file with the Secretary of Public
Instruction a copy of its incorporation papers and by-laws.

Having been recognized by the government, it was under obligation to incorporate under the Corporation Law within 90 days
from such recognition. It appears that it had not done so at the time the complaint was filed notwithstanding that it had been in
existence even earlier than 1932. The petitioner cannot now invoke its own non-compliance with the law to immunize it from
the private respondent's complaint.

There should also be no question that having contracted with the private respondent every year for thirty two years and thus
represented itself as possessed of juridical personality to do so, the petitioner is now estopped from denying such personality
to defeat her claim against it. According to Article 1431 of the Civil Code, "through estoppel an admission or representation is
rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying on it."

As the school itself may be sued in its own name, there is no need to apply Rule 3, Section 15, under which the persons joined
in an association without any juridical personality may be sued with such association. Besides, it has been shown that the
individual members of the board of trustees are not liable, having been appointed only after the private respondent's
dismissal. 6

It is clear now that a charitable institution is covered by the labor laws 7 although the question was still unsettled when this case arose in 1968. At any rate, there was no law even
then exempting such institutions from the operation of the labor laws (although they were exempted by the Constitution from ad valorem taxes). Hence, even assuming that the
petitioner was a charitable institution as it claims, the private respondent was nonetheless still entitled to the protection of the Termination Pay Law, which was then in force.

While it may be that the petitioner was engaged in charitable works, it would not necessarily follow that those in its employ
were as generously motivated. Obviously, most of them would not have the means for such charity. The private respondent
herself was only a humble school teacher receiving a meager salary of Pl80. 00 per month.

At that, it has not been established that the petitioner is a charitable institution, considering especially that it charges tuition
fees and collects book rentals from its students. 8 While this alone may not indicate that it is profit-making, it does weaken its claim that it is a non-profit entity.

The petitioner says the private respondent had not been illegally dismissed because her teaching contract was on a yearly
basis and the school was not required to rehire her in 1968. The argument is that her services were terminable at the end of
each year at the discretion of the school. Significantly, no explanation was given by the petitioner, and no advance notice
either, of her relief after teaching year in and year out for all of thirty-two years, the private respondent was simply told she
could not teach any more.

The Court holds, after considering the particular circumstance of Oh's employment, that she had become a permanent
employee of the school and entitled to security of tenure at the time of her dismissal. Since no cause was shown and
established at an appropriate hearing, and the notice then required by law had not been given, such dismissal was invalid.

The private respondent's position is no different from that of the rank-and-file employees involved in Gregorio Araneta
University Foundation v. NLRC, 9 of whom the Court had the following to say:

Undoubtedly, the private respondents' positions as deans and department heads of the petitioner university are
necessary in its usual business. Moreover, all the private respondents have been serving the university from 18
to 28 years. All of them rose from the ranks starting as instructors until they became deans and department
heads of the university. A person who has served the University for 28 years and who occupies a high
administrative position in addition to teaching duties could not possibly be a temporary employee or a casual.
The applicable law is the Termination Pay Law, which provided:

SECTION 1. In cases of employment, without a definite period, in a commercial, industrial, or agricultural


establishment or enterprise, the employer or the employee may terminate at any time the employment with just
cause; or without just cause in the case of an employee by serving written notice on the employer at least one
month in advance, or in the case of an employer, by serving such notice to the employee at least one month in
advance or one-half month for every year of service of the employee, whichever, is longer, a fraction of at least
six months being considered as one whole year.

The employer, upon whom no such notice was served in case of termination of employment without just cause
may hold the employee liable for damages.

The employee, upon whom no such notice was served in case of termination of employment without just cause
shall be entitled to compensation from the date of termination of his employment in an I amount equivalent to
his salaries or wages correspond to the required period of notice. ... .

The respondent court erred, however, in awarding her one month pay instead of only one-half month salary for every year of
service. The law is quite clear on this matter. Accordingly, the separation pay should be computed at P90.00 times 32 months,
for a total of P2,880.00.

Parenthetically, R.A. No. 4670, otherwise known as the Magna Carta for Public School Teachers, confers security of tenure on
the teacher upon appointment as long as he possesses the required qualification. 10 And under the present policy of the Department of
Education, Culture and Sports, a teacher becomes permanent and automatically acquires security of tenure upon completion of three years in the service. 11

While admittedly not applicable to the case at bar, these I rules nevertheless reflect the attitude of the government on the protection of the worker's security of tenure, which is
now guaranteed by no less than the Constitution itself. 12

We find that the private respondent was arbitrarily treated by the petitioner, which has shown no cause for her removal nor had it given her the notice required by the Termination
Pay Law. As the respondent court said, the contention that she could not report one week before the start of classes is a flimsy justification for replacing her. 13 She had been in
its employ for all of thirty-two years. Her record was apparently unblemished. There is no showing of any previous strained relations between her and the petitioner. Oh had every
reason to assume, as she had done in previous years, that she would continue teaching as usual.

It is easy to imagine the astonishment and hurt she felt when she was flatly and without warning told she was dismissed. There
was not even the amenity of a formal notice of her replacement, with perhaps a graceful expression of thanks for her past
services. She was simply informed she was no longer in the teaching staff. To put it bluntly, she was fired.

For the wrongful act of the petitioner, the private respondent is entitled to moral damages. 14 As a proximate result of her illegal dismissal,
she suffered mental anguish, serious anxiety, wounded feelings and even besmirched reputation as an experienced teacher for more than three decades. We also find that the
respondent court did not err in awarding her exemplary damages because the petitioner acted in a wanton and oppressive manner when it dismissed her. 15

The Court takes this opportunity to pay a sincere tribute to the grade school teachers, who are always at the forefront in the battle against illiteracy and ignorance. If only because
it is they who open the minds of their pupils to an unexplored world awash with the magic of letters and numbers, which is an extraordinary feat indeed, these humble mentors
deserve all our respect and appreciation.

WHEREFORE, the petition is DENIED. The appealed decision is AFFIRMED except for the award of separation pay, which is
reduced to P2,880.00. All the other awards are approved. Costs against the petitioner.

This decision is immediately executory.

SO ORDERED.

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


Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 22106 September 11, 1924

ASIA BANKING CORPORATION, plaintiff-appellee,


vs.
STANDARD PRODUCTS, CO., INC., defendant-appellant.

Charles C. De Selms for appellant.


Gibbs & McDonough and Roman Ozaeta for appellee.

OSTRAND, J.:

This action is brought to recover the sum of P24,736.47, the balance due on the following promissory note:

P37,757.22

MANILA, P. I., Nov. 28, 1921.

MANILA, P. I., Nov. 28, 1921.

On demand, after date we promise to pay to the Asia Banking Corporation, or order, the sum of thirty-seven thousand
seven hundred fifty-seven and 22/100 pesos at their office in Manila, for value received, together with interest at the
rate of ten per cent per annum.

No. ________ Due __________

THE STANDARD PRODUCTS CO., INC.


By (Sgd.) GEORGE H. SEAVER

By President

The court below rendered judgment in favor of the plaintiff for the sum demanded in the complaint, with interest on the sum of
P24,147.34 from November 1, 1923, at the rate of 10 per cent per annum, and the costs. From this judgment the defendant
appeals to this court.

At the trial of the case the plaintiff failed to prove affirmatively the corporate existence of the parties and the appellant insists
that under these circumstances the court erred in finding that the parties were corporations with juridical personality and
assigns same as reversible error.

There is no merit whatever in the appellant's contention. The general rule is that in the absence of fraud a person who has
contracted or otherwise dealt with an association in such a way as to recognize and in effect admit its legal existence as a
corporate body is thereby estopped to deny its corporate existence in any action leading out of or involving such contract or
dealing, unless its existence is attacked for cause which have arisen since making the contract or other dealing relied on as an
estoppel and this applies to foreign as well as to domestic corporations. (14 C. J., 227; Chinese Chamber of
Commerce vs. Pua Te Ching, 14 Phil., 222.)

The defendant having recognized the corporate existence of the plaintiff by making a promissory note in its favor and making
partial payments on the same is therefore estopped to deny said plaintiff's corporate existence. It is, of course, also estopped
from denying its own corporate existence. Under these circumstances it was unnecessary for the plaintiff to present other
evidence of the corporate existence of either of the parties. It may be noted that there is no evidence showing circumstances
taking the case out of the rules stated.

The judgment appealed from is affirmed, with the costs against the appellant. So ordered.
Street, Malcolm, Avancea, Villamor and Romualdez, JJ., concur.

FIRST DIVISION

[G.R. No. 119002. October 19, 2000]

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner, vs. HON.
COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL
FEDERATION, respondents.

DECISION
KAPUNAN, J.:

On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its
managing director, wrote a letter to the Philippine Football Federation (Federation), through its
president private respondent Henri Kahn, wherein the former offered its services as a travel agency
to the latter.[1] The offer was accepted.
Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to
the South East Asian Games in Kuala Lumpur as well as various other trips to the People's Republic
of China and Brisbane.The total cost of the tickets amounted to P449,654.83. For the tickets
received, the Federation made two partial payments, both in September of 1989, in the total amount
of P176,467.50.[2]
On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand
letter requesting for the amount of P265,894.33.[3] On 30 October 1989, the Federation, through the
Project Gintong Alay, paid the amount of P31,603.00.[4]
On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial
payment for the outstanding balance of the Federation.[5] Thereafter, no further payments were made
despite repeated demands.
This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner
sued Henri Kahn in his personal capacity and as President of the Federation and impleaded the
Federation as an alternative defendant. Petitioner sought to hold Henri Kahn liable for the unpaid
balance for the tickets purchased by the Federation on the ground that Henri Kahn allegedly
guaranteed the said obligation.[6]
Henri Kahn filed his answer with counterclaim. While not denying the allegation that the
Federation owed the amount P207,524.20, representing the unpaid balance for the plane tickets,
he averred that the petitioner has no cause of action against him either in his personal capacity or
in his official capacity as president of the Federation. He maintained that he did not guarantee
payment but merely acted as an agent of the Federation which has a separate and distinct juridical
personality.[7]
On the other hand, the Federation failed to file its answer, hence, was declared in default by the
trial court.[8]
In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared
Henri Kahn personally liable for the unpaid obligation of the Federation. In arriving at the said ruling,
the trial court rationalized:

Defendant Henri Kahn would have been correct in his contentions had it been duly established that
defendant Federation is a corporation. The trouble, however, is that neither the plaintiff nor the defendant
Henri Kahn has adduced any evidence proving the corporate existence of the defendant Federation. In
paragraph 2 of its complaint, plaintiff asserted that "Defendant Philippine Football Federation is a sports
association xxx." This has not been denied by defendant Henri Kahn in his Answer. Being the President of
defendant Federation, its corporate existence is within the personal knowledge of defendant Henri Kahn. He
could have easily denied specifically the assertion of the plaintiff that it is a mere sports association, if it
were a domestic corporation. But he did not.

xxx

A voluntary unincorporated association, like defendant Federation has no power to enter into, or to ratify, a
contract. The contract entered into by its officers or agents on behalf of such association is not binding on, or
enforceable against it. The officers or agents are themselves personally liable.

x x x[9]
The dispositive portion of the trial court's decision reads:

WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the principal sum
of P207,524.20, plus the interest thereon at the legal rate computed from July 5, 1990, the date the complaint
was filed, until the principal obligation is fully liquidated; and another sum of P15,000.00 for attorney's fees.

The complaint of the plaintiff against the Philippine Football Federation and the counterclaims of the
defendant Henri Kahn are hereby dismissed.

With the costs against defendant Henri Kahn.[10]

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994,
the respondent court rendered a decision reversing the trial court, the decretal portion of said
decision reads:

WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET ASIDE
and another one is rendered dismissing the complaint against defendant Henri S. Kahn. [11]

In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the
Federation. It rationalized that since petitioner failed to prove that Henri Kahn guaranteed the
obligation of the Federation, he should not be held liable for the same as said entity has a separate
and distinct personality from its officers.
Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the
Federation be held liable for the unpaid obligation. The same was denied by the appellate court in
its resolution of 8 February 1995, where it stated that:
As to the alternative prayer for the Modification of the Decision by expressly declaring in the dispositive
portion thereof the Philippine Football Federation (PFF) as liable for the unpaid obligation, it should be
remembered that the trial court dismissed the complaint against the Philippine Football Federation, and the
plaintiff did not appeal from this decision. Hence, the Philippine Football Federation is not a party to this
appeal and consequently, no judgment may be pronounced by this Court against the PFF without violating
the due process clause, let alone the fact that the judgment dismissing the complaint against it, had already
become final by virtue of the plaintiff's failure to appeal therefrom. The alternative prayer is therefore
similarly DENIED.[12]

Petitioner now seeks recourse to this Court and alleges that the respondent court committed the
following assigned errors:[13]
A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD DEALT WITH THE
PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE ENTITY AND IN NOT HOLDING THAT
PRIVATE RESPONDENT HENRI KAHN WAS THE ONE WHO REPRESENTED THE PFF AS HAVING A
CORPORATE PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE RESPONDENT HENRI
KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF THE UNINCORPORATED PFF, HAVING
NEGOTIATED WITH PETITIONER AND CONTRACTED THE OBLIGATION IN BEHALF OF THE PFF, MADE
A PARTIAL PAYMENT AND ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY LIABLE, THE
HONORABLE COURT OF APPEALS ERRED IN NOT EXPRESSLY DECLARING IN ITS DECISION THAT
THE PFF IS SOLELY LIABLE FOR THE OBLIGATION.

The resolution of the case at bar hinges on the determination of the existence of the Philippine
Football Federation as a juridical person. In the assailed decision, the appellate court recognized
the existence of the Federation. In support of this, the CA cited Republic Act 3135, otherwise known
as the Revised Charter of the Philippine Amateur Athletic Federation, and Presidential Decree No.
604 as the laws from which said Federation derives its existence.
As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the
juridical existence of national sports associations. This may be gleaned from the powers and
functions granted to these associations.Section 14 of R.A. 3135 provides:

SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall have the
following functions, powers and duties:

1. To adopt a constitution and by-laws for their internal organization and government;

2. To raise funds by donations, benefits, and other means for their purposes.

3. To purchase, sell, lease or otherwise encumber property both real and personal, for the accomplishment of
their purpose;

4. To affiliate with international or regional sports' Associations after due consultation with the executive
committee;

xxx

13. To perform such other acts as may be necessary for the proper accomplishment of their purposes and not
inconsistent with this Act.

Section 8 of P.D. 604, grants similar functions to these sports associations:


SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National sports associations
shall have the following functions, powers, and duties:

1. Adopt a Constitution and By-Laws for their internal organization and government which shall be
submitted to the Department and any amendment thereto shall take effect upon approval by the
Department: Provided, however, That no team, school, club, organization, or entity shall be admitted as a
voting member of an association unless 60 per cent of the athletes composing said team, school, club,
organization, or entity are Filipino citizens;

2. Raise funds by donations, benefits, and other means for their purpose subject to the approval of the
Department;

3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the accomplishment of
their purpose;

4. Conduct local, interport, and international competitions, other than the Olympic and Asian Games, for the
promotion of their sport;

5. Affiliate with international or regional sports associations after due consultation with the Department;

xxx

13. Perform such other functions as may be provided by law.

The above powers and functions granted to national sports associations clearly indicate that
these entities may acquire a juridical personality. The power to purchase, sell, lease and encumber
property are acts which may only be done by persons, whether natural or artificial, with juridical
capacity.However, while we agree with the appellate court that national sports associations may be
accorded corporate status, such does not automatically take place by the mere passage of these
laws.
It is a basic postulate that before a corporation may acquire juridical personality, the State must
give its consent either in the form of a special law or a general enabling act. We cannot agree with
the view of the appellate court and the private respondent that the Philippine Football Federation
came into existence upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D.
604 any provision creating the Philippine Football Federation. These laws merely recognized the
existence of national sports associations and provided the manner by which these entities may
acquire juridical personality. Section 11 of R.A. 3135 provides:

SEC. 11. National Sports' Association; organization and recognition. - A National Association shall be
organized for each individual sports in the Philippines in the manner hereinafter provided to constitute the
Philippine Amateur Athletic Federation. Applications for recognition as a National Sports' Association shall
be filed with the executive committee together with, among others, a copy of the constitution and by-laws
and a list of the members of the proposed association, and a filing fee of ten pesos.

The Executive Committee shall give the recognition applied for if it is satisfied that said association will
promote the purposes of this Act and particularly section three thereof. No application shall be held pending
for more than three months after the filing thereof without any action having been taken thereon by the
executive committee. Should the application be rejected, the reasons for such rejection shall be clearly stated
in a written communication to the applicant. Failure to specify the reasons for the rejection shall not affect
the application which shall be considered as unacted upon: Provided, however, That until the executive
committee herein provided shall have been formed, applications for recognition shall be passed upon by the
duly elected members of the present executive committee of the Philippine Amateur Athletic
Federation. The said executive committee shall be dissolved upon the organization of the executive
committee herein provided: Provided, further, That the functioning executive committee is charged with the
responsibility of seeing to it that the National Sports' Associations are formed and organized within six
months from and after the passage of this Act.

Section 7 of P.D. 604, similarly provides:

SEC. 7. National Sports Associations. - Application for accreditation or recognition as a national sports
association for each individual sport in the Philippines shall be filed with the Department together with,
among others, a copy of the Constitution and By-Laws and a list of the members of the proposed
association.

The Department shall give the recognition applied for if it is satisfied that the national sports association to
be organized will promote the objectives of this Decree and has substantially complied with the rules and
regulations of the Department: Provided,That the Department may withdraw accreditation or recognition for
violation of this Decree and such rules and regulations formulated by it.

The Department shall supervise the national sports association: Provided, That the latter shall have exclusive
technical control over the development and promotion of the particular sport for which they are organized.

Clearly the above cited provisions require that before an entity may be considered as a national
sports association, such entity must be recognized by the accrediting organization, the Philippine
Amateur Athletic Federation under R.A. 3135, and the Department of Youth and Sports
Development under P.D. 604. This fact of recognition, however, Henri Kahn failed to substantiate.In
attempting to prove the juridical existence of the Federation, Henri Kahn attached to his motion for
reconsideration before the trial court a copy of the constitution and by-laws of the Philippine Football
Federation. Unfortunately, the same does not prove that said Federation has indeed been
recognized and accredited by either the Philippine Amateur Athletic Federation or the Department
of Youth and Sports Development. Accordingly, we rule that the Philippine Football Federation is
not a national sports association within the purview of the aforementioned laws and does not have
corporate existence of its own.
Thus being said, it follows that private respondent Henry Kahn should be held liable for the
unpaid obligations of the unincorporated Philippine Football Federation. It is a settled principal in
corporation law that any person acting or purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and becomes personally liable for contract entered into or
for other acts performed as such agent.[14] As president of the Federation, Henri Kahn is presumed
to have known about the corporate existence or non-existence of the Federation. We cannot
subscribe to the position taken by the appellate court that even assuming that the Federation was
defectively incorporated, the petitioner cannot deny the corporate existence of the Federation
because it had contracted and dealt with the Federation in such a manner as to recognize and in
effect admit its existence.[15] The doctrine of corporation by estoppel is mistakenly applied by the
respondent court to the petitioner. The application of the doctrine applies to a third party only when
he tries to escape liability on a contract from which he has benefited on the irrelevant ground of
defective incorporation.[16] In the case at bar, the petitioner is not trying to escape liability from the
contract but rather is the one claiming from the contract.
WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the
Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby REINSTATED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 109272 August 10, 1994

GEORG GROTJAHN GMBH & CO., petitioner,


vs.
HON. LUCIA VIOLAGO ISNANI, Presiding Judge, Regional Trial Court, Makati, Br. 59; ROMANA R. LANCHINEBRE;
and TEOFILO A. LANCHINEBRE, respondents.

A.M. Sison, Jr. & Associates for petitioner.

Pedro L. Laso for private respondents.

PUNO, J.:

Petitioner impugns the dismissal of its Complaint for a sum of money by the respondent judge for lack of jurisdiction and lack of
capacity to sue.

The records show that petitioner is a multinational company organized and existing under the laws of the Federal Republic of
Germany. On July 6, 1983, petitioner filed an application, dated July 2, 1983, 1 with the Securities and Exchange Commission
(SEC) for the establishment of a regional or area headquarters in the Philippines, pursuant to Presidential Decree No. 218.
The application was approved by the Board of Investments (BOI) on September 6, 1983. Consequently, on September 20,
1983, the SEC issued a Certificate of Registration and License to petitioner. 2

Private respondent Romana R. Lanchinebre was a sales representative of petitioner from 1983 to mid-1992. On March 12,
1992, she secured a loan of twenty-five thousand pesos (P25,000.00) from petitioner. On March 26 and June 10, 1992, she
made additional cash advances in the sum of ten thousand pesos (P10,000.00). Of the total amount, twelve thousand one
hundred seventy pesos and thirty-seven centavos (P12,170.37) remained unpaid. Despite demand, private respondent
Romana failed to settle her obligation with petitioner.

On July 22, 1992, private respondent Romana Lanchinebre filed with the Arbitration Branch of the National Labor Relations
Commission (NLRC) in Manila, a Complaint for illegal suspension, dismissal and non-payment of commissions against
petitioner. On August 18, 1992, petitioner in turn filed against private respondent a Complaint for damages amounting to one
hundred twenty thousand pesos (P120,000.00) also with the NLRC Arbitration Branch (Manila). 3 The two cases were
consolidated.

On September 2, 1992, petitioner filed another Complaint for collection of sum of money against private respondents spouses
Romana and Teofilo Lanchinebre which was docketed as Civil Case No. 92-2486 and raffled to the sala of respondent judge.
Instead of filing their Answer, private respondents moved to dismiss the Complaint. This was opposed by petitioner.

On December 21, 1992, respondent judge issued the first impugned Order, granting the motion to dismiss. She held, viz:

Jurisdiction over the subject matter or nature of the action is conferred by law and not subject to the whims and
caprices of the parties.

Under Article 217 of the Labor Code of the Philippines, the Labor Arbiters shall have original and exclusive
jurisdiction to hear and decide, within thirty (30) calendar days after the submission of the case by the parties
for decision, the following cases involving all workers, whether agricultural or non-agricultural:

(4) claims for actual, moral, exemplary and other forms of damages arising from an employer-employee
relations.
xxx xxx xxx

(6) Except claims for employees compensation, social security, medicare and maternity benefits, all other
claims arising from employer-employee relations, including those of persons in domestic or household service,
involving an amount exceeding five thousand pesos (P5,000.00) regardless of whether or not accompanied
with a claim for reinstatement.

In its complaint, the plaintiff (petitioner herein) seeks to recover alleged cash advances made by defendant
(private respondent herein) Romana Lanchinebre while the latter was in the employ of the former. Obviously
the said cash advances were made pursuant to the employer-employee relationship between the (petitioner)
and the said (private respondent) and as such, within the original and exclusive jurisdiction of the National
Labor Relations Commission.

Again, it is not disputed that the Certificate of Registration and License issued to the (petitioner) by the
Securities and Exchange Commission was merely "for the establishment of a regional or area headquarters in
the Philippines, pursuant to Presidential Decree No. 218 and its implementing rules and regulations." It does
not include a license to do business in the Philippines. There is no allegation in the complaint moreover that
(petitioner) is suing under an isolated transaction. It must be considered that under Section 4, Rule 8 of the
Revised Rules of Court, facts showing the capacity of a party to sue or be sued or the authority of a party to
sue or be sued in a representative capacity or the legal existence of an organized association of persons that is
made a party must be averred. There is no averment in the complaint regarding (petitioner's) capacity to sue or
be sued.

Finally, (petitioner's) claim being clearly incidental to the occupation or exercise of (respondent) Romana
Lanchinebre's profession, (respondent) husband should not be joined as party defendant. 4

On March 8, 1993, the respondent judge issued a minute Order denying petitioner's Motion for Reconsideration.

Petitioner now raises the following assignments of errors:

THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT THE REGULAR COURTS HAVE NO
JURISDICTION OVER DISPUTES BETWEEN AN EMPLOYER AND AN EMPLOYEE INVOLVING THE
APPLICATION PURELY OF THE GENERAL CIVIL LAW.

II

THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT PETITIONER HAS NO CAPACITY TO SUE AND
BE SUED IN THE PHILIPPINES DESPITE THE FACT THAT PETITIONER IS DULY LICENSED BY THE
SECURITIES AND EXCHANGE COMMISSION TO SET UP AND OPERATE A REGIONAL OR AREA
HEADQUARTERS IN THE COUNTRY AND THAT IT HAS CONTINUOUSLY OPERATED AS SUCH FOR
THE LAST NINE (9) YEARS.

III

THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT THE ERRONEOUS INCLUSION OF THE
HUSBAND IN A COMPLAINT IS A FATAL DEFECT THAT SHALL RESULT IN THE OUTRIGHT DISMISSAL
OF THE COMPLAINT.

IV

THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT THE HUSBAND IS NOT REQUIRED BY THE
RULES TO BE JOINED AS A DEFENDANT IN A COMPLAINT AGAINST THE WIFE.

There is merit to the petition.

Firstly, the trial court should not have held itself without jurisdiction over Civil Case No. 92-2486. It is true that the loan and
cash advances sought to be recovered by petitioner were contracted by private respondent Romana Lanchinebre while she
was still in the employ of petitioner. Nonetheless, it does not follow that Article 217 of the Labor Code covers their relationship.
Not every dispute between an employer and employee involves matters that only labor arbiters and the NLRC can resolve in
the exercise of their adjudicatory or quasi-judicial powers. The jurisdiction of labor arbiters and the NLRC under Article 217 of
the Labor Code is limited to disputes arising from an employer-employee relationship which can only be resolved by reference
to the Labor Code, other labor statutes, or their collective bargaining agreement. In this regard, we held in the earlier case
of Molave Motor Sales, Inc. vs. Laron, 129 SCRA 485 (1984), viz:

Before the enactment of BP Blg. 227 on June 1, 1982, Labor Arbiters, under paragraph 5 of Article 217 of the
Labor Code had jurisdiction over "all other cases arising from employer-employee relation, unless expressly
excluded by this Code." Even then, the principal followed by this Court was that, although a controversy is
between an employer and an employee, the Labor Arbiters have no jurisdiction if the Labor Code is not
involved. In Medina vs. Castro-Bartolome, 116 SCRA 597, 604 in negating jurisdiction of the Labor Arbiter,
although the parties were an employer and two employees, Mr. Justice Abad Santos stated:

The pivotal question to Our mind is whether or not the Labor Code has any relevance to the
reliefs sought by plaintiffs. For if the Labor Code has no relevance, any discussion concerning
the statutes amending it and whether or not they have retroactive effect is unnecessary.

xxx xxx xxx

And in Singapore Airlines Limited vs. Pao, 122 SCRA 671, 677, the following was said:

Stated differently, petitioner seeks protection under the civil laws and claims no benefits under
the Labor Code. The primary relief sought is for liquidated damages for breach of a contractual
obligation. The other items demanded are not labor benefits demanded by workers generally
taken cognizance of in labor disputes, such as payment of wages, overtime compensation or
separation pay. The items claimed are the natural consequences flowing from breach of an
obligation, intrinsically a civil dispute.

xxx xxx xxx

In San Miguel Corporation vs. NLRC, 161 SCRA 719 (1988), we crystallized the doctrines set forth in the Medina, Singapore
Airlines, and Molave Motors cases, thus:

. . . The important principle that runs through these three (3) cases is that where the claim to the principal relief
sought is to be resolved not by reference to the Labor Code or other labor relations statute or a collective
bargaining agreement but by the general civil law, the jurisdiction over the dispute belongs to the regular courts
of justice and not to the Labor Arbiter and the NLRC. In such situations, resolutions of the dispute requires
expertise, not in labor management relations nor in wage structures and other terms and conditions of
employment, but rather in the application of the general civil law. Clearly, such claims fall outside the area of
competence or expertise ordinarily ascribed to Labor Arbiters and the NLRC and the rationale for granting
jurisdiction over such claims to these agencies disappears.

Civil Case No. 92-2486 is a simple collection of a sum of money brought by petitioner, as creditor, against private respondent
Romana Lanchinebre, as debtor. The fact that they were employer and employee at the time of the transaction does not
negate the civil jurisdiction of the trial court. The case does not involve adjudication of a labor dispute but recovery of a sum of
money based on our civil laws on obligation and contract.

Secondly, the trial court erred in holding that petitioner does not have capacity to sue in the Philippines. It is clear that
petitioner is a foreign corporation doing business in the Philippines. Petitioner is covered by the Omnibus Investment Code of
1987. Said law defines "doing business," as follows:

. . . shall include soliciting orders, purchases, service contracts, opening offices, whether called "liaison" offices
or branches; appointing representatives or distributors who are domiciled in the Philippines or who in any
calendar year stay in the Philippines for a period or periods totalling one hundred eighty (180) days or more;
participating in the management, supervision or control of any domestic business firm, entity or corporation in
the Philippines, and any other act or acts that imply a continuity of commercial dealings or arrangements and
contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business
organization. 5

There is no general rule or governing principle as to what constitutes "doing" or "engaging in" or "transacting" business in the
Philippines. Each case must be judged in the light of its peculiar circumstances. 6 In the case at bench, petitioner does not
engage in commercial dealings or activities in the country because it is precluded from doing so by P.D. No. 218, under which
it was established. 7 Nonetheless, it has been continuously, since 1983, acting as a supervision, communications and
coordination center for its home office's affiliates in Singapore, and in the process has named its local agent and has employed
Philippine nationals like private respondent Romana Lanchinebre. From this uninterrupted performance by petitioner of acts
pursuant to its primary purposes and functions as a regional/area headquarters for its home office, it is clear that petitioner is
doing business in the country. Moreover, private respondents are estopped from assailing the personality of petitioner. So we
held in Merrill Lynch Futures, Inc. vs. Court of Appeals, 211 SCRA 824, 837 (1992):

The rule is that a party is estopped to challenge the personality of a corporation after having acknowledged the
same by entering into a contract with it. And the "doctrine of estoppel to deny corporate existence applies to
foreign as well as to domestic corporations;" "one who has dealth with a corporation of foreign origin as a
corporate entity is estopped to deny its corporate existence and capacity." The principle "will be applied to
prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with
the statutes chiefly in cases where such person has received the benefits of the contract, . . . (Citations
omitted.)

Finally, the trial court erred when it dismissed Civil Case No. 92-2486 on what it found to be the misjoinder of private
respondent Teofilo Lanchinebre as party defendant. It is a basic rule that "(m)isjoinder or parties is not ground for dismissal of
an action."8 Moreover, the Order of the trial court is based on Section 4(h), Rule 3 of the Revised Rules of Court, which
provides:

A married woman may not . . . be sued alone without joining her husband, except . . . if the litigation is
incidental to the profession, occupation or business in which she is engaged,

Whether or not the subject loan was incurred by private respondent as an incident to her profession, occupation or business is
a question of fact. In the absence of relevant evidence, the issue cannot be resolved in a motion to dismiss.

IN VIEW WHEREOF, the instant Petition is GRANTED. The Orders, dated December 21, 1992 and March 8, 1993, in Civil
Case No. 92-2486 are REVERSED AND SET ASIDE. The RTC of Makati, Br. 59, is hereby ordered to hear the reinstated
case on its merits. No costs.

SO ORDERED.