Page |1
Republic of the Philippines computed from October 4, 1999 the date the letter of demand was presumably
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 182398 July 20, 2010
BENNY Y. HUNG,x Petitioner,
vs.
BPI CARD FINANCE CORP. Respondent.
DECISION
PEREZ, J.:
For our resolution is the instant petition for review by certiorari assailing the
Decision1 dated 31 August 2007 and Resolution2 dated 14 April 2008 of the Court
of Appeals in CA-G.R. CV No. 84641. The Court of Appeals’ Decision affirmed the
Order3 dated 30 November 2004 of the Regional Trial Court (RTC) of Makati City
in Civil Case No. 99-2040, entitled BPI Card Finance Corporation v. B & R
Sportswear Distributor, Inc., finding petitioner Benny Hung liable to respondent
BPI Card Finance Corporation (BPI for brevity) for the satisfaction of the RTC’s 24
June 2002 Decision4 against B & R Sportswear Distributor, Inc. The pertinent
portion of the Decision states:
xxx
The delivery by the plaintiff to the defendant of P3,480,427.43 pursuant to the
Merchant Agreements was sufficiently proven by the checks, Exhibits B to V-5.
Plaintiff’s evidence that the amount due to the defendant was P139,484.38 only
was not controverted by the defendant, hence the preponderance of evidence is in
favor of the plaintiff. The lack of controversy on the amount due to the defendant
when considered with the contents of the letter of the defendant, Exhibit TT when
it returned to plaintiff P963,604.03 "as partial settlement of overpayments made
by BPI Card Corporation to B & R Sportswear, pending final reconciliation of exact
amount of overpayment" amply support the finding of the Court that plaintiff
indeed has a right to be paid by the defendant of the amount of P2,516,826.68.
Plaintiff claims interest of 12%. The obligation of the defendant to return did not
arose out of a loan or forbearance of money, hence, applying Eastern Shipping
Lines Inc. vs. Court of Appeals, 234 SCRA 78 (1994) the rate due is only 6%
received by the defendant.
The foregoing effectively dispose of the defenses raised by the defendant and
furnish the reason of the Court for not giving due course to them.
WHEREFORE, judgment is rendered directing defendant to pay plaintiff
P2,516,826.68 with interest at the rate of 6% from October 4, 1999 until full
payment.
The antecedent facts of the case are as follows:
Guess? Footwear and BPI Express Card Corporation entered into two merchant
agreements,5 dated 25 August 1994 and 16 November 1994, whereby Guess?
Footwear agreed to honor validly issued BPI Express Credit Cards presented by
cardholders in the purchase of its goods and services. In the first agreement,
petitioner Benny Hung signed as owner and manager of Guess? Footwear. He
signed the second agreement as president of Guess? Footwear which he also
referred to as B & R Sportswear Enterprises.
From May 1997 to January 1999, respondent BPI mistakenly credited, through
three hundred fifty-two (352) checks, Three Million Four Hundred Eighty
Thousand Four Hundred Twenty-Seven Pesos and 23/100 (P3,480,427.23) to the
account of Guess? Footwear. When informed of the overpayments,6 petitioner
Benny Hung transferred Nine Hundred Sixty-Three Thousand Six Hundred Four
Pesos and 03/100 (₱963,604.03) from the bank account of B & R Sportswear
Enterprises to BPI’s account as partial payment.7 The letter dated 31 May 1999
was worded as follows:
Dear Sir/Madame
This is to authorize BPI Ortigas Branch to transfer the amount of P963,604.03
from the account of B & R Sportswear Enterprises to the account of BPI Card
Corporation.
The aforementioned amount shall represent partial settlement of overpayments
made by BPI Card Corporation to B & R Sportswear, pending final reconciliation of
exact amount of overpayment. (Emphasis supplied.)
Thank you for your usual kind cooperation.
Very truly yours,

(Sgd.)
Benny Hung
In a letter dated 27 September 1999, BPI demanded the balance payment
amounting to Two Million Five Hundred Sixteen Thousand Eight Hundred Twenty-
Six Pesos and 68/100 (P2,516,826.68), but Guess? Footwear failed to pay.
BPI filed a collection suit before the RTC of Makati City naming as defendant B & R
Sportswear Distributor, Inc.8Although the case was against B & R Sportswear
Distributor, Inc., it was B & R Footwear Distributors, Inc., that filed an answer,
appeared and participated in the trial.9
On 24 June 2002, the RTC rendered a decision ordering defendant B & R
Sportswear Distributor, Inc., to pay the plaintiff (BPI) ₱2,516,826.68 with 6%
interest from 4 October 1999. The RTC ruled that the overpayment of
₱3,480,427.43 was proven by checks credited to the account of Guess? Footwear
and the ₱963,604.03 partial payment proved that defendant ought to pay
₱2,516,826.6810 more. During the execution of judgment, it was discovered that B
& R Sportswear Distributor, Inc., is a non-existing entity. Thus, the trial court failed
to execute the judgment.
Consequently, respondent filed a Motion11 to pierce the corporate veil of B & R
Footwear Distributors, Inc. to hold its stockholders and officers, including
petitioner Benny Hung, personally liable. In its 30 November 2004 Order, the RTC
ruled that petitioner is liable for the satisfaction of the judgment, since he signed
the merchant agreements in his personal capacity.12
The Court of Appeals affirmed the order and dismissed petitioner’s appeal. It ruled
that since B & R Sportswear Distributor, Inc. is not a corporation, it therefore has
no personality separate from petitioner Benny Hung who induced the respondent
BPI and the RTC to believe that it is a corporation.13
After his motion for reconsideration was denied, petitioner filed the instant
petition anchored on the following grounds:
I.
PIERCING THE VEIL OF CORPORATE FICTION CANNOT JUSTIFY EXECUTION
AGAINST [HIM].
II.
Page |2
FOR LACK OF SERVICE OF SUMMONS AND A COPY OF THE COMPLAINT UPON
[HIM], THE ASSAILED DECISION OF THE COURT OF APPEALS, AS WELL AS, ITS
RESOLUTION DENYING [HIS] MOTION FOR RECONSIDERATION SHOULD BE
DECLARED NULL AND VOID FOR LACK OF JURISDICTION.14
In essence, the basic issue is whether petitioner can be held liable for the
satisfaction of the RTC’s Decision against B & R Sportswear Distributor, Inc.? As we
answer this question, we shall pass upon the grounds raised by petitioner.
Petitioner claims that he never represented B & R Sportswear Distributor, Inc., the
non-existent corporation sued by respondent; that it would be unfair to treat his
single proprietorship B & R Sportswear Enterprises as B & R Sportswear
Distributor, Inc.; that the confusing similarity in the names should not be taken
against him because he established his single proprietorship long before
respondent sued; that he did not defraud respondent; that he even paid
respondent "in the course of their mutual transactions;" and that without fraud, he
cannot be held liable for the obligations of B & R Footwear Distributors, Inc. or B &
R Sportswear Distributor, Inc. by piercing the veil of corporate fiction.
Petitioner also states that the "real corporation" B & R Footwear Distributors, Inc.
or Guess? Footwear acknowledged itself as the "real defendant." It answered the
complaint and participated in the trial. According to petitioner, respondent should
have executed the judgment against it as the "real contracting party" in the
merchant agreements. Execution against him was wrong since he was not served
with summons nor was he a party to the case. Thus, the lower courts did not
acquire jurisdiction over him, and their decisions are null and void for lack of due
process.
Respondent counters that petitioner’s initial silence on the non-existence of B & R
Sportswear Distributor, Inc. was intended to mislead. Still, the evidence showed
that petitioner treats B & R Footwear Distributors, Inc. and his single
proprietorship B & R Sportswear Enterprises as one and the same entity.
Petitioner ordered the partial payment using the letterhead of B & R Footwear
Distributor, Inc. and yet the fund transferred belongs to his single proprietorship B
& R Sportswear Enterprises. This fact, according to respondent, justifies piercing
the corporate veil of B & R Footwear Distributor, Inc. to hold petitioner personally
liable.
Citing Sections 4 and 5, Rule 10 of the Rules of Court, respondent also prays that
the name of the inexistent defendant B & R Sportswear Distributor, Inc. be
amended and changed to Benny Hung and/or B & R Footwear Distributors, Inc.

Moreover, respondent avers that petitioner cannot claim that he was not served
with summons because it was served at his address and the building standing
thereon is registered in his name per the tax declaration.
At the outset, we note the cause of respondent’s predicament in failing to execute
the 2002 judgment in its favor: its own failure to state the correct name of the
defendant it sued and seek a correction earlier. Instead of suing Guess? Footwear
and B & R Sportswear Enterprises, the contracting parties in the merchant
agreements, BPI named B & R Sportswear Distributor, Inc. as defendant. BPI
likewise failed to sue petitioner Benny Hung who signed the agreements as
owner/manager and president of Guess? Footwear and B & R Sportswear
Enterprises. Moreover, when B & R Footwear Distributors, Inc. appeared as
defendant, no corresponding correction was sought. Unfortunately, BPI has buried
its omission by silence and lamented instead petitioner’s alleged initial silence on
the non-existence of B & R Sportswear Distributor, Inc. Respondent even accused
the "defendant" in its motion to pierce the corporate veil of B & R Footwear
Distributors, Inc. of having "employed deceit, bad faith and illegal
scheme/maneuver,"15 an accusation no longer pursued before us.
Our impression that respondent BPI should have named petitioner as a defendant
finds validation from (1) petitioner’s own admission that B & R Sportswear
Enterprises is his sole proprietorship and (2) respondent’s belated prayer that
defendant’s name be changed to Benny Hung and/or B & R Footwear Distributors,
Inc. on the ground that such relief is allowed under Sections 416 and 5,17 Rule 10 of
the Rules of Court.
Indeed, we can validly make the formal correction on the name of the defendant
from B & R Sportswear Distributor, Inc. to B & R Footwear Distributors, Inc. Such
correction only confirms the voluntary correction already made by B & R
Footwear Distributors, Inc. which answered the complaint and claimed that it is
the defendant. Section 4, Rule 10 of the Rules of Court also allows a summary
correction of this formal defect. Such correction can be made even if the case is
already before us as it can be made at any stage of the action.18 Respondent’s
belated prayer for correction is also sufficient since a court can even make the
correction motu propio. More importantly, no prejudice is caused to B & R
Footwear Distributors, Inc. considering its participation in the trial. Hence,
petitioner has basis for saying that respondent should have tried to execute the
judgment against B & R Footwear Distributors, Inc.
But we cannot agree with petitioner that B & R Footwear Distributors, Inc. or
Guess? Footwear is the only "real contracting party." The facts show that B & R
Sportswear Enterprises is also a contracting party. Petitioner conveniently ignores
this fact although he himself signed the second agreement indicating that Guess?
Footwear is also referred to as B & R Sportswear Enterprises. Petitioner also tries
Page |3
to soften the significance of his directive to the bank, under the letterhead of B & R
Footwear Distributor’s, Inc., to transfer the funds belonging to his sole
proprietorship B & R Sportswear Enterprises as partial payment to the
overpayments made by respondent to Guess? Footwear. He now claims the partial
payment as his payment to respondent "in the course of their mutual
transactions."
Clearly, petitioner has represented in his dealings with respondent that Guess?
Footwear or B & R Footwear Distributors, Inc. is also B & R Sportswear
Enterprises. For this reason, the more complete correction on the name of
defendant should be from B & R Sportswear Distributor, Inc. to B & R Footwear
Distributors, Inc. and Benny Hung. Petitioner is the proper defendant because his
sole proprietorship B & R Sportswear Enterprises has no juridical personality
apart from him.19 Again, the correction only confirms the voluntary correction
already made by B & R Footwear Distributors, Inc. or Guess? Footwear which is
also B & R Sportswear Enterprises. Correction of this formal defect is also allowed
by Section 4, Rule 10 of the Rules of Court.
Relatedly, petitioner cannot complain of non-service of summons upon his person.
Suffice it to say that B & R Footwear Distributors, Inc. or Guess? Footwear which is
also B & R Sportswear Enterprises had answered the summons and the complaint
and participated in the trial.
Accordingly, we find petitioner liable to respondent and we affirm, with the
foregoing clarification, the finding of the RTC that he signed the second merchant
agreement in his personal capacity.
The correction on the name of the defendant has rendered moot any further
discussion on the doctrine of piercing the veil of corporate fiction. In any event, we
have said that whether the separate personality of a corporation should be pierced
hinges on facts pleaded and proved.20 In seeking to pierce the corporate veil of B &
R Footwear Distributors, Inc., respondent complained of "deceit, bad faith and
illegal scheme/maneuver." As stated earlier, respondent has abandoned such
accusation. And respondent’s proof – the SEC certification that B & R Sportswear
Distributor, Inc. is not an existing corporation – would surely attest to no other
fact but the inexistence of a corporation named B & R Sportswear Distributor, Inc.
as such name only surfaced because of its own error. Hence, we cannot agree with
the Court of Appeals that petitioner has represented a non-existing corporation
and induced the respondent and the RTC to believe in his representation.1avvphi1
On petitioner’s alleged intention to mislead for his initial silence on the non-
existence of the named defendant, we find more notable respondent’s own silence
on the error it committed. Contrary to the allegation, the "real" defendant has even
corrected respondent’s error. While the evidence showed that petitioner has
 Page |4

treated B & R Footwear Distributors, Inc. or Guess? Footwear as B & R Sportswear No pronouncement as to costs.
Enterprises, respondent did not rely on this ground in filing the motion to pierce
the corporate veil of B & R Footwear Distributors, Inc. Respondent’s main SO ORDERED.
contention therein was petitioner’s alleged act to represent a non-existent
corporation amounting to deceit, bad faith and illegal scheme/maneuver. JOSE PORTUGAL PEREZ
Associate Justice
With regard to the imposable rate of legal interest, we find application of the rule
laid down by this Court in Eastern Shipping Lines, Inc. vs. Court of Appeals,21 to
wit:

2. When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes

final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.

Since this case before us involves an obligation not arising from a loan or
forbearance of money, the applicable interest rate is 6% per annum. The legal
interest rate of 6% shall be computed from 4 October 1999, the date the letter of
demand was presumably received by the defendant.22 And in accordance with the
aforesaid decision, the rate of 12% per annum shall be charged on the total
amount outstanding, from the time the judgment becomes final and executory
until its satisfaction.

WHEREFORE, we DENY the petition for lack of merit, and ORDER B & R Footwear
Distributors, Inc. and petitioner Benny Hung TO PAY respondent BPI Card Finance
Corporation: (a) ₱2,516,823.40, representing the overpayments, with interest at
the rate of 6% per annum from 4 October 1999 until finality of judgment; and (b)
additional interest of 12% per annum from finality of judgment until full payment.

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 100866 July 14, 1992
REBECCA BOYER-ROXAS and GUILLERMO ROXAS, petitioners,
vs.
HON. COURT OF APPEALS and HEIRS OF EUGENIA V. ROXAS, INC., respondents.
GUTIERREZ, JR., J.:
This is a petition to review the decision and resolution of the Court of Appeals in
CA-G.R. No. 14530 affirming the earlier decision of the Regional Trial Court of
Laguna, Branch 37, at Calamba, in the consolidated RTC Civil Case Nos. 802-84-C
and 803-84-C entitled "Heirs of Eugenia V. Roxas, Inc. v. Rebecca Boyer-Roxas" and
Heirs of Eugenia V. Roxas, Inc. v. Guillermo Roxas," the dispositive portion of
which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the
plaintiff and against the defendants, by ordering as it is hereby ordered that:
1) In RTC Civil Case No. 802-84-C: Rebecca Boyer-Roxas and all persons
claiming under her to:
a) Immediately vacate the residential house near the Balugbugan pool located
inside the premises of the Hidden Valley Springs Resort at Limao, Calauan,
Laguna;
b) Pay the plaintiff the amount of P300.00 per month from September 10, 1983,
for her occupancy of the residential house until the same is vacated;
c) Remove the unfinished building erected on the land of the plaintiff within
ninety (90) days from receipt of this decision;
d) Pay the plaintiff the amount of P100.00 per month from September 10, 1983,
until the said unfinished building is removed from the land of the plaintiff; and
e) Pay the costs.
Page |5
2) In RTC Civil Case No. 803-84-C: Guillermo Roxas and all persons claiming
under him to:
a) Immediately vacate the residential house near the tennis court located
within the premises of the Hidden Valley Springs Resort at Limao, Calauan,
Laguna;
b) Pay the plaintiff the amount of P300.00 per month from September 10, 1983,
for his occupancy of the said residential house until the same is vacated; and
c) Pay the costs. (Rollo, p. 36)
In two (2) separate complaints for recovery of possession filed with the Regional
Trial Court of Laguna against petitioners Rebecca Boyer-Roxas and Guillermo
Roxas respectively, respondent corporation, Heirs of Eugenia V. Roxas, Inc., prayed
for the ejectment of the petitioners from buildings inside the Hidden Valley
Springs Resort located at Limao, Calauan, Laguna allegedly owned by the
respondent corporation.
In the case of petitioner Rebecca Boyer-Roxas (Civil Case No-802-84-C), the
respondent corporation alleged that Rebecca is in possession of two (2) houses,
one of which is still under construction, built at the expense of the respondent
corporation; and that her occupancy on the two (2) houses was only upon the
tolerance of the respondent corporation.
In the case of petitioner Guillermo Roxas (Civil Case No. 803-84-C), the respondent
corporation alleged that Guillermo occupies a house which was built at the
expense of the former during the time when Guillermo's father, Eriberto Roxas,
was still living and was the general manager of the respondent corporation; that
the house was originally intended as a recreation hall but was converted for the
residential use of Guillermo; and that Guillermo's possession over the house and
lot was only upon the tolerance of the respondent corporation.
In both cases, the respondent corporation alleged that the petitioners never paid
rentals for the use of the buildings and the lots and that they ignored the demand
letters for them to vacate the buildings.
In their separate answers, the petitioners traversed the allegations in the
complaint by stating that they are heirs of Eugenia V. Roxas and therefore, co-
owners of the Hidden Valley Springs Resort; and as co-owners of the property,
they have the right to stay within its premises.
The cases were consolidated and tried jointly.

At the pre-trial, the parties limited the issues as follows:
1) whether plaintiff is entitled to recover the questioned premises;
2) whether plaintiff is entitled to reasonable rental for occupancy of the
premises in question;
3) whether the defendant is legally authorized to pierce the veil of corporate
fiction and interpose the same as a defense in an accion publiciana;
4) whether the defendants are truly builders in good faith, entitled to occupy
the questioned premises;
5) whether plaintiff is entitled to damages and reasonable compensation for
the use of the questioned premises;
6) whether the defendants are entitled to their counterclaim to recover moral
and exemplary damages as well as attorney's fees in the two cases;
7) whether the presence and occupancy by the defendants on the premises in
questioned (sic) hampers, deters or impairs plaintiff's operation of Hidden
Valley Springs Resort; and
8) whether or not a unilateral and sudden withdrawal of plaintiffs tolerance
allowing defendants' occupancy of the premises in questioned (sic) is unjust
enrichment. (Original Records, 486)
Upon motion of the plaintiff respondent corporation, Presiding Judge Francisco
Ma. Guerrero of Branch 34 issued an Order dated April 25, 1986 inhibiting himself
from further trying the case. The cases were re-raffled to Branch 37 presided by
Judge Odilon Bautista. Judge Bautista continued the hearing of the cases.
For failure of the petitioners (defendants below) and their counsel to attend the
October 22, 1986 hearing despite notice, and upon motion of the respondent
corporation, the court issued on the same day, October 22, 1986, an Order
considering the cases submitted for decision. At this stage of the proceedings, the
petitioners had not yet presented their evidence while the respondent corporation
had completed the presentation of its evidence.
The evidence of the respondent corporation upon which the lower court based its
decision is as follows:
Page |6
To support the complaints, the plaintiff offered the testimonies of Maria
Milagros Roxas and that of Victoria Roxas Villarta as well as Exhibits "A" to
"M-3".
The evidence of the plaintiff established the following: that the plaintiff, Heirs
of Eugenia V Roxas, Incorporated, was incorporated on December 4, 1962
(Exh. "C") with the primary purpose of engaging in agriculture to develop the
properties inherited from Eugenia V. Roxas and that of y Eufrocino Roxas; that
the Articles of Incorporation of the plaintiff, in 1971, was amended to allow it
to engage in the resort business (Exh.
"C-1"); that the incorporators as original members of the board of directors of
the plaintiff were all members of the same family, with Eufrocino Roxas
having the biggest share; that accordingly, the plaintiff put up a resort known
as Hidden Valley Springs Resort on a portion of its land located at Bo. Limao,
Calauan, Laguna, and covered by TCT No. 32639 (Exhs. "A" and "A-l"); that
improvements were introduced in the resort by the plaintiff and among them
were cottages, houses or buildings, swimming pools, tennis court, restaurant
and open pavilions; that the house near the Balugbugan Pool (Exh. "B-l") being
occupied by Rebecca B. Roxas was originally intended as staff house but later
used as the residence of Eriberto Roxas, deceased husband of the defendant
Rebecca Boyer-Roxas and father of Guillermo Roxas; that this house presently
being occupied by Rebecca B. Roxas was built from corporate funds; that the
construction of the unfinished house (Exh. "B-2") was started by the
defendant Rebecca Boyer-Roxas and her husband Eriberto Roxas; that the
third building (Exh. "B-3") presently being occupied by Guillermo Roxas was
originally intended as a recreation hall but later converted as a residential
house; that this house was built also from corporate funds; that the said house
occupied by Guillermo Roxas when it was being built had nipa roofing but was
later changed to galvanized iron sheets; that at the beginning, it had no
partition downstairs and the second floor was an open space; that the
conversion from a recreation hall to a residential house was with the
knowledge of Eufrocino Roxas and was not objected to by any of the Board of
Directors of the plaintiff; that most of the materials used in converting the
building into a residential house came from the materials left by Coppola, a
film producer, who filmed the movie "Apocalypse Now"; that Coppola left the
materials as part of his payment for rents of the rooms that he occupied in the
resort; that after the said recreation hall was converted into a residential
house, defendant Guillermo Roxas moved in and occupied the same together
with his family sometime in 1977 or 1978; that during the time Eufrocino
Roxas was still alive, Eriberto Roxas was the general manager of the
corporation and there was seldom any board meeting; that Eufrocino Roxas
together with Eriberto Roxas were (sic) the ones who were running the
corporation; that during this time, Eriberto Roxas was the restaurant and
wine concessionaire of the resort; that after the death of Eufrocino Roxas,
Eriberto Roxas continued as the general manager until his death in 1980; that

after the death of Eriberto Roxas in 1980, the defendants Rebecca B. Roxas
and Guillermo Roxas, committed acts that impeded the plaintiff's expansion
and normal operation of the resort; that the plaintiff could not even use its
own pavilions, kitchen and other facilities because of the acts of the
defendants which led to the filing of criminal cases in court; that cases were
even filed before the Ministry of Tourism, Bureau of Domestic Trade and the
Office of the President by the parties herein; that the defendants violated the
resolution and orders of the Ministry of Tourism dated July 28, 1983, August
3, 1983 and November 26, 1984 (Exhs. "G", "H" and "H-l") which ordered them
or the corporation they represent to desist from and to turn over immediately
to the plaintiff the management and operation of the restaurant and wine
outlets of the said resort (Exh. "G-l"); that the defendants also violated the
decision of the Bureau of Domestic Trade dated October 23, 1983 (Exh. "C");
that on August 27, 1983, because of the acts of the defendants, the Board of
Directors of the plaintiff adopted Resolution No. 83-12 series of 1983 (Exh.
"F") authorizing the ejectment of the defendants from the premises occupied
by them; that on September 1, 1983, demand letters were sent to Rebecca
Boyer-Roxas and Guillermo Roxas (Exhs. "D" and "D-1") demanding that they
vacate the respective premises they occupy; and that the dispute between the
plaintiff and the defendants was brought before the barangay level and the
same was not settled (Exhs. "E" and "E-l"). (Original Records, pp. 454-456)
The petitioners appealed the decision to the Court of Appeals. However, as stated
earlier, the appellate court affirmed the lower court's decision. The Petitioners'
motion for reconsideration was likewise denied.
Hence, this petition.
In a resolution dated February 5, 1992, we gave due course to the petition.
The petitioners now contend:
I Respondent Court erred when it refused to pierce the veil of corporate fiction
over private respondent and maintain the petitioners in their possession and/or
occupancy of the subject premises considering that petitioners are owners of
aliquot part of the properties of private respondent. Besides, private respondent
itself discarded the mantle of corporate fiction by acts and/or omissions of its
board of directors and/or stockholders.
II The respondent Court erred in not holding that petitioners were in fact denied
due process or their day in court brought about by the gross negligence of their
former counsel.
Page |7
III The respondent Court misapplied the law when it ordered petitioner Rebecca
Boyer-Roxas to remove the unfinished building in RTC Case No. 802-84-C, when
the trial court opined that she spent her own funds for the construction thereof.
(CA Rollo, pp. 17-18)
Were the petitioners denied due process of law in the lower court?
After the cases were re-raffled to the sala of Presiding Judge Odilon Bautista of
Branch 37 the following events transpired:
On July 3, 1986, the lower court issued an Order setting the hearing of the cases on
July 21, 1986. Petitioner Rebecca V. Roxas received a copy of the Order on July 15,
1986, while petitioner Guillermo Roxas received his copy on July 18, 1986. Atty.
Conrado Manicad, the petitioners' counsel received another copy of the Order on
July 11, 1986. (Original Records, p. 260)
On motion of the respondent corporation's counsel, the lower court issued an
Order dated July 15, 1986 cancelling the July 21, 1986 hearing and resetting the
hearing to August 11, 1986. (Original records, 262-263) Three separate copies of
the order were sent and received by the petitioners and their counsel. (Original
Records, pp. 268, 269, 271)
A motion to cancel and re-schedule the August 11, 1986 hearing filed by the
respondent corporation's counsel was denied in an Order dated August 8, 1986.
Again separate copies of the Order were sent and received by the petitioners and
their counsel. (Original Records, pp. 276-279)
At the hearing held on August 11, 1986, only Atty. Benito P. Fabie, counsel for the
respondent corporation appeared. Neither the petitioners nor their counsel
appeared despite notice of hearing. The lower court then issued an Order on the
same date, to wit:
ORDER
When these cases were called for continuation of trial, Atty.
Benito P. Fabie appeared before this Court, however, the
defendants and their lawyer despite receipt of the Order setting
the case for hearing today failed to appear. On Motion of Atty.
Fabie, further cross examination of witness Victoria Vallarta is
hereby considered as having been waived.
The plaintiff is hereby given twenty (20) days from today within
which to submit formal offer of evidence and defendants are also

given ten (10) days from receipt of such formal offer of evidence
to file their objection thereto.
In the meantime, hearing in these cases is set to September 29,
1986 at 10:00 o'clock in the morning. (Original Records, p. 286)
Copies of the Order were sent and received by the petitioners and their counsel on
the following dates — Rebecca Boyer-Roxas on August 20, 1986, Guillermo Roxas
on August 26, 1986, and Atty. Conrado Manicad on September 19, 1986. (Original
Records, pp. 288-290)
On September 1, 1986, the respondent corporation filed its "Formal Offer of
Evidence." In an Order dated September 29, 1986, the lower court issued an Order
admitting exhibits "A" to "M-3" submitted by the respondent corporation in its
"Formal Offer of Evidence . . . there being no objection . . ." (Original Records, p.
418) Copies of this Order were sent and received by the petitioners and their
counsel on the following dates: Rebecca Boyer-Roxas on October 9, 1986;
Guillermo Roxas on October 9, 1986 and Atty. Conrado Manicad on October 4,
1986 (Original Records, pp. 420, 421, 428).
The scheduled hearing on September 29, 1986 did not push through as the
petitioners and their counsel were not present prompting Atty. Benito Fabie, the
respondent corporation's counsel to move that the cases be submitted for
decision. The lower court denied the motion and set the cases for hearing on
October 22, 1986. However, in its Order dated September 29, 1986, the
court warned that in the event the petitioners and their counsel failed to appear on
the next scheduled hearing, the court shall consider the cases submitted for
decision based on the evidence on record. (Original Records, p. 429, 430 and 431)
Separate copies of this Order were sent and received by the petitioners and their
counsel on the following dates: Rebecca Boyer-Roxas on October 9, 1986,
Guillermo Roxas on October 9, 1986; and Atty. Conrado Manicad on October 1,
1986. (Original Records, pp. 429-430)
Despite notice, the petitioners and their counsel again failed to attend the
scheduled October 22, 1986 hearing. Atty. Fabie representing the respondent
corporation was present. Hence, in its Order dated October 22, 1986, on motion of
Atty. Fabie and pursuant to the order dated September 29, 1986, the Court
considered the cases submitted for decision. (Original Records, p. 436)
On November 14, 1986, the respondent corporation, filed a "Manifestation",
stating that ". . . it is submitting without further argument its "Opposition to the
Motion for Reconsideration" for the consideration of the Honorable Court in
resolving subject incident." (Original Records, p. 442)
Page |8
On December 16, 1986, the lower court issued an Order, to wit:
ORDER
Considering that the Court up to this date has not received any
Motion for Reconsideration filed by the defendants in the above-
entitled cases, the Court cannot act on the Opposition to Motion
for Reconsideration filed by the plaintiff and received by the
Court on November 14, 1986. (Original Records, p. 446)
On January 15, 1987, the lower court rendered the questioned decision in the two
(2) cases. (Original Records, pp. 453-459)
On January 20, 1987, Atty. Conrado Manicad, the petitioners' counsel filed an Ex-
Parte Manifestation and attached thereto, a motion for reconsideration of the
October 22, 1986 Order submitting the cases for decision. He prayed that the
Order be set aside and the cases be re-opened for reception of evidence for the
petitioners. He averred that: 1) within the reglementary period he prepared the
motion for reconsideration and among other documents, the draft was sent to his
law office thru his messenger; after signing the final copies, he caused the service
of a copy to the respondent corporation's counsel with the instruction that the
copy of the Court be filed; however, there was a miscommunication between his
secretary and messenger in that the secretary mailed the copy for the respondent
corporation's counsel and placed the rest in an envelope for the messenger to file
the same in court but the messenger thought that it was the secretary who would
file it; it was only later on when it was discovered that the copy for the Court has
not yet been filed and that such failure to file the motion for reconsideration was
due to excusable neglect and/or accident. The motion for reconsideration
contained the following allegations: that on the date set for hearing (October 22,
1986), he was on his way to Calamba to attend the hearing but his car suffered
transmission breakdown; and that despite efforts to repair said transmission, the
car remained inoperative resulting in his absence at the said hearing. (Original
Records, pp. 460-469)
On February 3, 1987, Atty. Manicad filed a motion for reconsideration of the
January 15, 1987 decision. He explained that he had to file the motion because the
receiving clerk refused to admit the motion for reconsideration attached to the ex-
parte manifestation because there was no proof of service to the other party.
Included in the motion for reconsideration was a notice of hearing of the motion
on February 3, 1987. (Original Records, p. 476-A)
On February 4, 1987, the respondent corporation through its counsel filed a
Manifestation and Motion manifesting that they received the copy of the motion

for reconsideration only today (February 4, 1987), hence they prayed for the
postponement of the hearing. (Original Records, pp. 478-479)
On the same day, February 4, 1987, the lower court issued an Order setting the
hearing on February 13, 1987 on the ground that it received the motion for
reconsideration late. Copies of this Order were sent separately to the petitioners
and their counsel. The records show that Atty. Manicad received his copy on
February 11, 1987. As regards the petitioners, the records reveal that Rebecca
Boyer-Roxas did not receive her copy while as regards Guillermo Roxas, somebody
signed for him but did not indicate when the copy was received. (Original Records,
pp. 481-483)
At the scheduled February 13, 1987 hearing, the counsels for the parties were
present. However, the hearing was reset for March 6, 1987 in order to allow the
respondent corporation to file its opposition to the motion for reconsideration.
(Order dated February 13, 1987, Original Records, p. 486) Copies of the Order
were sent and received by the petitioners and their counsel on the following dates:
Rebecca Boyer-Roxas on February 23, 1987; Guillermo Roxas on February 23,
1987 and Atty. Manicad on February 19, 1987. (Original Records, pp. 487, 489-
490)
The records are not clear as to whether or not the scheduled hearing on March 6,
1987 was held. Nevertheless, the records reveal that on March 13, 1987, the lower
court issued an Order denying the motion for reconsideration.
The well-settled doctrine is that the client is bound by the mistakes of his lawyer.
(Aguila v. Court of First Instance of Batangas, Branch I, 160 SCRA 352 [1988]; See
also Vivero v. Santos, et al., 98 Phil. 500 [1956]; Isaac v. Mendoza, 89 Phil. 279
[1951]; Montes v. Court of First Instance of Tayabas, 48 Phil. 640 [1926]; People v.
Manzanilla, 43 Phil. 167 [1922]; United States v. Dungca, 27 Phil. 274 [1914]; and
United States v. Umali, 15 Phil. 33 [1910]) This rule, however, has its exceptions.
Thus, in several cases, we ruled that the party is not bound by the actions of his
counsel in case the gross negligence of the counsel resulted in the client's
deprivation of his property without due process of law. In the case of Legarda v.
Court of Appeals (195 SCRA 418 [1991]), we said:
In People's Homesite & Housing Corp. v. Tiongco and Escasa (12
SCRA 471 [1964]), this Court ruled as follows:
Procedural technicality should not be made a
bar to the vindication of a legitimate grievance.
When such technicality deserts from being an
aid to Justice, the courts are justified in
excepting from its operation a particular case.
Page |9
Where there was something fishy and suspicious
about the actuations of the former counsel of
petitioners in the case at bar, in that he did not
give any significance at all to the processes of the
court, which has proven prejudicial to the rights
of said clients, under a lame and flimsy
explanation that the court's processes just
escaped his attention, it is held that said lawyer
deprived his clients of their day in court, thus
entitling said clients to petition for relief from
judgment despite the lapse of the reglementary
period for filing said period for filing said
petition.
In Escudero v. Judge Dulay (158 SCRA 69 [1988]), this Court, in
holding that the counsel's blunder in procedure is an exception to
the rule that the client is bound by the mistakes of counsel, made
the following disquisition:
Petitioners contend, through their new counsel,
that the judgment rendered against them by the
respondent court was null and void, because
they were therein deprived of their day in court
and divested of their property without due
process of law, through the gross ignorance,
mistake and negligence of their previous
counsel. They acknowledge that, while as a rule,
clients are bound by the mistake of their
counsel, the rule should not be applied
automatically to their case, as their trial
counsel's blunder in procedure and gross
ignorance of existing jurisprudence changed
their cause of action and violated their
substantial rights.
We are impressed with petitioner's contentions.
xxx xxx xxx
While this Court is cognizant of the rule that,
generally, a client will suffer consequences of the
negligence, mistake or lack of competence of his
counsel, in the interest of Justice and equity,
exceptions may be made to such rule, in

accordance with the facts and circumstances of
each case. Adherence to the general rule would,
in the instant case, result in the outright
deprivation of their property through a
technicality.
In its questioned decision dated November 19, 1989 the Court of
Appeals found, in no uncertain terms, the negligence of the then
counsel for petitioners when he failed to file the proper motion to
dismiss or to draw a compromise agreement if it was true that
they agreed on a settlement of the case; or in simply filing an
answer; and that after having been furnished a copy of the
decision by the court he failed to appeal therefrom or to file a
petition for relief from the order declaring petitioners in default.
In all these instances the appellate court found said counsel
negligent but his acts were held to bind his client, petitioners
herein, nevertheless.
The Court disagrees and finds that the negligence of counsel in
this case appears to be so gross and inexcusable. This was
compounded by the fact, that after petitioner gave said counsel
another chance to make up for his omissions by asking him to file
a petition for annulment of the judgment in the appellate court,
again counsel abandoned the case of petitioner in that after he
received a copy of the adverse judgment of the appellate court, he
did not do anything to save the situation or inform his client of
the judgment. He allowed the judgment to lapse and become final.
Such reckless and gross negligence should not be allowed to bind
the petitioner. Petitioner was thereby effectively deprived of her
day in court. (at pp. 426-427)
The herein petitioners, however, are not similarly situated as the parties
mentioned in the abovecited cases. We cannot rule that they, too, were victims of
the gross negligence of their counsel.
The petitioners are to be blamed for the October 22, 1986 order issued by the
lower court submitting the cases for decision. They received notices of the
scheduled hearings and yet they did not do anything. More specifically, the parties
received notice of the Order dated September 29, 1986 with the warning that if
they fail to attend the October 22, 1986 hearing, the cases would be submitted for
decision based on the evidence on record. Earlier, at the scheduled hearing on
September 29, 1986, the counsel for the respondent corporation moved that the
cases be submitted for decision for failure of the petitioners and their counsel to
P a g e | 10
attend despite notice. The lower court denied the motion and gave the petitioners
and their counsel another chance by rescheduling the October 22, 1986 hearing.
Indeed, the petitioners knew all along that their counsel was not attending the
scheduled hearings. They did not take steps to change their counsel or make him
attend to their cases until it was too late. On the contrary, they continued to retain
the services of Atty. Manicad knowing fully well his lapses vis-a-vis their cases.
They, therefore, cannot raise the alleged gross negligence of their counsel
resulting in their denial of due process to warrant the reversal of the lower court's
decision. In a similar case, Aguila v. Court of First Instance of Batangas, Branch
1 (supra), we ruled:
In the instant case, the petitioner should have noticed the
succession of errors committed by his counsel and taken
appropriate steps for his replacement before it was altogether
too late. He did not. On the contrary, he continued to retain his
counsel through the series of proceedings that all resulted in the
rejection of his cause, obviously through such counsel's
"ineptitude" and, let it be added, the clients' forbearance. The
petitioner's reverses should have cautioned him that his lawyer
was mishandling his case and moved him to seek the help of
other counsel, which he did in the end but rather tardily.
Now petitioner wants us to nullify all of the antecedent
proceedings and recognize his earlier claims to the disputed
property on the justification that his counsel was grossly inept.
Such a reason is hardly plausible as the petitioner's new counsel
should know. Otherwise, all a defeated party would have to do to
salvage his case is claim neglect or mistake on the part of his
counsel as a ground for reversing the adverse judgment. There
would be no end to litigation if these were allowed as every
shortcoming of counsel could be the subject of challenge by his
client through another counsel who, if he is also found wanting,
would likewise be disowned by the same client through another
counsel, and so on ad infinitum. This would render court
proceedings indefinite, tentative and subject to reopening at any
time by the mere subterfuge of replacing counsel. (at pp. 357-
358)
We now discuss the merits of the cases.
In the first assignment of error, the petitioners maintain that their possession of
the questioned properties must be respected in view of their ownership of an
aliquot portion of all the properties of the respondent corporation being

stockholders thereof. They propose that the veil of corporate fiction be pierced,
considering the circumstances under which the respondent corporation was
formed.
Originally, the questioned properties belonged to Eugenia V. Roxas. After her
death, the heirs of Eugenia V. Roxas, among them the petitioners herein, decided to
form a corporation — Heirs of Eugenia V. Roxas, Incorporated (private respondent
herein) with the inherited properties as capital of the corporation. The
corporation was incorporated on December 4, 1962 with the primary purpose of
engaging in agriculture to develop the inherited properties. The Articles of
Incorporation of the respondent corporation were amended in 1971 to allow it to
engage in the resort business. Accordingly, the corporation put up a resort known
as Hidden Valley Springs Resort where the questioned properties are located.
These facts, however, do not justify the position taken by the petitioners.
The respondent is a bona fide corporation. As such, it has a juridical personality of
its own separate from the members composing it. (Western Agro Industrial
Corporation v. Court of Appeals, 188 SCRA 709 [1990]; Tan Boon Bee & Co., Inc. v.
Jarencio, 163 SCRA 205 [1988]; Yutivo Sons Hardware Company v. Court of Tax
Appeals, 1 SCRA 160 [1961]; Emilio Cano Enterprises, Inc. v. Court of Industrial
Relations, 13 SCRA 290 [1965]) There is no dispute that title over the questioned
land where the Hidden Valley Springs Resort is located is registered in the name of
the corporation. The records also show that the staff house being occupied by
petitioner Rebecca Boyer-Roxas and the recreation hall which was later on
converted into a residential house occupied by petitioner Guillermo Roxas are
owned by the respondent corporation. Regarding properties owned by a
corporation, we stated in the case of Stockholders of F. Guanzon and Sons, Inc. v.
Register of Deeds of Manila, (6 SCRA 373 [1962]):
xxx xxx xxx
. . . Properties registered in the name of the corporation are
owned by it as an entity separate and distinct from its members.
While shares of stock constitute personal property, they do not
represent property of the corporation. The corporation has
property of its own which consists chiefly of real estate (Nelson v.
Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123
N.W. 743). A share of stock only typifies an aliquot part of the
corporation's property, or the right to share in its proceeds to
that extent when distributed according to law and equity (Hall &
Faley v. Alabama Terminal, 173 Ala., 398, 56 So. 235), but its
holder is not the owner of any part of the capital of the
corporation (Bradley v. Bauder, 36 Ohio St., 28). Nor is he entitled
P a g e | 11
to the possession of any definite portion of its property or assets
(Gottfried V. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St., 474).
The stockholder is not a co-owner or tenant in common of the
corporate property (Harton v. Johnston, 166 Ala., 317, 51 So.
992). (at pp. 375-376)
The petitioners point out that their occupancy of the staff house which was later
used as the residence of Eriberto Roxas, husband of petitioner Rebecca Boyer-
Roxas and the recreation hall which was converted into a residential house were
with the blessings of Eufrocino Roxas, the deceased husband of Eugenia V. Roxas,
who was the majority and controlling stockholder of the corporation. In his
lifetime, Eufrocino Roxas together with Eriberto Roxas, the husband of petitioner
Rebecca Boyer-Roxas, and the father of petitioner Guillermo Roxas managed the
corporation. The Board of Directors did not object to such an arrangement. The
petitioners argue that . . . the authority thus given by Eufrocino Roxas for the
conversion of the recreation hall into a residential house can no longer be
questioned by the stockholders of the private respondent and/or its board of
directors for they impliedly but no leas explicitly delegated such authority to said
Eufrocino Roxas. (Rollo, p. 12)
Again, we must emphasize that the respondent corporation has a distinct
personality separate from its members. The corporation transacts its business
only through its officers or agents. (Western Agro Industrial Corporation v. Court
of Appeals, supra). Whatever authority these officers or agents may have is
derived from the board of directors or other governing body unless conferred by
the charter of the corporation. An officer's power as an agent of the corporation
must be sought from the statute, charter, the by-laws or in a delegation of
authority to such officer, from the acts of the board of directors, formally
expressed or implied from a habit or custom of doing business. (Vicente v.
Geraldez, 52 SCRA 210 [1973])
In the present case, the record shows that Eufrocino V. Roxas who then controlled
the management of the corporation, being the majority stockholder, consented to
the petitioners' stay within the questioned properties. Specifically, Eufrocino
Roxas gave his consent to the conversion of the recreation hall to a residential
house, now occupied by petitioner Guillermo Roxas. The Board of Directors did
not object to the actions of Eufrocino Roxas. The petitioners were allowed to stay
within the questioned properties until August 27, 1983, when the Board of
Directors approved a Resolution ejecting the petitioners, to wit:
R E S O L U T I O N No. 83-12
RESOLVED, That Rebecca B. Roxas and Guillermo Roxas, and all
persons claiming under them, be ejected from their occupancy of

the Hidden Valley Springs compound on which their houses have
been constructed and/or are being constructed only on tolerance
of the Corporation and without any contract therefor, in order to
give way to the Corporation's expansion and improvement
program and obviate prejudice to the operation of the Hidden
Valley Springs Resort by their continued interference.
RESOLVED, Further that the services of Atty. Benito P. Fabie be
engaged and that he be authorized as he is hereby authorized to
effect the ejectment, including the filing of the corresponding
suits, if necessary to do so. (Original Records, p. 327)
We find nothing irregular in the adoption of the Resolution by the Board of
Directors. The petitioners' stay within the questioned properties was merely by
tolerance of the respondent corporation in deference to the wishes of Eufrocino
Roxas, who during his lifetime, controlled and managed the corporation. Eufrocino
Roxas' actions could not have bound the corporation forever. The petitioners have
not cited any provision of the corporation by-laws or any resolution or act of the
Board of Directors which authorized Eufrocino Roxas to allow them to stay within
the company premises forever. We rule that in the absence of any existing contract
between the petitioners and the respondent corporation, the corporation may
elect to eject the petitioners at any time it wishes for the benefit and interest of the
respondent corporation.
The petitioners' suggestion that the veil of the corporate fiction should be pierced
is untenable. The separate personality of the corporation may be disregarded only
when the corporation is used "as a cloak or cover for fraud or illegality, or to work
injustice, or where necessary to achieve equity or when necessary for the
protection of the creditors." (Sulong Bayan, Inc. v. Araneta, Inc., 72 SCRA 347
[1976] cited in Tan Boon Bee & Co., Inc., v. Jarencio, supra and Western Agro
Industrial Corporation v. Court of Appeals, supra) The circumstances in the
present cases do not fall under any of the enumerated categories.
In the third assignment of error, the petitioners insist that as regards the
unfinished building, Rebecca Boyer-Roxas is a builder in good faith.
The construction of the unfinished building started when Eriberto Roxas, husband
of Rebecca Boyer-Roxas, was still alive and was the general manager of the
respondent corporation. The couple used their own funds to finance the
construction of the building. The Board of Directors of the corporation, however,
did not object to the construction. They allowed the construction to continue
despite the fact that it was within the property of the corporation. Under these
circumstances, we agree with the petitioners that the provision of Article 453 of
the Civil Code should have been applied by the lower courts.
P a g e | 12
Article 453 of the Civil Code provides:
If there was bad faith, not only on the part of the person who
built, planted or sown on the land of another but also on the part
of the owner of such land, the rights of one and the other shall be
the same as though both had acted in good faith.
In such a case, the provisions of Article 448 of the Civil Code govern the
relationship between petitioner Rebecca-Boyer-Roxas and the respondent
corporation, to wit:
Art. 448 — The owner of the land on which anything has been
built, sown or planted in good faith, shall have the right to
appropriate as his own the works, sowing or planting after
payment of the indemnity provided for in articles 546 and 548, or
to oblige the one who built or planted to pay the price of the land,
and the one who sowed, the proper rent. However, the builder or
planter cannot be obliged to buy the land if its value is
considerably more than that of the building or trees. In such case,
he shall pay reasonable rent, if the owner of the land does not
choose to appropriate the buildings or trees after proper
indemnity. The parties shall agree upon the terms of the lease and
in case of disagreement, the court shall fix the terms thereof.
WHEREFORE, the present petition is partly GRANTED. The questioned decision of
the Court of Appeals affirming the decision of the Regional Trial Court of Laguna,
Branch 37, in RTC Civil Case No. 802-84-C is MODIFIED in that subparagraphs (c)
and (d) of Paragraph 1 of the dispositive portion of the decision are deleted. In
their stead, the petitioner Rebecca Boyer-Roxas and the respondent corporation
are ordered to follow the provisions of Article 448 of the Civil Code as regards the
questioned unfinished building in RTC Civil Case No. 802-84-C. The questioned
decision is affirmed in all other respects.
SO ORDERED.
Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.
 P a g e | 13

Republic of the Philippines xxxx

SUPREME COURT
Manila 12. Machinery and Equipment:

SECOND DIVISION The following machinery/equipment have been contributed by you to the
company:
G.R. No. 150283 April 16, 2008
Splitting machine - 1 unit
RYUICHI YAMAMOTO, petitioner,
vs. Samming machine - 1 unit
NISHINO LEATHER INDUSTRIES, INC. and IKUO NISHINO, respondents.
Forklift - 1 unit
DECISION
Drums - 4 units
CARPIO MORALES, J.:
Toggling machine - 2 units
In 1983, petitioner, Ryuichi Yamamoto (Yamamoto), a Japanese national,
organized under Philippine laws Wako Enterprises Manila, Incorporated (WAKO), Regarding the above machines, you may take them out with you (for your
a corporation engaged principally in leather tanning, now known as Nishino own use and sale) if you want, provided, the value of such machines is
Leather Industries, Inc. (NLII), one of herein respondents. deducted from your and Wako’s capital contributions, which will be paid
to you.
In 1987, Yamamoto and the other respondent, Ikuo Nishino (Nishino), also a
Japanese national, forged a Memorandum of Agreement under which they agreed Kindly let me know of your comments on all the above, soonest.
to enter into a joint venture wherein Nishino would acquire such number of shares
of stock equivalent to 70% of the authorized capital stock of WAKO. x x x x5 (Emphasis and underscoring supplied)

Eventually, Nishino and his brother1 Yoshinobu Nishino (Yoshinobu) acquired
more than 70% of the authorized capital stock of WAKO, reducing Yamamoto’s
investment therein to, by his claim, 10%,2 less than 10% according to Nishino.3
The corporate name of WAKO was later changed to, as reflected earlier, its current
name NLII.
Negotiations subsequently ensued in light of a planned takeover of NLII by Nishino
who would buy-out the shares of stock of Yamamoto. In the course of the
negotiations, Yoshinobu and Nishino’s counsel Atty. Emmanuel G. Doce (Atty.
Doce) advised Yamamoto by letter dated October 30, 1991, the pertinent portions
of which follow:
Hereunder is a simple memorandum of the subject matters discussed with
me by Mr. Yoshinobu Nishino yesterday, October 29th, based on the letter
of Mr. Ikuo Nishino from Japan, and which I am now transmitting to you. 4
On the basis of such letter, Yamamoto attempted to recover the machineries and
equipment which were, by Yamamoto’s admission, part of his investment in the
corporation,6 but he was frustrated by respondents, drawing Yamamoto to file on
January 15, 1992 before the Regional Trial Court (RTC) of Makati a
complaint7 against them for replevin.
Branch 45 of the Makati RTC issued a writ of replevin after Yamamoto filed a
bond. 8
In their Answer with Counterclaim,9 respondents claimed that the machineries
and equipment subject of replevin form part of Yamamoto’s capital contributions
in consideration of his equity in NLII and should thus be treated as corporate
property; and that the above-said letter of Atty. Doce to Yamamoto was merely a
proposal, "conditioned on [Yamamoto’s] sell-out to . . . Nishino of his entire
equity,"10 which proposal was yet to be authorized by the stockholders and Board
of Directors of NLII.

By way of Counterclaim, respondents, alleging that they suffered damage due to
the seizure via the implementation of the writ of replevin over the machineries
and equipment, prayed for the award to them of moral and exemplary damages,
attorney’s fees and litigation expenses, and costs of suit.
The trial court, by Decision of June 9, 1995, decided the case in favor of
Yamamoto,11 disposing thus:
WHEREFORE, judgment is hereby rendered: (1) declaring plaintiff as the
rightful owner and possessor of the machineries in question, and making
the writ of seizure permanent; (2) ordering defendants to pay plaintiff
attorney’s fees and expenses of litigation in the amount of Fifty Thousand
Pesos (P50,000.00), Philippine Currency; (3) dismissing defendants’
counterclaims for lack of merit; and (4) ordering defendants to pay the
costs of suit.
SO ORDERED.12 (Underscoring supplied)
On appeal,13 the Court of Appeals held in favor of herein respondents and
accordingly reversed the RTC decision and dismissed the complaint.14 In so
holding, the appellate court found that the machineries and equipment claimed by
Yamamoto are corporate property of NLII and may not thus be retrieved without
the authority of the NLII Board of Directors;15 and that petitioner’s argument that
Nishino and Yamamoto cannot hide behind the shield of corporate fiction does not
lie,16 nor does petitioner’s invocation of the doctrine of promissory estoppel.17 At
the same time, the Court of Appeals found no ground to support respondents’
Counterclaim.18
The Court of Appeals having denied19 his Motion for Reconsideration,20 Yamamoto
filed the present petition,21faulting the Court of Appeals
A.
x x x IN HOLDING THAT THE VEIL OF CORPORATE FICTION SHOULD NOT
BE PIERCED IN THE CASE AT BAR.
B.
x x x IN HOLDING THAT THE DOCTRINE OF PROMISSORY ESTOPPEL
DOES NOT APPLY TO THE CASE AT BAR.
C.
P a g e | 14
x x x IN HOLDING THAT RESPONDENTS ARE NOT LIABLE FOR
ATTORNEY’S FEES.22
The resolution of the petition hinges, in the main, on whether the advice in the
letter of Atty. Doce that Yamamoto may retrieve the machineries and equipment,
which admittedly were part of his investment, bound the corporation. The Court
holds in the negative.
Indeed, without a Board Resolution authorizing respondent Nishino to act for and
in behalf of the corporation, he cannot bind the latter. Under the Corporation Law,
unless otherwise provided, corporate powers are exercised by the Board of
Directors.23
Urging this Court to pierce the veil of corporate fiction, Yamamoto argues, viz:
During the negotiations, the issue as to the ownership of the
Machiner[ies] never came up. Neither did the issue on the proper
procedure to be taken to execute the complete take-over of the Company
come up since Ikuo, Yoshinobu, and Yamamoto were the owners thereof,
the presence of other stockholders being only for the purpose of
complying with the minimum requirements of the law.
What course of action the Company decides to do or not to do depends
not on the "other members of the Board of Directors". It depends on
what Ikuo and Yoshinobu decide. The Company is but a mere
instrumentality of Ikuo [and] Yoshinobu.24
xxxx
x x x The Company hardly holds board meetings. It has an inactive board,
the directors are directors in name only and are there to do the bidding of
the Nish[i]nos, nothing more. Its minutes are paper minutes. x x x 25
xxxx
The fact that the parties started at a 70-30 ratio and Yamamoto’s
percentage declined to 10% does not mean the 20% went to others. x x x
The 20% went to no one else but Ikuo himself. x x x Yoshinobu is the
younger brother of Ikuo and has no say at all in the business. Only
Ikuo makes the decisions. There were, therefore, no other members
of the Board who have not given their approval.26 (Emphasis and
underscoring supplied)

While the veil of separate corporate personality may be pierced when the
corporation is merely an adjunct, a business conduit, or alter ego of a person, 27 the
mere ownership by a single stockholder of even all or nearly all of the capital
stocks of a corporation is not by itself a sufficient ground to disregard the separate
corporate personality.28
The elements determinative of the applicability of the doctrine of piercing the veil
of corporate fiction follow:
"1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty,
or dishonest and unjust act in contravention of the plaintiff’s legal rights;
and
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the
corporate veil." In applying the ‘instrumentality’ or ‘alter ego’ doctrine, the
courts are concerned with reality and not form, with how the corporation
operated and the individual defendant’s relationship to that
operation."29 (Italics in the original; emphasis and underscoring supplied)
In relation to the second element, to disregard the separate juridical personality of
a corporation, the wrongdoing or unjust act in contravention of a plaintiff’s legal
rights must be clearly and convincingly established; it cannot be
presumed.30 Without a demonstration that any of the evils sought to be prevented
by the doctrine is present, it does not apply.31
In the case at bar, there is no showing that Nishino used the separate personality
of NLII to unjustly act or do wrong to Yamamoto in contravention of his legal
rights.
Yamamoto argues, in another vein, that promissory estoppel lies against
respondents, thus:
Under the doctrine of promissory estoppel, x x x estoppel may arise from
the making of a promise, even though without consideration, if it was
P a g e | 15
intended that the promise should be relied upon and in fact it was relied
upon, and if a refusal to enforce it would be virtually to sanction the
perpetration of fraud or would result in other injustice.
x x x Ikuo and Yoshinobu wanted Yamamoto out of the Company. For this
purpose negotiations were had between the parties. Having expressly
given Yamamoto, through the Letter and through a subsequent meeting at
the Manila Peninsula where Ikuo himself confirmed that Yamamoto may
take out the Machinery from the Company anytime, respondents should
not be allowed to turn around and do the exact opposite of what they have
represented they will do.
In paragraph twelve (12) of the Letter, Yamamoto was expressly advised
that he could take out the Machinery if he wanted to so, provided that the
value of said machines would be deducted from his capital contribution x
x x.
xxxx
Respondents cannot now argue that they did not intend for Yamamoto to
rely upon the Letter. That was the purpose of the Letter to begin with.
Petitioner[s] in fact, relied upon said Letter and such reliance was further
strengthened during their meeting at the Manila Peninsula.
To sanction respondents’ attempt to evade their obligation would be to
sanction the perpetration of fraud and injustice against
petitioner.32 (Underscoring supplied)
It bears noting, however, that the aforementioned paragraph 12 of the letter is
followed by a request for Yamamoto to give his "comments on all the above,
soonest."33
What was thus proffered to Yamamoto was not a promise, but a mere offer, subject
to his acceptance. Without acceptance, a mere offer produces no obligation. 34
Thus, under Article 1181 of the Civil Code, "[i]n conditional obligations, the
acquisition of rights, as well as the extinguishment or loss of those already
acquired, shall depend upon the happening of the event which constitutes the
condition." In the case at bar, there is no showing of compliance with the condition
for allowing Yamamoto to take the machineries and equipment, namely, his
agreement to the deduction of their value from his capital contribution due him in
the buy-out of his interests in NLII. Yamamoto’s allegation that he agreed to the
condition35remained just that, no proof thereof having been presented.
 P a g e | 16

The machineries and equipment, which comprised Yamamoto’s investment in

NLII,36 thus remained part of the capital property of the corporation.37

It is settled that the property of a corporation is not the property of its

stockholders or members.38 Under the trust fund doctrine, the capital stock,
property, and other assets of a corporation are regarded as equity in trust for the
payment of corporate creditors which are preferred over the stockholders in the
distribution of corporate assets.39The distribution of corporate assets and
property cannot be made to depend on the whims and caprices of the
stockholders, officers, or directors of the corporation unless the indispensable
conditions and procedures for the protection of corporate creditors are followed. 40

WHEREFORE, the petition is DENIED.

Costs against petitioner.

SO ORDERED.

CONCHITA CARPIO MORALES

Associate Justice

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 84197 July 28, 1989
PIONEER INSURANCE & SURETY CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT,
INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S.
LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner,
vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION,
BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and
MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.
Leonardo B. Lucena for Constancio Maglana.
GUTIERREZ, JR., J.:
The subject matter of these consolidated petitions is the decision of the Court of
Appeals in CA-G.R. CV No. 66195 which modified the decision of the then Court of
First Instance of Manila in Civil Case No. 66135. The plaintiffs complaint
(petitioner in G.R. No. 84197) against all defendants (respondents in G.R. No.
84197) was dismissed but in all other respects the trial court's decision was
affirmed.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant Jacob S.
Lim requiring Lim to pay plaintiff the amount of P311,056.02,
with interest at the rate of 12% per annum compounded
monthly; plus 15% of the amount awarded to plaintiff as
P a g e | 17
attorney's fees from July 2,1966, until full payment is made; plus
P70,000.00 moral and exemplary damages.
It is found in the records that the cross party plaintiffs incurred
additional miscellaneous expenses aside from
Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S.
Lim is further required to pay cross party plaintiff, Bormaheco,
the Cervanteses one-half and Maglana the other half, the amount
of Pl84,878.74 with interest from the filing of the cross-
complaints until the amount is fully paid; plus moral and
exemplary damages in the amount of P184,878.84 with interest
from the filing of the cross-complaints until the amount is fully
paid; plus moral and exemplary damages in the amount of
P50,000.00 for each of the two Cervanteses.
Furthermore, he is required to pay P20,000.00 to Bormaheco and
the Cervanteses, and another P20,000.00 to Constancio B.
Maglana as attorney's fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of plaintiff
Pioneer against defendants Bormaheco, the Cervanteses and
Constancio B. Maglana, is dismissed. Instead, plaintiff is required
to indemnify the defendants Bormaheco and the Cervanteses the
amount of P20,000.00 as attorney's fees and the amount of
P4,379.21, per year from 1966 with legal rate of interest up to the
time it is paid.
Furthermore, the plaintiff is required to pay Constancio B.
Maglana the amount of P20,000.00 as attorney's fees and costs.
No moral or exemplary damages is awarded against plaintiff for
this action was filed in good faith. The fact that the properties of
the Bormaheco and the Cervanteses were attached and that they
were required to file a counterbond in order to dissolve the
attachment, is not an act of bad faith. When a man tries to protect
his rights, he should not be saddled with moral or exemplary
damages. Furthermore, the rights exercised were provided for in
the Rules of Court, and it was the court that ordered it, in the
exercise of its discretion.
No damage is decided against Malayan Insurance Company, Inc.,
the third-party defendant, for it only secured the attachment

prayed for by the plaintiff Pioneer. If an insurance company
would be liable for damages in performing an act which is clearly
within its power and which is the reason for its being, then
nobody would engage in the insurance business. No further claim
or counter-claim for or against anybody is declared by this Court.
(Rollo - G.R. No. 24197, pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline
business as owner-operator of Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered
into and executed a sales contract (Exhibit A) for the sale and purchase of two (2)
DC-3A Type aircrafts and one (1) set of necessary spare parts for the total agreed
price of US $109,000.00 to be paid in installments. One DC-3 Aircraft with Registry
No. PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived in
Manila on July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner
in G.R. No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit
C) in favor of JDA, in behalf of its principal, Lim, for the balance price of the
aircrafts and spare parts.
It appears that Border Machinery and Heavy Equipment Company, Inc.
(Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and Constancio
Maglana (respondents in both petitions) contributed some funds used in the
purchase of the above aircrafts and spare parts. The funds were supposed to be
their contributions to a new corporation proposed by Lim to expand his airline
business. They executed two (2) separate indemnity agreements (Exhibits D-1 and
D-2) in favor of Pioneer, one signed by Maglana and the other jointly signed by Lim
for SAL, Bormaheco and the Cervanteses. The indemnity agreements stipulated
that the indemnitors principally agree and bind themselves jointly and severally to
indemnify and hold and save harmless Pioneer from and against any/all damages,
losses, costs, damages, taxes, penalties, charges and expenses of whatever kind
and nature which Pioneer may incur in consequence of having become surety
upon the bond/note and to pay, reimburse and make good to Pioneer, its
successors and assigns, all sums and amounts of money which it or its
representatives should or may pay or cause to be paid or become liable to pay on
them of whatever kind and nature.
On June 10, 1965, Lim doing business under the name and style of SAL executed in
favor of Pioneer as deed of chattel mortgage as security for the latter's suretyship
in favor of the former. It was stipulated therein that Lim transfer and convey to the
surety the two aircrafts. The deed (Exhibit D) was duly registered with the Office
of the Register of Deeds of the City of Manila and with the Civil Aeronautics
P a g e | 18
Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics
Law (Republic Act No. 776), respectively.
Lim defaulted on his subsequent installment payments prompting JDA to request
payments from the surety. Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel
mortgage before the Sheriff of Davao City. The Cervanteses and Maglana, however,
filed a third party claim alleging that they are co-owners of the aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an
application for a writ of preliminary attachment against Lim and respondents, the
Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims
against Lim alleging that they were not privies to the contracts signed by Lim and,
by way of counterclaim, sought for damages for being exposed to litigation and for
recovery of the sums of money they advanced to Lim for the purchase of the
aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer
but dismissed Pioneer's complaint against all other defendants.
As stated earlier, the appellate court modified the trial court's decision in that the
plaintiffs complaint against all the defendants was dismissed. In all other respects
the trial court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN
IT DISMISSED THE APPEAL OF PETITIONER ON THE SOLE
GROUND THAT PETITIONER HAD ALREADY COLLECTED THE
PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF
THE JDA AND THAT IT CANNOT REPRESENT A REINSURER TO
RECOVER THE AMOUNT FROM HEREIN PRIVATE RESPONDENTS
AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No. 84197,
p. 10)
The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff
Pioneer had reinsured its risk of liability under the surety bond in
favor of JDA and subsequently collected the proceeds of such
reinsurance in the sum of P295,000.00. Defendants' alleged
obligation to Pioneer amounts to P295,000.00, hence, plaintiffs
instant action for the recovery of the amount of P298,666.28 from
defendants will no longer prosper. Plaintiff Pioneer is not the real
party in interest to institute the instant action as it does not stand
to be benefited or injured by the judgment.
Plaintiff Pioneer's contention that it is representing the reinsurer
to recover the amount from defendants, hence, it instituted the
action is utterly devoid of merit. Plaintiff did not even present any
evidence that it is the attorney-in-fact of the reinsurance
company, authorized to institute an action for and in behalf of the
latter. To qualify a person to be a real party in interest in whose
name an action must be prosecuted, he must appear to be the
present real owner of the right sought to be enforced (Moran, Vol.
I, Comments on the Rules of Court, 1979 ed., p. 155). It has been
held that the real party in interest is the party who would be
benefited or injured by the judgment or the party entitled to the
avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil.
125, 131). By real party in interest is meant a present substantial
interest as distinguished from a mere expectancy or a future,
contingent, subordinate or consequential interest (Garcia v.
David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d
1600, 385 III, 414; Flowers v. Germans, 1 NW 2d 424; Weber v.
City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot be
considered as the real party in interest as it has already been paid
by the reinsurer the sum of P295,000.00 — the bulk of
defendants' alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by
plaintiff Pioneer from its reinsurer, the former was able to
foreclose extra-judicially one of the subject airplanes and its
spare engine, realizing the total amount of P37,050.00 from the
sale of the mortgaged chattels. Adding the sum of P37,050.00, to
the proceeds of the reinsurance amounting to P295,000.00, it is
patent that plaintiff has been overpaid in the amount of
P33,383.72 considering that the total amount it had paid to JDA
totals to only P298,666.28. To allow plaintiff Pioneer to recover
from defendants the amount in excess of P298,666.28 would be
P a g e | 19
tantamount to unjust enrichment as it has already been paid by
the reinsurance company of the amount plaintiff has paid to JDA
as surety of defendant Lim vis-a-vis defendant Lim's liability to
JDA. Well settled is the rule that no person should unjustly enrich
himself at the expense of another (Article 22, New Civil Code).
(Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent court based its
finding that petitioner was paid by its reinsurer in the aforesaid amount, as this
matter has never been raised by any of the parties herein both in their answers in
the court below and in their respective briefs with respondent court; (Rollo, p. 11)
(2) even assuming hypothetically that it was paid by its reinsurer, still none of the
respondents had any interest in the matter since the reinsurance is strictly
between the petitioner and the re-insurer pursuant to section 91 of the Insurance
Code; (3) pursuant to the indemnity agreements, the petitioner is entitled to
recover from respondents Bormaheco and Maglana; and (4) the principle of unjust
enrichment is not applicable considering that whatever amount he would recover
from the co-indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance
money was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the issues
threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect
to so much of its obligations to JDA as has been paid with
reinsurance money?
2. If the answer to the preceding question is in the negative, has
Pioneer still any claim against defendants, considering the
amount it has realized from the sale of the mortgaged properties?
(Record on Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under the
surety bond it had executed in favor of JDA, collected the
proceeds of such reinsurance in the sum of P295,000, and paid
with the said amount the bulk of its alleged liability to JDA under

the said surety bond, it is plain that on this score it no longer has
any right to collect to the extent of the said amount.
On the question of why it is Pioneer, instead of the reinsurance
(sic), that is suing defendants for the amount paid to it by the
reinsurers, notwithstanding that the cause of action pertains to
the latter, Pioneer says: The reinsurers opted instead that the
Pioneer Insurance & Surety Corporation shall pursue alone the
case.. . . . Pioneer Insurance & Surety Corporation is representing
the reinsurers to recover the amount.' In other words, insofar as
the amount paid to it by the reinsurers Pioneer is suing
defendants as their attorney-in-fact.
But in the first place, there is not the slightest indication in the
complaint that Pioneer is suing as attorney-in- fact of the
reinsurers for any amount. Lastly, and most important of all,
Pioneer has no right to institute and maintain in its own name an
action for the benefit of the reinsurers. It is well-settled that an
action brought by an attorney-in-fact in his own name instead of
that of the principal will not prosper, and this is so even where
the name of the principal is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court
provides that 'Every action must be prosecuted
in the name of the real party in interest.' This
provision is mandatory. The real party in
interest is the party who would be benefitted or
injured by the judgment or is the party entitled
to the avails of the suit.
This Court has held in various cases that an
attorney-in-fact is not a real party in interest,
that there is no law permitting an action to be
brought by an attorney-in-fact. Arroyo v.
Granada and Gentero, 18 Phil. Rep. 484;
Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep.
12; Filipinos Industrial Corporation v. San Diego
G.R. No. L- 22347,1968, 23 SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29. Since
Pioneer has collected P295,000.00 from the reinsurers, the
uninsured portion of what it paid to JDA is the difference between
the two amounts, or P3,666.28. This is the amount for which
Pioneer may sue defendants, assuming that the indemnity
P a g e | 20
agreement is still valid and effective. But since the amount
realized from the sale of the mortgaged chattels are P35,000.00
for one of the airplanes and P2,050.00 for a spare engine, or a
total of P37,050.00, Pioneer is still overpaid by P33,383.72.
Therefore, Pioneer has no more claim against defendants.
(Record on Appeal, pp. 360-363).
The payment to the petitioner made by the reinsurers was not disputed in the
appellate court. Considering this admitted payment, the only issue that cropped up
was the effect of payment made by the reinsurers to the petitioner. Therefore, the
petitioner's argument that the respondents had no interest in the reinsurance
contract as this is strictly between the petitioner as insured and the reinsuring
company pursuant to Section 91 (should be Section 98) of the Insurance Code has
no basis.
In general a reinsurer, on payment of a loss acquires the same
rights by subrogation as are acquired in similar cases where the
original insurer pays a loss (Universal Ins. Co. v. Old Time
Molasses Co. C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance policies are
in general applicable to actions or contracts of reinsurance.
(Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126
GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
Art. 2207. If the plaintiffs property has been insured, and he has
received indemnity from the insurance company for the injury or
loss arising out of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated
the contract. If the amount paid by the insurance company does
not fully cover the injury or loss, the aggrieved party shall be
entitled to recover the deficiency from the person causing the
loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v.
Heald Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied
in Manila Mahogany Manufacturing Corporation v. Court of Appeals (154 SCRA 650
[1987]):
Note that if a property is insured and the owner receives the
indemnity from the insurer, it is provided in said article that the

insurer is deemed subrogated to the rights of the insured against
the wrongdoer and if the amount paid by the insurer does not
fully cover the loss, then the aggrieved party is the one entitled to
recover the deficiency. Evidently, under this legal provision, the
real party in interest with regard to the portion of the indemnity
paid is the insurer and not the insured. (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not as an
attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing
the petitioner's complaint as against the respondents for the reason that the
petitioner was not the real party in interest in the complaint and, therefore, has no
cause of action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter
indemnitors should not have been dismissed on the premise that the evidence on
record shows that it is entitled to recover from the counter indemnitors. It does
not, however, cite any grounds except its allegation that respondent "Maglanas
defense and evidence are certainly incredible" (p. 12, Rollo) to back up its
contention.
On the other hand, we find the trial court's findings on the matter replete with
evidence to substantiate its finding that the counter-indemnitors are not liable to
the petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity agreement
ceased to be valid and effective after the execution of the chattel
mortgage.
Testimonies of defendants Francisco Cervantes and Modesto
Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the
spare parts involved, agreed to issue the bond provided that the
same would be mortgaged to it, but this was not possible because
the planes were still in Japan and could not be mortgaged here in
the Philippines. As soon as the aircrafts were brought to the
Philippines, they would be mortgaged to Pioneer Insurance to
cover the bond, and this indemnity agreement would be
cancelled.
P a g e | 21
The following is averred under oath by Pioneer in the original
complaint:
The various conflicting claims over the
mortgaged properties have impaired and
rendered insufficient the security under the
chattel mortgage and there is thus no other
sufficient security for the claim sought to be
enforced by this action.
This is judicial admission and aside from the chattel mortgage
there is no other security for the claim sought to be enforced by
this action, which necessarily means that the indemnity
agreement had ceased to have any force and effect at the time this
action was instituted. Sec 2, Rule 129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed the
chattel mortgage on the planes and spare parts, no longer has any
further action against the defendants as indemnitors to recover
any unpaid balance of the price. The indemnity agreement was
ipso jure extinguished upon the foreclosure of the chattel
mortgage. These defendants, as indemnitors, would be entitled to
be subrogated to the right of Pioneer should they make payments
to the latter. Articles 2067 and 2080 of the New Civil Code of the
Philippines.
Independently of the preceding proposition Pioneer's election of
the remedy of foreclosure precludes any further action to recover
any unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and last
installments to JDA and Pioneer as surety having made of the
payments to JDA, the alternative remedies open to Pioneer were
as provided in Article 1484 of the New Civil Code, known as the
Recto Law.
Pioneer exercised the remedy of foreclosure of the chattel
mortgage both by extrajudicial foreclosure and the instant suit.
Such being the case, as provided by the aforementioned
provisions, Pioneer shall have no further action against the
purchaser to recover any unpaid balance and any agreement to
the contrary is void.' Cruz, et al. v. Filipinas Investment & Finance
Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from
through the contention that Pioneer is not the vendor but JDA.
The reason is that Pioneer is actually exercising the rights of JDA
as vendor, having subrogated it in such rights. Nor may the
application of the provision be validly opposed on the ground
that these defendants and defendant Maglana are not the vendee
but indemnitors. Pascual, et al. v. Universal Motors Corporation,
G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the
change of their maturity dates discharged these defendants from
any liability as alleged indemnitors. The change of the maturity
dates of the obligations of Lim, or SAL extinguish the original
obligations thru novations thus discharging the indemnitors.
The principal hereof shall be paid in eight equal
successive three months interval installments,
the first of which shall be due and payable 25
August 1965, the remainder of which ... shall be
due and payable on the 26th day x x x of each
succeeding three months and the last of which
shall be due and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a
memorandum executed by SAL or Lim and JDA, modifying the
maturity dates of the obligations, as follows:
The principal hereof shall be paid in eight equal
successive three month interval installments the
first of which shall be due and payable 4
September 1965, the remainder of which ... shall
be due and payable on the 4th day ... of each
succeeding months and the last of which shall be
due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported promissory
notes bearing maturity dates different from that fixed in the
aforesaid memorandum; the due date of the first installment
appears as October 15, 1965, and those of the rest of the
installments, the 15th of each succeeding three months, that of
the last installment being July 15, 1967.
These restructuring of the obligations with regard to their
maturity dates, effected twice, were done without the knowledge,
P a g e | 22
much less, would have it believed that these defendants Maglana
(sic). Pioneer's official Numeriano Carbonel would have it
believed that these defendants and defendant Maglana knew of
and consented to the modification of the obligations. But if that
were so, there would have been the corresponding documents in
the form of a written notice to as well as written conformity of
these defendants, and there are no such document. The
consequence of this was the extinguishment of the obligations
and of the surety bond secured by the indemnity agreement
which was thereby also extinguished. Applicable by analogy are
the rulings of the Supreme Court in the case of Kabankalan Sugar
Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic
Petroleum Co. v. Hizon David, 45 Phil. 532, 538.
Art. 2079. An extension granted to the debtor by
the creditor without the consent of the
guarantor extinguishes the guaranty The mere
failure on the part of the creditor to demand
payment after the debt has become due does not
of itself constitute any extension time referred to
herein, (New Civil Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F.
Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed when
Pioneer paid the same. Consequently, Pioneer has no more cause
of action to recover from these defendants, as supposed
indemnitors, what it has paid to JDA. By virtue of an express
stipulation in the surety bond, the failure of JDA to present its
claim to Pioneer within ten days from default of Lim or SAL on
every installment, released Pioneer from liability from the claim.
Therefore, Pioneer is not entitled to exact reimbursement from
these defendants thru the indemnity.
Art. 1318. Payment by a solidary debtor shall not
entitle him to reimbursement from his co-
debtors if such payment is made after the
obligation has prescribed or became illegal.
These defendants are entitled to recover damages and attorney's
fees from Pioneer and its surety by reason of the filing of the
instant case against them and the attachment and garnishment of

their properties. The instant action is clearly unfounded insofar
as plaintiff drags these defendants and defendant Maglana.'
(Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors
whose agreement was to do business through the corporate
vehicle but who failed to incorporate the entity in which they had
chosen to invest? How are the losses to be treated in situations
where their contributions to the intended 'corporation' were
invested not through the corporate form? This Petition presents
these fundamental questions which we believe were resolved
erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the
failure of respondents Bormaheco, Spouses Cervantes, Constancio Maglana and
petitioner Lim to incorporate, a de facto partnership among them was created, and
that as a consequence of such relationship all must share in the losses and/or
gains of the venture in proportion to their contribution. The petitioner, therefore,
questions the appellate court's findings ordering him to reimburse certain
amounts given by the respondents to the petitioner as their contributions to the
intended corporation, to wit:
However, defendant Lim should be held liable to pay his co-
defendants' cross-claims in the total amount of P184,878.74 as
correctly found by the trial court, with interest from the filing of
the cross-complaints until the amount is fully paid. Defendant
Lim should pay one-half of the said amount to Bormaheco and the
Cervanteses and the other one-half to defendant Maglana. It is
established in the records that defendant Lim had duly received
the amount of Pl51,000.00 from defendants Bormaheco and
Maglana representing the latter's participation in the ownership
of the subject airplanes and spare parts (Exhibit 58). In addition,
the cross-party plaintiffs incurred additional expenses, hence, the
total sum of P 184,878.74.
P a g e | 23
We first state the principles.
While it has been held that as between themselves the rights of
the stockholders in a defectively incorporated association should
be governed by the supposed charter and the laws of the state
relating thereto and not by the rules governing partners (Cannon
v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is
ordinarily held that persons who attempt, but fail, to form a
corporation and who carry on business under the corporate
name occupy the position of partners inter se (Lynch v.
Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus,
where persons associate themselves together under articles to
purchase property to carry on a business, and their organization
is so defective as to come short of creating a corporation within
the statute, they become in legal effect partners inter se, and their
rights as members of the company to the property acquired by
the company will be recognized (Smith v. Schoodoc Pond Packing
Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So,
where certain persons associated themselves as a corporation for
the development of land for irrigation purposes, and each
conveyed land to the corporation, and two of them contracted to
pay a third the difference in the proportionate value of the land
conveyed by him, and no stock was ever issued in the
corporation, it was treated as a trustee for the associates in an
action between them for an accounting, and its capital stock was
treated as partnership assets, sold, and the proceeds distributed
among them in proportion to the value of the property
contributed by each (Shorb v. Beaudry, 56 Cal. 446). However,
such a relation does not necessarily exist, for ordinarily persons
cannot be made to assume the relation of partners, as between
themselves, when their purpose is that no partnership shall
exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S.
461, 472, 29 L.Ed. 688), and it should be implied only when
necessary to do justice between the parties; thus, one who takes no
part except to subscribe for stock in a proposed corporation which
is never legally formed does not become a partner with other
subscribers who engage in business under the name of the
pretended corporation, so as to be liable as such in an action for
settlement of the alleged partnership and contribution (Ward v.
Brigham, 127 Mass. 24). A partnership relation between certain
stockholders and other stockholders, who were also directors,
will not be implied in the absence of an agreement, so as to make
the former liable to contribute for payment of debts illegally
contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa
23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied).
 P a g e | 24

In the instant case, it is to be noted that the petitioner was declared non-suited for
his failure to appear during the pretrial despite notification. In his answer, the
petitioner denied having received any amount from respondents Bormaheco, the
Cervanteses and Maglana. The trial court and the appellate court, however, found
through Exhibit 58, that the petitioner received the amount of P151,000.00
representing the participation of Bormaheco and Atty. Constancio B. Maglana in
the ownership of the subject airplanes and spare parts. The record shows that
defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to form a
corporation with the respondents despite his representations to them. This gives
credence to the cross-claims of the respondents to the effect that they were
induced and lured by the petitioner to make contributions to a proposed
corporation which was never formed because the petitioner reneged on their
agreement. Maglana alleged in his cross-claim:
... that sometime in early 1965, Jacob Lim proposed to Francisco
Cervantes and Maglana to expand his airline business. Lim was to
procure two DC-3's from Japan and secure the necessary
certificates of public convenience and necessity as well as the
required permits for the operation thereof. Maglana sometime in
May 1965, gave Cervantes his share of P75,000.00 for delivery to
Lim which Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking. Lim in
an undertaking sometime on or about August 9,1965, promised
to incorporate his airline in accordance with their agreement and
proceeded to acquire the planes on his own account. Since then
up to the filing of this answer, Lim has refused, failed and still
refuses to set up the corporation or return the money of Maglana.
(Record on Appeal, pp. 337-338).
personal capacity as the alleged proprietor of the SAL. The
answering defendants learned for the first time of this trickery
and misrepresentation of the other, Jacob Lim, when the herein
plaintiff chattel mortgage (sic) allegedly executed by defendant
Lim, thereby forcing them to file an adverse claim in the form of
third party claim. Notwithstanding repeated oral demands made
by defendants Bormaheco and Cervanteses, to defendant Lim, to
surrender the possession of the two planes and their accessories
and or return the amount advanced by the former amounting to
an aggregate sum of P 178,997.14 as evidenced by a statement of
accounts, the latter ignored, omitted and refused to comply with
them. (Record on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of the case,
necessarily, no de facto partnership was created among the parties which would
entitle the petitioner to a reimbursement of the supposed losses of the proposed
corporation. The record shows that the petitioner was acting on his own and not
in behalf of his other would-be incorporators in transacting the sale of the
airplanes and spare parts.
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the
Court of Appeals is AFFIRMED.
SO ORDERED.
Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur.
Feliciano, J., took no part.

while respondents Bormaheco and the Cervanteses alleged in their answer,

counterclaim, cross-claim and third party complaint:

Sometime in April 1965, defendant Lim lured and induced the

answering defendants to purchase two airplanes and spare parts
from Japan which the latter considered as their lawful
contribution and participation in the proposed corporation to be
known as SAL. Arrangements and negotiations were undertaken
by defendant Lim. Down payments were advanced by defendants
Bormaheco and the Cervanteses and Constancio Maglana (Exh. E-
1). Contrary to the agreement among the defendants, defendant
Lim in connivance with the plaintiff, signed and executed the
alleged chattel mortgage and surety bond agreement in his

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 177131 June 7, 2011
BOY SCOUTS OF THE PHILIPPINES, Petitioner,
vs.
COMMISSION ON AUDIT, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
The jurisdiction of the Commission on Audit (COA) over the Boy Scouts of the
Philippines (BSP) is the subject matter of this controversy that reached us via
petition for prohibition1 filed by the BSP under Rule 65 of the 1997 Rules of Court.
In this petition, the BSP seeks that the COA be prohibited from implementing its
June 18, 2002 Decision,2 its February 21, 2007 Resolution,3 as well as all other
issuances arising therefrom, and that all of the foregoing be rendered null and
void. 4
Antecedent Facts and Background of the Case
This case arose when the COA issued Resolution No. 99-0115 on August 19, 1999
("the COA Resolution"), with the subject "Defining the Commission’s policy with
respect to the audit of the Boy Scouts of the Philippines." In its whereas clauses,
the COA Resolution stated that the BSP was created as a public corporation under
Commonwealth Act No. 111, as amended by Presidential Decree No. 460 and
Republic Act No. 7278; that in Boy Scouts of the Philippines v. National Labor
Relations Commission,6 the Supreme Court ruled that the BSP, as constituted
under its charter, was a "government-controlled corporation within the meaning
of Article IX(B)(2)(1) of the Constitution"; and that "the BSP is appropriately
regarded as a government instrumentality under the 1987 Administrative
Code."7 The COA Resolution also cited its constitutional mandate under Section
2(1), Article IX (D). Finally, the COA Resolution reads:
NOW THEREFORE, in consideration of the foregoing premises, the COMMISSION
PROPER HAS RESOLVED, AS IT DOES HEREBY RESOLVE, to conduct an annual
financial audit of the Boy Scouts of the Philippines in accordance with generally
accepted auditing standards, and express an opinion on whether the financial
P a g e | 25
statements which include the Balance Sheet, the Income Statement and the
Statement of Cash Flows present fairly its financial position and results of
operations.
xxxx
BE IT RESOLVED FURTHERMORE, that for purposes of audit supervision, the Boy
Scouts of the Philippines shall be classified among the government corporations
belonging to the Educational, Social, Scientific, Civic and Research Sector under the
Corporate Audit Office I, to be audited, similar to the subsidiary corporations, by
employing the team audit approach.8 (Emphases supplied.)
The BSP sought reconsideration of the COA Resolution in a letter9 dated November
26, 1999 signed by the BSP National President Jejomar C. Binay, who is now the
Vice President of the Republic, wherein he wrote:
It is the position of the BSP, with all due respect, that it is not subject to the
Commission’s jurisdiction on the following grounds:
1. We reckon that the ruling in the case of Boy Scouts of the Philippines vs.
National Labor Relations Commission, et al. (G.R. No. 80767) classifying
the BSP as a government-controlled corporation is anchored on the
"substantial Government participation" in the National Executive Board of
the BSP. It is to be noted that the case was decided when the BSP Charter
is defined by Commonwealth Act No. 111 as amended by Presidential
Decree 460.
However, may we humbly refer you to Republic Act No. 7278 which amended the
BSP’s charter after the cited case was decided. The most salient of all amendments
in RA No. 7278 is the alteration of the composition of the National Executive Board
of the BSP.
The said RA virtually eliminated the "substantial government participation" in the
National Executive Board by removing: (i) the President of the Philippines and
executive secretaries, with the exception of the Secretary of Education, as
members thereof; and (ii) the appointment and confirmation power of the
President of the Philippines, as Chief Scout, over the members of the said Board.
The BSP believes that the cited case has been superseded by RA 7278. Thereby
weakening the case’s conclusion that the BSP is a government-controlled
corporation (sic). The 1987 Administrative Code itself, of which the BSP vs. NLRC
relied on for some terms, defines government-owned and controlled corporations

as agencies organized as stock or non-stock corporations which the BSP, under its
present charter, is not.
Also, the Government, like in other GOCCs, does not have funds invested in the
BSP. What RA 7278 only provides is that the Government or any of its
subdivisions, branches, offices, agencies and instrumentalities can from time to
time donate and contribute funds to the BSP.
xxxx
Also the BSP respectfully believes that the BSP is not "appropriately regarded as a
government instrumentality under the 1987 Administrative Code" as stated in the
COA resolution. As defined by Section 2(10) of the said code, instrumentality
refers to "any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter."
The BSP is not an entity administering special funds. It is not even included in the
DECS National Budget. x x x
It may be argued also that the BSP is not an "agency" of the Government. The 1987
Administrative Code, merely referred the BSP as an "attached agency" of the DECS
as distinguished from an actual line agency of departments that are included in the
National Budget. The BSP believes that an "attached agency" is different from an
"agency." Agency, as defined in Section 2(4) of the Administrative Code, is defined
as any of the various units of the Government including a department, bureau,
office, instrumentality, government-owned or controlled corporation or local
government or distinct unit therein.
Under the above definition, the BSP is neither a unit of the Government; a
department which refers to an executive department as created by law (Section
2[7] of the Administrative Code); nor a bureau which refers to any principal
subdivision or unit of any department (Section 2[8], Administrative Code).10
Subsequently, requests for reconsideration of the COA Resolution were also made
separately by Robert P. Valdellon, Regional Scout Director, Western Visayas
Region, Iloilo City and Eugenio F. Capreso, Council Scout Executive of Calbayog
City.11
In a letter12 dated July 3, 2000, Director Crescencio S. Sunico, Corporate Audit
Officer (CAO) I of the COA, furnished the BSP with a copy of the
Memorandum13 dated June 20, 2000 of Atty. Santos M. Alquizalas, the COA General
P a g e | 26
Counsel. In said Memorandum, the COA General Counsel opined that Republic Act
No. 7278 did not supersede the Court’s ruling in Boy Scouts of the Philippines v.
National Labor Relations Commission, even though said law eliminated the
substantial government participation in the selection of members of the National
Executive Board of the BSP. The Memorandum further provides:
Analysis of the said case disclosed that the substantial government participation is
only one (1) of the three (3) grounds relied upon by the Court in the resolution of
the case. Other considerations include the character of the BSP’s purposes and
functions which has a public aspect and the statutory designation of the BSP as a
"public corporation". These grounds have not been deleted by R.A. No. 7278. On
the contrary, these were strengthened as evidenced by the amendment made
relative to BSP’s purposes stated in Section 3 of R.A. No. 7278.
On the argument that BSP is not appropriately regarded as "a government
instrumentality" and "agency" of the government, such has already been answered
and clarified. The Supreme Court has elucidated this matter in the BSP case when
it declared that BSP is regarded as, both a "government-controlled corporation
with an original charter" and as an "instrumentality" of the Government. Likewise,
it is not disputed that the Administrative Code of 1987 designated the BSP as one
of the attached agencies of DECS. Being an attached agency, however, it does not
change its nature as a government-controlled corporation with original charter
and, necessarily, subject to COA audit jurisdiction. Besides, Section 2(1), Article IX-
D of the Constitution provides that COA shall have the power, authority, and duty
to examine, audit and settle all accounts pertaining to the revenue and receipts of,
and expenditures or uses of funds and property, owned or held in trust by, or
pertaining to, the Government, or any of its subdivisions, agencies or
instrumentalities, including government-owned or controlled corporations with
original charters.14
Based on the Memorandum of the COA General Counsel, Director Sunico wrote:
In view of the points clarified by said Memorandum upholding COA Resolution No.
99-011, we have to comply with the provisions of the latter, among which is to
conduct an annual financial audit of the Boy Scouts of the Philippines.15
In a letter dated November 20, 2000 signed by Director Amorsonia B. Escarda,
CAO I, the COA informed the BSP that a preliminary survey of its organizational
structure, operations and accounting system/records shall be conducted on
November 21 to 22, 2000.16
Upon the BSP’s request, the audit was deferred for thirty (30) days. The BSP then
filed a Petition for Review with Prayer for Preliminary Injunction and/or
Temporary Restraining Order before the COA. This was denied by the COA in its

questioned Decision, which held that the BSP is under its audit jurisdiction. The
BSP moved for reconsideration but this was likewise denied under its questioned
Resolution.17
This led to the filing by the BSP of this petition for prohibition with preliminary
injunction and temporary restraining order against the COA.
The Issue
As stated earlier, the sole issue to be resolved in this case is whether the BSP falls
under the COA’s audit jurisdiction.
The Parties’ Respective Arguments
The BSP contends that Boy Scouts of the Philippines v. National Labor Relations
Commission is inapplicable for purposes of determining the audit jurisdiction of
the COA as the issue therein was the jurisdiction of the National Labor Relations
Commission over a case for illegal dismissal and unfair labor practice filed by
certain BSP employees.18
While the BSP concedes that its functions do relate to those that the government
might otherwise completely assume on its own, it avers that this alone was not
determinative of the COA’s audit jurisdiction over it. The BSP further avers that
the Court in Boy Scouts of the Philippines v. National Labor Relations Commission
"simply stated x x x that in respect of functions, the BSP is akin to a public
corporation" but this was not synonymous to holding that the BSP is a government
corporation or entity subject to audit by the COA. 19
The BSP contends that Republic Act No. 7278 introduced crucial amendments to
its charter; hence, the findings of the Court in Boy Scouts of the Philippines v.
National Labor Relations Commission are no longer valid as the government has
ceased to play a controlling influence in it. The BSP claims that the
pronouncements of the Court therein must be taken only within the context of that
case; that the Court had categorically found that its assets were acquired from the
Boy Scouts of America and not from the Philippine government, and that its
operations are financed chiefly from membership dues of the Boy Scouts
themselves as well as from property rentals; and that "the BSP may correctly be
characterized as non-governmental, and hence, beyond the audit jurisdiction of
the COA." It further claims that the designation by the Court of the BSP as a
government agency or instrumentality is mere obiter dictum.20
The BSP maintains that the provisions of Republic Act No. 7278 suggest that
"governance of BSP has come to be overwhelmingly a private affair or nature, with
P a g e | 27
government participation restricted to the seat of the Secretary of Education,
Culture and Sports."21 It cites Philippine Airlines Inc. v. Commission on
Audit22 wherein the Court declared that, "PAL, having ceased to be a government-
owned or controlled corporation is no longer under the audit jurisdiction of the
COA."23 Claiming that the amendments introduced by Republic Act No. 7278
constituted a supervening event that changed the BSP’s corporate identity in the
same way that the government’s privatization program changed PAL’s, the BSP
makes the case that the government no longer has control over it; thus, the COA
cannot use the Boy Scouts of the Philippines v. National Labor Relations
Commission as its basis for the exercise of its jurisdiction and the issuance of COA
Resolution No. 99-011.24 The BSP further claims as follows:
It is not far-fetched, in fact, to concede that BSP’s funds and assets are private in
character. Unlike ordinary public corporations, such as provinces, cities, and
municipalities, or government-owned and controlled corporations, such as Land
Bank of the Philippines and the Development Bank of the Philippines, the assets
and funds of BSP are not derived from any government grant. For its operations,
BSP is not dependent in any way on any government appropriation; as a matter of
fact, it has not even been included in any appropriations for the government. To be
sure, COA has not alleged, in its Resolution No. 99-011 or in the Memorandum of
its General Counsel, that BSP received, receives or continues to receive assets and
funds from any agency of the government. The foregoing simply point to the
private nature of the funds and assets of petitioner BSP.
xxxx
As stated in petitioner’s third argument, BSP’s assets and funds were never
acquired from the government. Its operations are not in any way financed by the
government, as BSP has never been included in any appropriations act for the
government. Neither has the government invested funds with BSP. BSP, has not
been, at any time, a user of government property or funds; nor have properties of
the government been held in trust by BSP. This is precisely the reason why, until
this time, the COA has not attempted to subject BSP to its audit jurisdiction. x x x.25
To summarize its other arguments, the BSP contends that it is not a government-
owned or controlled corporation; neither is it an instrumentality, agency, or
subdivision of the government.
In its Comment,26 the COA argues as follows:
1. The BSP is a public corporation created under Commonwealth Act No.
111 dated October 31, 1936, and whose functions relate to the fostering of
public virtues of citizenship and patriotism and the general improvement
of the moral spirit and fiber of the youth. The manner of creation and the

purpose for which the BSP was created indubitably prove that it is a
government agency.
2. Being a government agency, the funds and property owned or held in
trust by the BSP are subject to the audit authority of respondent
Commission on Audit pursuant to Section 2 (1), Article IX-D of the 1987
Constitution.
3. Republic Act No. 7278 did not change the character of the BSP as a
government-owned or controlled corporation and government
instrumentality.27
The COA maintains that the functions of the BSP that include, among others, the
teaching to the youth of patriotism, courage, self-reliance, and kindred virtues, are
undeniably sovereign functions enshrined under the Constitution and discussed
by the Court in Boy Scouts of the Philippines v. National Labor Relations
Commission. The COA contends that any attempt to classify the BSP as a private
corporation would be incomprehensible since no less than the law which created
it had designated it as a public corporation and its statutory mandate embraces
performance of sovereign functions.28
The COA claims that the only reason why the BSP employees fell within the scope
of the Civil Service Commission even before the 1987 Constitution was the fact
that it was a government-owned or controlled corporation; that as an attached
agency of the Department of Education, Culture and Sports (DECS), the BSP is an
agency of the government; and that the BSP is a chartered institution under
Section 1(12) of the Revised Administrative Code of 1987, embraced under the
term government instrumentality.29
The COA concludes that being a government agency, the funds and property
owned or held by the BSP are subject to the audit authority of the COA pursuant to
Section 2(1), Article IX (D) of the 1987 Constitution.
In support of its arguments, the COA cites The Veterans Federation of the
Philippines (VFP) v. Reyes,30 wherein the Court held that among the reasons why
the VFP is a public corporation is that its charter, Republic Act No. 2640,
designates it as one. Furthermore, the COA quotes the Court as saying in that case:
In several cases, we have dealt with the issue of whether certain specific activities
can be classified as sovereign functions. These cases, which deal with activities not
immediately apparent to be sovereign functions, upheld the public sovereign
nature of operations needed either to promote social justice or to stimulate
patriotic sentiments and love of country.
P a g e | 28
xxxx
Petitioner claims that its funds are not public funds because no budgetary
appropriations or government funds have been released to the VFP directly or
indirectly from the DBM, and because VFP funds come from membership dues and
lease rentals earned from administering government lands reserved for the VFP.
The fact that no budgetary appropriations have been released to the VFP does not
prove that it is a private corporation. The DBM indeed did not see it fit to propose
budgetary appropriations to the VFP, having itself believed that the VFP is a
private corporation. If the DBM, however, is mistaken as to its conclusion
regarding the nature of VFP's incorporation, its previous assertions will not
prevent future budgetary appropriations to the VFP. The erroneous application of
the law by public officers does not bar a subsequent correct application of the
law.31(Citations omitted.)
The COA points out that the government is not precluded by law from extending
financial support to the BSP and adding to its funds, and that "as a government
instrumentality which continues to perform a vital function imbued with public
interest and reflective of the government’s policy to stimulate patriotic sentiments
and love of country, the BSP’s funds from whatever source are public funds, and
can be used solely for public purpose in pursuance of the provisions of Republic
Act No. [7278]."32
The COA claims that the fact that it has not yet audited the BSP’s funds may not bar
the subsequent exercise of its audit jurisdiction.
The BSP filed its Reply33 on August 29, 2007 maintaining that its statutory
designation as a "public corporation" and the public character of its purpose and
functions are not determinative of the COA’s audit jurisdiction; reiterating its
stand that Boy Scouts of the Philippines v. National Labor Relations Commission is
not applicable anymore because the aspect of government ownership and control
has been removed by Republic Act No. 7278; and concluding that the funds and
property that it either owned or held in trust are not public funds and are not
subject to the COA’s audit jurisdiction.
Thereafter, considering the BSP’s claim that it is a private corporation, this Court,
in a Resolution34 dated July 20, 2010, required the parties to file, within a period of
twenty (20) days from receipt of said Resolution, their respective comments on
the issue of whether Commonwealth Act No. 111, as amended by Republic Act No.
7278, is constitutional.
In compliance with the Court’s resolution, the parties filed their respective
Comments.

In its Comment35 dated October 22, 2010, the COA argues that the constitutionality
of Commonwealth Act No. 111, as amended, is not determinative of the resolution
of the present controversy on the COA’s audit jurisdiction over petitioner, and in
fact, the controversy may be resolved on other grounds; thus, the requisites before
a judicial inquiry may be made, as set forth in Commissioner of Internal Revenue v.
Court of Tax Appeals,36 have not been fully met.37 Moreover, the COA maintains
that behind every law lies the presumption of constitutionality.38 The COA likewise
argues that contrary to the BSP’s position, repeal of a law by implication is not
favored.39 Lastly, the COA claims that there was no violation of Section 16, Article
XII of the 1987 Constitution with the creation or declaration of the BSP as a
government corporation. Citing Philippine Society for the Prevention of Cruelty to
Animals v. Commission on Audit,40 the COA further alleges:
The true criterion, therefore, to determine whether a corporation is public or
private is found in the totality of the relation of the corporation to the State. If the
corporation is created by the State as the latter’s own agency or instrumentality to
help it in carrying out its governmental functions, then that corporation is
considered public; otherwise, it is private. x x x.41
For its part, in its Comment42 filed on December 3, 2010, the BSP submits that its
charter, Commonwealth Act No. 111, as amended by Republic Act No. 7278, is
constitutional as it does not violate Section 16, Article XII of the Constitution. The
BSP alleges that "while [it] is not a public corporation within the purview of COA’s
audit jurisdiction, neither is it a private corporation created by special law falling
within the ambit of the constitutional prohibition x x x."43 The BSP further alleges:
Petitioner’s purpose is embodied in Section 3 of C.A. No. 111, as amended by
Section 1 of R.A. No. 7278, thus:
xxxx
A reading of the foregoing provision shows that petitioner was created to advance
the interest of the youth, specifically of young boys, and to mold them into
becoming good citizens. Ultimately, the creation of petitioner redounds to the
benefit, not only of those boys, but of the public good or welfare. Hence, it can be
said that petitioner’s purpose and functions are more of a public rather than a
private character. Petitioner caters to all boys who wish to join the organization
without any distinction. It does not limit its membership to a particular class of
boys. Petitioner’s members are trained in scoutcraft and taught patriotism, civic
consciousness and responsibility, courage, self-reliance, discipline and kindred
virtues, and moral values, preparing them to become model citizens and
outstanding leaders of the country.44
P a g e | 29
The BSP reiterates its stand that the public character of its purpose and functions
do not place it within the ambit of the audit jurisdiction of the COA as it lacks the
government ownership or control that the Constitution requires before an entity
may be subject of said jurisdiction.45 It avers that it merely stated in its Reply that
the withdrawal of government control is akin to privatization, but it does not
necessarily mean that petitioner is a private corporation.46The BSP claims that it
has a unique characteristic which "neither classifies it as a purely public nor a
purely private corporation";47 that it is not a quasi-public corporation; and that it
may belong to a different class altogether.48
The BSP claims that assuming arguendo that it is a private corporation, its creation
is not contrary to the purpose of Section 16, Article XII of the Constitution; and
that the evil sought to be avoided by said provision is inexistent in the enactment
of the BSP’s charter,49 as, (i) it was not created for any pecuniary purpose; (ii)
those who will primarily benefit from its creation are not its officers but its entire
membership consisting of boys being trained in scoutcraft all over the country;
(iii) it caters to all boys who wish to join the organization without any distinction;
and (iv) it does not limit its membership to a particular class or group of boys.
Thus, the enactment of its charter confers no special privilege to particular
individuals, families, or groups; nor does it bring about the danger of granting
undue favors to certain groups to the prejudice of others or of the interest of the
country, which are the evils sought to be prevented by the constitutional provision
involved.50
Finally, the BSP states that the presumption of constitutionality of a legislative
enactment prevails absent any clear showing of its repugnancy to the
Constitution.51
The Ruling of the Court
After looking at the legislative history of its amended charter and carefully
studying the applicable laws and the arguments of both parties, we find that the
BSP is a public corporation and its funds are subject to the COA’s audit jurisdiction.
The BSP Charter (Commonwealth Act No. 111, approved on October 31, 1936),
entitled "An Act to Create a Public Corporation to be Known as the Boy Scouts of
the Philippines, and to Define its Powers and Purposes" created the BSP as a
"public corporation" to serve the following public interest or purpose:
Sec. 3. The purpose of this corporation shall be to promote through organization
and cooperation with other agencies, the ability of boys to do useful things for
themselves and others, to train them in scoutcraft, and to inculcate in them
patriotism, civic consciousness and responsibility, courage, self-reliance, discipline

and kindred virtues, and moral values, using the method which are in common use
by boy scouts.
Presidential Decree No. 460, approved on May 17, 1974, amended Commonwealth
Act No. 111 and provided substantial changes in the BSP organizational structure.
Pertinent provisions are quoted below:
Section II. Section 5 of the said Act is also amended to read as follows:
The governing body of the said corporation shall consist of a National Executive
Board composed of (a) the President of the Philippines or his representative; (b)
the charter and life members of the Boy Scouts of the Philippines; (c) the Chairman
of the Board of Trustees of the Philippine Scouting Foundation; (d) the Regional
Chairman of the Scout Regions of the Philippines; (e) the Secretary of Education
and Culture, the Secretary of Social Welfare, the Secretary of National Defense, the
Secretary of Labor, the Secretary of Finance, the Secretary of Youth and Sports,
and the Secretary of Local Government and Community Development; (f) an equal
number of individuals from the private sector; (g) the National President of the
Girl Scouts of the Philippines; (h) one Scout of Senior age from each Scout Region
to represent the boy membership; and (i) three representatives of the cultural
minorities. Except for the Regional Chairman who shall be elected by the Regional
Scout Councils during their annual meetings, and the Scouts of their respective
regions, all members of the National Executive Board shall be either by
appointment or cooption, subject to ratification and confirmation by the Chief
Scout, who shall be the Head of State. Vacancies in the Executive Board shall be
filled by a majority vote of the remaining members, subject to ratification and
confirmation by the Chief Scout. The by-laws may prescribe the number of
members of the National Executive Board necessary to constitute a quorum of the
board, which number may be less than a majority of the whole number of the
board. The National Executive Board shall have power to make and to amend the
by-laws, and, by a two-thirds vote of the whole board at a meeting called for this
purpose, may authorize and cause to be executed mortgages and liens upon the
property of the corporation.
Subsequently, on March 24, 1992, Republic Act No. 7278 further amended
Commonwealth Act No. 111 "by strengthening the volunteer and democratic
character" of the BSP and reducing government representation in its governing
body, as follows:
Section 1. Sections 2 and 3 of Commonwealth Act. No. 111, as amended, is hereby
amended to read as follows:
"Sec. 2. The said corporation shall have the powers of perpetual succession, to sue
and be sued; to enter into contracts; to acquire, own, lease, convey and dispose of
P a g e | 30
such real and personal estate, land grants, rights and choses in action as shall be
necessary for corporate purposes, and to accept and receive funds, real and
personal property by gift, devise, bequest or other means, to conduct fund-raising
activities; to adopt and use a seal, and the same to alter and destroy; to have
offices and conduct its business and affairs in Metropolitan Manila and in the
regions, provinces, cities, municipalities, and barangays of the Philippines, to make
and adopt by-laws, rules and regulations not inconsistent with this Act and the
laws of the Philippines, and generally to do all such acts and things, including the
establishment of regulations for the election of associates and successors, as may
be necessary to carry into effect the provisions of this Act and promote the
purposes of said corporation: Provided, That said corporation shall have no power
to issue certificates of stock or to declare or pay dividends, its objectives and
purposes being solely of benevolent character and not for pecuniary profit of its
members.
"Sec. 3. The purpose of this corporation shall be to promote through organization
and cooperation with other agencies, the ability of boys to do useful things for
themselves and others, to train them in scoutcraft, and to inculcate in them
patriotism, civic consciousness and responsibility, courage, self-reliance, discipline
and kindred virtues, and moral values, using the method which are in common use
by boy scouts."
Sec. 2. Section 4 of Commonwealth Act No. 111, as amended, is hereby repealed
and in lieu thereof, Section 4 shall read as follows:
"Sec. 4. The President of the Philippines shall be the Chief Scout of the Boy Scouts
of the Philippines."
Sec. 3. Sections 5, 6, 7 and 8 of Commonwealth Act No. 111, as amended, are
hereby amended to read as follows:
"Sec. 5. The governing body of the said corporation shall consist of a National
Executive Board, the members of which shall be Filipino citizens of good moral
character. The Board shall be composed of the following:
"(a) One (1) charter member of the Boy Scouts of the Philippines who
shall be elected by the members of the National Council at its meeting
called for this purpose;
"(b) The regional chairmen of the scout regions who shall be elected by
the representatives of all the local scout councils of the region during its
meeting called for this purpose: Provided, That a candidate for regional
chairman need not be the chairman of a local scout council;

"(c) The Secretary of Education, Culture and Sports;
"(d) The National President of the Girl Scouts of the Philippines;
"(e) One (1) senior scout, each from Luzon, Visayas and Mindanao areas,
to be elected by the senior scout delegates of the local scout councils to
the scout youth forums in their respective areas, in its meeting called for
this purpose, to represent the boy scout membership;
"(f) Twelve (12) regular members to be elected by the members of the
National Council in its meeting called for this purpose;
"(g) At least ten (10) but not more than fifteen (15) additional members
from the private sector who shall be elected by the members of the
National Executive Board referred to in the immediately preceding
paragraphs (a), (b), (c), (d), (e) and (f) at the organizational meeting of the
newly reconstituted National Executive Board which shall be held
immediately after the meeting of the National Council wherein the twelve
(12) regular members and the one (1) charter member were elected.
xxxx
"Sec. 8. Any donation or contribution which from time to time may be made to the
Boy Scouts of the Philippines by the Government or any of its subdivisions,
branches, offices, agencies or instrumentalities or by a foreign government or by
private, entities and individuals shall be expended by the National Executive Board
in pursuance of this Act.
The BSP as a Public Corporation under Par. 2, Art. 2 of the Civil Code
There are three classes of juridical persons under Article 44 of the Civil Code and
the BSP, as presently constituted under Republic Act No. 7278, falls under the
second classification. Article 44 reads:
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for public interest or
purpose created by law; their personality begins as soon as they
have been constituted according to law;
P a g e | 31
(3) Corporations, partnerships and associations for private interest or
purpose to which the law grants a juridical personality, separate and
distinct from that of each shareholder, partner or member. (Emphases
supplied.)
The BSP, which is a corporation created for a public interest or purpose, is subject
to the law creating it under Article 45 of the Civil Code, which provides:
Art. 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article
are governed by the laws creating or recognizing them.
Private corporations are regulated by laws of general application on the subject.
Partnerships and associations for private interest or purpose are governed by the
provisions of this Code concerning partnerships. (Emphasis and underscoring
supplied.)
The purpose of the BSP as stated in its amended charter shows that it was created
in order to implement a State policy declared in Article II, Section 13 of the
Constitution, which reads:
ARTICLE II - DECLARATION OF PRINCIPLES AND STATE POLICIES
Section 13. The State recognizes the vital role of the youth in nation-building and
shall promote and protect their physical, moral, spiritual, intellectual, and social
well-being. It shall inculcate in the youth patriotism and nationalism, and
encourage their involvement in public and civic affairs.
Evidently, the BSP, which was created by a special law to serve a public purpose in
pursuit of a constitutional mandate, comes within the class of "public
corporations" defined by paragraph 2, Article 44 of the Civil Code and governed by
the law which creates it, pursuant to Article 45 of the same Code.
The BSP’s Classification Under the Administrative Code of 1987
The public, rather than private, character of the BSP is recognized by the fact that,
along with the Girl Scouts of the Philippines, it is classified as an attached agency
of the DECS under Executive Order No. 292, or the Administrative Code of 1987,
which states:
TITLE VI – EDUCATION, CULTURE AND SPORTS
Chapter 8 – Attached Agencies

SEC. 20. Attached Agencies. – The following agencies are hereby attached to the
Department:
xxxx
(12) Boy Scouts of the Philippines;
(13) Girl Scouts of the Philippines.
The administrative relationship of an attached agency to the department is defined
in the Administrative Code of 1987 as follows:
BOOK IV
THE EXECUTIVE BRANCH
Chapter 7 – ADMINISTRATIVE RELATIONSHIP
SEC. 38. Definition of Administrative Relationship. – Unless otherwise expressly
stated in the Code or in other laws defining the special relationships of particular
agencies, administrative relationships shall be categorized and defined as follows:
xxxx
(3) Attachment. – (a) This refers to the lateral relationship between the
department or its equivalent and the attached agency or corporation for purposes
of policy and program coordination. The coordination may be accomplished by
having the department represented in the governing board of the attached agency
or corporation, either as chairman or as a member, with or without voting rights, if
this is permitted by the charter; having the attached corporation or agency comply
with a system of periodic reporting which shall reflect the progress of programs
and projects; and having the department or its equivalent provide general policies
through its representative in the board, which shall serve as the framework for the
internal policies of the attached corporation or agency. (Emphasis ours.)
As an attached agency, the BSP enjoys operational autonomy, as long as policy and
program coordination is achieved by having at least one representative of
government in its governing board, which in the case of the BSP is the DECS
Secretary. In this sense, the BSP is not under government control or "supervision
and control." Still this characteristic does not make the attached chartered agency
a private corporation covered by the constitutional proscription in question.
Art. XII, Sec. 16 of the Constitution refers to "private corporations" created
by government for proprietary or economic/business purposes
P a g e | 32
At the outset, it should be noted that the provision of Section 16 in issue is found in
Article XII of the Constitution, entitled "National Economy and Patrimony." Section
1 of Article XII is quoted as follows:
SECTION 1. The goals of the national economy are a more equitable distribution of
opportunities, income, and wealth; a sustained increase in the amount of goods
and services produced by the nation for the benefit of the people; and an
expanding productivity as the key to raising the quality of life for all, especially the
underprivileged.
The State shall promote industrialization and full employment based on sound
agricultural development and agrarian reform, through industries that make full
and efficient use of human and natural resources, and which are competitive in
both domestic and foreign markets. However, the State shall protect Filipino
enterprises against unfair foreign competition and trade practices.
In the pursuit of these goals, all sectors of the economy and all regions of the
country shall be given optimum opportunity to develop. Private enterprises,
including corporations, cooperatives, and similar collective organizations, shall be
encouraged to broaden the base of their ownership.
The scope and coverage of Section 16, Article XII of the Constitution can be seen
from the aforementioned declaration of state policies and goals which pertains to
national economy and patrimony and the interests of the people in economic
development.
Section 16, Article XII deals with "the formation, organization, or regulation of
private corporations,"52 which should be done through a general law enacted by
Congress, provides for an exception, that is: if the corporation is government
owned or controlled; its creation is in the interest of the common good; and it
meets the test of economic viability. The rationale behind Article XII, Section 16 of
the 1987 Constitution was explained in Feliciano v. Commission on Audit,53 in the
following manner:
The Constitution emphatically prohibits the creation of private corporations
except by a general law applicable to all citizens. The purpose of this constitutional
provision is to ban private corporations created by special charters, which
historically gave certain individuals, families or groups special privileges denied to
other citizens.54 (Emphasis added.)
It may be gleaned from the above discussion that Article XII, Section 16 bans the
creation of "private corporations" by special law. The said constitutional provision
should not be construed so as to prohibit the creation of public corporations or a
corporate agency or instrumentality of the government intended to serve a public

interest or purpose, which should not be measured on the basis of economic
viability, but according to the public interest or purpose it serves as envisioned by
paragraph (2), of Article 44 of the Civil Code and the pertinent provisions of the
Administrative Code of 1987.
The BSP is a Public Corporation Not Subject to the Test of Government Ownership
or Control and Economic Viability
The BSP is a public corporation or a government agency or instrumentality with
juridical personality, which does not fall within the constitutional prohibition in
Article XII, Section 16, notwithstanding the amendments to its charter. Not all
corporations, which are not government owned or controlled, are ipso facto to be
considered private corporations as there exists another distinct class of
corporations or chartered institutions which are otherwise known as "public
corporations." These corporations are treated by law as agencies or
instrumentalities of the government which are not subject to the tests of
ownership or control and economic viability but to different criteria relating to
their public purposes/interests or constitutional policies and objectives and their
administrative relationship to the government or any of its Departments or
Offices.
Classification of Corporations Under Section 16, Article XII of the Constitution on
National Economy and Patrimony
The dissenting opinion of Associate Justice Antonio T. Carpio, citing a line of cases,
insists that the Constitution recognizes only two classes of corporations: private
corporations under a general law, and government-owned or controlled
corporations created by special charters.
We strongly disagree. Section 16, Article XII should not be construed so as to
prohibit Congress from creating public corporations. In fact, Congress has enacted
numerous laws creating public corporations or government agencies or
instrumentalities vested with corporate powers. Moreover, Section 16, Article XII,
which relates to National Economy and Patrimony, could not have tied the hands
of Congress in creating public corporations to serve any of the constitutional
policies or objectives.
In his dissent, Justice Carpio contends that this ponente introduces "a totally
different species of corporation, which is neither a private corporation nor a
government owned or controlled corporation" and, in so doing, is missing the fact
that the BSP, "which was created as a non-stock, non-profit corporation, can only
be either a private corporation or a government owned or controlled corporation."
P a g e | 33
Note that in Boy Scouts of the Philippines v. National Labor Relations Commission,
the BSP, under its former charter, was regarded as both a government owned or
controlled corporation with original charter and a "public corporation." The said
case pertinently stated:
While the BSP may be seen to be a mixed type of entity, combining aspects of both
public and private entities, we believe that considering the character of its
purposes and its functions, the statutory designation of the BSP as "a public
corporation" and the substantial participation of the Government in the selection
of members of the National Executive Board of the BSP, the BSP, as presently
constituted under its charter, is a government-controlled corporation within the
meaning of Article IX (B) (2) (1) of the Constitution.
We are fortified in this conclusion when we note that the Administrative Code of
1987 designates the BSP as one of the attached agencies of the Department of
Education, Culture and Sports ("DECS"). An "agency of the Government" is defined
as referring to any of the various units of the Government including a department,
bureau, office, instrumentality, government-owned or -controlled corporation, or
local government or distinct unit therein. "Government instrumentality" is in turn
defined in the 1987 Administrative Code in the following manner:
Instrumentality - refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by
law, endowed with some if not all corporate powers, administering special funds,
and enjoying operational autonomy usually through a charter. This term includes
regulatory agencies, chartered institutions and government-owned or controlled
corporations.
The same Code describes a "chartered institution" in the following terms:
Chartered institution - refers to any agency organized or operating under a special
charter, and vested by law with functions relating to specific constitutional
policies or objectives. This term includes the state universities and colleges, and
the monetary authority of the State.
We believe that the BSP is appropriately regarded as "a government
instrumentality" under the 1987 Administrative Code.
It thus appears that the BSP may be regarded as both a "government controlled
corporation with an original charter" and as an "instrumentality" of the
Government within the meaning of Article IX (B) (2) (1) of the Constitution. x x
x.55(Emphases supplied.)

The existence of public or government corporate or juridical entities or chartered
institutions by legislative fiat distinct from private corporations and government
owned or controlled corporation is best exemplified by the 1987 Administrative
Code cited above, which we quote in part:
Sec. 2. General Terms Defined. – Unless the specific words of the text, or the context
as a whole, or a particular statute, shall require a different meaning:
xxxx
(10) "Instrumentality" refers to any agency of the National Government, not
integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers, administering
special funds, and enjoying operational autonomy, usually through a charter. This
term includes regulatory agencies, chartered institutions and government-owned
or controlled corporations. 
 government corporations performing governmental functions and corporations
xxxx
(12) "Chartered institution" refers to any agency organized or operating under a
special charter, and vested by law with functions relating to specific constitutional
policies or objectives. This term includes the state universities and colleges and
the monetary authority of the State.
(13) "Government-owned or controlled corporation" refers to any agency
organized as a stock or non-stock corporation, vested with functions relating to
public needs whether governmental or proprietary in nature, and owned by the
Government directly or through its instrumentalities either wholly, or, where
applicable as in the case of stock corporations, to the extent of at least fifty-one
(51) per cent of its capital stock: Provided, That government-owned or controlled
corporations may be further categorized by the Department of the Budget, the
Civil Service Commission, and the Commission on Audit for purposes of the
exercise and discharge of their respective powers, functions and responsibilities
with respect to such corporations.
Assuming for the sake of argument that the BSP ceases to be owned or controlled
by the government because of reduction of the number of representatives of the
government in the BSP Board, it does not follow that it also ceases to be a
government instrumentality as it still retains all the characteristics of the latter as
an attached agency of the DECS under the Administrative Code. Vesting corporate
powers to an attached agency or instrumentality of the government is not
constitutionally prohibited and is allowed by the above-mentioned provisions of
the Civil Code and the 1987 Administrative Code.
P a g e | 34
Economic Viability and Ownership and Control Tests Inapplicable to Public
Corporations
As presently constituted, the BSP still remains an instrumentality of the national
government. It is a public corporation created by law for a public purpose,
attached to the DECS pursuant to its Charter and the Administrative Code of 1987.
It is not a private corporation which is required to be owned or controlled by the
government and be economically viable to justify its existence under a special law.
The dissent of Justice Carpio also submits that by recognizing "a new class of
public corporation(s)" created by special charter that will not be subject to the test
of economic viability, the constitutional provision will be circumvented.
However, a review of the Record of the 1986 Constitutional Convention reveals the
intent of the framers of the highest law of our land to distinguish between
involved in business or proprietary functions:
THE PRESIDENT. Commissioner Foz is recognized.
MR. FOZ. Madam President, I support the proposal to insert "ECONOMIC
VIABILITY" as one of the grounds for organizing government corporations. x x x.
MR. OPLE. Madam President, the reason for this concern is really that when the
government creates a corporation, there is a sense in which this corporation
becomes exempt from the test of economic performance. We know what happened
in the past. If a government corporation loses, then it makes its claim upon the
taxpayers’ money through new equity infusions from the government and what is
always invoked is the common good. x x x
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the
"common good," this becomes a restraint on future enthusiasts for state capitalism
to excuse themselves from the responsibility of meeting the market test so that
they become viable. x x x.
xxxx
THE PRESIDENT. Commissioner Quesada is recognized.
MS. QUESADA. Madam President, may we be clarified by the committee on what is
meant by economic viability?
THE PRESIDENT. Please proceed.

MR. MONSOD. Economic viability normally is determined by cost-benefit ratio that
takes into consideration all benefits, including economic external as well as
internal benefits. These are what they call externalities in economics, so that these
are not strictly financial criteria. Economic viability involves what we call
economic returns or benefits of the country that are not quantifiable in financial
terms. x x x.
xxxx
MS. QUESADA. So, would this particular formulation now really limit the entry of
government corporations into activities engaged in by corporations?
MR. MONSOD. Yes, because it is also consistent with the economic philosophy that
this Commission approved – that there should be minimum government
participation and intervention in the economy.
MS. QUESDA. Sometimes this Commission would just refer to Congress to provide
the particular requirements when the government would get into corporations.
But this time around, we specifically mentioned economic viability. x x x.
MR. VILLEGAS. Commissioner Ople will restate the reason for his introducing that
amendment.
MR. OPLE. I am obliged to repeat what I said earlier in moving for this particular
amendment jointly with Commissioner Foz. During the past three decades, there
had been a proliferation of government corporations, very few of which have
succeeded, and many of which are now earmarked by the Presidential
Reorganization Commission for liquidation because they failed the economic test.
x x x.
xxxx
MS. QUESADA. But would not the Commissioner say that the reason why many of
the government-owned or controlled corporations failed to come up with the
economic test is due to the management of these corporations, and not the idea
itself of government corporations? It is a problem of efficiency and effectiveness of
management of these corporations which could be remedied, not by eliminating
government corporations or the idea of getting into state-owned corporations, but
improving management which our technocrats should be able to do, given the
training and the experience.
MR. OPLE. That is part of the economic viability, Madam President.
P a g e | 35
MS. QUESADA. So, is the Commissioner saying then that the Filipinos will benefit
more if these government-controlled corporations were given to private hands,
and that there will be more goods and services that will be affordable and within
the reach of the ordinary citizens?
MR. OPLE. Yes. There is nothing here, Madam President, that will prevent the
formation of a government corporation in accordance with a special charter given
by Congress. However, we are raising the standard a little bit so that, in the future,
corporations established by the government will meet the test of the common
good but within that framework we should also build a certain standard of
economic viability.
xxxx
THE PRESIDENT. Commissioner Padilla is recognized.
MR. PADILLA. This is an inquiry to the committee. With regard to corporations
created by a special charter for government-owned or controlled corporations,
will these be in the pioneer fields or in places where the private enterprise does
not or cannot enter? Or is this so general that these government corporations can
compete with private corporations organized under a general law?
MR. MONSOD. Madam President, x x x. There are two types of government
corporations – those that are involved in performing governmental functions, like
garbage disposal, Manila waterworks, and so on; and those government
corporations that are involved in business functions. As we said earlier, there are
two criteria that should be followed for corporations that want to go into business.
First is for government corporations to first prove that they can be efficient in the
areas of their proper functions. This is one of the problems now because they go
into all kinds of activities but are not even efficient in their proper functions.
Secondly, they should not go into activities that the private sector can do better.
MR. PADILLA. There is no question about corporations performing governmental
functions or functions that are impressed with public interest. But the question is
with regard to matters that are covered, perhaps not exhaustively, by private
enterprise. It seems that under this provision the only qualification is economic
viability and common good, but shall government, through government-controlled
corporations, compete with private enterprise?
MR. MONSOD. No, Madam President. As we said, the government should not
engage in activities that private enterprise is engaged in and can do better. x x
x.56 (Emphases supplied.)

Thus, the test of economic viability clearly does not apply to public corporations
dealing with governmental functions, to which category the BSP belongs. The
discussion above conveys the constitutional intent not to apply this constitutional
ban on the creation of public corporations where the economic viability test would
be irrelevant. The said test would only apply if the corporation is engaged in some
economic activity or business function for the government.
It is undisputed that the BSP performs functions that are impressed with public
interest. In fact, during the consideration of the Senate Bill that eventually became
Republic Act No. 7278, which amended the BSP Charter, one of the bill’s sponsors,
Senator Joey Lina, described the BSP as follows:
Senator Lina. Yes, I can only think of two organizations involving the masses of our
youth, Mr. President, that should be given this kind of a privilege – the Boy Scouts
of the Philippines and the Girl Scouts of the Philippines. Outside of these two
groups, I do not think there are other groups similarly situated.
The Boy Scouts of the Philippines has a long history of providing value formation
to our young, and considering how huge the population of the young people is, at
this point in time, and also considering the importance of having an organization
such as this that will inculcate moral uprightness among the young people, and
further considering that the development of these young people at that tender age
of seven to sixteen is vital in the development of the country producing good
citizens, I believe that we can make an exception of the Boy Scouting movement of
the Philippines from this general prohibition against providing tax exemption and
privileges.57
Furthermore, this Court cannot agree with the dissenting opinion which equates
the changes introduced by Republic Act No. 7278 to the BSP Charter as clear
manifestation of the intent of Congress "to return the BSP to the private sector." It
was not the intent of Congress in enacting Republic Act No. 7278 to give up all
interests in this basic youth organization, which has been its partner in forming
responsible citizens for decades.
In fact, as may be seen in the deliberation of the House Bills that eventually
resulted to Republic Act No. 7278, Congress worked closely with the BSP to
rejuvenate the organization, to bring it back to its former glory reached under its
original charter, Commonwealth Act No. 111, and to correct the perceived ills
introduced by the amendments to its Charter under Presidential Decree No. 460.
The BSP suffered from low morale and decrease in number because the
Secretaries of the different departments in government who were too busy to
attend the meetings of the BSP’s National Executive Board ("the Board") sent
representatives who, as it turned out, changed from meeting to meeting. Thus, the
Scouting Councils established in the provinces and cities were not in touch with
P a g e | 36
what was happening on the national level, but they were left to implement what
was decided by the Board.58
A portion of the legislators’ discussion is quoted below to clearly show their
intent:
HON. DEL MAR. x x x I need not mention to you the value and the tremendous
good that the Boy Scout Movement has done not only for the youth in particular
but for the country in general. And that is why, if we look around, our past and
present national leaders, prominent men in the various fields of endeavor, public
servants in government offices, and civic leaders in the communities all over the
land, and not only in our country but all over the world many if not most of them
have at one time or another been beneficiaries of the Scouting Movement. And so,
it is along this line, Mr. Chairman, that we would like to have the early approval of
this measure if only to pay back what we owe much to the Scouting Movement.
Now, going to the meat of the matter, Mr. Chairman, if I may just – the Scouting
Movement was enacted into law in October 31, 1936 under Commonwealth Act
No. 111. x x x [W]e were acknowledged as the third biggest scouting organization
in the world x x x. And to our mind, Mr. Chairman, this erratic growth and this
decrease in membership [number] is because of the bad policy measures that
were enunciated with the enactment or promulgation by the President before of
Presidential Decree No. 460 which we feel is the culprit of the ills that is flagging
the Boy Scout Movement today. And so, this is specifically what we are attacking,
Mr. Chairman, the disenfranchisement of the National Council in the election of the
national board. x x x. And so, this is what we would like to be appraised of by the
officers of the Boy [Scouts] of the Philippines whom we are also confident, have
the best interest of the Boy Scout Movement at heart and it is in this spirit, Mr.
Chairman, that we see no impediment towards working together, the Boy Scout of
the Philippines officers working together with the House of Representatives in
coming out with a measure that will put back the vigor and enthusiasm of the Boy
Scout Movement. x x x.59 (Emphasis ours.)
The following is another excerpt from the discussion on the House version of the
bill, in the Committee on Government Enterprises:
HON. AQUINO: x x x Well, obviously, the two bills as well as the previous laws that
have created the Boy Scouts of the Philippines did not provide for any direct
government support by way of appropriation from the national budget to support
the activities of this organization. The point here is, and at the same time they have
been subjected to a governmental intervention, which to their mind has been
inimical to the objectives and to the institution per se, that is why they are seeking
legislative fiat to restore back the original mandate that they had under
Commonwealth Act 111. Such having been the experience in the hands of
government, meaning, there has been negative interference on their part and

inasmuch as their mandate is coming from a legislative fiat, then shouldn’t it be,
this rhetorical question, shouldn’t it be better for this organization to seek a
mandate from, let’s say, the government the Corporation Code of the Philippines
and register with the SEC as non-profit non-stock corporation so that government
intervention could be very very minimal. Maybe that’s a rhetorical question, they
may or they may not answer, ano. I don’t know what would be the benefit of a
charter or a mandate being provided for by way of legislation versus a registration
with the SEC under the Corporation Code of the Philippines inasmuch as they don’t
get anything from the government anyway insofar as direct funding. In fact, the
only thing that they got from government was intervention in their affairs. Maybe
we can solicit some commentary comments from the resource persons.
Incidentally, don’t take that as an objection, I’m not objecting. I’m all for the
objectives of these two bills. It just occurred to me that since you have had very
bad experience in the hands of government and you will always be open to such
possible intervention even in the future as long as you have a legislative mandate
or your mandate or your charter coming from legislative action.
xxxx
MR. ESCUDERO: Mr. Chairman, there may be a disadvantage if the Boy Scouts of
the Philippines will be required to register with the SEC. If we are registered with
the SEC, there could be a danger of proliferation of scout organization. Anybody
can organize and then register with the SEC. If there will be a proliferation of this,
then the organization will lose control of the entire organization. Another
disadvantage, Mr. Chairman, anybody can file a complaint in the SEC against the
Boy Scouts of the Philippines and the SEC may suspend the operation or freeze the
assets of the organization and hamper the operation of the organization. I don’t
know, Mr. Chairman, how you look at it but there could be a danger for anybody
filing a complaint against the organization in the SEC and the SEC might suspend
the registration permit of the organization and we will not be able to operate.
HON. AQUINO: Well, that I think would be a problem that will not be exclusive to
corporations registered with the SEC because even if you are government
corporation, court action may be taken against you in other judicial bodies
because the SEC is simply another quasi-judicial body. But, I think, the first point
would be very interesting, the first point that you raised. In effect, what you are
saying is that with the legislative mandate creating your charter, in effect, you
have been given some sort of a franchise with this movement.
MR. ESCUDERO: Yes.
HON. AQUINO: Exclusive franchise of that movement?
MR. ESCUDERO: Yes.
P a g e | 37
HON. AQUINO: Well, that’s very well taken so I will proceed with other issues, Mr.
Chairman. x x x.60 (Emphases added.)
Therefore, even though the amended BSP charter did away with most of the
governmental presence in the BSP Board, this was done to more strongly promote
the BSP’s objectives, which were not supported under Presidential Decree No. 460.
The BSP objectives, as pointed out earlier, are consistent with the public purpose
of the promotion of the well-being of the youth, the future leaders of the country.
The amendments were not done with the view of changing the character of the
BSP into a privatized corporation. The BSP remains an agency attached to a
department of the government, the DECS, and it was not at all stripped of its public
character.
The ownership and control test is likewise irrelevant for a public corporation like
the BSP. To reiterate, the relationship of the BSP, an attached agency, to the
government, through the DECS, is defined in the Revised Administrative Code of
1987. The BSP meets the minimum statutory requirement of an attached
government agency as the DECS Secretary sits at the BSP Board ex officio, thus
facilitating the policy and program coordination between the BSP and the DECS.
Requisites for Declaration of Unconstitutionality Not Met in this Case
The dissenting opinion of Justice Carpio improperly raised the issue of
unconstitutionality of certain provisions of the BSP Charter. Even if the parties
were asked to Comment on the validity of the BSP charter by the Court, this alone
does not comply with the requisites for judicial review, which were clearly set
forth in a recent case:
When questions of constitutional significance are raised, the Court can exercise its
power of judicial review only if the following requisites are present: (1) the
existence of an actual and appropriate case; (2) the existence of personal and
substantial interest on the part of the party raising the constitutional question; (3)
recourse to judicial review is made at the earliest opportunity; and (4) the
constitutional question is the lis mota of the case.61(Emphasis added.)
Thus, when it comes to the exercise of the power of judicial review, the
constitutional issue should be the very lis mota, or threshold issue, of the case, and
that it should be raised by either of the parties. These requirements would be
ignored under the dissent’s rather overreaching view of how this case should have
been decided. True, it was the Court that asked the parties to comment, but the
Court cannot be the one to raise a constitutional issue. Thus, the Court chooses to
once more exhibit restraint in the exercise of its power to pass upon the validity of
a law.

Re: the COA’s Jurisdiction
Regarding the COA’s jurisdiction over the BSP, Section 8 of its amended charter
allows the BSP to receive contributions or donations from the government. Section
8 reads:
Section 8. Any donation or contribution which from time to time may be made to
the Boy Scouts of the Philippines by the Government or any of its subdivisions,
branches, offices, agencies or instrumentalities shall be expended by the Executive
Board in pursuance of this Act.lawph!1
The sources of funds to maintain the BSP were identified before the House
Committee on Government Enterprises while the bill was being deliberated, and
the pertinent portion of the discussion is quoted below:
MR. ESCUDERO. Yes, Mr. Chairman. The question is the sources of funds of the
organization. First, Mr. Chairman, the Boy Scouts of the Philippines do not receive
annual allotment from the government. The organization has to raise its own
funds through fund drives and fund campaigns or fund raising activities. Aside
from this, we have some revenue producing projects in the organization that gives
us funds to support the operation. x x x From time to time, Mr. Chairman, when we
have special activities we request for assistance or financial assistance from
government agencies, from private business and corporations, but this is only
during special activities that the Boy Scouts of the Philippines would conduct
during the year. Otherwise, we have to raise our own funds to support the
organization.62
The nature of the funds of the BSP and the COA’s audit jurisdiction were likewise
brought up in said congressional deliberations, to wit:
HON. AQUINO: x x x Insofar as this organization being a government created
organization, in fact, a government corporation classified as such, are your funds
or your finances subjected to the COA audit?
MR. ESCUDERO: Mr. Chairman, we are not. Our funds is not subjected. We don’t
fall under the jurisdiction of the COA.
HON. AQUINO: All right, but before were you?
MR. ESCUDERO: No, Mr. Chairman.
MR. JESUS: May I? As historical backgrounder, Commonwealth Act 111 was
written by then Secretary Jorge Vargas and before and up to the middle of the
P a g e | 38
Martial Law years, the BSP was receiving a subsidy in the form of an annual… a
one draw from the Sweepstakes. And, this was the case also with the Girl Scouts at
the Anti-TB, but then this was… and the Boy Scouts then because of this funding
partly from government was being subjected to audit in the contributions being
made in the part of the Sweepstakes. But this was removed later during the
Martial Law years with the creation of the Human Settlements Commission. So the
situation right now is that the Boy Scouts does not receive any funding from
government, but then in the case of the local councils and this legislative charter,
so to speak, enables the local councils even the national headquarters in view of
the provisions in the existing law to receive donations from the government or any
of its instrumentalities, which would be difficult if the Boy Scouts is registered as a
private corporation with the Securities and Exchange Commission. Government
bodies would be estopped from making donations to the Boy Scouts, which at
present is not the case because there is the Boy Scouts charter, this
Commonwealth Act 111 as amended by PD 463.
xxxx
HON. AMATONG: Mr. Chairman, in connection with that.
THE CHAIRMAN: Yeah, Gentleman from Zamboanga.
HON. AMATONG: There is no auditing being made because there’s no money put in
the organization, but how about donated funds to this organization? What are the
remedies of the donors of how will they know how their money are being spent?
MR. ESCUDERO: May I answer, Mr. Chairman?
THE CHAIRMAN: Yes, gentleman.
MR. ESCUDERO: The Boy Scouts of the Philippines has an external auditor and by
the charter we are required to submit a financial report at the end of each year to
the National Executive Board. So all the funds donated or otherwise is accounted
for at the end of the year by our external auditor. In this case the SGV.63
Historically, therefore, the BSP had been subjected to government audit in so far as
public funds had been infused thereto. However, this practice should not preclude
the exercise of the audit jurisdiction of COA, clearly set forth under the
Constitution, which pertinently provides:
Section 2. (1) The Commission on Audit shall have the power, authority, and duty
to examine, audit, and settle all accounts pertaining to the revenue and receipts of,
and expenditures or uses of funds and property, owned or held in trust by, or
 P a g e | 39

pertaining to, the Government, or any of its subdivisions, agencies, or

instrumentalities, including government-owned and controlled corporations with
original charters, and on a post-audit basis: (a) constitutional bodies, commissions
and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or
controlled corporations with original charters and their subsidiaries; and (d) such
non-governmental entities receiving subsidy or equity, directly or indirectly, from
or through the Government, which are required by law of the granting institution
to submit to such audit as a condition of subsidy or equity. x x x. 64

Since the BSP, under its amended charter, continues to be a public corporation or a
government instrumentality, we come to the inevitable conclusion that it is subject
to the exercise by the COA of its audit jurisdiction in the manner consistent with
the provisions of the BSP Charter.

WHEREFORE, premises considered, the instant petition for prohibition is

DISMISSED.

SO ORDERED.

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 176579 June 28, 2011
WILSON P. GAMBOA, Petitioner,
vs.
FINANCE SECRETARY MARGARITO B. TEVES, FINANCE UNDERSECRETARY
JOHN P. SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG) IN THEIR
CAPACITIES AS CHAIR AND MEMBERS, RESPECTIVELY, OF THE
PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC
CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET
HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS 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 ARNO V. SANIDAD, Petitioners-in-Intervention.
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.
P a g e | 40
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 ₱25.6
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
₱25,217,556,000 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
Pacific’s 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 Tirso Rivilla. 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 Court’s 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 ₱25,217,556,000. 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
PTIC’s Articles of Incorporation. First Pacific announced its intention to match
Parallax’s 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 government’s 111,415 PTIC shares bore due diligence,
transparency and conformity with existing legal procedures; and (b) First
Pacific’s intended acquisition of the government’s 111,415 PTIC shares
resulting in First Pacific’s 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.
P a g e | 41
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 ₱25,217,556,000; (c) pursuant to the right of first refusal in
favor of PTIC and its shareholders granted in PTIC’s 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 ₱25,217,556,000 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 Pacific’s common shareholdings in PLDT from
30.7 percent to 37 percent, and this, combined with Japanese NTT DoCoMo’s
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 Pacific’s 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 Japan’s NTT DoCoMo, which is the world’s 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
PLDT’s 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 x" 7
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 Court’s 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 ₱25,217,556,000 and the government
delivered the certificates for the 111,415 PTIC shares.
P a g e | 42
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 tourist’s 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. 157360.16 That 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.17There, petitioner Fernandez assailed on a pure question of law the
Regional Trial Court’s Decision of 21 February 2003 via a petition for review
under Rule 45. The Court’s 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 issuewhich 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,
P a g e | 43
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 PLDT’s franchise
could be revoked, a dire consequence directly affecting petitioner’s 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 Tañada 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 Tañada, 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 petitioner’s 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
P a g e | 44
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 PLDT’s 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 petitioner’s arguments and adopt
petitioner’s 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 Pangilinan of PLDT do not dispute that more than 40 percent of the
common shares of PLDT are held by foreigners.
In particular, respondent Nazareno’s 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 petitioner’s 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
petitioner’s 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
P a g e | 45
Similarly, respondent Manuel V. Pangilinan does not define the term "capital" in
Section 11, Article XII of the Constitution. Neither does he refute petitioner’s claim
of foreigners holding more than 40 percent of PLDT’s 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 Court’s jurisdiction over
the petition; (2) petitioner’s lack of standing; (3) mootness of the petition; (4) non-
availability of declaratory relief; and (5) the denial of due process rights.
Moreover, respondent Pangilinan alleges 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 person’s
property (the shareholder’s stock in the utility company) on the basis of another
party’s alleged failure to satisfy a requirement that is a condition only for that
other party’s 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 PLDT’s 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 Court’s 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 Court’s 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
P a g e | 46
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 SEC’s 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 corporation’s
"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,
petitioner’s suggestion to reckon PLDT’s foreign equity only on the basis of PLDT’s
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 petitioner’s view that only common shares should form the basis
for computing a public utility’s 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 Constitution’s 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.
P a g e | 47
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 (₱5.00) 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.
P a g e | 48
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 and entitled 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
P a g e | 49
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-votingpreferred 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 (₱1.00) 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. PLDT’s 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. PLDT’s 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
P a g e | 50
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 PLDT’s 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 PLDT’s 2010 General
Information Sheet (GIS),54 which 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 PLDT’s
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 SIP58preferred shares earn a pittance in dividends
compared to the common shares. PLDT declared dividends for the common shares
at ₱70.00 per share, while the declared dividends for the preferred shares
amounted to a measly ₱1.00 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 PLDT’s 2010 GIS,60 as submitted to the SEC, the par value of PLDT
common shares is ₱5.00 per share, whereas the par value of preferred shares is
₱10.00 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.61 Worse,
preferred shares constitute 77.85% of the authorized capital stock of PLDT while
common shares constitute only 22.15%.62 This undeniably shows that beneficial
interest in PLDT is not with the non-voting preferred shares but with the common
shares, blatantly violating the constitutional requirement of 60 percent Filipino
control and Filipino beneficial ownership in a public utility.
The legal and beneficial ownership of 60 percent of the outstanding capital stock
must rest in the hands of Filipinos in accordance with the constitutional mandate.

Full beneficial ownership of 60 percent of the outstanding capital stock, coupled
with 60 percent of the voting rights, is constitutionally required for the State’s
grant of authority to operate a public utility. The undisputed fact that the PLDT
preferred shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70
of the dividends that PLDT common shares earn, grossly violates the
constitutional requirement of 60 percent Filipino control and Filipino beneficial
ownership of a public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and earn less
than 60 percent of the dividends, of PLDT. This directly contravenes the
express command in Section 11, Article XII of the Constitution that "[n]o franchise,
certificate, or any other form of authorization for the operation of a public utility
shall be granted except to x x x corporations x x x organized under the laws of the
Philippines, at least sixty per centum of whose capital is owned by such
citizens x x x."
To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class
of shares exercises the sole right to vote in the election of directors, and thus
exercise control over PLDT; (2) Filipinos own only 35.73% of PLDT’s 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 ₱5.00 have a
current stock market value of ₱2,328.00 per share,64 while PLDT preferred shares
with a par value of ₱10.00 per share have a current stock market value ranging
from only ₱10.92 to ₱11.06 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 State’s 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
P a g e | 51
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,68this
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.1awphi1
P a g e | 52
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 PLDT’s voting shares, as admitted by respondents and as stated in
PLDT’s 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.
ANTONIO T. CARPIO
Associate Justice

Republic of the Philippines
SUPREME COURT
Baguio City
THIRD DIVISION
G.R. No. 195580 April 21, 2014
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND
DEVELOPMENT, INC., and MCARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
DECISION
VELASCO, JR., J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 filed by
Narra Nickel and Mining Development Corp. (Narra), Tesoro Mining and
Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur), which seeks to
reverse the October 1, 2010 Decision1 and the February 15, 2011 Resolution of the
Court of Appeals (CA).
The Facts
Sometime in December 2006, respondent Redmont Consolidated Mines Corp.
(Redmont), a domestic corporation organized and existing under Philippine laws,
took interest in mining and exploring certain areas of the province of Palawan.
After inquiring with the Department of Environment and Natural Resources
(DENR), it learned that the areas where it wanted to undertake exploration and
mining activities where already covered by Mineral Production Sharing
Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc.
(SMMI), filed an application for an MPSA and Exploration Permit (EP) with the
Mines and Geo-Sciences Bureau (MGB), Region IV-B, Office of the Department of
Environment and Natural Resources (DENR).
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over
1,782 hectares in Barangay Sumbiling, Municipality of Bataraza, Province of
Palawan and EPA-IVB-44 which includes an area of 3,720 hectares in Barangay
Malatagao, Bataraza, Palawan. The MPSA and EP were then transferred to
P a g e | 53
Madridejos Mining Corporation (MMC) and, on November 6, 2006, assigned to
petitioner McArthur.2
Petitioner Narra acquired its MPSA from Alpha Resources and Development
Corporation and Patricia Louise Mining & Development Corporation (PLMDC)
which previously filed an application for an MPSA with the MGB, Region IV-B,
DENR on January 6, 1992. Through the said application, the DENR issued MPSA-
IV-1-12 covering an area of 3.277 hectares in barangays Calategas and San Isidro,
Municipality of Narra, Palawan. Subsequently, PLMDC conveyed, transferred
and/or assigned its rights and interests over the MPSA application in favor of
Narra.
Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled
as MPSA-AMA-IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in Barangays
Malinao and Princesa Urduja, Municipality of Narra, Province of Palawan. SMMI
subsequently conveyed, transferred and assigned its rights and interest over the
said MPSA application to Tesoro.
On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the
DENR three (3) separate petitions for the denial of petitioners’ applications for
MPSA designated as AMA-IVB-153, AMA-IVB-154 and MPSA IV-1-12.
In the petitions, Redmont alleged that at least 60% of the capital stock of
McArthur, Tesoro and Narra are owned and controlled by MBMI Resources, Inc.
(MBMI), a 100% Canadian corporation. Redmont reasoned that since MBMI is a
considerable stockholder of petitioners, it was the driving force behind
petitioners’ filing of the MPSAs over the areas covered by applications since it
knows that it can only participate in mining activities through corporations which
are deemed Filipino citizens. Redmont argued that given that petitioners’ capital
stocks were mostly owned by MBMI, they were likewise disqualified from
engaging in mining activities through MPSAs, which are reserved only for Filipino
citizens.
In their Answers, petitioners averred that they were qualified persons under
Section 3(aq) of Republic Act No. (RA) 7942 or the Philippine Mining Act of 1995
which provided:
Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following
terms, whether in singular or plural, shall mean:
xxxx

(aq) "Qualified person" means any citizen of the Philippines with capacity to
contract, or a corporation, partnership, association, or cooperative organized or
authorized for the purpose of engaging in mining, with technical and financial
capability to undertake mineral resources development and duly registered in
accordance with law at least sixty per cent (60%) of the capital of which is owned
by citizens of the Philippines: Provided, That a legally organized foreign-owned
corporation shall be deemed a qualified person for purposes of granting an
exploration permit, financial or technical assistance agreement or mineral
processing permit.
Additionally, they stated that their nationality as applicants is immaterial because
they also applied for Financial or Technical Assistance Agreements (FTAA)
denominated as AFTA-IVB-09 for McArthur, AFTA-IVB-08 for Tesoro and AFTA-
IVB-07 for Narra, which are granted to foreign-owned corporations. Nevertheless,
they claimed that the issue on nationality should not be raised since McArthur,
Tesoro and Narra are in fact Philippine Nationals as 60% of their capital is owned
by citizens of the Philippines. They asserted that though MBMI owns 40% of the
shares of PLMC (which owns 5,997 shares of Narra),3 40% of the shares of MMC
(which owns 5,997 shares of McArthur)4 and 40% of the shares of SLMC (which, in
turn, owns 5,997 shares of Tesoro),5 the shares of MBMI will not make it the
owner of at least 60% of the capital stock of each of petitioners. They added that
the best tool used in determining the nationality of a corporation is the "control
test," embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of 1991. They
also claimed that the POA of DENR did not have jurisdiction over the issues in
Redmont’s petition since they are not enumerated in Sec. 77 of RA 7942. Finally,
they stressed that Redmont has no personality to sue them because it has no
pending claim or application over the areas applied for by petitioners.
On December 14, 2007, the POA issued a Resolution disqualifying petitioners from
gaining MPSAs. It held:
[I]t is clearly established that respondents are not qualified applicants to engage in
mining activities. On the other hand, [Redmont] having filed its own applications
for an EPA over the areas earlier covered by the MPSA application of respondents
may be considered if and when they are qualified under the law. The violation of
the requirements for the issuance and/or grant of permits over mining areas is
clearly established thus, there is reason to believe that the cancellation and/or
revocation of permits already issued under the premises is in order and open the
areas covered to other qualified applicants.
xxxx
WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining
Inc., Tesoro Mining and Development, Inc., and Narra Nickel Mining and
P a g e | 54
Development Corp. as, DISQUALIFIED for being considered as Foreign
Corporations. Their Mineral Production Sharing Agreement (MPSA) are hereby x x
x DECLARED NULL AND VOID.6
The POA considered petitioners as foreign corporations being "effectively
controlled" by MBMI, a 100% Canadian company and declared their MPSAs null
and void. In the same Resolution, it gave due course to Redmont’s EPAs.
Thereafter, on February 7, 2008, the POA issued an Order7 denying the Motion for
Reconsideration filed by petitioners.
Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a
joint Notice of Appeal8 and Memorandum of Appeal9 with the Mines Adjudication
Board (MAB) while Narra separately filed its Notice of Appeal 10 and Memorandum
of Appeal.11
In their respective memorandum, petitioners emphasized that they are qualified
persons under the law. Also, through a letter, they informed the MAB that they had
their individual MPSA applications converted to FTAAs. McArthur’s FTAA was
denominated as AFTA-IVB-0912 on May 2007, while Tesoro’s MPSA application
was converted to AFTA-IVB-0813 on May 28, 2007, and Narra’s FTAA was
converted to AFTA-IVB-0714 on March 30, 2006.
Pending the resolution of the appeal filed by petitioners with the MAB, Redmont
filed a Complaint15 with the Securities and Exchange Commission (SEC), seeking
the revocation of the certificates for registration of petitioners on the ground that
they are foreign-owned or controlled corporations engaged in mining in violation
of Philippine laws. Thereafter, Redmont filed on September 1, 2008 a
Manifestation and Motion to Suspend Proceeding before the MAB praying for the
suspension of the proceedings on the appeals filed by McArthur, Tesoro and Narra.
Subsequently, on September 8, 2008, Redmont filed before the Regional Trial
Court of Quezon City, Branch 92 (RTC) a Complaint16 for injunction with
application for issuance of a temporary restraining order (TRO) and/or writ of
preliminary injunction, docketed as Civil Case No. 08-63379. Redmont prayed for
the deferral of the MAB proceedings pending the resolution of the Complaint
before the SEC.
But before the RTC can resolve Redmont’s Complaint and applications for
injunctive reliefs, the MAB issued an Order on September 10, 2008, finding the
appeal meritorious. It held:
WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby
REVERSES and SETS ASIDE the Resolution dated 14 December 2007 of the Panel
of Arbitrators of Region IV-B (MIMAROPA) in POA-DENR Case Nos. 2001-01,

2007-02 and 2007-03, and its Order dated 07 February 2008 denying the Motions
for Reconsideration of the Appellants. The Petition filed by Redmont Consolidated
Mines Corporation on 02 January 2007 is hereby ordered DISMISSED.17
Belatedly, on September 16, 2008, the RTC issued an Order18 granting Redmont’s
application for a TRO and setting the case for hearing the prayer for the issuance
of a writ of preliminary injunction on September 19, 2008.
Meanwhile, on September 22, 2008, Redmont filed a Motion for
Reconsideration19 of the September 10, 2008 Order of the MAB. Subsequently, it
filed a Supplemental Motion for Reconsideration20 on September 29, 2008.
Before the MAB could resolve Redmont’s Motion for Reconsideration and
Supplemental Motion for Reconsideration, Redmont filed before the RTC a
Supplemental Complaint21 in Civil Case No. 08-63379.
On October 6, 2008, the RTC issued an Order22 granting the issuance of a writ of
preliminary injunction enjoining the MAB from finally disposing of the appeals of
petitioners and from resolving Redmont’s Motion for Reconsideration and
Supplement Motion for Reconsideration of the MAB’s September 10, 2008
Resolution.
On July 1, 2009, however, the MAB issued a second Order denying Redmont’s
Motion for Reconsideration and Supplemental Motion for Reconsideration and
resolving the appeals filed by petitioners.
Hence, the petition for review filed by Redmont before the CA, assailing the Orders
issued by the MAB. On October 1, 2010, the CA rendered a Decision, the dispositive
of which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated
September 10, 2008 and July 1, 2009 of the Mining Adjudication Board are
reversed and set aside. The findings of the Panel of Arbitrators of the Department
of Environment and Natural Resources that respondents McArthur, Tesoro and
Narra are foreign corporations is upheld and, therefore, the rejection of their
applications for Mineral Product Sharing Agreement should be recommended to
the Secretary of the DENR.
With respect to the applications of respondents McArthur, Tesoro and Narra for
Financial or Technical Assistance Agreement (FTAA) or conversion of their MPSA
applications to FTAA, the matter for its rejection or approval is left for
determination by the Secretary of the DENR and the President of the Republic of
the Philippines.
P a g e | 55
SO ORDERED.23
In a Resolution dated February 15, 2011, the CA denied the Motion for
Reconsideration filed by petitioners.
After a careful review of the records, the CA found that there was doubt as to the
nationality of petitioners when it realized that petitioners had a common major
investor, MBMI, a corporation composed of 100% Canadians. Pursuant to the first
sentence of paragraph 7 of Department of Justice (DOJ) Opinion No. 020, Series of
2005, adopting the 1967 SEC Rules which implemented the requirement of the
Constitution and other laws pertaining to the exploitation of natural resources, the
CA used the "grandfather rule" to determine the nationality of petitioners. It
provided:
Shares belonging to corporations or partnerships at least 60% of the capital of
which is owned by Filipino citizens shall be considered as of Philippine nationality,
but if the percentage of Filipino ownership in the corporation or partnership is
less than 60%, only the number of shares corresponding to such percentage shall
be counted as of Philippine nationality. Thus, if 100,000 shares are registered in
the name of a corporation or partnership at least 60% of the capital stock or
capital, respectively, of which belong to Filipino citizens, all of the shares shall be
recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital
stock or capital of the corporation or partnership, respectively, belongs to Filipino
citizens, only 50,000 shares shall be recorded as belonging to aliens. 24(emphasis
supplied)
In determining the nationality of petitioners, the CA looked into their corporate
structures and their corresponding common shareholders. Using the grandfather
rule, the CA discovered that MBMI in effect owned majority of the common stocks
of the petitioners as well as at least 60% equity interest of other majority
shareholders of petitioners through joint venture agreements. The CA found that
through a "web of corporate layering, it is clear that one common controlling
investor in all mining corporations involved x x x is MBMI."25 Thus, it concluded
that petitioners McArthur, Tesoro and Narra are also in partnership with, or
privies-in-interest of, MBMI.
Furthermore, the CA viewed the conversion of the MPSA applications of
petitioners into FTAA applications suspicious in nature and, as a consequence, it
recommended the rejection of petitioners’ MPSA applications by the Secretary of
the DENR.
With regard to the settlement of disputes over rights to mining areas, the CA
pointed out that the POA has jurisdiction over them and that it also has the power
to determine the of nationality of petitioners as a prerequisite of the Constitution

prior the conferring of rights to "co-production, joint venture or production-
sharing agreements" of the state to mining rights. However, it also stated that the
POA’s jurisdiction is limited only to the resolution of the dispute and not on the
approval or rejection of the MPSAs. It stipulated that only the Secretary of the
DENR is vested with the power to approve or reject applications for MPSA.
Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution
which considered petitioners McArthur, Tesoro and Narra as foreign corporations.
Nevertheless, the CA determined that the POA’s declaration that the MPSAs of
McArthur, Tesoro and Narra are void is highly improper.
While the petition was pending with the CA, Redmont filed with the Office of the
President (OP) a petition dated May 7, 2010 seeking the cancellation of
petitioners’ FTAAs. The OP rendered a Decision26 on April 6, 2011, wherein it
canceled and revoked petitioners’ FTAAs for violating and circumventing the
"Constitution x x x[,] the Small Scale Mining Law and Environmental Compliance
Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O.
584."27 The OP, in affirming the cancellation of the issued FTAAs, agreed with
Redmont stating that petitioners committed violations against the
abovementioned laws and failed to submit evidence to negate them. The Decision
further quoted the December 14, 2007 Order of the POA focusing on the alleged
misrepresentation and claims made by petitioners of being domestic or Filipino
corporations and the admitted continued mining operation of PMDC using their
locally secured Small Scale Mining Permit inside the area earlier applied for an
MPSA application which was eventually transferred to Narra. It also agreed with
the POA’s estimation that the filing of the FTAA applications by petitioners is a
clear admission that they are "not capable of conducting a large scale mining
operation and that they need the financial and technical assistance of a foreign
entity in their operation, that is why they sought the participation of MBMI
Resources, Inc."28 The Decision further quoted:
The filing of the FTAA application on June 15, 2007, during the pendency of the
case only demonstrate the violations and lack of qualification of the respondent
corporations to engage in mining. The filing of the FTAA application conversion
which is allowed foreign corporation of the earlier MPSA is an admission that
indeed the respondent is not Filipino but rather of foreign nationality who is
disqualified under the laws. Corporate documents of MBMI Resources, Inc.
furnished its stockholders in their head office in Canada suggest that they are
conducting operation only through their local counterparts.29
The Motion for Reconsideration of the Decision was further denied by the OP in a
Resolution30 dated July 6, 2011. Petitioners then filed a Petition for Review on
Certiorari of the OP’s Decision and Resolution with the CA, docketed as CA-G.R. SP
No. 120409. In the CA Decision dated February 29, 2012, the CA affirmed the
P a g e | 56
Decision and Resolution of the OP. Thereafter, petitioners appealed the same CA
decision to this Court which is now pending with a different division.
Thus, the instant petition for review against the October 1, 2010 Decision of the
CA. Petitioners put forth the following errors of the CA:
I.
The Court of Appeals erred when it did not dismiss the case for mootness
despite the fact that the subject matter of the controversy, the MPSA
Applications, have already been converted into FTAA applications and that the
same have already been granted.
II.
The Court of Appeals erred when it did not dismiss the case for lack of
jurisdiction considering that the Panel of Arbitrators has no jurisdiction to
determine the nationality of Narra, Tesoro and McArthur.
III.
The Court of Appeals erred when it did not dismiss the case on account of
Redmont’s willful forum shopping.
IV.
The Court of Appeals’ ruling that Narra, Tesoro and McArthur are foreign
corporations based on the "Grandfather Rule" is contrary to law, particularly the
express mandate of the Foreign Investments Act of 1991, as amended, and the
FIA Rules.
V.
The Court of Appeals erred when it applied the exceptions to the res inter alios
acta rule.
VI.
The Court of Appeals erred when it concluded that the conversion of the MPSA
Applications into FTAA Applications were of "suspicious nature" as the same is
based on mere conjectures and surmises without any shred of evidence to show
the same.31
We find the petition to be without merit.
This case not moot and academic
The claim of petitioners that the CA erred in not rendering the instant case as
moot is without merit.

Basically, a case is said to be moot and/or academic when it "ceases to present a
justiciable controversy by virtue of supervening events, so that a declaration
thereon would be of no practical use or value."32 Thus, the courts "generally
decline jurisdiction over the case or dismiss it on the ground of mootness."33
The "mootness" principle, however, does accept certain exceptions and the mere
raising of an issue of "mootness" will not deter the courts from trying a case when
there is a valid reason to do so. In David v. Macapagal-Arroyo (David), the Court
provided four instances where courts can decide an otherwise moot case, thus:
1.) There is a grave violation of the Constitution;
2.) The exceptional character of the situation and paramount public
interest is involved;
3.) When constitutional issue raised requires formulation of controlling
principles to guide the bench, the bar, and the public; and
4.) The case is capable of repetition yet evading review.34
All of the exceptions stated above are present in the instant case. We of this Court
note that a grave violation of the Constitution, specifically Section 2 of Article XII,
is being committed by a foreign corporation right under our country’s nose
through a myriad of corporate layering under different, allegedly, Filipino
corporations. The intricate corporate layering utilized by the Canadian company,
MBMI, is of exceptional character and involves paramount public interest since it
undeniably affects the exploitation of our Country’s natural resources. The
corresponding actions of petitioners during the lifetime and existence of the
instant case raise questions as what principle is to be applied to cases with similar
issues. No definite ruling on such principle has been pronounced by the Court;
hence, the disposition of the issues or errors in the instant case will serve as a
guide "to the bench, the bar and the public."35 Finally, the instant case is capable of
repetition yet evading review, since the Canadian company, MBMI, can keep on
utilizing dummy Filipino corporations through various schemes of corporate
layering and conversion of applications to skirt the constitutional prohibition
against foreign mining in Philippine soil.
Conversion of MPSA applications to FTAA applications
We shall discuss the first error in conjunction with the sixth error presented by
petitioners since both involve the conversion of MPSA applications to FTAA
applications. Petitioners propound that the CA erred in ruling against them since
the questioned MPSA applications were already converted into FTAA applications;
P a g e | 57
thus, the issue on the prohibition relating to MPSA applications of foreign mining
corporations is academic. Also, petitioners would want us to correct the CA’s
finding which deemed the aforementioned conversions of applications as
suspicious in nature, since it is based on mere conjectures and surmises and not
supported with evidence.
We disagree.
The CA’s analysis of the actions of petitioners after the case was filed against them
by respondent is on point. The changing of applications by petitioners from one
type to another just because a case was filed against them, in truth, would raise
not a few sceptics’ eyebrows. What is the reason for such conversion? Did the said
conversion not stem from the case challenging their citizenship and to have the
case dismissed against them for being "moot"? It is quite obvious that it is
petitioners’ strategy to have the case dismissed against them for being "moot."
Consider the history of this case and how petitioners responded to every action
done by the court or appropriate government agency: on January 2, 2007,
Redmont filed three separate petitions for denial of the MPSA applications of
petitioners before the POA. On June 15, 2007, petitioners filed a conversion of
their MPSA applications to FTAAs. The POA, in its December 14, 2007 Resolution,
observed this suspect change of applications while the case was pending before it
and held:
The filing of the Financial or Technical Assistance Agreement application is a clear
admission that the respondents are not capable of conducting a large scale mining
operation and that they need the financial and technical assistance of a foreign
entity in their operation that is why they sought the participation of MBMI
Resources, Inc. The participation of MBMI in the corporation only proves the fact
that it is the Canadian company that will provide the finances and the resources to
operate the mining areas for the greater benefit and interest of the same and not
the Filipino stockholders who only have a less substantial financial stake in the
corporation.
xxxx
x x x The filing of the FTAA application on June 15, 2007, during the pendency of
the case only demonstrate the violations and lack of qualification of the
respondent corporations to engage in mining. The filing of the FTAA application
conversion which is allowed foreign corporation of the earlier MPSA is an
admission that indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws. Corporate documents of MBMI
Resources, Inc. furnished its stockholders in their head office in Canada suggest
that they are conducting operation only through their local counterparts.36

On October 1, 2010, the CA rendered a Decision which partially granted the
petition, reversing and setting aside the September 10, 2008 and July 1, 2009
Orders of the MAB. In the said Decision, the CA upheld the findings of the POA of
the DENR that the herein petitioners are in fact foreign corporations thus a
recommendation of the rejection of their MPSA applications were recommended
to the Secretary of the DENR. With respect to the FTAA applications or conversion
of the MPSA applications to FTAAs, the CA deferred the matter for the
determination of the Secretary of the DENR and the President of the Republic of
the Philippines.37
In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for
the dismissal of the petition asserting that on April 5, 2010, then President Gloria
Macapagal-Arroyo signed and issued in their favor FTAA No. 05-2010-IVB, which
rendered the petition moot and academic. However, the CA, in a Resolution dated
February 15, 2011 denied their motion for being a mere "rehash of their claims
and defenses."38 Standing firm on its Decision, the CA affirmed the ruling that
petitioners are, in fact, foreign corporations. On April 5, 2011, petitioners elevated
the case to us via a Petition for Review on Certiorari under Rule 45, questioning
the Decision of the CA. Interestingly, the OP rendered a Decision dated April 6,
2011, a day after this petition for review was filed, cancelling and revoking the
FTAAs, quoting the Order of the POA and stating that petitioners are foreign
corporations since they needed the financial strength of MBMI, Inc. in order to
conduct large scale mining operations. The OP Decision also based the cancellation
on the misrepresentation of facts and the violation of the "Small Scale Mining Law
and Environmental Compliance Certificate as well as Sections 3 and 8 of the
Foreign Investment Act and E.O. 584."39 On July 6, 2011, the OP issued a
Resolution, denying the Motion for Reconsideration filed by the petitioners.
Respondent Redmont, in its Comment dated October 10, 2011, made known to the
Court the fact of the OP’s Decision and Resolution. In their Reply, petitioners chose
to ignore the OP Decision and continued to reuse their old arguments claiming that
they were granted FTAAs and, thus, the case was moot. Petitioners filed a
Manifestation and Submission dated October 19, 2012,40 wherein they asserted
that the present petition is moot since, in a remarkable turn of events, MBMI was
able to sell/assign all its shares/interest in the "holding companies" to DMCI
Mining Corporation (DMCI), a Filipino corporation and, in effect, making their
respective corporations fully-Filipino owned.
Again, it is quite evident that petitioners have been trying to have this case
dismissed for being "moot." Their final act, wherein MBMI was able to allegedly
sell/assign all its shares and interest in the petitioner "holding companies" to
DMCI, only proves that they were in fact not Filipino corporations from the start.
The recent divesting of interest by MBMI will not change the stand of this Court
with respect to the nationality of petitioners prior the suspicious change in their
P a g e | 58
corporate structures. The new documents filed by petitioners are factual evidence
that this Court has no power to verify.
The only thing clear and proved in this Court is the fact that the OP declared that
petitioner corporations have violated several mining laws and made
misrepresentations and falsehood in their applications for FTAA which lead to the
revocation of the said FTAAs, demonstrating that petitioners are not beyond going
against or around the law using shifty actions and strategies. Thus, in this instance,
we can say that their claim of mootness is moot in itself because their defense of
conversion of MPSAs to FTAAs has been discredited by the OP Decision.
Grandfather test
The main issue in this case is centered on the issue of petitioners’ nationality,
whether Filipino or foreign. In their previous petitions, they had been adamant in
insisting that they were Filipino corporations, until they submitted their
Manifestation and Submission dated October 19, 2012 where they stated the
alleged change of corporate ownership to reflect their Filipino ownership. Thus,
there is a need to determine the nationality of petitioner corporations.
Basically, there are two acknowledged tests in determining the nationality of a
corporation: the control test and the grandfather rule. Paragraph 7 of DOJ Opinion
No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented the
requirement of the Constitution and other laws pertaining to the controlling
interests in enterprises engaged in the exploitation of natural resources owned by
Filipino citizens, provides:
Shares belonging to corporations or partnerships at least 60% of the capital of
which is owned by Filipino citizens shall be considered as of Philippine nationality,
but if the percentage of Filipino ownership in the corporation or partnership is
less than 60%, only the number of shares corresponding to such percentage shall
be counted as of Philippine nationality. Thus, if 100,000 shares are registered in
the name of a corporation or partnership at least 60% of the capital stock or
capital, respectively, of which belong to Filipino citizens, all of the shares shall be
recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital
stock or capital of the corporation or partnership, respectively, belongs to Filipino
citizens, only 50,000 shares shall be counted as owned by Filipinos and the other
50,000 shall be recorded as belonging to aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to
corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality," pertains to the
control test or the liberal rule. On the other hand, the second part of the DOJ
Opinion which provides, "if the percentage of the Filipino ownership in the

corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as Philippine nationality,"
pertains to the stricter, more stringent grandfather rule.
Prior to this recent change of events, petitioners were constant in advocating the
application of the "control test" under RA 7042, as amended by RA 8179,
otherwise known as the Foreign Investments Act (FIA), rather than using the
stricter grandfather rule. The pertinent provision under Sec. 3 of the FIA provides:
SECTION 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 the citizens of the
Philippines; 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
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 were 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, in order
that the corporation shall be considered a Philippine national. (emphasis supplied)
The grandfather rule, petitioners reasoned, has no leg to stand on in the instant
case since the definition of a "Philippine National" under Sec. 3 of the FIA does not
provide for it. They further claim that the grandfather rule "has been abandoned
and is no longer the applicable rule."41 They also opined that the last portion of
Sec. 3 of the FIA admits the application of a "corporate layering" scheme of
corporations. Petitioners claim that the clear and unambiguous wordings of the
statute preclude the court from construing it and prevent the court’s use of
discretion in applying the law. They said that the plain, literal meaning of the
statute meant the application of the control test is obligatory.
We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used
to circumvent the Constitution and pertinent laws, then it becomes illegal. Further,
the pronouncement of petitioners that the grandfather rule has already been
abandoned must be discredited for lack of basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other
mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife,
P a g e | 59
flora and fauna, and other natural resources are owned by the State. With the
exception of agricultural lands, all other natural resources shall not be alienated.
The exploration, development, and utilization of natural resources shall be under
the full control and supervision of the State. The State may directly undertake such
activities, or it may enter into co-production, joint venture or production-sharing
agreements with Filipino citizens, or corporations or associations at least sixty per
centum of whose capital is owned by such citizens. Such agreements may be for a
period not exceeding twenty-five years, renewable for not more than twenty-five
years, and under such terms and conditions as may be provided by law.
xxxx
The President may enter into agreements with Foreign-owned corporations
involving either technical or financial assistance for large-scale exploration,
development, and utilization of minerals, petroleum, and other mineral oils
according to the general terms and conditions provided by law, based on real
contributions to the economic growth and general welfare of the country. In such
agreements, the State shall promote the development and use of local scientific
and technical resources. (emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State entering into different
types of agreements for the exploration, development, and utilization of natural
resources with entities who are deemed Filipino due to 60 percent ownership of
capital is pertinent to this case, since the issues are centered on the utilization of
our country’s natural resources or specifically, mining. Thus, there is a need to
ascertain the nationality of petitioners since, as the Constitution so provides, such
agreements are only allowed corporations or associations "at least 60 percent of
such capital is owned by such citizens." The deliberations in the Records of the
1986 Constitutional Commission shed light on how a citizenship of a corporation
will be determined:
Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an
independent national economy is freedom from undue foreign control? What is
the meaning of undue foreign control?
MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national
sovereignty and the welfare of the Filipino in the economic sphere.
MR. BENNAGEN: Why does it have to be qualified still with the word "undue"?
Why not simply freedom from foreign control? I think that is the meaning of
independence, because as phrased, it still allows for foreign control.

MR. VILLEGAS: It will now depend on the interpretation because if, for example,
we retain the 60/40 possibility in the cultivation of natural resources, 40 percent
involves some control; not total control, but some control.
MR. BENNAGEN: In any case, I think in due time we will propose some
amendments.
MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.
Mr. BENNAGEN: Yes.
Thank you, Mr. Vice-President.
xxxx
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 the 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 with a draft. The phrase that is
contained here which we adopted from the UP draft is ‘60 percent of the 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?
P a g e | 60
MR. VILLEGAS: Yes, that is the understanding of the Committee.
MR. NOLLEDO: Therefore, we need additional Filipino capital?
MR. VILLEGAS: Yes.42 (emphasis supplied)
It is apparent that it is the intention of the framers of the Constitution to apply the
grandfather rule in cases where corporate layering is present.
Elementary in statutory construction is when there is conflict between the
Constitution and a statute, the Constitution will prevail. In this instance,
specifically pertaining to the provisions under Art. XII of the Constitution on
National Economy and Patrimony, Sec. 3 of the FIA will have no place of
application. As decreed by the honorable framers of our Constitution, the
grandfather rule prevails and must be applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:
The above-quoted SEC Rules provide for the manner of calculating the Filipino
interest in a corporation for purposes, among others, of determining compliance
with nationality requirements (the ‘Investee Corporation’). Such manner of
computation is necessary since the shares in the Investee Corporation may be
owned both by individual stockholders (‘Investing Individuals’) and by
corporations and partnerships (‘Investing Corporation’). The said rules thus
provide for the determination of nationality depending on the ownership of the
Investee Corporation and, in certain instances, the Investing Corporation.
Under the above-quoted SEC Rules, there are two cases in determining the
nationality of the Investee Corporation. The first case is the ‘liberal rule’, later
coined by the SEC as the Control Test in its 30 May 1990 Opinion, and pertains to
the portion in said Paragraph 7 of the 1967 SEC Rules which states, ‘(s)hares
belonging to corporations or partnerships at least 60% of the capital of which is
owned by Filipino citizens shall be considered as of Philippine nationality.’ Under
the liberal Control Test, there is no need to further trace the ownership of the 60%
(or more) Filipino stockholdings of the Investing Corporation since a corporation
which is at least 60% Filipino-owned is considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper and pertains to
the portion in said Paragraph 7 of the 1967 SEC Rules which states, "but if the
percentage of Filipino ownership in the corporation or partnership is less than
60%, only the number of shares corresponding to such percentage shall be
counted as of Philippine nationality." Under the Strict Rule or Grandfather Rule
Proper, the combined totals in the Investing Corporation and the Investee
 P a g e | 61

Corporation must be traced (i.e., "grandfathered") to determine the total McArthur Mining, Inc.
percentage of Filipino ownership.
To establish the actual ownership, interest or participation of MBMI in each of
Moreover, the ultimate Filipino ownership of the shares must first be traced to the petitioners’ corporate structure, they have to be "grandfathered."
level of the Investing Corporation and added to the shares directly owned in the
Investee Corporation x x x. As previously discussed, McArthur acquired its MPSA application from MMC,
which acquired its application from SMMI. McArthur has a capital stock of ten
xxxx million pesos (PhP 10,000,000) divided into 10,000 common shares at one
thousand pesos (PhP 1,000) per share, subscribed to by the following:44
In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule
or the second part of the SEC Rule applies only when the 60-40 Filipino-foreign Name Nationality Number of Amount Amount Paid
equity ownership is in doubt (i.e., in cases where the joint venture corporation Shares Subscribed
with Filipino and foreign stockholders with less than 60% Filipino stockholdings
[or 59%] invests in other joint venture corporation which is either 60-40% Madridejos Filipino 5,997 PhP PhP 825,000.00
Filipino-alien or the 59% less Filipino). Stated differently, where the 60-40 Mining 5,997,000.00
Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will not Corporation
apply. (emphasis supplied)
MBMI Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60
Resources,
After a scrutiny of the evidence extant on record, the Court finds that this case calls Inc.
for the application of the grandfather rule since, as ruled by the POA and affirmed
by the OP, doubt prevails and persists in the corporate ownership of petitioners. Lauro L. Filipino 1 PhP 1,000.00 PhP 1,000.00
Also, as found by the CA, doubt is present in the 60-40 Filipino equity ownership of Salazar
petitioners Narra, McArthur and Tesoro, since their common investor, the 100%
Canadian corporation––MBMI, funded them. However, petitioners also claim that Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
there is "doubt" only when the stockholdings of Filipinos are less than 60%. 43 Esguerra
Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
The assertion of petitioners that "doubt" only exists when the stockholdings are Agcaoili
less than 60% fails to convince this Court. DOJ Opinion No. 20, which petitioners
quoted in their petition, only made an example of an instance where "doubt" as to Michael T. American 1 PhP 1,000.00 PhP 1,000.00
the ownership of the corporation exists. It would be ludicrous to limit the Mason
application of the said word only to the instances where the stockholdings of non- Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00
Filipino stockholders are more than 40% of the total stockholdings in a Cawkell
corporation. The corporations interested in circumventing our laws would clearly
strive to have "60% Filipino Ownership" at face value. It would be senseless for Total 10,000 PhP PhP 2,708,174.60
these applying corporations to state in their respective articles of incorporation 10,000,000.00 (emphasis
that they have less than 60% Filipino stockholders since the applications will be supplied)
denied instantly. Thus, various corporate schemes and layerings are utilized to
circumvent the application of the Constitution.
Interestingly, looking at the corporate structure of MMC, we take note that it has a
similar structure and composition as McArthur. In fact, it would seem that MBMI is
Obviously, the instant case presents a situation which exhibits a scheme employed also a major investor and "controls"45 MBMI and also, similar nominal
by stockholders to circumvent the law, creating a cloud of doubt in the Court’s shareholders were present, i.e. Fernando B. Esguerra (Esguerra), Lauro L. Salazar
mind. To determine, therefore, the actual participation, direct or indirect, of MBMI, (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):
the grandfather rule must be used.
 P a g e | 62

Madridejos Mining Corporation it holds directly and indirectly a 60% effective equity interest in the Olympic
Properties.46 Quoting the said Annual report:
Name Nationality Number of Amount Amount Paid
Shares Subscribed On September 9, 2004, the Company and Olympic Mines & Development
Corporation ("Olympic") entered into a series of agreements including a Property
Olympic Mines Filipino 6,663 PhP PhP 0 Purchase and Development Agreement (the Transaction Documents) with respect
& 6,663,000.00 to three nickel laterite properties in Palawan, Philippines (the "Olympic
Properties"). The Transaction Documents effectively establish a joint venture
Development between the Company and Olympic for purposes of developing the Olympic
Properties. The Company holds directly and indirectly an initial 60% interest in
Corp. the joint venture. Under certain circumstances and upon achieving certain
milestones, the Company may earn up to a 100% interest, subject to a 2.5% net
MBMI Canadian 3,331 PhP PhP 2,803,900.00 revenue royalty.47 (emphasis supplied)
Resources, 3,331,000.00
Thus, as demonstrated in this first corporation, McArthur, when it is
Inc. "grandfathered," company layering was utilized by MBMI to gain control over
McArthur. It is apparent that MBMI has more than 60% or more equity interest in
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00 McArthur, making the latter a foreign corporation.
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Tesoro Mining and Development, Inc.
Esguerra
Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00 million pesos (PhP 10,000,000) divided into ten thousand (10,000) common
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00 shares at PhP 1,000 per share, as demonstrated below:

Hernando [[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/apri
Michael T. American 1 PhP 1,000.00 PhP 1,000.00 l2014/195580.pdf]]
Mason
Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00 Name Nationality Number Amount Amount
Cawkell of Paid
Total 10,000 PhP PhP 2,809,900.00 Subscribed
10,000,000.00 Shares
(emphasis Sara Marie Filipino 5,997 PhP PhP
supplied) 5,997,000.00 825,000.00
Mining, Inc.
Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any
amount with respect to the number of shares they subscribed to in the MBMI Canadian 3,998 PhP PhP
corporation, which is quite absurd since Olympic is the major stockholder in MMC. 3,998,000.00 1,878,174.60
MBMI’s 2006 Annual Report sheds light on why Olympic failed to pay any amount Resources,
with respect to the number of shares it subscribed to. It states that Olympic Inc.
entered into joint venture agreements with several Philippine companies, wherein
 P a g e | 63

Lauro L. Filipino 1 PhP 1,000.00 PhP Olympic Mines & Filipino 6,663 PhP PhP 0
Salazar 1,000.00 6,663,000.00
Development
Fernando Filipino 1 PhP 1,000.00 PhP
B. 1,000.00
Corp.

Esguerra MBMI Canadian 3,331 PhP PhP 2,794,000.00

Resources, 3,331,000.00
Manuel A. Filipino 1 PhP 1,000.00 PhP
1,000.00
Inc.
Agcaoili
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Michael T. American 1 PhP 1,000.00 PhP
Mason 1,000.00 Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Kenneth Canadian 1 PhP 1,000.00 PhP
Esguerra
Cawkell 1,000.00
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Total 10,000 PhP PhP
10,000,000.00 2,708,174.60
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00
(emphasis
Hernando
supplied)
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the
same figures as the corporate structure of petitioner McArthur, down to the last Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
centavo. All the other shareholders are the same: MBMI, Salazar, Esguerra,
Agcaoili, Mason and Cawkell. The figures under "Nationality," "Number of Shares," Total 10,000 PhP PhP 2,809,900.00
"Amount Subscribed," and "Amount Paid" are exactly the same. Delving deeper, we 10,000,000.00
scrutinize SMMI’s corporate structure: (emphasis
supplied)
Sara Marie Mining, Inc.
After subsequently studying SMMI’s corporate structure, it is not farfetched for us
[[reference to spot the glaring similarity between SMMI and MMC’s corporate structure. Again,
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/apri the presence of identical stockholders, namely: Olympic, MBMI, Amanti Limson
l2014/195580.pdf]] (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell. The figures under the
headings "Nationality," "Number of Shares," "Amount Subscribed," and "Amount
Name Nationality Number Amount Amount PaidPaid" are exactly the same except for the amount paid by MBMI which now reflects
of the amount of two million seven hundred ninety four thousand pesos (PhP
2,794,000). Oddly, the total value of the amount paid is two million eight hundred
Subscribed
nine thousand nine hundred pesos (PhP 2,809,900).
Shares
 P a g e | 64

Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
participation in SMMI’s corporate structure, it is clear that MBMI is in control of
Tesoro and owns 60% or more equity interest in Tesoro. This makes petitioner
Tesoro a non-Filipino corporation and, thus, disqualifies it to participate in the Agcaoili
exploitation, utilization and development of our natural resources.
Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00
Narra Nickel Mining and Development Corporation
Bocalan
Moving on to the last petitioner, Narra, which is the transferee and assignee of Bayani H. Filipino 1 PhP 1,000.00 PhP 1,000.00
PLMDC’s MPSA application, whose corporate structure’s arrangement is similar to Agabin
that of the first two petitioners discussed. The capital stock of Narra is ten million
pesos (PhP 10,000,000), which is divided into ten thousand common shares Robert L. American 1 PhP 1,000.00 PhP 1,000.00
(10,000) at one thousand pesos (PhP 1,000) per share, shown as follows:
McCurdy
[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/apri Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00
l2014/195580.pdf]] Cawkell

Total 10,000 PhP PhP

Name Nationality Number Amount Amount Paid
10,000,000.00 2,800,000.00
of
(emphasis
Subscribed supplied)
Shares

Patricia Louise Filipino 5,997 PhP PhP Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and
5,997,000.00 1,677,000.00 Esguerra, is present in this corporate structure.
Mining &
Patricia Louise Mining & Development Corporation
Development
Using the grandfather method, we further look and examine PLMDC’s corporate
Corp. structure:

MBMI Canadian 3,998 PhP PhP

Name Nationality Number Amount Amount Paid
3,996,000.00 1,116,000.00
of Shares Subscribed
Resources, Inc.
Palawan Alpha South Filipino 6,596 PhP PhP 0
Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00 Resources 6,596,000.00
Development
Mendoza, Jr. Corporation
MBMI Resources, Canadian 3,396 PhP PhP
Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00
3,396,000.00 2,796,000.00
Inc.
Fernandez
 P a g e | 65

Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00 Pursuant to the Olympic joint venture agreement the Company holds directly and
indirectly an effective equity interest in the Olympic Property of 60.0%. Pursuant
Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00 to a shareholders’ agreement, the Company exercises joint control over the
companies in the Olympic Group.
Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00
Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00 (b) Alpha Group
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
The Philippine companies holding the Alpha Property, and the ownership interests
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00 therein, are as follows:

Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00 Alpha- Philippines (the "Alpha Group")
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Patricia Louise Mining Development Inc. ("Patricia") 34.0%
Total 10,000 PhP PhP
10,000,000.00 2,708,174.60
Narra Nickel Mining & Development Corporation (Narra) 60.4%
(emphasis
supplied)
Under a joint venture agreement the Company holds directly and indirectly an
effective equity interest in the Alpha Property of 60.4%. Pursuant to a
Yet again, the usual players in petitioners’ corporate structures are present. shareholders’ agreement, the Company exercises joint control over the companies
Similarly, the amount of money paid by the 2nd tier majority stock holder, in this in the Alpha Group.48 (emphasis supplied)
case, Palawan Alpha South Resources and Development Corp. (PASRDC), is zero.
Concluding from the above-stated facts, it is quite safe to say that petitioners
Studying MBMI’s Summary of Significant Accounting Policies dated October 31, McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian
2005 explains the reason behind the intricate corporate layering that MBMI corporation, owns 60% or more of their equity interests. Such conclusion is
immersed itself in: derived from grandfathering petitioners’ corporate owners, namely: MMI, SMMI
and PLMDC. Going further and adding to the picture, MBMI’s Summary of
JOINT VENTURES The Company’s ownership interests in various mining ventures Significant Accounting Policies statement– –regarding the "joint venture"
engaged in the acquisition, exploration and development of mineral properties in agreements that it entered into with the "Olympic" and "Alpha" groups––involves
the Philippines is described as follows: SMMI, Tesoro, PLMDC and Narra. Noticeably, the ownership of the "layered"
corporations boils down to MBMI, Olympic or corporations under the "Alpha"
(a) Olympic Group group wherein MBMI has joint venture agreements with, practically exercising
majority control over the corporations mentioned. In effect, whether looking at the
The Philippine companies holding the Olympic Property, and the ownership and capital structure or the underlying relationships between and among the
interests therein, are as follows: corporations, petitioners are NOT Filipino nationals and must be considered
foreign since 60% or more of their capital stocks or equity interests are owned by
MBMI.
Olympic- Philippines (the "Olympic Group")
Application of the res inter alios acta rule
Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%
Petitioners question the CA’s use of the exception of the res inter alios acta or the
Tesoro Mining & Development, Inc. (Tesoro) 60.0%
"admission by co-partner or agent" rule and "admission by privies" under the
Rules of Court in the instant case, by pointing out that statements made by MBMI

should not be admitted in this case since it is not a party to the case and that it is
not a "partner" of petitioners.
Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:
Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or
agent of the party within the scope of his authority and during the existence of the
partnership or agency, may be given in evidence against such party after the
partnership or agency is shown by evidence other than such act or declaration
itself. The same rule applies to the act or declaration of a joint owner, joint debtor,
or other person jointly interested with the party.
Sec. 31. Admission by privies.- Where one derives title to property from another,
the act, declaration, or omission of the latter, while holding the title, in relation to
the property, is evidence against the former.
Petitioners claim that before the above-mentioned Rule can be applied to a case,
"the partnership relation must be shown, and that proof of the fact must be made
by evidence other than the admission itself."49 Thus, petitioners assert that the CA
erred in finding that a partnership relationship exists between them and MBMI
because, in fact, no such partnership exists.
Partnerships vs. joint venture agreements
Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by
stating that "by entering into a joint venture, MBMI have a joint interest" with
Narra, Tesoro and McArthur. They challenged the conclusion of the CA which
pertains to the close characteristics of
"partnerships" and "joint venture agreements." Further, they asserted that before
this particular partnership can be formed, it should have been formally reduced
into writing since the capital involved is more than three thousand pesos (PhP
3,000). Being that there is no evidence of written agreement to form a partnership
between petitioners and MBMI, no partnership was created.
We disagree.
A partnership is defined as two or more persons who bind themselves to
contribute money, property, or industry to a common fund with the intention of
dividing the profits among themselves.50 On the other hand, joint ventures have
been deemed to be "akin" to partnerships since it is difficult to distinguish
between joint ventures and partnerships. Thus:
P a g e | 66
[T]he relations of the parties to a joint venture and the nature of their association
are so similar and closely akin to a partnership that it is ordinarily held that their
rights, duties, and liabilities are to be tested by rules which are closely analogous
to and substantially the same, if not exactly the same, as those which govern
partnership. In fact, it has been said that the trend in the law has been to blur the
distinctions between a partnership and a joint venture, very little law being found
applicable to one that does not apply to the other.51
Though some claim that partnerships and joint ventures are totally different
animals, there are very few rules that differentiate one from the other; thus, joint
ventures are deemed "akin" or similar to a partnership. In fact, in joint venture
agreements, rules and legal incidents governing partnerships are applied.52
Accordingly, culled from the incidents and records of this case, it can be assumed
that the relationships entered between and among petitioners and MBMI are no
simple "joint venture agreements." As a rule, corporations are prohibited from
entering into partnership agreements; consequently, corporations enter into joint
venture agreements with other corporations or partnerships for certain
transactions in order to form "pseudo partnerships."
Obviously, as the intricate web of "ventures" entered into by and among
petitioners and MBMI was executed to circumvent the legal prohibition against
corporations entering into partnerships, then the relationship created should be
deemed as "partnerships," and the laws on partnership should be applied. Thus, a
joint venture agreement between and among corporations may be seen as similar
to partnerships since the elements of partnership are present.
Considering that the relationships found between petitioners and MBMI are
considered to be partnerships, then the CA is justified in applying Sec. 29, Rule 130
of the Rules by stating that "by entering into a joint venture, MBMI have a joint
interest" with Narra, Tesoro and McArthur.
Panel of Arbitrators’ jurisdiction
We affirm the ruling of the CA in declaring that the POA has jurisdiction over the
instant case. The POA has jurisdiction to settle disputes over rights to mining areas
which definitely involve the petitions filed by Redmont against petitioners Narra,
McArthur and Tesoro. Redmont, by filing its petition against petitioners, is
asserting the right of Filipinos over mining areas in the Philippines against alleged
foreign-owned mining corporations. Such claim constitutes a "dispute" found in
Sec. 77 of RA 7942:

Within thirty (30) days, after the submission of the case by the parties for the
decision, the panel shall have exclusive and original jurisdiction to hear and decide
the following:
(a) Disputes involving rights to mining areas
(b) Disputes involving mineral agreements or permits
We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.: 53
The phrase "disputes involving rights to mining areas" refers to any adverse claim,
protest, or opposition to an application for mineral agreement. The POA therefore
has the jurisdiction to resolve any adverse claim, protest, or opposition to a
pending application for a mineral agreement filed with the concerned Regional
Office of the MGB. This is clear from Secs. 38 and 41 of the DENR AO 96-40, which
provide:
Sec. 38.
xxxx
Within thirty (30) calendar days from the last date of publication/posting/radio
announcements, the authorized officer(s) of the concerned office(s) shall issue a
certification(s) that the publication/posting/radio announcement have been
complied with. Any adverse claim, protest, opposition shall be filed directly, within
thirty (30) calendar days from the last date of publication/posting/radio
announcement, with the concerned Regional Office or through any concerned
PENRO or CENRO for filing in the concerned Regional Office for purposes of its
resolution by the Panel of Arbitrators pursuant to the provisions of this Act and
these implementing rules and regulations. Upon final resolution of any adverse
claim, protest or opposition, the Panel of Arbitrators shall likewise issue a
certification to that effect within five (5) working days from the date of finality of
resolution thereof. Where there is no adverse claim, protest or opposition, the
Panel of Arbitrators shall likewise issue a Certification to that effect within five
working days therefrom.
xxxx
No Mineral Agreement shall be approved unless the requirements under this
Section are fully complied with and any adverse claim/protest/opposition is
finally resolved by the Panel of Arbitrators.
Sec. 41.
P a g e | 67
xxxx
Within fifteen (15) working days form the receipt of the Certification issued by the
Panel of Arbitrators as provided in Section 38 hereof, the concerned Regional
Director shall initially evaluate the Mineral Agreement applications in areas
outside Mineral reservations. He/She shall thereafter endorse his/her findings to
the Bureau for further evaluation by the Director within fifteen (15) working days
from receipt of forwarded documents. Thereafter, the Director shall endorse the
same to the secretary for consideration/approval within fifteen working days
from receipt of such endorsement.
In case of Mineral Agreement applications in areas with Mineral Reservations,
within fifteen (15) working days from receipt of the Certification issued by the
Panel of Arbitrators as provided for in Section 38 hereof, the same shall be
evaluated and endorsed by the Director to the Secretary for
consideration/approval within fifteen days from receipt of such endorsement.
(emphasis supplied)
It has been made clear from the aforecited provisions that the "disputes involving
rights to mining areas" under Sec. 77(a) specifically refer only to those disputes
relative to the applications for a mineral agreement or conferment of mining
rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a
mining right application is further elucidated by Secs. 219 and 43 of DENR AO 95-
936, which read:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the
provisions of Sections 28, 43 and 57 above, any adverse claim, protest or
opposition specified in said sections may also be filed directly with the Panel of
Arbitrators within the concerned periods for filing such claim, protest or
opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement.-
xxxx
The Regional Director or concerned Regional Director shall also cause the posting
of the application on the bulletin boards of the Bureau, concerned Regional
office(s) and in the concerned province(s) and municipality(ies), copy furnished
the barangays where the proposed contract area is located once a week for two (2)
consecutive weeks in a language generally understood in the locality. After forty-
five (45) days from the last date of publication/posting has been made and no

adverse claim, protest or opposition was filed within the said forty-five (45) days,
the concerned offices shall issue a certification that publication/posting has been
made and that no adverse claim, protest or opposition of whatever nature has
been filed. On the other hand, if there be any adverse claim, protest or opposition,
the same shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional Offices concerned, or through the
Department’s Community Environment and Natural Resources Officers (CENRO)
or Provincial Environment and Natural Resources Officers (PENRO), to be filed at
the Regional Office for resolution of the Panel of Arbitrators. However previously
published valid and subsisting mining claims are exempted from posted/posting
required under this Section.
No mineral agreement shall be approved unless the requirements under this
section are fully complied with and any opposition/adverse claim is dealt with in
writing by the Director and resolved by the Panel of Arbitrators. (Emphasis
supplied.)
It has been made clear from the aforecited provisions that the "disputes involving
rights to mining areas" under Sec. 77(a) specifically refer only to those disputes
relative to the applications for a mineral agreement or conferment of mining
rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a
mining right application is further elucidated by Secs. 219 and 43 of DENRO AO
95-936, which reads:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the
provisions of Sections 28, 43 and 57 above, any adverse claim, protest or
opposition specified in said sections may also be filed directly with the Panel of
Arbitrators within the concerned periods for filing such claim, protest or
opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement Application.-
xxxx
The Regional Director or concerned Regional Director shall also cause the posting
of the application on the bulletin boards of the Bureau, concerned Regional
office(s) and in the concerned province(s) and municipality(ies), copy furnished
the barangays where the proposed contract area is located once a week for two (2)
consecutive weeks in a language generally understood in the locality. After forty-
five (45) days from the last date of publication/posting has been made and no
adverse claim, protest or opposition was filed within the said forty-five (45) days,
the concerned offices shall issue a certification that publication/posting has been
P a g e | 68
made and that no adverse claim, protest or opposition of whatever nature has
been filed. On the other hand, if there be any adverse claim, protest or opposition,
the same shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional offices concerned, or through the
Department’s Community Environment and Natural Resources Officers (CENRO)
or Provincial Environment and Natural Resources Officers (PENRO), to be filed at
the Regional Office for resolution of the Panel of Arbitrators. However, previously
published valid and subsisting mining claims are exempted from posted/posting
required under this Section.
No mineral agreement shall be approved unless the requirements under this
section are fully complied with and any opposition/adverse claim is dealt with in
writing by the Director and resolved by the Panel of Arbitrators. (Emphasis
supplied.)
These provisions lead us to conclude that the power of the POA to resolve any
adverse claim, opposition, or protest relative to mining rights under Sec. 77(a) of
RA 7942 is confined only to adverse claims, conflicts and oppositions relating to
applications for the grant of mineral rights.
POA’s jurisdiction is confined only to resolutions of such adverse claims, conflicts
and oppositions and it has no authority to approve or reject said applications. Such
power is vested in the DENR Secretary upon recommendation of the MGB
Director. Clearly, POA’s jurisdiction over "disputes involving rights to mining
areas" has nothing to do with the cancellation of existing mineral agreements.
(emphasis ours)
Accordingly, as we enunciated in Celestial, the POA unquestionably has
jurisdiction to resolve disputes over MPSA applications subject of Redmont’s
petitions. However, said jurisdiction does not include either the approval or
rejection of the MPSA applications, which is vested only upon the Secretary of the
DENR. Thus, the finding of the POA, with respect to the rejection of petitioners’
MPSA applications being that they are foreign corporation, is valid.
Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular
courts, not the POA, that has jurisdiction over the MPSA applications of petitioners.
This postulation is incorrect.
It is basic that the jurisdiction of the court is determined by the statute in force at
the time of the commencement of the action.54
Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization

Act of 1980" reads:
Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise exclusive
original jurisdiction:
1. In all civil actions in which the subject of the litigation is incapable of pecuniary
estimation.
On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:
Section 77. Panel of Arbitrators.—
x x x Within thirty (30) days, after the submission of the case by the
parties for the decision, the panel shall have exclusive and original
jurisdiction to hear and decide the following:
(c) Disputes involving rights to mining areas
(d) Disputes involving mineral agreements or permits
It is clear that POA has exclusive and original jurisdiction over any and all disputes
involving rights to mining areas. One such dispute is an MPSA application to which
an adverse claim, protest or opposition is filed by another interested
applicant.1âwphi1 In the case at bar, the dispute arose or originated from MPSA
applications where petitioners are asserting their rights to mining areas subject of
their respective MPSA applications. Since respondent filed 3 separate petitions for
the denial of said applications, then a controversy has developed between the
parties and it is POA’s jurisdiction to resolve said disputes.
Moreover, the jurisdiction of the RTC involves civil actions while what petitioners
filed with the DENR Regional Office or any concerned DENRE or CENRO are MPSA
applications. Thus POA has jurisdiction.
Furthermore, the POA has jurisdiction over the MPSA applications under the
doctrine of primary jurisdiction. Euro-med Laboratories v. Province of
Batangas55 elucidates:
The doctrine of primary jurisdiction holds that if a case is such that its
determination requires the expertise, specialized training and knowledge of an
administrative body, relief must first be obtained in an administrative proceeding
before resort to the courts is had even if the matter may well be within their
proper jurisdiction.
P a g e | 69
Whatever may be the decision of the POA will eventually reach the court system
via a resort to the CA and to this Court as a last recourse.
Selling of MBMI’s shares to DMCI
As stated before, petitioners’ Manifestation and Submission dated October 19,
2012 would want us to declare the instant petition moot and academic due to the
transfer and conveyance of all the shareholdings and interests of MBMI to DMCI, a
corporation duly organized and existing under Philippine laws and is at least 60%
Philippine-owned.56 Petitioners reasoned that they now cannot be considered as
foreign-owned; the transfer of their shares supposedly cured the "defect" of their
previous nationality. They claimed that their current FTAA contract with the State
should stand since "even wholly-owned foreign corporations can enter into an
FTAA with the State."57Petitioners stress that there should no longer be any issue
left as regards their qualification to enter into FTAA contracts since they are
qualified to engage in mining activities in the Philippines. Thus, whether the
"grandfather rule" or the "control test" is used, the nationalities of petitioners
cannot be doubted since it would pass both tests.
The sale of the MBMI shareholdings to DMCI does not have any bearing in the
instant case and said fact should be disregarded. The manifestation can no longer
be considered by us since it is being tackled in G.R. No. 202877 pending before this
Court.1âwphi1 Thus, the question of whether petitioners, allegedly a Philippine-
owned corporation due to the sale of MBMI's shareholdings to DMCI, are allowed
to enter into FTAAs with the State is a non-issue in this case.
In ending, the "control test" is still the prevailing mode of determining whether or
not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the
1987 Constitution, entitled to undertake the exploration, development and
utilization of the natural resources of the Philippines. When in the mind of the
Court there is doubt, based on the attendant facts and circumstances of the case, in
the 60-40 Filipino-equity ownership in the corporation, then it may apply the
"grandfather rule."
WHEREFORE, premises considered, the instant petition is DENIED. The assailed
Court of Appeals Decision dated October 1, 2010 and Resolution dated February
15, 2011 are hereby AFFIRMED.
SO ORDERED.
PRESBITERO J. VELASCO, JR.
Associate Justice

Republic of the Philippines
SUPREME COURT
Manila
SPECIAL THIRD DIVISION
G.R. No. 195580 January 28, 2015
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND
DEVELOPMENT, INC., and McARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
RESOLUTION
VELASCO, JR., J.:
Before the Court is the Motion for Reconsideration of its April 21, 2014 Decision,
which denied the Petition for Review on Certiorari under Rule 45 jointly
interposed by petitioners Narra Nickel and Mining Development Corp. (Narra),
Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc.
(McArthur), and affirmed the October 1, 2010 Decision and February 15, 2011
Resolution of the Court of Appeals (CA) in CA-G.R. SP No. 109703.
Very simply, the challenged Decision sustained the appellate court's ruling that
petitioners, being foreign corporations, are not entitled to Mineral Production
Sharing Agreements (MPSAs). In reaching its conclusion, this Court upheld with
approval the appellate court's finding that there was doubt as to petitioners'
nationality since a 100% Canadian-owned firm, MBMI Resources, Inc. (MBMI),
effectively owns 60% of the common stocks of the petitioners by owning equity
interest of petitioners' other majority corporate shareholders.
In a strongly worded Motion for Reconsideration dated June 5, 2014, petitioners-
movants argued, in the main, that the Court's Decision was not in accord with law
and logic. In its September 2, 2014 Comment, on the other hand, respondent
Redmont Consolidated Mines Corp. (Redmont) countered that petitioners’ motion
for reconsideration is nothing but a rehash of their arguments and should, thus, be
denied outright for being pro-forma. Petitioners have interposed on September 30,
2014 their Reply to the respondent’s Comment.
After considering the parties’ positions, as articulated in their respective
submissions, We resolve to deny the motion for reconsideration.
P a g e | 70
I.
The case has not been rendered moot and academic
Petitioners have first off criticized the Court for resolving in its Decision a
substantive issue, which,as argued, has supposedly been rendered moot by the
fact that petitioners’ applications for MPSAs had already been converted to an
application for a Financial Technical Assistance Agreement (FTAA), as petitioners
have in fact been granted an FTAA. Further, the nationality issue, so petitioners
presently claim, had been rendered moribund by the fact that MBMI had already
divested itself and sold all its shareholdings in the petitioners, as well as in their
corporate stockholders, to a Filipino corporation—DMCI Mining Corporation
(DMCI).
As a counterpoint, respondent Redmontavers that the present case has not been
rendered moot by the supposed issuance of an FTAA in petitioners’ favor as this
FTAA was subsequently revoked by the Office of the President (OP) and is
currently a subject of a petition pending in the Court’s First Division. Redmont
likewise contends that the supposed sale of MBMI’s interest in the petitioners and
in their "holding companies" is a question of fact that is outside the Court’s
province to verify in a Rule 45 certiorari proceedings. In any case, assuming that
the controversy has been rendered moot, Redmont claims that its resolution on
the merits is still justified by the fact that petitioners have violated a constitutional
provision, the violation is capable of repetition yet evading review, and the present
case involves a matter of public concern.
Indeed, as the Court clarified in its Decision, the conversion of the MPSA
application to one for FTAAs and the issuance by the OP of an FTAA in petitioners’
favor are irrelevant. The OP itself has already cancelled and revoked the FTAA
thusissued to petitioners. Petitioners curiously have omitted this critical factin
their motion for reconsideration. Furthermore, the supposed sale by MBMI of its
shares in the petition ercorporations and in their holding companies is not only a
question of fact that this Court is without authority toverify, it also does not negate
any violation of the Constitutional provisions previously committed before any
such sale.
We can assume for the nonce that the controversy had indeed been rendered moot
by these two events. Asthis Court has time and again declared, the "moot and
academic" principle is not a magical formula that automatically dissuades courts in
resolving a case.1 The Court may still take cognizance of an otherwise moot and
academic case, if it finds that (a) there is a grave violation of the Constitution;(b)
the situation is of exceptional character and paramount public interest is involved;
(c) the constitutional issue raised requires formulation of controlling principles to
guide the bench, the bar, and the public; and (d) the case is capable of repetition

yet evading review.2 The Court’s April 21, 2014 Decision explained in some detail
that all four (4) of the foregoing circumstances are present in the case. If only to
stress a point, we will do so again. First, allowing the issuance of MPSAs to
applicants that are owned and controlled by a 100% foreign-owned corporation,
albeit through an intricate web of corporate layering involving alleged Filipino
corporations, is tantamount to permitting a blatant violation of Section 2, Article
XII of the Constitution. The Court simply cannot allow this breach and inhibit itself
from resolving the controversy on the facile pretext that the case had already been
rendered academic.
Second, the elaborate corporate layering resorted to by petitioners so as to make it
appear that there is compliance with the minimum Filipino ownership in the
Constitution is deftly exceptional in character. More importantly, the case is of
paramount public interest, as the corporate layering employed by petitioners was
evidently designed to circumvent the constitutional caveat allowing only Filipino
citizens and corporations 60%-owned by Filipino citizens to explore, develop, and
use the country’s natural resources.
Third, the facts of the case, involving as they do a web of corporate layering
intended to go around the Filipino ownership requirement in the Constitution and
pertinent laws, requirethe establishment of a definite principle that will ensure
that the Constitutional provision reserving to Filipino citizens or "corporations at
least sixty per centum of whose capital is owned by such citizens" be effectively
enforced and complied with. The case, therefore, is an opportunity to establish a
controlling principle that will "guide the bench, the bar, and the public."
Lastly, the petitioners’ actions during the lifetime and existence of the instant case
that gave rise to the present controversy are capable of repetition yet evading
review because, as shown by petitioners’ actions, foreign corporations can easily
utilize dummy Filipino corporations through various schemes and stratagems to
skirt the constitutional prohibition against foreign mining in Philippine soil.
II.
The application of the Grandfather Ruleis justified by the circumstances of the case
to determine the nationality of petitioners.
To petitioners, the Court’s application of the Grandfather Rule to determine their
nationality is erroneous and allegedly without basis in the Constitution, the
Foreign Investments Act of 1991 (FIA), the Philippine Mining Act of 1995,3 and
the Rules issued by the Securities and Exchange Commission (SEC). These laws
and rules supposedly espouse the application of the Control Test in verifying the
Philippine nationality of corporate entities for purposes of determining
compliance withSec. 2, Art. XII of the Constitution that only "corporations or
P a g e | 71
associations at least sixty per centum of whose capital is owned by such [Filipino]
citizens" may enjoy certain rights and privileges, like the exploration and
development of natural resources.
The application of the Grandfather Rule in the present case does not eschew the
Control Test.
Clearly, petitioners have misread, and failed to appreciate the clear import of, the
Court’s April 21, 2014 Decision. Nowhere in that disposition did the Court
foreclose the application of the Control Test in determining which corporations
may be considered as Philippine nationals. Instead, to borrow Justice Leonen’s
term, the Court used the Grandfather Rule as a "supplement" to the Control Test so
that the intent underlying the averted Sec. 2, Art. XII of the Constitution be given
effect. The following excerpts of the April 21, 2014 Decision cannot be clearer:
In ending, the "control test" is still the prevailing mode of determining whether or
not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. XII of the
1987 Constitution, entitled to undertake the exploration, development and
utilization of the natural resources of the Philippines. When in the mind of the
Court, there is doubt, based on the attendant facts and circumstances of the case,
in the 60-40 Filipino equity ownership in the corporation, then it may apply the
"grandfather rule." (emphasis supplied)
With that, the use of the Grandfather Rule as a "supplement" to the Control Test is
not proscribed by the Constitution or the Philippine Mining Act of 1995.
The Grandfather Rule implements the intent of the Filipinization provisions of the
Constitution.
To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration,
development, and utilization of natural resources to Filipino citizens and
"corporations or associations at least sixty per centum of whose capital is owned
by such citizens." Similarly, Section 3(aq) of the Philippine Mining Act of 1995
considers a "corporation x x x registered in accordance with law at least sixty per
cent of the capital of which is owned by citizens of the Philippines" as a person
qualified to undertake a mining operation. Consistent with this objective, the
Grandfather Rulewas originally conceived to look into the citizenshipof the
individuals who ultimately own and control the shares of stock of a corporation
for purposes of determining compliance with the constitutional requirement of
Filipino ownership. It cannot, therefore, be denied that the framers of the
Constitution have not foreclosed the Grandfather Rule as a tool in verifying the
nationality of corporations for purposes of ascertaining their right to participate in
nationalized or partly nationalized activities. The following excerpts from the
Record of the 1986 Constitutional Commission suggest as much:

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.
xxxx
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.
As further defined by Dean Cesar Villanueva, the Grandfather Rule is "the method
by which the percentage of Filipino equity in a corporation engaged in
nationalized and/or partly nationalized areas of activities, provided for under the
Constitution and other nationalization laws, is computed, in cases where corporate
shareholders are present, by attributing the nationality of the second or even
subsequent tier of ownership to determine the nationality of the corporate
shareholder."4 Thus, to arrive at the actual Filipino ownership and control in a
corporation, both the direct and indirect shareholdings in the corporation are
determined.
This concept of stock attribution inherent in the Grandfather Rule to determine
the ultimate ownership in a corporation is observed by the Bureau of Internal
Revenue (BIR) in applying Section 127 (B)5 of the National Internal Revenue Code
on taxes imposed on closely held corporations, in relation to Section 96 of the
Corporation Code6 on close corporations. Thus, in BIR Ruling No. 148-10,
Commissioner Kim Henares held:
In the case of a multi-tiered corporation, the stock attribution rule must be
allowed to run continuously along the chain of ownership until it finally reaches
the individual stockholders. This is in consonance with the "grandfather rule"
adopted in the Philippines under Section 96 of the Corporation Code(Batas
Pambansa Blg. 68) which provides that notwithstanding the fact that all the issued
stock of a corporation are held by not more than twenty persons, among others, a
corporation is nonetheless not to be deemed a close corporation when at least two
thirds of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation.7
P a g e | 72
In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 10-31), the
SEC applied the Grandfather Rule even if the corporation engaged in mining
operation passes the 60-40 requirement of the Control Test, viz:
You allege that the structure of MML’s ownership in PHILSAGA is as follows: (1)
MML owns 40% equity in MEDC, while the 60% is ostensibly owned by Philippine
individual citizens who are actually MML’s controlled nominees; (2) MEDC, in
turn, owns 60% equity in MOHC, while MML owns the remaining 40%; (3) Lastly,
MOHC owns 60% of PHILSAGA, while MML owns the remaining 40%. You provide
the following figure to illustrate this structure:
xxxx
We note that the Constitution and the statute use the concept "Philippine citizens."
Article III, Section 1 of the Constitution provides who are Philippine citizens: x x x
This enumeration is exhaustive. In other words, there can be no other Philippine
citizens other than those falling within the enumeration provided by the
Constitution. Obviously, only natural persons are susceptible of citizenship. Thus,
for purposes of the Constitutional and statutory restrictions on foreign
participation in the exploitation of mineral resources, a corporation investing in a
mining joint venture can never be considered as a Philippine citizen.
The Supreme Court En Banc confirms this [in]… Pedro R. Palting, vs. San Jose
Petroleum [Inc.]. The Court held that a corporation investing in another
corporation engaged ina nationalized activity cannot be considered as a citizen for
purposes of the Constitutional provision restricting foreign exploitation of natural
resources:
xxxx
Accordingly, we opine that we must look into the citizenship of the individual
stockholders, i.e. natural persons, of that investor-corporation in order to
determine if the Constitutional and statutory restrictions are complied with. If the
shares of stock of the immediate investor corporation is in turn held and
controlled by another corporation, then we must look into the citizenship of the
individual stockholders of the latter corporation. In other words, if there are layers
of intervening corporations investing in a mining joint venture, we must delve into
the citizenship of the individual stockholders of each corporation. This is the strict
application of the grandfather rule, which the Commission has been consistently
applying prior to the 1990s. Indeed, the framers of the Constitution intended for
the "grandfather rule" to apply in case a 60%-40% Filipino-Foreign equity
corporation invests in another corporation engaging in an activity where the
Constitution restricts foreign participation.

xxxx
Accordingly, under the structure you represented, the joint mining venture is
87.04 % foreign owned, while it is only 12.96% owned by Philippine citizens.
Thus, the constitutional requirement of 60% ownership by Philippine citizens
isviolated. (emphasis supplied)
Similarly, in the eponymous Redmont Consolidated Mines Corporation v.
McArthur Mining Inc., et al.,8 the SEC en bancapplied the Grandfather Rule despite
the fact that the subject corporations ostensibly have satisfied the 60-40 Filipino
equity requirement. The SEC en bancheld that to attain the Constitutional
objective of reserving to Filipinos the utilization of natural resources, one should
not stop where the percentage of the capital stock is 60%.Thus:
[D]oubt, we believe, exists in the instant case because the foreign investor, MBMI,
provided practically all the funds of the remaining appellee-corporations. The
records disclose that: (1) Olympic Mines and Development Corporation ("OMDC"),
a domestic corporation, and MBMI subscribed to 6,663 and 3,331 shares,
respectively, out of the authorized capital stock of Madridejos; however, OMDC
paid nothing for this subscription while MBMI paid ₱2,803,900.00 out of its total
subscription cost of ₱3,331,000.00; (2) Palawan Alpha South Resource
Development Corp. ("Palawan Alpha"), also a domestic corporation, and MBMI
subscribed to 6,596 and 3,996 shares, respectively, out of the authorized capital
stock of PatriciaLouise; however, Palawan Alpha paid nothing for this subscription
while MBMI paid ₱2,796,000.00 out of its total subscription cost of ₱3,996,000.00;
(3) OMDC and MBMI subscribed to 6,663 and 3,331 shares, respectively, out of the
authorized capital stock of Sara Marie; however, OMDC paid nothing for this
subscription while MBMI paid ₱2,794,000.00 out of its total subscription cost of
₱3,331,000.00; and (4) Falcon Ridge Resources Management Corp. ("Falcon
Ridge"), another domestic corporation, and MBMI subscribed to 5,997 and 3,998
shares, respectively, out of the authorized capital stock of San Juanico; however,
Falcon Ridge paid nothing for this subscription while MBMI paid ₱2,500,000.00
out of its total subscription cost of ₱3,998,000.00. Thus, pursuant to the afore-
quoted DOJ Opinion, the Grandfather Rule must be used.
xxxx
The avowed purpose of the Constitution is to place in the hands of Filipinos the
exploitation of our natural resources. Necessarily, therefore, the Rule interpreting
the constitutional provision should not diminish that right through the legal fiction
of corporate ownership and control. But the constitutional provision, as
interpreted and practicedvia the 1967 SEC Rules, has favored foreigners contrary
to the command of the Constitution. Hence, the Grandfather Rule must be applied
P a g e | 73
to accurately determine the actual participation, both direct and indirect, of
foreigners in a corporation engaged in a nationalized activity or business.
The method employed in the Grandfather Rule of attributing the shareholdings of
a given corporate shareholder to the second or even the subsequent tier of
ownership hews with the rule that the "beneficial ownership" of corporations
engaged in nationalized activities must reside in the hands of Filipino citizens.
Thus, even if the 60-40 Filipino equity requirement appears to have been satisfied,
the Department of Justice (DOJ), in its Opinion No. 144, S. of 1977, stated that an
agreement that may distort the actual economic or beneficial ownership of a
mining corporation may be struck down as violative of the constitutional
requirement, viz:
In this connection, you raise the following specific questions:
1. Can a Philippine corporation with 30% equity owned by foreigners enter into a
mining service contract with a foreign company granting the latter a share of not
morethan 40% from the proceeds of the operations?
xxxx
By law, a mining lease may be granted only to a Filipino citizen, or to a corporation
or partnership registered with the [SEC] at least 60% of the capital of which is
owned by Filipino citizens and possessing x x x.The sixty percent Philippine equity
requirement in mineral resource exploitation x x xis intended to insure, among
other purposes, the conservation of indigenous natural resources, for Filipino
posterityx x x. I think it is implicit in this provision, even if it refers merely to
ownership of stock in the corporation holding the mining concession, that
beneficial ownership of the right to dispose, exploit, utilize, and develop natural
resources shall pertain to Filipino citizens, and that the nationality requirementis
not satisfied unless Filipinos are the principal beneficiaries in the exploitation of
the country’s natural resources. This criterion of beneficial ownership is tacitly
adopted in Section 44 of P.D. No. 463, above-quoted, which limits the service fee in
service contracts to 40% of the proceeds of the operation, thereby implying that
the 60-40 benefit-sharing ration is derived from the 60-40 equity requirement in
the Constitution.
xxxx
It is obvious that while payments to a service contractor may be justified as a
service fee, and therefore, properly deductible from gross proceeds, the service
contract could be employed as a means of going about or circumventing the
constitutional limit on foreign equity participation and the obvious constitutional
policy to insure that Filipinos retain beneficial ownership of our mineral

resources. Thus, every service contract scheme has to be evaluated in its entirety,
on a case to case basis, to determine reasonableness of the total "service fee" x x x
like the options available tothe contractor to become equity participant in the
Philippine entity holding the concession, or to acquire rights in the processing and
marketing stages. x x x (emphasis supplied)
The "beneficial ownership" requirement was subsequently used in tandem with
the "situs of control" todetermine the nationality of a corporation in DOJ Opinion
No. 84, S.of 1988, through the Grandfather Rule, despite the fact that both the
investee and investor corporations purportedly satisfy the 60-40 Filipino equity
requirement:9
This refers to your request for opinion on whether or not there may be an
investment in real estate by a domestic corporation (the investing corporation)
seventy percent (70%) of the capital stock of which is owned by another domestic
corporation withat least 60%-40% Filipino-Foreign Equity, while the remaining
thirty percent (30%) of the capital stock is owned by a foreign corporation.
xxxx
This Department has had the occasion to rule in several opinions that it is implicit
in the constitutional provisions, even if it refers merely to ownership of stock in
the corporation holding the land or natural resource concession, that the
nationality requirement is not satisfied unless it meets the criterion of beneficial
ownership, i.e. Filipinos are the principal beneficiaries in the exploration of natural
resources(Op. No. 144, s. 1977; Op. No. 130, s. 1985), and that in applying the
same "the primordial consideration is situs of control, whether in a stock or
nonstock corporation"(Op. No. 178, s. 1974). As stated in the Register of Deeds vs.
Ung Sui Si Temple (97 Phil. 58), obviously toinsure that corporations and
associations allowed to acquire agricultural land or to exploit natural resources
"shall be controlled by Filipinos." Accordingly, any arrangement which attempts to
defeat the constitutional purpose should be eschewed (Op. No 130, s. 1985).
We are informed that in the registration of corporations with the [SEC],
compliance with the sixty per centum requirement is being monitored by SEC
under the "Grandfather Rule" a method by which the percentage of Filipino equity
in corporations engaged in nationalized and/or partly nationalized areas of
activities provided for under the Constitution and other national laws is accurately
computed, and the diminution if said equity prevented (SEC Memo, S. 1976). The
"Grandfather Rule" is applied specifically in cases where the corporation has
corporate stockholders with alien stockholdings, otherwise, if the rule is not
applied, the presence of such corporate stockholders could diminish the effective
control of Filipinos.
P a g e | 74
Applying the "Grandfather Rule" in the instant case, the result is as follows: x x x
the total foreign equity in the investing corporation is 58% while the Filipino
equity is only 42%, in the investing corporation, subject of your query, is
disqualified from investing in real estate, which is a nationalized activity, as it does
not meet the 60%-40% Filipino-Foreign equity requirement under the
Constitution.
This pairing of the concepts "beneficial ownership" and the "situs of control" in
determining what constitutes"capital" has been adopted by this Court in Heirs of
Gamboa v. Teves.10 In its October 9, 2012 Resolution, the Court clarified, thus:
This is consistent with Section 3 of the FIA which provides that where 100% of the
capital stock is heldby "a trustee of funds for pension or other employee
retirement or separation benefits," the trustee is a Philippine national if "at least
sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals."
Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "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."
(emphasis supplied)
In emphasizing the twin requirements of "beneficial ownership" and "control" in
determining compliance with the required Filipino equity in Gamboa, the en
bancCourt explicitly cited with approval the SEC en banc’s application in Redmont
Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. of the Grandfather Rule,
to wit:
Significantly, the SEC en banc, which is the collegial body statutorily empowered to
issue rules and opinions on behalf of SEC, has adopted the Grandfather Rulein
determining compliance with the 60-40 ownership requirement in favor of
Filipino citizens mandated by the Constitution for certain economic activities. This
prevailing SEC ruling, which the SEC correctly adopted to thwart any
circumvention of the required Filipino "ownership and control," is laid down in the
25 March 2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v.
McArthur Mining, Inc., et al. x x x (emphasis supplied)
Applying Gamboa, the Court, in Express Investments III Private Ltd. v. Bayantel
Communications, Inc.,11 denied the foreign creditors’ proposal to convert part of
Bayantel’s debts to common shares of the company at a rate of 77.7%. Supposedly,
the conversion of the debts to common shares by the foreign creditors would be
done, both directly and indirectly, in order to meet the control test principle under
the FIA.Under the proposed structure, the foreign creditors would own 40% of the
outstanding capital stock of the telecommunications company on a direct basis,
while the remaining 40% of shares would be registered to a holding company that

shall retain, on a direct basis, the other 60% equity reserved for Filipino citizens.
Nonetheless, the Court found the proposal non-compliant with the Constitutional
requirement of Filipino ownership as the proposed structure would give more
than 60% of the ownership of the common shares of Bayantel to the foreign
corporations, viz:
In its Rehabilitation Plan, among the material financial commitments made by
respondent Bayantelis that its shareholders shall relinquish the agreed-upon
amount of common stock[s] as payment to Unsecured Creditors as per the Term
Sheet. Evidently, the parties intend to convert the unsustainable portion of
respondent’s debt into common stocks, which have voting rights. If we indulge
petitioners on their proposal, the Omnibus Creditors which are foreign
corporations, shall have control over 77.7% of Bayantel, a public utility company.
This is precisely the scenario proscribed by the Filipinization provision of the
Constitution.Therefore, the Court of Appeals acted correctly in sustaining the 40%
debt-to-equity ceiling on conversion. (emphasis supplied) As shown by the quoted
legislative enactments, administrative rulings, opinions, and this Court’s decisions,
the Grandfather Rule not only finds basis, but more importantly, it implements the
Filipino equity requirement, in the Constitution.
Application of the Grandfather
Rule with the Control Test.
Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in
determining compliance with the minimum Filipino equity requirement vis-à-vis
the Control Test. This confusion springs from the erroneous assumption that the
use of one method forecloses the use of the other.
As exemplified by the above rulings, opinions, decisions and this Court’s April 21,
2014 Decision, the Control Test can be, as it has been, applied jointly withthe
Grandfather Rule to determine the observance of foreign ownership restriction in
nationalized economic activities. The Control Test and the Grandfather Rule are
not, as it were, incompatible ownership-determinant methods that canonly be
applied alternative to each other. Rather, these methodscan, if appropriate, be
used cumulatively in the determination of the ownership and control of
corporations engaged in fully or partly nationalized activities, as the mining
operation involved in this case or the operation of public utilities as in Gamboa or
Bayantel.
The Grandfather Rule, standing alone, should not be used to determine the Filipino
ownership and control in a corporation, as it could result in an otherwise foreign
corporation rendered qualified to perform nationalized or partly nationalized
activities. Hence, it is only when the Control Test is first complied with that the
P a g e | 75
Grandfather Rule may be applied. Put in another manner, if the subject
corporation’s Filipino equity falls below the threshold 60%, the corporation is
immediately considered foreign-owned, in which case, the needto resort to the
Grandfather Rule disappears.
On the other hand, a corporation that complies with the 60-40 Filipino to foreign
equity requirement can be considered a Filipino corporation if there is no doubtas
to who has the "beneficial ownership" and "control" of the corporation. In that
instance, there is no need fora dissection or further inquiry on the ownership of
the corporate shareholders in both the investing and investee corporation or the
application of the Grandfather Rule.12 As a corollary rule, even if the 60-40 Filipino
to foreign equity ratio is apparently met by the subject or investee corporation, a
resort to the Grandfather Rule is necessary if doubt existsas to the locusof the
"beneficial ownership" and "control." In this case, a further investigation as to the
nationality of the personalities with the beneficial ownership and control of the
corporate shareholders in both the investing and investee corporations is
necessary.
As explained in the April 21,2012 Decision, the "doubt" that demands the
application of the Grandfather Rule in addition to or in tandem with the Control
Test is not confined to, or more bluntly, does not refer to the fact that the apparent
Filipino ownership of the corporation’s equity falls below the 60% threshold.
Rather, "doubt" refers to various indicia that the "beneficial ownership" and
"control" of the corporation do not in fact reside in Filipino shareholders but in
foreign stakeholders. As provided in DOJ Opinion No. 165, Series of 1984, which
applied the pertinent provisions of the Anti-DummyLaw in relation to the
minimum Filipino equity requirement in the Constitution, "significant indicators of
the dummy status" have been recognized in view of reports "that some Filipino
investors or businessmen are being utilized or [are] allowing themselves to be
used as dummies by foreign investors" specifically in joint ventures for national
resource exploitation. These indicators are:
1. That the foreign investors provide practically all the funds for the joint
investment undertaken by these Filipino businessmen and their foreign
partner;
2. That the foreign investors undertake to provide practically all the
technological support for the joint venture;
3. That the foreign investors, while being minority stockholders, manage
the company and prepare all economic viability studies.
Thus, In the Matter of the Petition for Revocation of the Certificate of Registration
of Linear Works Realty Development Corporation,13 the SEC held that when
 P a g e | 76

foreigners contribute more capital to an enterprise, doubt exists as to the actual
control and ownership of the subject corporation even if the 60% Filipino equity
threshold is met. Hence, the SEC in that one ordered a further investigation, viz:
x x x The [SEC Enforcement and Prosecution Department (EPD)] maintained that
the basis for determining the level of foreign participation is the number of shares
subscribed, regardless of the par value. Applying such an interpretation, the EPD
rules that the foreign equity participation in Linear works Realty Development
Corporation amounts to 26.41% of the corporation’s capital stock since the
amount of shares subscribed by foreign nationals is 1,795 only out of the 6,795
shares. Thus, the subject corporation is compliant with the 40% limit on foreign
equity participation. Accordingly, the EPD dismissed the complaint, and did not
pursue any investigation against the subject corporation.
xxxx
Parenthetically, it is advanced that the application of the Grandfather Rule is
impractical as tracing the shareholdings to the point when natural persons hold
rights to the stocks may very well lead to an investigation ad infinitum. Suffice it to
say in this regard that, while the Grandfather Rule was originally intended to trace
the shareholdings to the point where natural persons hold the shares, the SEC had
already set up a limit as to the number of corporate layers the attribution of the
nationality of the corporate shareholders may be applied.
In a 1977 internal memorandum, the SEC suggested applying the Grandfather Rule
on two (2) levels of corporate relations for publicly-held corporations or where
the shares are traded in the stock exchanges, and to three (3) levels for closely
held corporations or the shares of which are not traded in the stock
exchanges.14 These limits comply with the requirement in Palting v. San Jose
Petroleum, Inc.15 that the application of the Grandfather Rule cannot go beyond
the level of what is reasonable.

x x x [I]n this respect we find no error in the assailed order made by the EPD. The
EPD did not err when it did not take into account the par value of shares in
determining compliance with the constitutional and statutory restrictionson
foreign equity.
However, we are aware that some unscrupulous individuals employ schemes to
circumvent the constitutional and statutory restrictions on foreign equity. In the
present case, the fact that the shares of the Japanese nationals have a greater par
value but only have similar rights to those held by Philippine citizens having much
lower par value, is highly suspicious. This is because a reasonable investor would
expect to have greater control and economic rights than other investors who
invested less capital than him. Thus, it is reasonable to suspectthat there may be
secret arrangements between the corporation and the stockholders wherein the
Japanese nationals who subscribed to the shares with greater par value actually
have greater control and economic rights contrary to the equality of shares based
on the articles of incorporation.
A doubt exists as to the extent of control and beneficial ownership of MBMI over
the petitioners and their investing corporate stockholders.
In the Decision subject of this recourse, the Court applied the Grandfather Rule to
determine the matter of true ownership and control over the petitioners as doubt
exists as to the actual extent of the participation of MBMI in the equity of the
petitioners and their investing corporations.
We considered the following membership and control structures and like nuances:
Tesoro
Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds
59.97% of the 10,000 commonshares of petitioner Tesoro while the Canadian-
owned company, MBMI, holds 39.98% of its shares.

With this in mind, we find it proper for the EPD to investigate the subject Name Nationality Number Amount Amount Paid
corporation. The EPD is advised to avail of the Commission’s subpoena powers in of Subscribed
order to gather sufficient evidence, and file the necessary complaint. Shares
Sara Marie Filipino 5,997 ₱5,997,000.00 ₱825,000.00
As will be discussed, even if atfirst glance the petitioners comply with the 60-40 Mining,
Filipino to foreign equity ratio, doubt exists in the present case that gives rise to a Inc.
reasonable suspicion that the Filipino shareholders do not actually have the
requisite number of control and beneficial ownership in petitioners Narra, Tesoro, MBMI Canadian 3,998 ₱3,998,000.00 ₱1,878,174.60
and McArthur. Hence, a further investigation and dissection of the extent of the Resources,
ownership of the corporate shareholders through the Grandfather Rule is justified. Inc.16
 P a g e | 77

Lauro L. Filipino 1 ₱1,000.00 ₱1,000.00 Michael T. American 1 ₱1,000.00 ₱1,000.00

Salazar Mason
Fernando Filipino 1 ₱1,000.00 ₱1,000.00 Kenneth Canadian 1 ₱1,000.00 ₱1,000.00
B. Cawkel
Esguerra
Total 10,000 ₱10,000,000.00 ₱2,800,000.00
Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00
Agcaoili
The fact that MBMI had practically provided all the funds in Sara Marie and
Michael T. American 1 ₱1,000.00 ₱1,000.00 Tesoro creates serious doubt as to the true extent of its (MBMI) control and
Mason ownership over both Sara Marie and Tesoro since, as observed by the SEC, "a
reasonable investor would expect to have greater control and economic rights
Kenneth Canadian 1 ₱1,000.00 ₱1,000.00 than other investors who invested less capital than him." The application of the
Cawkel Grandfather Rule is clearly called for, and as shown below, the Filipinos’ control
Total 10,000 ₱10,000,000.00 ₱2,708,174.60 and economic benefits in petitioner Tesoro (through Sara Marie) fallbelow the
threshold 60%, viz:

In turn, the Filipino corporation Olympic Mines & Development Corp. (Olympic) Filipino participation in petitioner Tesoro: 40.01%
holds 66.63% of Sara Marie’s shares while the same Canadian company MBMI
holds 33.31% of Sara Marie’s shares. Nonetheless, it is admitted that Olympic did
not pay a single peso for its shares. On the contrary, MBMI paid for 99% of the 66.67
(Filipino equity in Sara Marie) x 59.97 (Sara Marie’s share in
paid-up capital of Sara Marie. Tesoro) = 39.98%
100
Name Nationality Number of Amount Amount Paid 39.98% + .03% (shares of individual Filipino shareholders [SHs] in
Shares Subscribed Tesoro)
=40.01%
Olympic Mines Filipino 6,663 ₱6,663,000.00 P0.00
&
Development Foreign participation in petitioner Tesoro: 59.99%
Corp.17
MBMI Canadian 3,331 ₱3,331,000.00 ₱2,794,000.00 33.33
Resources, Inc. (Foreign equity in Sara Marie) x 59.97 (Sara Marie’s share in
Tesoro) = 19.99%
100
Amanti Filipino 1 ₱1,000.00 ₱1,000.00
Limson 19.99% + 39.98% (MBMI’s direct participation in Tesoro) + .02%
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00 (shares of foreign individual SHs in Tesoro)
Esguerra = 59.99%

Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00

With only 40.01% Filipino ownership in petitioner Tesoro, as compared to 59.99%
Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00 foreign ownership of its shares, it is clear that petitioner Tesoro does not comply
with the minimum Filipino equity requirement imposed in Sec. 2, Art. XII of the
Hernando Constitution. Hence, the appellate court’s observation that Tesoro is a foreign
corporation not entitled to an MPSA is apt.
 P a g e | 78

McArthur MBMI Canadian 3,331 ₱3,331,000.00 ₱2,803,900.00

Resources, Inc.
Petitioner McArthur follows the corporate layering structure of Tesoro, as 59.97%
of its 10, 000 common shares is owned by supposedly Filipino Madridejos Mining Amanti Filipino 1 ₱1,000.00 ₱1,000.00
Corporation (Madridejos), while 39.98% belonged to the Canadian MBMI. Limson
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Name Nationality Number Amount Amount Paid Esguerra
of Subscribed
Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Shares
Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00
Madridejos Filipino 5,997 ₱5,997,000.00 ₱825,000.00
Hernando
Mining
Corporation Michael T. American 1 ₱1,000.00 ₱1,000.00
Mason
MBMI Canadian 3,998 ₱3,998,000.0 ₱1,878,174.60
Resources, Kenneth Canadian 1 ₱1,000.00 ₱1,000.00
Inc.18 Cawkel
Lauro L. Filipino 1 ₱1,000.00 ₱1,000.00 Total 10,000 ₱10,000,000.00 ₱2,809,900.00
Salazar
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00 Again, the fact that MBMI had practically provided all the funds in Madridejos and
McArthur creates serious doubt as to the true extent of its control and ownership
Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00 of MBMI over both Madridejos and McArthur. The application of the Grandfather
Agcaoili Rule is clearly called for, and as will be shown below, MBMI, along with the other
Michael T. American 1 ₱1,000.00 ₱1,000.00 foreign shareholders, breached the maximum limit of 40% ownership in petitioner
Mason McArthur, rendering the petitioner disqualified to an MPSA:

Kenneth Canadian 1 ₱1,000.00 ₱1,000.00 Filipino participation in petitioner McArthur: 40.01%

Cawkel
Total 10,000 ₱10,000,000.00 ₱2,708,174.60 66.67
(Filipino equity in Madridejos) x 59.97 (Madridejos’ share in
McArthur) = 39.98%
In turn, 66.63% of Madridejos’ shares were held by Olympic while 33.31% of its 100
shares belonged to MBMI. Yet again, Olympic did not contribute to the paid-up
capital of Madridejos and it was MBMI that provided 99.79% of the paid-up capital 39.98% + .03% (shares of individual Filipino SHs in McArthur)
=40.01%
of Madridejos.

Name Nationality Number of Amount Amount Paid Foreign participation in petitioner McArthur: 59.99%
Shares Subscribed
Olympic Mines Filipino 6,663 ₱6,663,000.00 P0.00 33.33 (Foreign equity in Madridejos) x 59.97 (Madridejos’ share in
& McArthur) = 19.99%
Development
Corp.19
 P a g e | 79

19.99% + 39.98% (MBMI’s direct participation inMcArthur) + .02% Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00
(shares of foreign individual SHs in McArthur) Agcaoili
= 59.99%
Bayani H. Filipino 1 ₱1,000.00 ₱1,000.00
Agabin
As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner
Total 10,000 ₱10,000,000.00 ₱2,800,000.00
McArthur, as compared to 59.99% foreign ownership of its shares, it is clear that
petitioner McArthur does not comply with the minimum Filipino equity
requirement imposed in Sec. 2, Art. XII of the Constitution. Thus, the appellate PLMDC’s shares, in turn, were held by Palawan Alpha South Resources
court did not err in holding that petitioner McArthur is a foreign corporation not Development Corporation (PASRDC), which subscribed to 65.96% of PLMDC’s
entitled to an MPSA. shares, and the Canadian MBMI, which subscribed to 33.96% of PLMDC’s shares.

Narra Name Nationality Number of Amount Amount Paid

Shares Subscribed
As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise Mining &
Development Corporation (PLMDC), while Canadian MBMI held 39.98% of its Palawan Filipino 6,596 ₱6,596,000.00 P0
shares. Alpha South
Resource
Development
Name Nationality Number Amount Amount Paid Corp.
of Subscribed
Shares MBMI Canadian 3,396 ₱3,396,000.00 ₱2,796,000.00
Resources,
Patricia Filipino 5,997 ₱5,997,000.00 ₱1,677,000.00 Inc.21
Lousie
Mining and Higinio C. Filipino 1 ₱1,000.00 ₱1,000.00
Development Mendoza, Jr.
Corp.
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
MBMI Canadian 3,996 ₱3,996,000.00 ₱1,116,000.00 Esguerra
Resources,
Inc.20 Henry E. Filipino 1 ₱1,000.00 ₱1,000.00
Fernandez
Higinio C. Filipino 1 ₱1,000.00 ₱1,000.00
Mendoza, Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00
Bocalan
Henry E. Filipino 1 ₱1,000.00 ₱1,000.00
Fernandez Michael T. American 1 ₱1,000.00 ₱1,000.00
Mason
Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00
Bocalan Robert L. Canadian 1 ₱1,000.00 ₱1,000.00
McCurdy
Michael T. American 1 ₱1,000.00 ₱1,000.00
Mason Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00
Agcaoili
Robert L. Canadian 1 ₱1,000.00 ₱1,000.00
McCurdy Bayani H, Filipino 1 ₱1,000.00 ₱1,000.00
Agabin

Total 10,000 ₱10,000,000.00 ₱2,804,000.00
Yet again, PASRDC did not pay for any of its subscribed shares, while MBMI
contributed 99.75% of PLMDC’s paid-up capital. This fact creates serious doubt as
to the true extent of MBMI’s control and ownership over both PLMDC and Narra
since "a reasonable investor would expect to have greater control and economic
rights than other investors who invested less capital than him." Thus, the
application of the Grandfather Rule is justified. And as will be shown, it is clear
that the Filipino ownership in petitioner Narra falls below the limit prescribed in
both the Constitution and the Philippine Mining Act of 1995.
Filipino participation in petitioner Narra: 39.64%
66.02
(Filipino equity in PLMDC) x 59.97 (PLMDC’s share in Narra) =
39.59%
100
39.59% + .05% (shares of individual Filipino SHs in McArthur)
=39.64%
Foreign participation in petitioner Narra: 60.36%
33.98
(Foreign equity in PLMDC) x 59.97 (PLMDC’s share in
Narra) = 20.38%
100
20.38% + 39.96% (MBMI’s direct participation in Narra) + .02%
(shares of foreign individual SHs in McArthur)
= 60.36%
With 60.36% foreign ownership in petitioner Narra, as compared to only 39.64%
Filipino ownership of its shares, it is clear that petitioner Narra does not comply
with the minimum Filipino equity requirement imposed in Section 2, Article XII of
the Constitution. Hence, the appellate court did not err in holding that petitioner
McArthur is a foreign corporation not entitled to an MPSA.
It must be noted that the foregoing determination and computation of petitioners’
Filipino equity composition was based on their common shareholdings, not
preferred or redeemable shares. Section 6 of the Corporation Code of the
Philippines explicitly provides that "no share may be deprived of voting rights
except those classified as ‘preferred’ or ‘redeemable’ shares." Further, as Justice
Leonen puts it, there is "no indication that any of the shares x x x do not have
P a g e | 80
voting rights, [thus] it must be assumed that all such shares have voting
rights."22 It cannot therefore be gain said that the foregoing computation hewed
with the pronouncements of Gamboa, as implemented by SEC Memorandum
Circular No. 8, Series of 2013, (SEC Memo No. 8)23 Section 2 of which states:
Section 2. All covered corporations shall, at all times, observe the constitutional or
statutory requirement.1âwphi1 For purposes of determining compliance
therewith, the required percentage of Filipino ownership shall be applied to BOTH
(a) the total outstanding shares of stock entitled to vote in the election of
directors; AND (b) the total number of outstanding shares of stock, whether or not
entitled to vote in the election of directors.
In fact, there is no indication that herein petitioners issued any other class of
shares besides the 10,000 common shares. Neither is it suggested that the
common shares were further divided into voting or non-voting common shares.
Hence, for purposes of this case, items a) and b) in SEC Memo No. 8 both refer to
the 10,000 common shares of each of the petitioners, and there is no need to
separately apply the 60-40 ratio to any segment or part of the said common
shares.
III.
In mining disputes, the POA has jurisdiction to pass upon the nationality of
applications for MPSAs
Petitioners also scoffed at this Court’s decision to uphold the jurisdiction of the
Panel of Arbitrators (POA) of the Department of Environment and Natural
Resources (DENR) since the POA’s determination of petitioners’ nationalities is
supposedly beyond its limited jurisdiction, as defined in Gonzales v. Climax Mining
Ltd.24 and Philex Mining Corp. v. Zaldivia.25
The April 21, 2014 Decision did not dilute, much less overturn, this Court’s
pronouncements in either Gonzales or Philex Mining that POA’s jurisdiction "is
limited only to mining disputes which raise questions of fact," and not judicial
questions cognizable by regular courts of justice. However, to properly recognize
and give effect to the jurisdiction vested in the POA by Section 77 of the Philippine
Mining Act of 1995,26 and in parallel with this Court’s ruling in Celestial Nickel
Mining Exploration Corporation v. Macroasia Corp.,27 the Court has recognized in
its Decision that in resolving disputes "involving rights to mining areas" and
"involving mineral agreements or permits," the POA has jurisdiction to make a
preliminary finding of the required nationality of the corporate applicant in order
to determine its right to a mining area or a mineral agreement.
 P a g e | 81

There is certainly nothing novel or aberrant in this approach. In ejectment and

unlawful detainer cases, where the subject of inquiry is possession de facto, the
jurisdiction of the municipal trial courts to make a preliminary adjudication
regarding ownership of the real property involved is allowed, but only for
purposes of ruling on the determinative issue of material possession.

The present case arose from petitioners' MPSA applications, in which they
asserted their respective rights to the mining areas each applied for. Since
respondent Redmont, itself an applicant for exploration permits over the same
mining areas, filed petitions for the denial of petitioners' applications, it should be
clear that there exists a controversy between the parties and it is POA's
jurisdiction to resolve the said dispute. POA's ruling on Redmont's assertion that
petitioners are foreign corporations not entitled to MPSA is but a necessary
incident of its disposition of the mining dispute presented before it, which is
whether the petitioners are entitled to MPSAs.

Indeed, as the POA has jurisdiction to entertain "disputes involving rights to

mining areas," it necessarily follows that the POA likewise wields the authority to
pass upon the nationality issue involving petitioners, since the resolution of this
issue is essential and indispensable in the resolution of the main issue, i.e., the
determination of the petitioners' right to the mining areas through MPSAs.

WHEREFORE, We DENY the motion for reconsideration WITH FINALITY. No

further pleadings shall be entertained. Let entry of judgment be made in due
course.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice