CORPORATION LAW- 1
Second Division The petitioners averred that they were employees of private respondent
June 21, 2017
G.R. No. 224099
ROMMEL M. ZAMBRANO, ROMEO O. CALIPAY, JESUS L. CHIN,
LYNDON B. APOSAGA, BONIFACIO A. CASTANEDA, ROSEMARIE P.
FALCUNIT, ROMEO A. FINALLA, LUISITO G. GELLIDO, JOSE ALLI
L. MABUHAY, VICENTE A. MORALES, RAUL L. REANZARES,
DIODITO I. TACUD, ERNAN D. TERCERO, LARRY V. MUTIA, ROMEO
A. GURON, DIOSDADO S. AZUSANO, BENEDICTO D. GIDAYAWAN,
LOWIS M. LANDRITO, NARCISO R. ASI, TEODULO BORAC, SANTOS
J. CRUZADO, JR., ROLANDO DELA CRUZ, RAYMUNDO, MILA Y.
ABLAY, ERMITY F. GABUCAY, PABLITO M. LACANARIA, MELCHOR
PENAFLOR, ARSENIO B. PICART III, ROMEO M. SISON, JOSE
VELASCO JR., ERWIN M. VICTORIA, PRISCO J. ABILO, WILFREDO
D. ARANDIA, ALEXANDER Y. HILADO, JAIME M. CORALES,
GERALDINE C. MAUHAY, MAURO P. MARQUEZ, JONATHAN T.
BARQUIN, RICARDO M. CALDERON JR., RENA TO R. RAMIREZ,
VIVIAN P. VIRTUDES, DOMINGO P. COSTANTINO JR., RENATO A.
MANAIG, RAFAEL D. CARILLO, Petitioners
vs.
PHILIPPINE CARPET MANUFACTURING CORPORATION/ PACIFIC
CARPET MANUFACTURING CORPORATION, DAVIDE. T. LIM, and
EVELYN LIM FORBES, Respondents
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking to reverse and set aside the January 8, 2016 Decision 1 and April 11, 2016
Resolution2 of the Court of Appeals (CA) in CA-G.R. SP No. 140663, which
affirmed the February 27, 2015 Decision3 and March 31, 2015 Resolution4 of the
National Labor Relations Commission (NLRC) in NLRC NCR Case No. 01-00109-
14; 01-00230-14; 01-00900-14; 01-01025-14; and 01-01133-14, for five (5)
consolidated complaints for illegal dismissal and unfair labor practice.
The Antecedents
Philippine Carpet Manufacturing Corporation (Phil Carpet). On January 3, 2011,
they were notified of the termination of their employment effective February 3,
2011 on the ground of cessation of operation due to serious business losses. They
were of the belief that their dismissal was without just cause and in violation of
due process because the closure of Phil Carpet was a mere pretense to transfer its
operations to its wholly owned and controlled corporation, Pacific Carpet
Manufacturing Corporation (PacificCarpet). They claimed that the job orders of
some regular clients of PhilCarpet were transferred to Pacific Carpet; and that
from October to November 2011, several machines were moved from the
premises of Phil Carpet to Pacific Carpet. They asserted that their dismissal
constituted unfair labor practice as it involved the mass dismissal of all union
officers and members of the Philippine Carpet Manufacturing Employees
Association (PHILCEA).
In its defense, Phil Carpet countered that it permanently closed and totally ceased
its operations because there had been a steady decline in the demand for its
products due to global recession, stiffer competition, and the effects of a changing
market. Based on the Audited Financial Statements5 conducted by SGV & Co., it
incurred losses of ₱4.1M in 2006; ₱12.8M in 2007; ₱53.28M in 2008; and
₱47.79M in 2009. As of the end of October 2010, unaudited losses already
amounted to ₱26.59M. Thus, in order to stem the bleeding, the company
implemented several cost-cutting measures, including voluntary redundancy and
early retirement programs. In 2007, the car carpet division was closed. Moreover,
from a high production capacity of about 6,000 square meters of carpet a month
in 2002, its final production capacity steadily went down to an average of 350
square meters per month for 2009 and 2010. Subsequently, the Board of
Directors decided to approve the recommendation of its management to cease
manufacturing operations. The termination of the petitioners' employment was
effective as of the close of office hours on February 3, 2011. Phil Carpet likewise
faithfully complied with the requisites for closure or cessation of business under
the Labor Code. The petitioners and the Department of Labor and
Employment (DOLE) were served written notices one (1) month before the
intended closure of the company. The petitioners ·were also paid their separation
pay and they voluntarily executed their respective Release and Quitclaim6 before
the DOLE officials.
The LA Ruling
In the September 29, 2014 Decision, 7 the Labor Arbiter (LA) dismissed the
complaints for illegal dismissal and unfair labor practice. It ruled that the
termination of the petitioners' employment was due to total cessation of
manufacturing operations of Phil Carpet because it suffered continuous serious
business losses from 2007 to 2010. The LA added that the closure was truly
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dictated by economic necessity as evidenced by its audited financial statements.
It observed that written notices of termination were served on the DOLE and on
the petitioners at least one (1) month before the intended date of closure. The LA
further found that the petitioners voluntarily accepted their separation pay and
other benefits and eventually executed their individual release and quitclaim in
favor of the company. Finally, it declared that there was no showing that the total
closure of operations was motivated by any specific and clearly determinable
union activity of the employees. The dispositive portion reads:
WHEREFORE, premises considered, judgment is hereby rendered DISMISSING
the complaint of Domingo P. Constantino, Jr. on ground of prescription of cause
of action and the consolidated complaints of the rest of complainants for lack of
merit.
SO ORDERED. 8
Unconvinced, the petitioners elevated an appeal before the NLRC.
The NLRC Ruling
In its February 27, 2015 Decision, the NLRC affirmed the findings of the LA. It
held that the Audited Financial Statements show that Phil Carpet continuously
incurred net losses starting 2007 leading to its closure in the year 2010. The
NLRC added that Phil Carpet complied with the procedural requirements of
effecting the closure of business pursuant to the Labor Code. Thefallo reads:
WHEREFORE, premises considered, complainants' appealfrom the Decision of
the Labor Arbiter Marita V. Padolina is hereby DISMISSED for lack of merit.
SO ORDERED. 9
Undeterred, the petitioners filed a motion for reconsideration thereof. In its
resolution, dated March 31, 2015, the NLRC denied the same.
Aggrieved, the petitioners filed a petition for certiorari with the CA.
The CA Ruling
In its assailed decision, dated January 8, 2016, the CA ruled that the total
cessation of Phil Carpet's manufacturing operations was not made in bad faith
because the same was clearly due to economic necessity. It determined that there
was no convincing evidence to show that the regular clients of Phil Carpet secretly
transferred their job orders to Pacific Carpet; and that Phil Carpet's machines
were not transferred to Pacific Carpet but were actually sold to the latter after the
closure of business as shown by the several sales invoices and official receipts
issued by Phil Carpet. The CA adjudged that the dismissal of the petitioners who
were union officers and members of PHILCEA did not constitute unfair labor
practice because Phil Carpet was able to show that the closure was due to serious
business losses.
The CA opined that the petitioners' claim that their termination was a mere
pretense because Phil Carpet continued operation through Pacific Carpet was
unfounded because mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality. The CA
disposed the petition in this wise:
WHEREFORE, premises considered, the instant petition for certiorari is hereby
DISMISSED.
SO ORDERED. 10
The petitioners moved for reconsideration, but their motion was denied by the
CA in its assailed resolution, dated April 11, 2016.
Hence, this present petition.
ISSUES
WHETHER THE PETITIONERS WERE DISMISSED FROM EMPLOYMENT
FOR A LAWFUL CAUSE
WHETHER THE PETITIONERS' TERMINATION FROM EMPLOYMENT
CONSTITUTES UNFAIR LABOR PRACTICE
WHETHER PACIFIC CARPET MAY BE HELD LIABLE FOR PHIL CARPET'S
OBLIGATIONS
WHETHER THE QUITCLAIMS SIGNED BY THE PETITIONERS ARE VALID
AND BINDING
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The petitioners argue that Phil Carpet did not totally cease its operations; that
most of the job orders of Phil Carpet were transferred to its wholly owned
subsidiary, Pacific Carpet; and that the signing of quitclaims did not bar them
from pursuing their case because they were made to believe that the closure was
legal.
In its Comment, 11 dated August 26, 2016, Phil Carpet averred that the
termination of the petitioners' employment as a consequence of its total closure
and cessation of operations was in accordance with law and supported by
substantial evidence; that the petitioners could only offer bare and self-serving
claims and sham evidence such as financial statements that did not pertain to
Phil Carpet; and that under the Labor Code, any compromise settlement
voluntarily agreed upon by the parties with the assistance of the regional office of
the DOLE was final and binding upon the parties.
In their Reply, 12 dated November 8, 2016, the petitioners alleged that the losses
of Phil Carpet were almost proportionate to the net income of its subsidiary,
Pacific Carpet; and that the alleged sale, which transpired between Phil Carpet
and Pacific Carpet, was simulated.
The Court's Ruling
The petition is bereft of merit.
The petitioners were terminated fromemploymentfor an authorized cause
Under Article 298 (formerly Article 283) of the Labor Code, closure or cessation
of operation of the establishment is an authorized cause for terminating an
employee, viz.:
Article 298. Closure of establishment and reduction ofpersonnel. -The employer
may also terminate the employment ofany employee due to the installation of
labor-saving devices, redundancy, retrenchment to prevent losses or the closing
or cessation of operations of the establishment or undertaking unless the closing
is for the purpose of circumventing the provisions of this Title, by serving a
written notice on the workers and the Department of Labor and Employment at
least one (1) month before the intended date thereof. In case of termination due
to the installation of labor-saving devices or redundancy, the worker affected
thereby shall be entitled to a separation pay equivalent to at least one (1) month
pay or to at least one (1) month pay for every year of service, whichever is higher.
In case of retrenchment to prevent losses and in cases of closure or cessation of
operations of establishment or undertaking not due to serious business losses or
financial reverses, the separation pay shall be equivalent to at least one (1) month
pay or at least one-half (1/2) month pay for every year of service, whichever is
higher. A fraction of at least six (6) months shall be considered as one (1) whole
year. [Emphases supplied]
Closure of business is the reversal of fortune of the employer whereby there is a
complete cessation of business operations and/or an actual locking-up of the
doors of establishment, usually due to financial losses. Closure of business, as an
authorized cause for termination of employment, aims to prevent further
financial drain upon an employer who cannot pay anymore his employees since
business has already stopped. In such a case, the employer is generally required
to give separation benefits to its employees, unless the closure is due to serious
business losses. 13
Further, in Industrial Timber Corporation v. Ababon, 14 the Court held:
A reading of the foregoing law shows that a partial or total closure or cessation of
operations of establishment or undertaking may either be due to serious business
losses or financial reverses or otherwise. Under the first kind, the employer must
sufficiently and convincingly prove its allegation of substantial losses, while
under the second kind, the employer can lawfully close shop anytime as long as
cessation of or withdrawal from business operations was bona fide in character
and not impelled by a motive to defeat orcircumvent the tenurial rights of
employees, and as long as he pays his employees their termination pay in the
amount corresponding to their length of service. Just as no law forces anyone to
go into business, no law can compel anybody to continue the same. It would be
stretching the intent and spirit of the law if a court interferes with management's
prerogative to close or cease its business operations just because the business is
not suffering from any loss or because of the desire to provide the workers
continued employment.
In sum, under Article 283 of the Labor Code, three requirements are necessary
for a valid cessation of business operations: (a) service of a written notice to the
employees and to the DOLE at least one month before the intended date thereof;
(b) the cessation of business must be bona fide in character; and (c) payment to
the employees of termination pay amounting to one month pay or at least one-
half month pay for every year of service, whichever is higher. 15 [citations
omitted]
In this case, the LA's findings that Phil Carpet suffered from serious business
losses which resulted in its closure were affirmed in toto by the NLRC, and
subsequently by the CA. It is a rule that absent any showing that the findings of
fact of the labor tribunals and the appellate court are not supported by evidence
on record or the judgment is based on a misapprehension of facts, the Court shall
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not examine anew the evidence submitted by the parties. 16 In Alfaro v. Court of separation pay equivalent to 100% of their monthly basic salary for every year of
Appeals, 17 the Court explained the reasons therefor, to wit: service.

The Supreme Court is not a trier of facts, and this doctrine applies with greater The dismissal of the petitioners did not amount to unfair labor practice
force in labor cases. Factual questions are for the labor tribunals to resolve. In
this case, the factual issues have already been determined by the labor arbiter and Article 259 (formerly Article 248) of the Labor Code enumerates the unfair labor
the National Labor Relations Commission. Their findings were affirmed by the practices of employers, to wit:
CA. Judicial review by this Court does not extend to a reevaluation of the
sufficiency of the evidence upon which the proper labor tribunal has based its
determination. Art. 259. Unfair Labor Practices of Employers. - It shall be unlawful for an
employer to commit any of the following unfair labor practices:
Indeed, factual findings of labor officials who are deemed to have acquired
expertise in matters within their respective jurisdictions are generally accorded (a) To interfere with, restrain or coerce employees in the exercise of their right to
not only respect, but even finality, and are binding on the Supreme Court. Verily, self-organization;
their conclusions are accorded great weight upon appeal, especially when
supported by substantial evidence. Consequently, the Supreme Court is not duty- (b) To require a:s a condition of employment that a person or an employee shall
bound to delve into the accuracy of their factual findings, in the absence of a clear not join a labor organization or shall withdraw from one to which he belongs;
showing that the same were arbitrary and bereft of any rational basis. 18
(c) To contract out services or functions being performed by union members
Even after perusal of the records, the Court finds no reason to take exception when such will interfere with, restrain or coerce employees in the exercise of their
from the foregoing rule. Phil Carpet continuously incurred losses starting 2007, right to self-organization;
as shown by the Audited Financial Statements 19 which were offered in evidence
by the petitioners themselves. The petitioners, in claiming that Phil Carpet
(d) To initiate, dominate, assist or otherwise interfere with the formation or
continued to earn profit in 2011 and 2012, disregarded the reason for such
administration of any labor organization, including the giving of financial or
income, which was Phil Carpet's act of selling its remaining inventories.
other support to it or its organizers or supporters;
Notwithstanding such income, Phil Carpet continued to incur total
comprehensive losses in the amounts of ₱9,559,716 and ₱12,768,277 for the years
2011 and 2012, respectively. 20 (e) To discriminate in regard to wages, hours of work and other terms and
conditions of employment in order to encourage or discourage membership in
any labor organization. Nothing in this Code or in any other law shall stop the
Further, even if the petitioners refuse to consider these losses as serious enough
parties from requiring membership in a recognized collective bargaining agent as
to warrant Phil Carpet's total and permanent closure, it was a business judgment
a condition for employment, except those employees who are already members of
on the part of the company's owners and stockholders to cease operations, a
another union at the time of the signing of the collective bargaining agreement.
judgment which the Court has no business interfering with. The only limitation
Employees of an appropriate bargaining unit who are not members of the
provided by law is that the closure must be "bonafide in character and not
recognized collective bargaining agent may be assessed a reasonable fee
impelled by a motive to defeat or circumvent thetenurial rights of
equivalent to the dues and other fees paid by members of the recognized
employees."21 Thus, when an employer complies with the foregoing conditions,
collective bargaining agent, if such non-union members accept the benefits under
the Court cannot prohibit closure "just because the business is not suffering from
the collective bargaining agreement: Provided, That the individual authorization
any loss or because of the desire to provide the workers continued
required under Article 242, paragraph (o) of this Code shall not apply to the non-
employment."22
members of the recognized collective bargaining agent;

Finally, Phil Carpet notified DOLE23 and the petitioners24 of its decision to cease
(f) To dismiss, discharge or otherwise prejudice or discriminate against an
manufacturing operations on January 3, 2011, or at least one (1) month prior to
employee for having given or being about to give testimony under this Code;
the intended date of closure on February 3, 2011. The petitioners were also given

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(g) To violate the duty to bargain collectively as prescribed by this Code;
(h) To pay negotiation or attorney's fees to the union or its officers or agents as
part of the settlement of any issue in collective bargaining or any other dispute; or
(i) To violate a collective bargaining agreement.
The provisions of the preceding paragraph notwithstanding, only the officers and
agents of corporations, associations or partnerships who have actually
participated in, authorized or ratified unfair labor practices shall be held
criminally liable.
Unfair labor practice refers to acts that violate the workers' right to
organize.25 There should be no dispute that all the prohibited acts constituting
unfair labor practice in essence relate to the workers' right to self-
organization.26Thus, an employer may only be held liable for unfair labor practice
if it can be shown that his acts affect in whatever manner the right of his
employees to self-organize. 27
The general principle is that one who makes an allegation has the burden of
proving it. Although there are exceptions to this general rule, in the case of unfair
labor practice, the alleging party has the burden of proving it. 28In the case
of Standard Chartered Bank Employees Union (NUBE) v. Confesor,29 this Court
elaborated:
In order to show that the employer committed ULP under the Labor
Code, substantial evidence is required to support the claim. Substantial
evidence has been defined as such relevantevidence as a reasonable mind might
accept as adequate to support a conclusion. 30 [Emphasis supplied]
Moreover, good faith is presumed and he who alleges bad faith has the duty to
prove the same. 31
The petitioners miserably failed to discharge the duty imposed upon them. They
did not identify the acts of Phil Carpet which, they claimed, constituted unfair
labor practice. They did not even point out the specific provisions which Phil
Carpet violated. Thus, they would have the Court pronounce that Phil Carpet
committed unfair labor practice on the ground that they were dismissed from
employment simply because they were union officers and members. The
constitutional commitment to the policy of social justice, however, cannot be
understood to mean that every labor dispute shall automatically be decided in
favor of labor.32
In this case, as far as the pieces of evidence offered by the petitioners are
concerned, there is no showing that the closure of the company was an attempt at
union-busting. Hence, the charge that Phil Carpet is guilty of unfair labor practice
must fail for lack of merit.
Pacific Carpethasapersonalityseparateand distinct from Phil Carpet
The petitioners, in asking the Court to disregard the separate corporate
personality of Pacific Carpet and to make it liable for the obligations of Phil
Carpet, rely heavily on the former being a subsidiary of the latter.
A corporation is an artificial being created by operation of law. It possesses the
right of succession and such powers, attributes, and properties expressly
authorized by law or incident to its existence. It has a personality separate and
distinct from the persons composing it, as well as from any other legal entity to
which may be related. 33
Equally well-settled is the principle that the corporate mask may be removed or
the corporate veil pierced when the corporation is just an alter ego of a person or
of another corporation. For reasons of public policy and in the interest of justice,
the corporate veil will justifiably be impaled only when it becomes a shield for
fraud, illegality or inequity committed against third persons. 34
Hence, any application of the doctrine of piercing the corporate veil should be
done with caution. A court should be mindful of the milieu where it is to be
applied. It must be certain that the corporate fiction was misused to such an
extent that injustice, fraud, or crime was committed against another, in disregard
of rights. The wrongdoing must be clearly and convincingly established; it cannot
be presumed. Otherwise, an injustice that was never unintended may result from
an erroneous application. 35
Further, the Court's ruling in Philippine National Bank v. HydroResources
Contractors Corporation 36 is enlightening,viz.:
The doctrine of piercing the corporate veil applies only in three (3) basic areas,
namely: 1) defeat of public convenience as when the corporate fiction is used as a
vehicle for the evasion of an existing obligation; 2) fraud cases or when the
corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3)
alter ego cases, where a corporation is merely a farce since it is a mere alter ego or
business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.
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xxxx
In this connection, case law lays down a three-pronged test to determine the
application of the alter ego theory, which is also known as the instrumentality
theory, namely:
(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 plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the
injury or unjust loss complained of.
The first prong is the "instrumentality" or "control" test. This test requires that
the subsidiary be completely under the control and domination of the parent. It
examines the parent corporation's relationship with the subsidiary. It inquires
whether a subsidiary corporation is so organized and controlled and its affairs are
so conducted as to make it a mere instrumentality or agent of the parent
corporation such that its separate existence as a distinct corporate entity will be
ignored. It seeks to establish whether the subsidiary corporation has no
autonomy and the parent corporation, though acting through the subsidiary in
form and appearance, "is operating the business directly for itself."
The second prong is the "fraud" test. This test requires that the parent
corporation's conduct in using the subsidiary corporation be unjust, fraudulent or
wrongful.1âwphi1 It examines the relationship of the plaintiff to the corporation.
It recognizes that piercing is appropriate only if the parent corporation uses the
subsidiary in a way that harms the plaintiff creditor. As such, it requires a
showing of "an element of injustice or fundamental unfairness."
The third prong is the "harm" test. This test requires the plaintiff to show that the
defendant's control, exerted in a fraudulent, illegal or otherwise unfair manner
toward it, caused the harm suffered. A causal connection between the fraudulent
conduct committed through the instrumentality of the subsidiary and the injury
suffered or the damage incurred by the plaintiff should be established. The
plaintiff must prove that, unless the corporate veil is pierced, it will have been
treated unjustly by the defendant's exercise of control and improper use of the
corporate form and, thereby, suffer damages.
To summarize, piercing the corporate veil based on the alter ego theory requires
the concurrence of three elements: control of the corporation by the stockholder
or parent corporation, fraud or fundamental unfairness imposed on the plaintiff,
and harm or damage caused to the plaintiff by the fraudulent or unfair act of the
corporation. The absence of any of these elements prevents piercing the corporate
veil.37 [Citations omitted]
The Court finds that none of the tests has been satisfactorily met in this case.
Although ownership by one corporation of all or a great majority of stocks of
another corporation and their interlocking directorates may serve as indicia of
control, by themselves and without more, these circumstances are insufficient to
establish an alter ego relationship or connection between Phil Carpet on the one
hand and Pacific Carpet on the other hand, that will justify the puncturing of the
latter's corporate cover.38
This Court has declared that "mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a corporation is not
of itself sufficient ground for disregarding the separate corporate
personality."39 It has likewise ruled that the "existence of interlocking directors,
corporate officers and shareholders is not enough justification to pierce the veil of
corporate fiction in the absence of fraud or other public policy considerations."40
It must be noted that Pacific Carpet was registered with the Securities and
Exchange Commission on January 29, 1999,41 such that it could not be said that
Pacific Carpet was set up to evade Phil Carpet's liabilities. As to the transfer of
Phil Carpet's machines to Pacific Carpet, settled is the rule that "where one
corporation sells or otherwise transfers all its assets to another corporation for
value, the latter is not, by that fact alone, liable for the debts and liabilities of the
transferor. "42
All told, the petitioners failed to present substantial evidence to prove their
allegation that Pacific Carpet is a mere alter ego of Phil Carpet.
The quitclaims were valid and binding upon the petitioners
Where the person making the waiver has done so voluntarily, with a full
understanding thereof, and the consideration for the quitclaim is credible and
reasonable, the transaction must be recognized as being a valid and binding
undertaking.43 Not all quitclaims are per se invalid or against policy, except (1)
where there is clear proof that the waiver was wangled from an unsuspecting or
gullible person, or (2) where the terms of settlement are unconscionable on their
face; in these cases, the law will step in to annul the questionable transactions. 44
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In this case, the petitioners question the validity of the quitclaims they signed on
the ground that Phil Carpet's closure was a mere pretense. As the closure of Phil
Carpet, however, was supported by substantial evidence, the petitioners' reason
for seeking the invalidation of the quitclaims must necessarily fail. Further, as
aptly observed by the CA, the contents of the quitclaims, which were in Filipino,
were clear and simple, such that it was unlikely that the petitioners did not
understand what they were signing.45 Finally, the amount they received was
reasonable as the same complied with the requirements of the Labor Code.

WHEREFORE, the petition is DENIED. The January 8, 2016Decision and

April 11, 2016 Resolution of the Court of Appeals in CA-G.R. SP No. 140663,
are AFFIRMED intoto.

SO ORDERED.

JOSE CATRAL MENDOZA

Associate Justice

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THIRD DIVISION August 1, 1997 3,361,494.96

August 14, 1997 980,000.00
G.R. No. 166282 February 13, 2013 August 21, 1997 2,527,200.00
August 21, 1997 3,146,715.00
HEIRS OF FE TAN UY (Represented by her heir, Mauling Uy
Lim), Petitioners, September 3, 1997 1,385,511.75
vs. Total ₱24,938,898.08
INTERNATIONAL EXCHANGE BANK, Respondent.
These were made pursuant to the Letter-Agreement,4 dated March 23, 1996,
x-----------------------x between iBank and Hammer, represented by its President and General Manager,
Manuel Chua (Chua) a.k.a. Manuel Chua Uy Po Tiong, granting Hammer a P 25
G.R. No. 166283 Million-Peso Omnibus Line.5 The loans were secured by a P 9 Million-Peso Real
Estate Mortgage6executed on July 1, 1997 by Goldkey Development Corporation
(Goldkey) over several of its properties and a P 25 Million-Peso Surety
GOLDKEYDEVELOPMENT CORPORATION, Petitioner, Agreement7 signed by Chua and his wife, Fe Tan Uy (Uy), on April 15, 1996.
vs.
INTERNATIONAL EXCHANGE BANK, Respondent.
As of October 28, 1997, Hammer had an outstanding obligation of ₱25,420,177.62
to iBank.8 Hammer defaulted in the payment of its loans, prompting iBank to
DECISION foreclose on Goldkey’s third-party Real Estate Mortgage. The mortgaged
properties were sold for P 12 million during the foreclosure sale, leaving an
MENDOZA, J.: unpaid balance of P 13,420,177.62.9 For failure of Hammer to pay the deficiency,
iBank filed a Complaint10 for sum of money on December 16, 1997 against
Before the Court are two consolidated petitions for review on certiorari under Hammer, Chua, Uy, and Goldkey before the Regional Trial Court, Makati
Rule 45 of the 1997 Revised Rules of Civil Procedure, assailing the August 16, City (RTC).11
2004 Decision1 and the December 2, 2004 Resolution2 of the Court of
Appeals (CA) in CA-G.R. CV No. 69817 entitled "International Exchange Bank v. Despite service of summons, Chua and Hammer did not file their respective
Hammer Garments Corp., et al." answers and were declared in default. In her separate answer, Uy claimed that
she was not liable to iBank because she never executed a surety agreement in
The Facts favor of iBank. Goldkey, on the other hand, also denies liability, averring that it
acted only as a third-party mortgagor and that it was a corporation separate and
distinct from Hammer.12
On several occasions, from June 23, 1997 to September 3, 1997, respondent
International Exchange Bank (iBank), granted loans to Hammer Garments
Corporation (Hammer), covered by promissory notes and deeds of assignment, Meanwhile, iBank applied for the issuance of a writ of preliminary attachment
in the following amounts:3 which was granted by the RTC in its December 17, 1997 Order.13 The Notice of
Levy on Attachment of Real Properties, dated July 15, 1998, covering the
properties under the name of Goldkey, was sent by the sheriff to the Registry of
Date of Promissory Note Amount Deeds of Quezon City.14
June 23, 1997 P 5,599,471.33
July 24, 1997 2,700,000.00 The RTC, in its Decision,15 dated December 27, 2000, ruled in favor of iBank.
While it made the pronouncement that the signature of Uy on the Surety
July 25, 1997 2,300,000.00
Agreement was a forgery, it nevertheless held her liable for the outstanding
August 1, 1997 2,938,505.04 obligation of Hammer because she was an officer and stockholder of the said
corporation. The RTC agreed with Goldkey that as a third-party mortgagor, its

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liability was limited to the properties mortgaged. It came to the conclusion,
however, that Goldkey and Hammer were one and the same entity for the
following reasons: (1) both were family corporations of Chua and Uy, with Chua
as the President and Chief Operating Officer; (2) both corporations shared the
same office and transacted business from the same place, (3) the assets of
Hammer and Goldkey were co-mingled; and (4) when Chua absconded, both
Hammer and Goldkey ceased to operate. As such, the piercing of the veil of
corporate fiction was warranted. Uy, as an officer and stockholder of Hammer
and Goldkey, was found liable to iBank together with Chua, Hammer and
Goldkey for the deficiency of ₱13,420,177.62.
Aggrieved, the heirs of Uy and Goldkey (petitioners) elevated the case to the CA.
On August 16, 2004, it promulgated its decision affirming the findings of the
RTC. The CA found that iBank was not negligent in evaluating the financial
stability of Hammer. According to the appellate court, iBank was induced to grant
the loan because petitioners, with intent to defraud the bank, submitted a
falsified Financial Report for 1996 which incorrectly declared the assets and
cashflow of Hammer.16 Because petitioners acted maliciously and in bad faith and
used the corporate fiction to defraud iBank, they should be treated as one and the
same as Hammer.17
Hence, these petitions filed separately by the heirs of Uy and Goldkey. On
February 9, 2005, this Court ordered the consolidation of the two cases.18
The Issues
Petitioners raise the following issues:
Whether or not a trial court, under the facts of this case, can go out of
the issues raised by the pleadings;19
Whether or not there is guilt by association in those cases where the
veil of corporate fiction may be pierced;20 and
Whether or not the "alter ego" theory in disregarding the corporate
personality of a corporation is applicable to Goldkey.21
Simplifying the issues in this case, the Court must resolve the following: (1)
whether Uy can be held liable to iBank for the loan obligation of Hammer as an
officer and stockholder of the said corporation; and (2) whether Goldkey can be
held liable for the obligation of Hammer for being a mere alter ego of the latter.
The Court’s Ruling
The petitions are partly meritorious.
Uy is not liable; The piercing of the
veil of corporate fiction is not justified
The heirs of Uy argue that the latter could not be held liable for being merely an
officer of Hammer and Goldkey because it was not shown that she had committed
any actionable wrong22 or that she had participated in the transaction between
Hammer and iBank. They further claim that she had cut all ties with Hammer
and her husband long before the execution of the loan.23
The Court finds in favor of Uy.
Basic is the rule in corporation law that a corporation is a juridical entity which is
vested with a legal personality separate and distinct from those acting for and in
its behalf and, in general, from the people comprising it. Following this principle,
obligations incurred by the corporation, acting through its directors, officers and
employees, are its sole liabilities. A director, officer or employee of a corporation
is generally not held personally liable for obligations incurred by the
corporation.24 Nevertheless, this legal fiction may be disregarded if it is used as a
means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate
issues.25 This is consistent with the provisions of the Corporation Code of the
Philippines, which states:
Sec. 31. Liability of directors, trustees or officers. – Directors or trustees who
wilfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in conflict
with their duty as such directors or trustees shall be liable jointly and severally for
all damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons.
Solidary liability will then attach to the directors, officers or employees of the
corporation in certain circumstances, such as:
1. When directors and trustees or, in appropriate cases, the officers of a
corporation: (a) vote for or assent to patently unlawful acts of the
corporation; (b) act in bad faith or with gross negligence in directing the
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corporate affairs; and (c) are guilty of conflict of interest to the prejudice
of the corporation, its stockholders or members, and other persons;
2. When a director or officer has consented to the issuance of watered
stocks or who, having knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto;
3. When a director, trustee or officer has contractually agreed or
stipulated to hold himself personally and solidarily liable with the
corporation; or
4. When a director, trustee or officer is made, by specific provision of
law, personally liable for his corporate action.26
Before a director or officer of a corporation can be held personally liable for
corporate obligations, however, the following requisites must concur: (1) the
complainant must allege in the complaint that the director or officer assented to
patently unlawful acts of the corporation, or that the officer was guilty of gross
negligence or bad faith; and (2) the complainant must clearly and convincingly
prove such unlawful acts, negligence or bad faith.27
While it is true that the determination of the existence of any of the
circumstances that would warrant the piercing of the veil of corporate fiction is a
question of fact which cannot be the subject of a petition for review on certiorari
under Rule 45, this Court can take cognizance of factual issues if the findings of
the lower court are not supported by the evidence on record or are based on a
misapprehension of facts.28
In this case, petitioners are correct to argue that it was not alleged, much less
proven, that Uy committed an act as an officer of Hammer that would permit the
piercing of the corporate veil. A reading of the complaint reveals that with regard
to Uy, iBank did not demand that she be held liable for the obligations of
Hammer because she was a corporate officer who committed bad faith or gross
negligence in the performance of her duties such that the lifting of the corporate
mask would be merited. What the complaint simply stated is that she, together
with her errant husband Chua, acted as surety of Hammer, as evidenced by her
signature on the Surety Agreement which was later found by the RTC to have
been forged.29
Considering that the only basis for holding Uy liable for the payment of the loan
was proven to be a falsified document, there was no sufficient justification for the
RTC to have ruled that Uy should be held jointly and severally liable to iBank for
the unpaid loan of Hammer. Neither did the CA explain its affirmation of the
RTC’s ruling against Uy. The Court cannot give credence to the simplistic
declaration of the RTC that liability would attach directly to Uy for the sole reason
that she was an officer and stockholder of Hammer.
At most, Uy could have been charged with negligence in the performance of her
duties as treasurer of Hammer by allowing the company to contract a loan
despite its precarious financial position. Furthermore, if it was true, as petitioners
claim, that she no longer performed the functions of a treasurer, then she should
have formally resigned as treasurer to isolate herself from any liability that could
result from her being an officer of the corporation. Nonetheless, these
shortcomings of Uy are not sufficient to justify the piercing of the corporate veil
which requires that the negligence of the officer must be so gross that it could
amount to bad faith and must be established by clear and convincing evidence.
Gross negligence is one that is characterized by the lack of the slightest care,
acting or failing to act in a situation where there is a duty to act, wilfully and
intentionally with a conscious indifference to the consequences insofar as other
persons may be affected.30
It behooves this Court to emphasize that the piercing of the veil of corporate
fiction is frowned upon and can only be done if it has been clearly established
that the separate and distinct personality of the corporation is used to justify a
wrong, protect fraud, or perpetrate a deception.31 As aptly explained in Philippine
National Bank v. Andrada Electric & Engineering Company:32
Hence, any application of the doctrine of piercing the corporate veil should be
done with caution. A court should be mindful of the milieu where it is to be
applied. It must be certain that the corporate fiction was misused to such an
extent that injustice, fraud, or crime was committed against another, in disregard
of its rights. The wrongdoing must be clearly and convincingly established; it
cannot be presumed. Otherwise, an injustice that was never unintended may
result from an erroneous application.33
Indeed, there is no showing that Uy committed gross negligence. And in the
absence of any of the aforementioned requisites for making a corporate officer,
director or stockholder personally liable for the obligations of a corporation, Uy,
as a treasurer and stockholder of Hammer, cannot be made to answer for the
unpaid debts of the corporation.
Goldkey is a mere alter ego of Hammer
Goldkey contends that it cannot be held responsible for the obligations of its
stockholder, Chua.34 Moreover, it theorizes that iBank is estopped from
expanding Goldkey’s liability beyond the real estate mortgage.35 It adds that it did
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not authorize the execution of the said mortgage.36 Finally, it passes the blame on
to iBank for failing to exercise the requisite due diligence in properly evaluating
Hammer’s creditworthiness before it was extended an omnibus line.37
The Court disagrees with Goldkey.
There is no reason to discount the findings of the CA that iBank duly inspected
the viability of Hammer and satisfied itself that the latter was a good credit risk
based on the Financial Statement submitted. In addition, iBank required that the
loan be secured by Goldkey’s Real Estate Mortgage and the Surety Agreement
with Chua and Uy. The records support the factual conclusions made by the RTC
and the CA.
To the Court’s mind, Goldkey’s argument, that iBank is barred from pursuing
Goldkey for the satisfaction of the unpaid obligation of Hammer because it had
already limited its liability to the real estate mortgage, is completely absurd.
Goldkey needs to be reminded that it is being sued not as a consequence of the
real estate mortgage, but rather, because it acted as an alter ego of Hammer.
Accordingly, they must be treated as one and the same entity, making Goldkey
accountable for the debts of Hammer.
In fact, it is Goldkey who is now precluded from denying the validity of the Real
Estate Mortgage. In its Answer with Affirmative Defenses and Compulsory
Counterclaim, dated January 5, 1998, it already admitted that it acted as a third-
party mortgagor to secure the obligation of Hammer to iBank.38 Thus, it cannot,
at this late stage, question the due execution of the third-party mortgage.
Similarly, Goldkey is undoubtedly mistaken in claiming that iBank is seeking to
enforce an obligation of Chua. The records clearly show that it was Hammer, of
which Chua was the president and a stockholder, which contracted a loan from
iBank. What iBank sought was redress from Goldkey by demanding that the veil
of corporate fiction be lifted so that it could not raise the defense of having a
separate juridical personality to evade liability for the obligations of Hammer.
Under a variation of the doctrine of piercing the veil of corporate fiction, when
two business enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the rights of third
parties, disregard the legal fiction that two corporations are distinct entities and
treat them as identical or one and the same.39
While the conditions for the disregard of the juridical entity may vary, the
following are some probative factors of identity that will justify the application of
the doctrine of piercing the corporate veil, as laid down in Concept Builders, Inc.
v NLRC:40
(1) Stock ownership by one or common ownership of both corporations;
(2) Identity of directors and officers;
(3) The manner of keeping corporate books and records, and
(4) Methods of conducting the business.41
These factors are unquestionably present in the case of Goldkey and Hammer, as
observed by the RTC, as follows:
1. Both corporations are family corporations of defendants Manuel Chua and his
wife Fe Tan Uy. The other incorporators and shareholders of the two
corporations are the brother and sister of Manuel Chua (Benito Ng Po Hing and
Nenita Chua Tan) and the sister of Fe Tan Uy, Milagros Revilla. The other
incorporator/share holder is Manling Uy, the daughter of Manuel Chua Uy Po
Tiong and Fe Tan Uy.
The stockholders of Hammer Garments as of March 23, 1987, aside from spouses
Manuel and Fe Tan Uy are: Benito Chua, brother Manuel Chua, Nenita Chua Tan,
sister of Manuel Chua and Tessie See Chua Tan. On March 8, 1988, the shares of
Tessie See Chua Uy were assigned to Milagros T. Revilla, thereby consolidating
the shares in the family of Manuel Chua and Fe Tan Uy.
2. Hammer Garments and Goldkey share the same office and practically transact
their business from the same place.
3. Defendant Manuel Chua is the President and Chief Operating Officer of both
corporations. All business transactions of Goldkey and Hammer are done at the
instance of defendant Manuel Chua who is authorized to do so by the
corporations.
The promissory notes subject of this complaint are signed by him as Hammer’s
President and General Manager. The third-party real estate mortgage of
defendant Goldkey is signed by him for Goldkey to secure the loan obligation of
Hammer Garments with plaintiff "iBank". The other third-party real estate
mortgages which Goldkey executed in favor of the other creditor banks of
Hammer are also assigned by Manuel Chua.
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4. The assets of Goldkey and Hammer are co-mingled. The real properties of
Goldkey are mortgaged to secure Hammer’s obligation with creditor banks.

The proceed of at least two loans which Hammer obtained from plaintiff "iBank",
purportedly to finance its export to Wal-Mart are instead used to finance the
purchase of a manager’s check payable to Goldkey. The defendants’ claim that
Goldkey is a creditor of Hammer to justify its receipt of the Manager’s check is
not substantiated by evidence. Despite subpoenas issued by this Court, Goldkey
thru its treasurer, defendant Fe Tan Uy and or its corporate secretary Manling Uy
failed to produce the Financial Statement of Goldkey.

5. When defendant Manuel Chua "disappeared", the defendant Goldkey ceased to

operate despite the claim that the other "officers" and stockholders like Benito
Chua, Nenita Chua Tan, Fe Tan Uy, Manling Uy and Milagros T. Revilla are still
around and may be able to continue the business of Goldkey, if it were different
or distinct from Hammer which suffered financial set back.42

Based on the foregoing findings of the RTC, it was apparent that Goldkey was
merely an adjunct of Hammer and, as such, the legal fiction that it has a separate
personality from that of Hammer should be brushed aside as they are,
undeniably, one and the same.

WHEREFORE, the petition are PARTLY GRANTED. The August 16, 2004
Decision and the December 2, 2004 Resolution of the Court of Appeals in CA-
G.R. CV No. 69817, are hereby MODIFIED. Fe Tan Uy is released from any
liability arising from the debts incurred by Hammer from iBank. Hammer
Garments Corporation, Manuel Chua Uy Po Tiong and Goldkey Development
Corporation are jointly and severally liable to pay International Exchange Bank
the sum of ₱13,420,177.62 representing the unpaid loan obligation of Hammer as
of December 12, 1997 plus interest. No costs.

SO ORDERED.

JOSE CATRAL MENDOZA

Associate Justice

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THIRD DIVISION The Maria Cristina Chemical Industries (MCCI) and three (3) Korean
corporations, namely, the Ssangyong Corporation, the Pohang Iron and Steel
Company and the Dongil Industries Company, Ltd., decided to forge a joint
venture and establish a corporation, under the name of the Mindanao Ferroalloy
Corporation (Corporation for brevity) with principal offices in Iligan City.
[G.R. No. 153535. July 28, 2005]
Ricardo P. Guevara was the President and Chairman of the Board of Directors of
the Corporation. Jong-Won Hong, the General Manager of Ssangyong
Corporation, was the Vice-President of the Corporation for Finance, Marketing
and Administration. So was Teresita R. Cu. On November 26, 1990, the Board of
SOLIDBANK CORPORATION, petitioner, vs. MINDANAO Directors of the Corporation approved a Resolution authorizing its President and
FERROALLOY CORPORATION, Spouses JONG-WON HONG and Chairman of the Board of Directors or Teresita R. Cu, acting together with Jong-
SOO-OK KIM HONG,* TERESITA CU, and RICARDO P. GUEVARA Won Hong, to secure an omnibus line in the aggregate amount
and Spouse,** respondents. of P30,000,000.00 from the Solidbank x x x.

DECISION xxxxxxxxx

PANGANIBAN, J.:
To justify an award for moral and exemplary damages under Articles 19 to 21
of the Civil Code (on human relations), the claimants must establish the other
partys malice or bad faith by clear and convincing evidence.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,
assailing the December 21, 2001 Decision[2] and the May 15, 2002 Resolution[3] of
the Court of Appeals (CA) in CA-GR CV No. 67482. The CA disposed as follows:
IN THE LIGHT OF ALL THE FOREGOING, the appeal is DISMISSED.
The Decision appealed from is AFFIRMED.[4]
The assailed Resolution, on the other hand, denied petitioners Motion for
Reconsideration.
The Facts
The CA narrated the antecedents as follows:
In the meantime, the Corporation started its operations sometime in April, 1991.
Its indebtedness ballooned to P200,453,686.69 compared to its assets of
only P65,476,000.00. On May 21, 1991, the Corporation secured an ordinary time
loan from the Solidbank in the amount of P3,200,000.00. Another ordinary time
loan was granted by the Bank to the Corporation on May 28, 1991, in the amount
of P1,800,000.00 or in the total amount of P5,000,000.00, due on July 15 and
26, 1991, respectively.
However, the Corporation and the Bank agreed to consolidate and, at the same
time, restructure the two (2) loan availments, the same payable on September 20,
1991. The Corporation executed Promissory Note No. 96-91-00865-6 in favor of
the Bank evidencing its loan in the amount of P5,160,000.00, payable on
September 20, 1991. Teresita Cu and Jong-Won Hong affixed their signatures on
the note. To secure the payment of the said loan, the Corporation, through Jong-
Won Hong and Teresita Cu, executed a Deed of Assignment in favor of the Bank
covering its rights, title and interest to the following:
The entire proceeds of drafts drawn under Irrevocable Letter of Credit No. M-S-
041-2002080 opened with The Mitsubishi Bank Ltd. Tokyo dated June 13, 1991
for the account of Ssangyong Japan Corporation, 7F. Matsuoka-Tamura-Cho
Bldg., 22-10, 5-Chome, Shimbashi, Minato-Ku, Tokyo, Japan up to the extent of
US$197,679.00
The Corporation likewise executed a Quedan, by way of additional security, under
which the Corporation bound and obliged to keep and hold, in trust for the Bank
or its Order, Ferrosilicon for US$197,679.00. Jong-Won Hong and Teresita Cu
affixed their signatures thereon for the Corporation. The Corporation, also,

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 CORPORATION LAW- 1
through Jong-Won Hong and Teresita Cu, executed a Trust Receipt Agreement,
by way of additional security for said loan, the Corporation undertaking to hold in
trust, for the Bank, as its property, the following:
1. THE MITSUBISHI BANK LTD., Tokyo L/C No. M-S-041-2002080
for account of Ssangyong Japan Corporation, Tokyo, Japan for
US$197,679.00 Ferrosilicon to expire September 20, 1991.
2. SEC QUEDAN NO. 91-476 dated June 26, 1991 covering the
following:
Ferrosilicon for US$197,679.00
However, shortly after the execution of the said deeds, the Corporation stopped
its operations. The Corporation failed to pay its loan availments from the Bank
inclusive of accrued interest. On February 11, 1992, the Bank sent a letter to the
Corporation demanding payment of its loan availments inclusive of interests due.
The Corporation failed to comply with the demand of the Bank. On November 23,
1992, the Bank sent another letter to the [Corporation] demanding payment of its
account which, by November 23, 1992, had amounted to P7,283,913.33. The
Corporation again failed to comply with the demand of the Bank.
On January 6, 1993, the Bank filed a complaint against the Corporation with the
Regional Trial Court of Makati City, entitled and docketed as Solidbank
Corporation vs. Mindanao Ferroalloy Corporation, Sps. Jong-Won Hong and
the Sps. Teresita R. Cu, Civil Case No. 93-038 for Sum of Money with a plea for
the issuance of a writ of preliminary attachment. x x x
xxxxxxxxx
Under its Amended Complaint, the Plaintiff alleged that it impleaded Ricardo
Guevara and his wife as Defendants because, [among others]:
Defendants JONG-WON HONG and TERESITA CU, are the Vice-Presidents of
defendant corporation, and also members of the companys Board of Directors.
They are impleaded as joint and solidary debtors of [petitioner] bank having
signed the Promissory Note, Quedan, and Trust Receipt agreements with
[petitioner], in this case.
xxxxxxxxx
[Petitioner] likewise filed a criminal complaint x x x entitled and docketed as
Solidbank Corporation vs. Ricardo Guevara, Teresita R. Cu and Jong Won Hong x
x x for Violation of P.D. 115. On April 14, 1993, the investigating Prosecutor issued
a Resolution finding no probable cause for violation of P.D. 115 against the
Respondents as the goods covered by the quedan were nonexistent:
xxxxxxxxx
In their Answer to the complaint [in the civil case], the Spouses Jong-Won Hong
and Soo-ok Kim Hong alleged, inter alia, that [petitioner] had no cause of action
against them as:
x x x the clean loan of P5.1 M obtained was a corporate undertaking of defendant
MINFACO executed through its duly authorized representatives, Ms. Teresita R.
Cu and Mr. Jong-Won Hong, both Vice Presidents then of MINFACO. x x x.
xxxxxxxxx
[On their part, respondents] Teresita Cu and Ricardo Guevara alleged that
[petitioner] had no cause of action against them because: (a) Ricardo Guevara did
not sign any of the documents in favor of [petitioner]; (b) Teresita Cu signed
the Promissory Note, Deed of Assignment, Trust Receipt and Quedan in blank
and merely as representative and, hence, for and in behalf of the Defendant
Corporation and, hence, was not personally liable to [petitioner].
In the interim, the Corporation filed, on June 20, 1994, a Petition, with the
Regional Trial Court of Iligan City, for Voluntary Insolvency x x x.
xxxxxxxxx
Appended to the Petition was a list of its creditors, including [petitioner], for the
amount of P8,144,916.05. The Court issued an Order, on July 12, 1994, finding
the Petition sufficient in form and substance x x x.
xxxxxxxxx
In view of said development, the Court issued an Order, in Civil Case No. 93-038,
suspending the proceedings as against the Defendant Corporation but ordering
the proceedings to proceed as against the individual defendants x x x.
xxxxxxxxx
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 CORPORATION LAW- 1
On December 10, 1999, the Court rendered a Decision dismissing the complaint
for lack of cause of action of [petitioner] against the Spouses Jong-Won Hong,
Teresita Cu and the Spouses Ricardo Guevara, x x x.
xxxxxxxxx
In dismissing the complaint against the individual [respondents], the Court a
quo found and declared that [petitioner] failed to adduce a morsel of evidence to
prove the personal liability of the said [respondents] for the claims of [petitioner]
and that the latter impleaded the [respondents], in its complaint and amended
complaint, solely to put more pressure on the Defendant Corporation to pay its
obligations to [petitioner].
[Petitioner] x x x interposed an appeal, from the Decision of the Court a quo and
posed, for x x x resolution, the issue of whether or not the individual
[respondents], are jointly and severally liable to [petitioner] for the loan
availments of the [respondent] Corporation, inclusive of accrued interests and
penalties.
In the meantime, on motion of [petitioner], the Court set aside its Order, dated
February 2, 1995, suspending the proceedings as against the [respondent]
Corporation. [Petitioner] filed a Motion for Summary Judgment against the
[respondent] Corporation. On February 28, 2000, the Court rendered
a Summary Judgment against the [respondent] Corporation, the decretal portion
of which reads as follows:
WHEREFORE, premises considered, this Court hereby resolves to give due
course to the motion for summary judgment filed by herein [petitioner].
Consequently, judgment is hereby rendered in favor of [Petitioner] SOLIDBANK
CORPORATION and against [Respondent] MINDANAO FERROALLOY
CORPORATION, ordering the latter to pay the former the amount
of P7,086,686.70, representing the outstanding balance of the subject loan as of
24 September 1994, plus stipulated interest at the rate of 16% per annum to be
computed from the aforesaid date until fully paid together with an amount
equivalent to 12% of the total amount due each year from 24 September 1994
until fully paid. Lastly, said [respondent] is hereby ordered to pay [petitioner] the
amount of P25,000.00 to [petitioner] as reasonable attorneys fees as well as cost
of litigation.[5]
In its appeal, petitioner argued that (1) it had adduced the requisite evidence
to prove the solidary liability of the individual respondents, and (2) it was not liable
for their counterclaims for damages and attorneys fees.
Ruling of the Court of Appeals
Affirming the RTC, the appellate court ruled that the individual respondents
were not solidarily liable with the Mindanao Ferroalloy Corporation, because they
had acted merely as officers of the corporation, which was the real party in interest.
Respondent Guevara was not even a signatory to the Promissory Note, the Trust
Receipt Agreement, the Deed of Assignment or the Quedan; he was merely
authorized to represent Minfaco to negotiate with and secure the loans from the
bank. On the other hand, the CA noted that Respondents Cu and Hong had not
signed the above documents as comakers, but as signatories in their representative
capacities as officers of Minfaco.
Likewise, the CA held that the individual respondents were not liable to
petitioner for damages, simply because (1) they had not received the proceeds of
the irrevocable Letter of Credit, which was the subject of the Deed of Assignment;
and (2) the goods subject of the Trust Receipt Agreement had been found to be
nonexistent. The appellate court took judicial notice of the practice of banks and
financing institutions to investigate, examine and assess all properties offered by
borrowers as collaterals, in order to determine the feasibility and advisability of
granting loans. Before agreeing to the consolidation of Minfacos loans, it presumed
that petitioner had done its homework.
As to the award of damages to the individual respondents, the CA upheld the
trial courts findings that it was clearly unfair on petitioners part to have impleaded
the wives of Guevara and Hong, because the women were not privy to any of the
transactions between petitioner and Minfaco. Under Articles 19, 20 and 2229 of
the Civil Code, such reckless and wanton act of pressuring individual respondents
to settle the corporations obligations is a ground to award moral and exemplary
damages, as well as attorneys fees.
Hence this Petition.[6]
Issues
In its Memorandum, petitioner raises the following issues:
A. Whether or not there is ample evidence on record to support the joint and
solidary liability of individual respondents with Mindanao Ferroalloy
Corporation.
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 CORPORATION LAW- 1
B. In the absence of joint and solidary liability[,] will the provision of Article 1208
in relation to Article 1207 of the New Civil Code providing for joint liability be
applicable to the case at bar.
C. May bank practices be the proper subject of judicial notice under Sec. 1 [of]
Rule 129 of the Rules of Court.
D. Whether or not there is evidence to sustain the claim that respondents were
impleaded to apply pressure upon them to pay the obligations in lieu of
MINFACO that is declared insolvent.
E. Whether or not there are sufficient bases for the award of various kinds of and
substantial amounts in damages including payment for attorneys fees.
F. Whether or not respondents committed fraud and misrepresentations and
acted in bad faith.
G. Whether or not the inclusion of respondents spouses is proper under certain
circumstances and supported by prevailing jurisprudence.[7]
In sum, there are two main questions: (1) whether the individual respondents
are liable, either jointly or solidarily, with the Mindanao Ferroalloy Corporation;
and (2) whether the award of damages to the individual respondents is valid and
legal.
The Courts Ruling
The Petition is partly meritorious.
First Issue:
Liability of Individual Respondents
Petitioner argues that the individual respondents were jointly or solidarily
liable with Minfaco, either because their participation in the loan contract and the
loan documents made them comakers; or because they committed fraud and
deception, which justifies the piercing of the corporate veil.
The first contention hinges on certain factual determinations made by the
trial and the appellate courts. These tribunals found that, although he had not
signed any document in connection with the subject transaction, Respondent
Guevara was authorized to represent Minfaco in negotiating for a P30 million loan
from petitioner. As to Cu and Hong, it was determined, among others, that their
signatures on the loan documents other than the Deed of Assignment were not
prefaced with the word by, and that there were no other signatures to indicate who
had signed for and on behalf of Minfaco, the principal borrower. In the Promissory
Note, they signed above the printed name of the corporation -- on the space
provided for Maker/Borrower, not on that provided for Co-maker.
Petitioner has not shown any exceptional circumstance that sanctions the
disregard of these findings of fact, which are thus deemed final and conclusive
upon this Court and may not be reviewed on appeal.[8]
No Personal Liability
for Corporate Deeds
Basic is the principle that a corporation is vested by law with a personality
separate and distinct from that of each person composing[9] or representing
it.[10] Equally fundamental is the general rule that corporate officers cannot be held
personally liable for the consequences of their acts, for as long as these are for and
on behalf of the corporation, within the scope of their authority and in good
faith.[11] The separate corporate personality is a shield against the personal liability
of corporate officers, whose acts are properly attributed to the corporation.[12]
Tramat Mercantile v. Court of Appeals[13] held thus:
Personal liability of a corporate director, trustee or officer along (although not
necessarily) with the corporation may so validly attach, as a rule, only when
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith
or gross negligence in directing its affairs, or (c) for conflict of interest, resulting
in damages to the corporation, its stockholders or other persons;
2. He consents to the issuance of watered stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written objection
thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation;
or
Page 16 of 120
 CORPORATION LAW- 1
4. He is made, by a specific provision of law, to personally answer for his
corporate action.
Consistent with the foregoing principles, we sustain the CAs ruling that
Respondent Guevara was not personally liable for the contracts. First, it is beyond
cavil that he was duly authorized to act on behalf of the corporation; and that in
negotiating the loans with petitioner, he did so in his official capacity. Second, no
sufficient and specific evidence was presented to show that he had acted in bad
faith or gross negligence in that negotiation. Third, he did not hold himself
personally and solidarily liable with the corporation. Neither is there any specific
provision of law making him personally answerable for the subject corporate acts.
On the other hand, Respondents Cu and Hong signed the Promissory Note
without the word by preceding their signatures, atop the designation
Maker/Borrower and the printed name of the corporation, as follows:
__(Sgd) Cu/Hong__
(Maker/Borrower)
MINDANAO FERROALLOY
While their signatures appear without qualification, the inference that they
signed in their individual capacities is negated by the following facts: 1) the name
and the address of the corporation appeared on the space provided for
Maker/Borrower; 2) Respondents Cu and Hong had only one set of signatures on
the instrument, when there should have been two, if indeed they had intended to
be bound solidarily -- the first as representatives of the corporation, and the second
as themselves in their individual capacities; 3) they did not sign under the spaces
provided for Co-maker, and neither were their addresses reflected there; and 4) at
the back of the Promissory Note, they signed above the words Authorized
Representative.
Solidary Liability
Not Lightly Inferred
Moreover, it is axiomatic that solidary liability cannot be lightly
inferred.[14] Under Article 1207 of the Civil Code, there is a solidary liability only
when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity. Since solidary liability is not clearly expressed in the
Promissory Note and is not required by law or the nature of the obligation in this
case, no conclusion of solidary liability can be made.
Furthermore, nothing supports the alleged joint liability of the individual
petitioners because, as correctly pointed out by the two lower courts, the evidence
shows that there is only one debtor: the corporation. In a joint obligation, there
must be at least two debtors, each of whom is liable only for a proportionate part
of the debt; and the creditor is entitled only to a proportionate part of the credit.[15]
Moreover, it is rather late in the day to raise the alleged joint liability, as this
matter has not been pleaded before the trial and the appellate courts. Before the
lower courts, petitioner anchored its claim solely on the alleged joint and several
(or solidary) liability of the individual respondents. Petitioner must be reminded
that an issue cannot be raised for the first time on appeal, but seasonably in the
proceedings before the trial court.[16]
So too, the Promissory Note in question is a negotiable instrument. Under
Section 19 of the Negotiable Instruments Law, agents or representatives may sign
for the principal. Their authority may be established, as in other cases of agency.
Section 20 of the law provides that a person signing for and on behalf of a
[disclosed] principal or in a representative capacity x x x is not liable on the
instrument if he was duly authorized.
The authority of Respondents Cu and Hong to sign for and on behalf of the
corporation has been amply established by the Resolution of Minfacos Board of
Directors, stating that Atty. Ricardo P. Guevara (President and Chairman), or Ms.
Teresita R. Cu (Vice President), acting together with Mr. Jong Won Hong (Vice
President), be as they are hereby authorized for and in behalf of the Corporation
to: 1. Negotiate with and obtain from (petitioner) the extension of an omnibus line
in the aggregate of P30 million x x x; and 2. Execute and deliver all documentation
necessary to implement all of the foregoing.[17]
Further, the agreement involved here is a contract of adhesion, which was
prepared entirely by one party and offered to the other on a take it or leave it basis.
Following the general rule, the contract must be read against petitioner, because it
was the party that prepared it,[18] more so because a bank is held to high standards
of care in the conduct of its business.[19]
In the totality of the circumstances, we hold that Respondents Cu and Hong
clearly signed the Note merely as representatives of Minfaco.
Page 17 of 120
 CORPORATION LAW- 1
No Reason to Pierce
the Corporate Veil
Under certain circumstances, courts may treat a corporation as a mere
aggroupment of persons, to whom liability will directly attach. The distinct and
separate corporate personality may be disregarded, inter alia, when the corporate
identity is used to defeat public convenience, justify a wrong, protect a fraud, or
defend a crime. Likewise, the corporate veil may be pierced when the corporation
acts as a mere alter ego or business conduit of a person, or when it is so organized
and controlled and its affairs so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.[20] But to disregard the separate
juridical personality of a corporation, the wrongdoing must be clearly and
convincingly established; it cannot be presumed.[21]
Petitioner contends that the corporation was used to protect the fraud foisted
upon it by the individual respondents. It argues that the CA failed to consider the
following badges of fraud and evident bad faith: 1) the individual respondents
misrepresented the corporation as solvent and financially capable of paying its
loan; 2) they knew that prices of ferrosilicon were declining in the world market
when they secured the loan in June 1991; 3) not a single centavo was paid for the
loan; and 4) the corporation suspended its operations shortly after the loan was
granted.[22]
Fraud refers to all kinds of deception -- whether through insidious
machination, manipulation, concealment or misrepresentation -- that would lead
an ordinarily prudent person into error after taking the circumstances into
account.[23] In contracts, a fraud known as dolo causante or causal fraud[24] is
basically a deception used by one party prior to or simultaneous with the contract,
in order to secure the consent of the other.[25] Needless to say, the deceit employed
must be serious. In contradistinction, only some particular or accident of the
obligation is referred to by incidental fraud or dolo incidente,[26] or that which is
not serious in character and without which the other party would have entered into
the contract anyway.[27]
Fraud must be established by clear and convincing evidence; mere
preponderance of evidence is not adequate.[28] Bad faith, on the other hand,
imports a dishonest purpose or some moral obliquity and conscious doing of a
wrong, not simply bad judgment or negligence.[29] It is synonymous with fraud, in
that it involves a design to mislead or deceive another.[30]
Unfortunately, petitioner was unable to establish clearly and precisely how
the alleged fraud was committed. It failed to establish that it was deceived into
granting the loans because of respondents misrepresentations and/or insidious
actions. Quite the contrary, circumstances indicate the weakness of its submission.
First, petitioner does not deny that the P5 million loan represented the
consolidation of two loans,[31] granted long before the bank required the individual
respondents to execute the Promissory Note, Trust Receipt Agreement, Quedan or
Deed of Assignment. Hence, no words, acts or machinations arising from any of
those instruments could have been used by them prior to or simultaneous with the
execution of the contract, or even as some accident or particular of the obligation.
Second, petitioner bank was in a position to verify for itself the solvency and
trustworthiness of respondent corporation. In fact, ordinary business prudence
required it to do so before granting the multimillion loans. It is of common
knowledge that, as a matter of practice, banks conduct exhaustive investigations of
the financial standing of an applicant debtor, as well as appraisals of collaterals
offered as securities for loans to ensure their prompt and satisfactory payment. To
uphold petitioners cry of fraud when it failed to verify the existence of the goods
covered by the Trust Receipt Agreement and the Quedan is to condone its
negligence.
Judicial Notice
of Bank Practices
This point brings us to the alleged error of the appellate court in taking
judicial notice of the practice of banks in conducting background checks on
borrowers and sureties. While a court is not mandated to take judicial notice of this
practice under Section 1 of Rule 129 of the Rules of Court, it nevertheless may do
so under Section 2 of the same Rule. The latter Rule provides that a court, in its
discretion, may take judicial notice of matters which are of public knowledge, or
ought to be known to judges because of their judicial functions.
Thus, the Court has taken judicial notice of the practices of banks and other
financial institutions. Precisely, it has noted that it is their uniform practice, before
approving a loan, to investigate, examine and assess would-be borrowers credit
standing or real estate[32] offered as security for the loan applied for.
Second Issue:
Award of Damages
The individual respondents were awarded moral and exemplary damages as
well as attorneys fees under Articles 19 to 21 of the Civil Code, on the basic premise
that the suit was clearly malicious and intended merely to harass.
Page 18 of 120
 CORPORATION LAW- 1

Article 19 of the Civil Code expresses the fundamental principle of law on (2) When the defendants act or omission has compelled the plaintiff to litigate
human conduct that a person must, in the exercise of his rights and in the with third persons or to incur expenses to protect his interest;
performance of his duties, act with justice, give every one his due, and observe
honesty and good faith. Under this basic postulate, the exercise of a right, though (3) In criminal cases of malicious prosecution against the plaintiff;
legal by itself, must nonetheless be done in accordance with the proper norm.
When the right is exercised arbitrarily, unjustly or excessively and results in
damage to another, a legal wrong is committed for which the wrongdoer must be (4) In case of a clearly unfounded civil action or proceeding against the plaintiff;
held responsible.[33]
(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy
To be liable under the abuse-of-rights principle, three elements must concur: the plaintiffs plainly valid, just and demandable claim;
a) a legal right or duty, b) its exercise in bad faith, and c) the sole intent of
prejudicing or injuring another.[34] Needless to say, absence of good faith[35] must
be sufficiently established. (6) In actions for legal support;

Article 20 makes [e]very person who, contrary to law, willfully or negligently (7) In actions for the recovery of wages of household helpers, laborers and skilled
causes damage to another liable for damages. Upon the other hand, held liable for workers;
damages under Article 21 is one who willfully causes loss or injury to another in a
manner that is contrary to morals, good customs or public policy.
(8) In actions for indemnity under workmens compensation and employers
For damages to be properly awarded under the above provisions, it is liability laws;
necessary to demonstrate by clear and convincing evidence[36] that the action
instituted by petitioner was clearly so unfounded and untenable as to amount to
(9) In a separate civil action to recover civil liability arising from a crime;
gross and evident bad faith.[37] To justify an award of damages for malicious
prosecution, one must prove two elements: malice or sinister design to vex or
humiliate and want of probable cause.[38] (10) When at least double judicial costs are awarded;

Petitioner was proven wrong in impleading Spouses Guevara and Hong.

(11) In any other case where the court deems it just and equitable that attorneys
Beyond that fact, however, respondents have not established that the suit was
fees and expenses of litigation should be recovered.
so patently malicious as to warrant the award of damages under the Civil Codes
Articles 19 to 21, which are grounded on malice or bad faith.[39] With the
presumption of law on the side of good faith, and in the absence of adequate proof In the instant case, none of the enumerated grounds for recovery of attorneys
of malice, we find that petitioner impleaded the spouses because it honestly fees are present.
believed that the conjugal partnerships had benefited from the proceeds of the
loan, as stated in their Complaint and subsequent pleadings. Its act does not WHEREFORE, this Petition is PARTIALLY GRANTED. The assailed
amount to evident bad faith or malice; hence, an award for damages is not proper. Decision is AFFIRMED, but the award of moral and exemplary damages as well as
The adverse result of an act per se neither makes the act wrongful nor subjects the attorneys fees is DELETED. No costs.
actor to the payment of damages, because the law could not have meant to impose SO ORDERED.
a penalty on the right to litigate.[40]
Sandoval-Gutierrez, Corona, Carpio-Morales, and Garcia, JJ., concur.
For the same reason, attorneys fees cannot be granted. Article 2208 of the
Civil Code states that in the absence of a stipulation, attorneys fees cannot be
recovered, except in any of the following circumstances:

(1) When exemplary damages are awarded;

Page 19 of 120
 CORPORATION LAW- 1
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-17618 August 31, 1964
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
NORTON and HARRISON COMPANY, respondent.
PAREDES, J.:
This is an appeal interposed by the Commissioner of Internal Revenue against the
following judgment of the Court of Tax Appeals:
IN VIEW OF THE FOREGOING, we find no legal basis to support the
assessment in question against petitioner. If at all, the assessment
should have been directed against JACKBILT, the manufacturer.
Accordingly, the decision appealed from is reversed, and the surety bond
filed to guarantee payment of said assessment is ordered cancelled. No
pronouncement as to costs.
Norton and Harrison is a corporation organized in 1911, (1) to buy and sell at
wholesale and retail, all kinds of goods, wares, and merchandise; (2) to act as
agents of manufacturers in the United States and foreign countries; and (3) to
carry on and conduct a general wholesale and retail mercantile establishment in
the Philippines. Jackbilt is, likewise, a corporation organized on February 16,
1948 primarily for the purpose of making, producing and manufacturing concrete
blocks. Under date of July 27, 1948. Norton and Jackbilt entered into an
agreement whereby Norton was made the sole and exclusive distributor of
concrete blocks manufactured by Jackbilt. Pursuant to this agreement, whenever
an order for concrete blocks was received by the Norton & Harrison Co. from a
customer, the order was transmitted to Jackbilt which delivered the merchandise
direct to the customer. Payment for the goods is, however, made to Norton, which
in turn pays Jackbilt the amount charged the customer less a certain amount, as
its compensation or profit. To exemplify the sales procedures adopted by the
Norton and Jackbilt, the following may be cited. In the case of the sale of 420
pieces of concrete blocks to the American Builders on April 1, 1952, the purchaser
paid to Norton the sum of P189.00 the purchase price. Out of this amount Norton
paid Jackbilt P168.00, the difference obviously being its compensation. As per
records of Jackbilt, the transaction was considered a sale to Norton. It was under
this procedure that the sale of concrete blocks manufactured by Jackbilt was
conducted until May 1, 1953, when the agency agreement was terminated and a
management agreement between the parties was entered into. The management
agreement provided that Norton would sell concrete blocks for Jackbilt, for a
fixed monthly fee of P2,000.00, which was later increased to P5,000.00.
During the existence of the distribution or agency agreement, or on June 10,
1949, Norton & Harrison acquired by purchase all the outstanding shares of stock
of Jackbilt. Apparently, due to this transaction, the Commissioner of Internal
Revenue, after conducting an investigation, assessed the respondent Norton &
Harrison for deficiency sales tax and surcharges in the amount of P32,662.90,
making as basis thereof the sales of Norton to the Public. In other words, the
Commissioner considered the sale of Norton to the public as the original sale and
not the transaction from Jackbilt. The period covered by the assessment was from
July 1, 1949 to May 31, 1953. As Norton and Harrison did not conform with the
assessment, the matter was brought to the Court of Tax Appeals.
The Commissioner of Internal Revenue contends that since Jackbilt was owned
and controlled by Norton & Harrison, the corporate personality of the former
(Jackbilt) should be disregarded for sales tax purposes, and the sale of Jackbilt
blocks by petitioner to the public must be considered as the original sales from
which the sales tax should be computed. The Norton & Harrison Company
contended otherwise — that is, the transaction subject to tax is the sale from
Jackbilt to Norton.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be
admitted and approved by this Honorable Court, without prejudice to the parties
adducing other evidence to prove their case not covered by this stipulation of
facts. 1äwphï1.ñët
The majority of the Tax Court, in relieving Norton & Harrison of liability under
the assessment, made the following observations:
The law applicable to the case is Section 186 of the National Internal
Revenue Code which imposes a percentage tax of 7% on every original
sale of goods, wares or merchandise, such tax to be based on the gross
selling price of such goods, wares or merchandise. The term "original
sale" has been defined as the first sale by every manufacturer, producer
or importer. (Sec. 5, Com. Act No. 503.) Subsequent sales by persons
other than the manufacturer, producer or importer are not subject to the
sales tax.
Page 20 of 120
 CORPORATION LAW- 1
If JACKBILT actually sold concrete blocks manufactured by it to
petitioner under the distributorship or agency agreement of July 27,
1948, such sales constituted the original sales which are taxable under
Section 186 of the Revenue Code, while the sales made to the public by
petitioner are subsequent sales which are not taxable. But it appears to
us that there was no such sale by JACKBILT to petitioner. Petitioner
merely acted as agent for JACKBILT in the marketing of its products.
This is shown by the fact that petitioner merely accepted orders from the
public for the purchase of JACKBILT blocks. The purchase orders were
transmitted to JACKBILT which delivered the blocks to the purchaser
directly. There was no instance in which the blocks ordered by the
purchasers were delivered to the petitioner. Petitioner never purchased
concrete blocks from JACKBILT so that it never acquired ownership of
such concrete blocks. This being so, petitioner could not have sold
JACKBILT blocks for its own account. It did so merely as agent of
JACKBILT. The distributorship agreement of July 27, 1948, is
denominated by the parties themselves as an "agency for marketing"
JACKBILT products. ... .
xxx xxx xxx
Therefore, the taxable selling price of JACKBILT blocks under the
aforesaid agreement is the price charged to the public and not the
amount billed by JACKBILT to petitioner. The deficiency sales tax
should have been assessed against JACKBILT and not against petitioner
which merely acted as the former's agent.
xxx xxx xxx
Presiding Judge Nable of the same Court expressed a partial dissent, stating:
Upon the aforestated circumstances, which disclose Norton's control
over and direction of Jackbilt's affairs, the corporate personality of
Jackbilt should be disregarded, and the transactions between these two
corporations relative to the concrete blocks should be ignored in
determining the percentage tax for which Norton is liable.
Consequently, the percentage tax should be computed on the basis of
the sales of Jackbilt blocks to the public.
The majority opinion is now before Us on appeal by the Commissioner of Internal
Revenue, on four (4) assigned errors, all of which pose the following
propositions: (1) whether the acquisition of all the stocks of the Jackbilt by the
Norton & Harrison Co., merged the two corporations into a single corporation;
(2) whether the basis of the computation of the deficiency sales tax should be the
sale of the blocks to the public and not to Norton.
It has been settled that the ownership of all the stocks of a corporation by another
corporation does not necessarily breed an identity of corporate interest between
the two companies and be considered as a sufficient ground for disregarding the
distinct personalities (Liddell & Co., Inc. v. Coll. of Int. Rev. L-9687, June 30,
1961). However, in the case at bar, we find sufficient grounds to support the
theory that the separate identities of the two companies should be disregarded.
Among these circumstances, which we find not successfully refuted by appellee
Norton are: (a) Norton and Harrison owned all the outstanding stocks of Jackbilt;
of the 15,000 authorized shares of Jackbilt on March 31, 1958, 14,993 shares
belonged to Norton and Harrison and one each to seven others; (b) Norton
constituted Jackbilt's board of directors in such a way as to enable it to actually
direct and manage the other's affairs by making the same officers of the board for
both companies. For instance, James E. Norton is the President, Treasurer,
Director and Stockholder of Norton. He also occupies the same positions in
Jackbilt corporation, the only change being, in the Jackbilt, he is merely a
nominal stockholder. The same is true with Mr. Jordan, F. M. Domingo, Mr.
Mantaring, Gilbert Golden and Gerardo Garcia, while they are merely employees
of the North they are Directors and nominal stockholders of the Jackbilt (c)
Norton financed the operations of the Jackbilt, and this is shown by the fact that
the loans obtained from the RFC and Bank of America were used in the expansion
program of Jackbilt, to pay advances for the purchase of equipment, materials
rations and salaries of employees of Jackbilt and other sundry expenses. There
was no limit to the advances given to Jackbilt so much so that as of May 31, 1956,
the unpaid advances amounted to P757,652.45, which were not paid in cash by
Jackbilt, but was offset by shares of stock issued to Norton, the absolute and sole
owner of Jackbilt; (d) Norton treats Jackbilt employees as its own. Evidence
shows that Norton paid the salaries of Jackbilt employees and gave the same
privileges as Norton employees, an indication that Jackbilt employees were also
Norton's employees. Furthermore service rendered in any one of the two
companies were taken into account for purposes of promotion; (e) Compensation
given to board members of Jackbilt, indicate that Jackbilt is merely a department
of Norton. The income tax return of Norton for 1954 shows that as President and
Treasurer of Norton and Jackbilt, he received from Norton P56,929.95, but
received from Jackbilt the measly amount of P150.00, a circumstance which
points out that remuneration of purported officials of Jackbilt are deemed
included in the salaries they received from Norton. The same is true in the case of
Eduardo Garcia, an employee of Norton but a member of the Board of Jackbilt.
His Income tax return for 1956 reveals that he received from Norton in salaries
and bonuses P4,220.00, but received from Jackbilt, by way of entertainment,
representation, travelling and transportation allowances P3,000.00. However, in
the withholding statement (Exh. 28-A), it was shown that the total of P4,200.00
and P3,000.00 (P7,220.00) was received by Garcia from Norton, thus portraying
Page 21 of 120
 CORPORATION LAW- 1
the oneness of the two companies. The Income Tax Returns of Albert Golden and
Dioscoro Ramos both employees of Norton but board members of Jackbilt, also
disclose the game method of payment of compensation and allowances. The
offices of Norton and Jackbilt are located in the same compound. Payments were
effected by Norton of accounts for Jackbilt and vice versa. Payments were also
made to Norton of accounts due or payable to Jackbilt and vice versa.
Norton and Harrison, while not denying the presence of the set up stated above,
tried to explain that the control over the affairs of Jackbilt was not made in order
to evade payment of taxes; that the loans obtained by it which were given to
Jackbilt, were necessary for the expansion of its business in the manufacture of
concrete blocks, which would ultimately benefit both corporations; that the
transactions and practices just mentioned, are not unusual and extraordinary,
but pursued in the regular course of business and trade; that there could be no
confusion in the present set up of the two corporations, because they have
separate Boards, their cash assets are entirely and strictly separate; cashiers and
official receipts and bank accounts are distinct and different; they have separate
income tax returns, separate balance sheets and profit and loss statements. These
explanations notwithstanding an over-all appraisal of the circumstances
presented by the facts of the case, yields to the conclusion that the Jackbilt is
merely an adjunct, business conduit or alter ego, of Norton and Harrison and that
the fiction of corporate entities, separate and distinct from each, should be
disregarded. This is a case where the doctrine of piercing the veil of corporate
fiction, should be made to apply. In the case of Liddell & Co. Inc. v. Coll. of Int.
Rev., supra, it was held:
There are quite a series of conspicuous circumstances that militates
against the separate and distinct personality of Liddell Motors Inc., from
Liddell & Co. We notice that the bulk of the business of Liddell & Co.
was channel Red through Liddell Motors, Inc. On the other hand,
Liddell Motors Inc. pursued no activities except to secure cars, trucks,
and spare parts from Liddell & Co., Inc. and then sell them to the
general public. These sales of vehicles by Liddell & Co, to Liddell
Motors. Inc. for the most part were shown to have taken place on the
same day that Liddell Motors, Inc. sold such vehicles to the public. We
may even say that the cars and trucks merely touched the hands of
Liddell Motors, Inc. as a matter of formality.
xxx xxx xxx
Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc.
are corporations owned and controlled by Frank Liddell directly or
indirectly is not by itself sufficient to justify the disregard of the separate
corporate identity of one from the other. There is however, in this
instant case, a peculiar sequence of the organization and activities of
Liddell Motors, Inc.
As opined in the case of Gregory v. Helvering "the legal right of a tax
payer to decrease the amount of what otherwise would be his taxes, or
altogether avoid them, by means which the law permits, cannot be
doubted". But as held in another case, "where a corporation is a dummy,
is unreal or a sham and serves no business purpose and is intended only
as a blind, the corporate form may be ignored for the law cannot
countenance a form that is bald and a mischievous fictions".
... a taxpayer may gain advantage of doing business thru a corporation if
he pleases, but the revenue officers in proper cases, may disregard the
separate corporate entity where it serves but as a shield for tax evasion
and treat the person who actually may take benefits of the transactions
as the person accordingly taxable.
... to allow a taxpayer to deny tax liability on the ground that the sales
were made through another and distinct corporation when it is proved
that the latter is virtually owned by the former or that they are
practically one and the same is to sanction a circumvention of our tax
laws. (and cases cited therein.)
In the case of Yutivo Sons Hardware Co. v. Court of Tax Appeals, L-13203, Jan.
28, 1961, this Court made a similar ruling where the circumstances of unity of
corporate identities have been shown and which are identical to those obtaining
in the case under consideration. Therein, this Court said:
We are, however, inclined to agree with the court below that SM was
actually owned and controlled by petitioner as to make it a mere
subsidiary or branch of the latter created for the purpose of selling the
vehicles at retail (here concrete blocks) ... .
It may not be amiss to state in this connection, the advantages to Norton in
maintaining a semblance of separate entities. If the income of Norton should be
considered separate from the income of Jackbilt, then each would declare such
earning separately for income tax purposes and thus pay lesser income tax. The
combined taxable Norton-Jackbilt income would subject Norton to a higher tax.
Based upon the 1954-1955 income tax return of Norton and Jackbilt (Exhs. 7 &
8), and assuming that both of them are operating on the same fiscal basis and
their returns are accurate, we would have the following result: Jackbilt declared a
taxable net income of P161,202.31 in which the income tax due was computed at
P37,137.00 (Exh. 8); whereas Norton declared as taxable, a net income of
Page 22 of 120
 CORPORATION LAW- 1

P120,101.59, on which the income tax due was computed at P25,628.00. The total
of these liabilities is P50,764.84. On the other hand, if the net taxable earnings of
both corporations are combined, during the same taxable year, the tax due on
their total which is P281,303.90 would be P70,764.00. So that, even on the
question of income tax alone, it would be to the advantages of Norton that the
corporations should be regarded as separate entities.

WHEREFORE, the decision appealed from should be as it is hereby reversed and

another entered making the appellee Norton & Harrison liable for the deficiency
sales taxes assessed against it by the appellant Commissioner of Internal
Revenue, plus 25% surcharge thereon. Costs against appellee Norton & Harrison.

Bengzon, C.J., Bautista Angelo, Concepcion, Reyes J.B.L., Regala and

Makalintal, JJ., concur.

Page 23 of 120
 CORPORATION LAW- 1
SECOND DIVISION
[G.R. No. 131673. September 10, 2004]
RUBEN MARTINEZ,* substituted by his heirs, MENA CONSTANTINO
MARTINEZ, WILFRIDO C. MARTINEZ, EMMA M. NAVA, and
EDNA M. SAKHRANI, petitioners, vs. COURT OF APPEALS
and BPI INTERNATIONAL FINANCE, respondents.
DECISION
CALLEJO, SR., J.:
Before us is a petition for review on certiorari of the Decision[1] of the Court
of Appeals, in CA-G.R. CV No. 43985, modifying the Decision[2] of the Regional
Trial Court of Kalookan City, Branch 122, in Civil Case No. C-10811.
The antecedents are as follows:
Respondent BPI International Finance[3] is a foreign corporation not doing
business in the Philippines, with office address at the Bank of America Tower, 12
Harcourt Road, Central Hongkong. It was a deposit-taking company organized and
existing under and by virtue of the laws of Hongkong, and was also engaged in
investment banking operations therein.
Cintas Largas, Ltd. (CLL) was also a foreign corporation, established in
Hongkong, with a paid-up capital of HK$10,000. The registered shareholders of
the CLL in Hongkong were the Overseas Nominee, Ltd. and Shares Nominee, Ltd.,
which were mainly nominee shareholders. In Hongkong, the nominee shareholder
of CLL was Baker & McKenzie Nominees, Ltd., a leading solicitor firm. However,
beneficially, the company was equally owned by Messrs. Ramon Siy, Ricardo Lopa,
Wilfrido C. Martinez, and Miguel J. Lacson.[4] The registered office address of CLL
in Hongkong was 22/F, Princes Building, also the office address of Price
Waterhouse & Co., a large accounting firm in Hongkong.
The bulk of the business of the CLL was the importation of molasses from the
Philippines, principally from the Mar Tierra Corporation, and the resale thereof in
the international market.[5] However, Mar Tierra Corporation also sold molasses
to its customers.[6] Wilfrido C. Martinez was the president of Mar Tierra
Corporation, while its executive vice-president was Blamar Gonzales. The business
operations of both the CLL and Mar Tierra Corporation were run by Wilfrido
Martinez and Gonzales.
About 42% of the capital stock of Mar Tierra Corporation was owned by RJL
Martinez Fishing Corporation (RJL), the leading tuna fishing outfit in the
Philippines. Petitioner Ruben Martinez was the president of RJL and a member of
the board of directors thereof. The majority stockholders of RJL were Ruben
Martinez and his brothers, Jose and Luis Martinez. Sixty-eight (68) percent of the
total assets of Ruben Martinez were in the RJL.
In 1979, respondent BPI International Finance (then AIFL) granted CLL a
letter of credit in the amount of US$3,000,000. Wilfrido Martinez signed the letter
agreement with the respondent for the CLL. The respondent and the CLL had made
the following arrangements:
Cintas Largas, Ltd. will purchase molasses from the Philippines, mainly from Mar
Tierra Corporation, and then sell the molasses to foreign countries. Both the
purchase of the molasses from the Philippines and the subsequent sale thereof to
foreign customers were effected by means of Letters of Credit. A Letter of Credit
would be opened by Cintas Largas, Ltd. in favour of Mar Tierra Corporation or
any other seller in the Philippines. Upon the sale of the molasses to foreign
buyers, a Letter of Credit would then be opened by such buyers, in favour of
Cintas Largas, Ltd. The Letters of Credit were effected through the Letter of
Credit Facility of Cintas Largas, Ltd. in plaintiff. The profits of Cintas Largas, Ltd.
from these transactions were then deposited in either the deposit account of
Cintas Largas, Ltd. with plaintiff or the Money Market Placement Account Nos.
063 and 084, depending upon the instructions of Wilfrido C. Martinez and
Blamar C. Gonzales, principally.[7]
On January 24, 1979, the CLL opened a money market placement with the
respondent bearing MMP No. 063, with an initial placement of
US$390,000.[8] The CLL also opened and maintained a foreign currency account
and a deposit account with the respondent. The authorized signatory in both
accounts of CLL was Wilfrido C. Martinez. Some instructions also came from
Gonzales, to be confirmed by Wilfrido Martinez.[9] On March 21, 1980, petitioner
Ruben Martinez and/or his son Wilfrido C. Martinez and/or Miguel J. Lacson
affixed their signatures on the two signature cards furnished by the respondent
which became MMP No. 063 and MMP No. 084. On the face of the cards, the
signatories became joint account holders of the said money market placements.[10]
On March 25, 1980, the CLL opened a money market placement account with
the respondent bearing MMP No. 084 with an initial placement of US$68,768.60,
transferred from MMP No. 063.[11] At times, funds in MMP Nos. 063 and 084 were
transferred to the CLLs deposit account, and vice versa.
Page 24 of 120
 CORPORATION LAW- 1

On May 19, 1980, the CLL, through Wilfrido Martinez, and the respondent, telephone call.[18] Gonzales requested the respondent, in the same telex, to confirm
through Senen L. Matoto and Michael Sung, Senior Manager of the Money its total available account so that instructions on the transfer of the funds to FCD
Management Division of the respondent, executed a letter-agreement in which the SA 18402-7 could be formalized.[19]
existing back-to-back credit facility granted to the CLL way back in 1979 was
extended up to July 1980, and increased to US$5,000,000. The credit facility was On October 13, 1980, Sung sent a telex to Gonzales informing the latter of the
to be secured as follows: balances of the MMP Nos. 063 and 084 and in the CLL account deposit, with the
corresponding maturity dates thereof, thus:
SECURITY: (i) Back-to-Back L/C to be secured by an L/C issued,
by a bank acceptable to AFHK, in favor 1. DETAIL OF PLACEMENT IN VARIOUS A/C.
of Cintas Largas.
(ii) AFHK L/C issued prior to receipt of Backing
L/C to be secured by a 10% margin by MMP 063
way of a hold out on cash deposit with
AFHK with interest at LIBOR. The VALUE DATE MATURITY DATE DATE AMOUNT MATURITY VALUE
Backing L/C, however, shall be opened
not later than 120 days after the
25/9/80 28/11/80 12-1/4 USD306,043.48 USD 312,708.43
issuance of AFHKs L/C.
(iii) JSS of Messrs. Ramon Siy, Wilfrido C.
Martinez, Ricardo Lopa and Miguel J. MMP 084
Lacson for both of the above cases.
25/09/80 28/11/80 12-1/4 USD751,883.88 USD 768,258.24
DOCUMENTATION: Standard AFHK L/C documentation.[12]
-------------------------
The facility was designed to finance the purchases of molasses made by the
CLL from the Philippines for re-export.[13] USD1080,966.67
============
In compliance with the letter-agreement, Wilfrido C. Martinez, Miguel J.
Lacson, Ricardo Lopa, and Ramon Siy executed a continuing suretyship agreement
in which they bound and obliged themselves, jointly and severally, with the CLL to CINTAS LARGAS
pay the latters obligation under the said credit facility.[14]
VALUE DATE MATURITY DATE DATE AMOUNT MATURITY VALUE
As of September 26, 1980, the balance of the deposit account of the CLL with
the respondent was US$1,025,052.06.[15] On the other hand, the balance of the
money placement in MMP No. 063, as of September 25, 1980 was 15/9/80 1 DAY CALL 10-7/8 USD 46,131.26
US$312,708.43,[16] while the balance of the money market placement in MMP No.
084 as of September 8, 1980 stood at US$768,258.24.[17] 25/9/80 1 DAY CALL 11-1/4 USD500,000.00
On October 10, 1980, Blamar Gonzales, acting for Mar Tierra Corporation,
sent to the respondent a telex confirming his telephone conversation with Michael (RATE ADJ: TO 12-1/4 VALUE 7/10/80)
Sung/Bing Matoto requesting the respondent to transfer US$340,000 to Account
No. FCD SA 18402-7, registered in the name of Mar Tierra Corporation, Philippine 26/9/80 31/10/80 12-1/4 USD420,831.45 USD 425,843.44
Banking Corporation, Union Cement Building, Port Area, Manila, as payee, with
the following specific instructions: (a) there should be no mention of Wilfrido
Martinez or Mar Tierra Corporation; (b) the telex instruction should be signed only 2. ACCORDING TO AIDC, O/S OF PESO LOAN IS 10,930,000.00, AND
by Wilfrido Martinez and sent only through the telex machine of Mar Tierra THE HOLDOUT REQUIRED IS 120 PCT
Corporation; and, (c) the final confirmation of the transfer should be made by

Page 25 of 120
 CORPORATION LAW- 1
COMPUTATION: PESO 10,930,000.00
7.89 (EXCHANGE RATE)
1.20 (120 PCT)
--------------------
1,662,357.00
=============
3. ACCORDINGLY, THE FUND AVAILABLE IS APPROX. USD340,000.00.
PLS REVERT.[20]
Sung informed Gonzales that the account available was approximately
US$340,000, considering the CLL deposit account and the money market
placements.[21] On October 14, 1980, the respondent received a telex from Wilfrido
C. Martinez requesting that the transfer of US$340,000 from the deposit account
of the CLL or any deposit available be effected by telegraphic transfer as soon as
possible to their account, payee FCD SA 18402-7, Philippine Banking Corporation,
Port Area, Manila.[22] On October 21, 1980, Wilfrido Martinez wrote the
respondent confirming his request for the transfer of US$340,000 to their
account, FCD SA 18402-7, with the Philippine Banking Corporation, through Wells
Fargo Bank of New York, Philippine Banking Corporation Account No. FCDU SA
No. 003-019205.[23]
The respondent complied with the request of the CLL, through Wilfrido
Martinez and Gonzales, and remitted US$340,000 as instructed.[24] However,
instead of deducting the amount from the funds in the CLL foreign currency or
deposit accounts and/or MMP Nos. 063 and 084, the respondent merely posted
the US$340,000 as an account receivable of the CLL since, at that time, the money
market placements had not yet matured.[25] When the money market placements
matured, however, the respondent did not collect the US$340,000 therefrom.
Instead, the respondent allowed the CLL and/or Wilfrido C. Martinez to withdraw,
up to July 3, 1981, the bulk of the CLL deposit account and MMP Nos. 084 and
063;[26] hence, it failed to secure reimbursement for the US$340,000 from the said
deposit account and/or money market placements.
In the meantime, problems ensued in the reconciliation of the transactions
involving the funds of the CLL, including the MMP Nos. 063 and 084 with the
respondent, as well as the receivables of Mar Tierra Corporation. There was also a
need to audit the said funds. Sometime in July 1982, conferences were held
between the executive committee of Mar Tierra Corporation and some of its
officers, including Miguel J. Lacson, where the means to reduce the administrative
expenses and accountants fees, and the possibility of placing the CLL on an inactive
status were discussed.[27] The respondent pressured the CLL, Wilfrido Martinez,
and Gonzales to pay the US$340,000 it remitted to Account No. FCD SA 18402-
7.[28] Eventually, Wilfrido C. Martinez and Blamar Gonzales engaged the services
of the auditing firm, the Jacinto, Belano, Castro & Co., to review the flow of the
CLLs funds and the receivables of Mar Tierra Corporation.
On August 16, 1982, the CLL, through its certified public accountant, wrote
the respondent requesting the latter to furnish its accountant with a copy of the
financial report prepared by its auditors.[29] An audit was, thereafter, conducted by
the Jacinto, Belano, Castro & Co., certified public accountants of the CLL and Mar
Tierra Corporation. Based on their report, the auditors found that the CLL owed
the respondent US$340,000.[30]
In the meantime, the respondent demanded from the CLL, Wilfrido
Martinez, Lacson, Gonzales, and petitioner Ruben Martinez, the payment of the
US$340,000 remitted by it to FCD SA 18402-7, per instructions of Gonzales and
Wilfrido Martinez. No remittance was made to the respondent. Petitioner Ruben
Martinez denied knowledge of any such remittance, as well as any liability for the
amount thereof.
On June 17, 1983, the respondent filed a complaint against the CLL, Wilfrido
Martinez, Lacson, Gonzales, and petitioner Ruben Martinez, with the RTC of
Kaloocan City for the collection of the principal amount of US$340,000, with a
plea for a writ of preliminary attachment. Two alternative causes of action against
the defendants were alleged therein, viz:
FIRST ALTERNATIVE CAUSE OF ACTION
2.1 The allegations contained in the foregoing paragraphs are repleaded herein by
reference.
2.2 The remittance by plaintiff of the sum of US$340,000.00 as previously
explained in the foregoing paragraphs was made upon the express instructions of
defendants GONZALES and WILFRIDO C. MARTINEZ acting for and in behalf
of the defendant CINTAS, defendants GONZALES and WILFRIDO C.
MARTINEZ being the duly authorized representatives of defendant CINTAS to
transact any and all of its business with plaintiff.
2.3 The remittance of US$340,000.00 was made under an agreement for plaintiff
to advance the said amount and for defendants GONZALES, WILFRIDO C.
MARTINEZ and CINTAS to repay plaintiff all such monies so advanced to said
defendants or to their order.
2.4 In making said remittance, plaintiff acted as the agent of the foregoing
defendants in meeting the latters liability to the recipient/s of the amount so
remitted.
Page 26 of 120
 CORPORATION LAW- 1
2.5 The remittance of US$340,000.00 which remains unsettled to date is a just,
binding and lawful obligation of the defendants GONZALES, WILFRIDO C.
MARTINEZ and CINTAS.
2.6 Defendant CINTAS is a reinvoicing or paper company with nominee
shareholders in Hongkong. The real and beneficial shareholders of the foregoing
defendants are the defendants LACSON and WILFRIDO C. MARTINEZ.
2.7 Defendant CINTAS is being used by the foregoing defendants as an alter ego
or business conduit for their sole benefit and/or to defeat public convenience.
2.8 Defendant CINTAS, being a mere alter ego or business conduit for the
foregoing defendants, has no corporate personality distinct and separate from
that of its beneficial shareholders and, likewise, has no substantial assets in its
own name.
2.9 The remittance of US$340,000.00 as referred to previously, although made
upon the instructions of defendants GONZALES, WILFRIDO C. MARTINEZ and
CINTAS, was in fact a remittance made for the benefit of the beneficial
shareholders of defendant CINTAS.
2.10 Any and all obligations of defendant CINTAS are the obligations of its
beneficial shareholders since the former is being used by the latter as an alter ego
or business conduit for their sole benefit and/or to defeat public convenience.
SECOND ALTERNATIVE CAUSE OF ACTION
3.1 The allegations contained in the foregoing paragraphs are incorporated herein
by reference.
3.2 Defendants RUBEN MARTINEZ, WILFRIDO C. MARTINEZ and LACSON
are joint account holders of Money Market Placement Account Nos. 063 and 084
(hereinafter referred to as MMP 063 and 084 for brevity) opened and maintained
by said defendants with the plaintiff.
3.3 Said money market placement accounts, although nominally opened and
maintained by said defendants, were in reality for the account and benefit of all
the defendants.
3.4 Defendant CINTAS likewise opened and maintained a deposit account with
plaintiff.
3.5 Defendants W.C. Martinez and Gonzales upon giving instructions to plaintiff
to remit the amount of US$340,000.00 as previously discussed also instructed
plaintiff to reimburse itself from available funds in MMP Account Nos. 063 and
084 and the defendant CINTAS deposit account.
3.6 Due to excusable mistake, plaintiff was unable to obtain reimbursement for
the remittance it made from MMP Account Nos. 063, 084 and from the deposit
account of defendant CINTAS.
3.7 As a consequence of said mistake, plaintiff delivered to the foregoing
defendants and/or to third parties upon orders of the defendants substantially all
the funds in MMP Account Nos. 063, 084 and the deposit account of defendant
CINTAS.
3.8 The amount of US$340,000.00 delivered by plaintiff to the foregoing
defendants constituted an overpayment and/or erroneous payment as defendants
had no right to demand the same; further, said amount having been unduly
delivered by mistake, the foregoing defendants were obliged to return it.
3.9 Since the foregoing defendants had no legal right to the overpayment or
erroneous payment of US$340,000.00 they, therefore, hold said money in trust
for the plaintiff.
3.10 Despite numerous demands to the defendants WILFRIDO C. MARTINEZ,
RUBEN MARTINEZ, LACSON and CINTAS for restitution of the funds
erroneously paid or overpaid to said defendants, they have failed and continue to
fail to make any restitution.[31]
The respondent prayed therein that, after due proceedings, judgment be
rendered in its favor, viz:
ON THE
FIRST ALTERNATIVE CAUSE OF ACTION
4.1 Ordering defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS,
jointly and severally, liable to pay plaintiff the amount of US$340,000.00 with
interests thereon from February 20, 1982 until fully paid.
4.2 Declaring that defendant CINTAS is a mere alter ego or business conduit of
defendants LACSON and WILFRIDO C. MARTINEZ; hence, the foregoing
defendants are, jointly and severally, liable to pay plaintiff the amount of
US$340,000.00 with interests thereon.
Page 27 of 120
 CORPORATION LAW- 1
4.3 Ordering the foregoing defendants to be, jointly and severally, liable for the
amount of P100,000.00 as and for attorneys fees; and
4.4 Ordering the foregoing defendants to be, jointly and severally, liable to
plaintiff for actual damages in an amount to be proved at the trial. Or -
ON THE
SECOND ALTERNATIVE CAUSE OF ACTION
5.1 Declaring that plaintiff made an erroneous payment in the amount of
US$340,000.00 to defendants LACSON, WILFRIDO C. MARTINEZ, RUBEN
MARTINEZ and CINTAS.
5.2 Declaring the foregoing defendants to be, jointly and severally, liable to
reimburse plaintiff the amount of US$340,000.00 with interest thereon from
February 20, 1982 until fully paid.
5.3 Ordering defendants to be, jointly and severally, liable for the amount
of P100,000.00 as and for attorneys fees; and
5.4 Ordering defendants to be, jointly and severally, liable to plaintiff for actual
damages in an amount to be proved at the trial.
5.5 A writ of preliminary attachment be issued against the properties of the
defendants WILFRIDO C. MARTINEZ, RUBEN MARTINEZ, LACSON and
CINTAS as a security for the satisfaction of any judgment that may be recovered.
Plaintiff further prays for such other relief as may be deemed just and equitable
in the premises.[32]
In his answer to the complaint, petitioner Ruben Martinez interposed the
following special and affirmative defenses:
BY WAY OF SPECIAL AND AFFIRMATIVE DEFENSES, answering defendant
respectfully states:
2. Defendant is not the holder, owner, depositor, trustee and has no interest
whatsoever in the account in Philippine Banking Corporation (FCD SA 18402-7)
where the plaintiff remitted the amount sought to be recovered. Hence, he did not
benefit directly or indirectly from the said remittance;
3. Defendant did not participate in any manner whatsoever in the remittance of
funds from the plaintiff to the alleged FCD Account in the Philippine Banking
Corporation;
4. Defendant has not received nor benefited from the alleged remittance,
payment, overpayment or erroneous payment allegedly made by plaintiff; hence,
insofar as he is concerned, there is nothing to return to or to hold in trust for the
plaintiff;
5. Plaintiffs alleged remittance of the amount by mere telex or telephone
instruction was highly irregular and questionable considering that the
undertaking was that no remittance or transfer could be done without the prior
signature of the authorized signatories;
6. The alleged telex instructions to the plaintiff was for it to confirm the amounts
that are free and available which it did;
7. Plaintiff is guilty of estoppel or laches by making it appear that the funds so
remitted are free and available and by not acting within reasonable time to
correct the alleged mistake;
8. The alleged remittance, overpayment and erroneous payment was manipulated
by plaintiffs own employees, officers or representatives without connivance or
collusion on the part of the answering defendant; hence, plaintiff has only itself to
blame for the same; likewise, its recourse is not against answering defendant;
9. Plaintiffs Complaint is defective in that it has failed to state the facts
constituting the mistake regarding its failure to obtain reimbursement from MMP
063 and 084;
10. Plaintiff is guilty of gross negligence and it only has itself to blame for its
alleged loss;
11. Sometime on or about 1980, defendant was made to sign blank forms
concerning opening of money market placements and perhaps, this is how he
became a joint account holder of MMP 063 and 084; defendant at that time did
not realize the import or significance of his act; afterwards, defendant did not do
any act or omission by which he could be implicated in this case;
12. Assuming that defendant is a joint account holder of said MMP 063 and 084,
plaintiff has failed to plead defendants obligations, if any, by being said joint
Page 28 of 120
 CORPORATION LAW- 1
account holder; likewise, the Complaint fails to attach the corresponding
documents showing defendants being a joint account holder.[33]
The CLL was declared in default for its failure to file an answer to the
complaint.
After trial, the RTC rendered its decision, the dispositive portion of which
reads as follows:
PREMISES CONSIDERED, judgment is hereby rendered as follows:
1. Ordering all the defendants, jointly and severally, to pay plaintiff the amount of
US$340,000.00 or its equivalent in Philippine currency measured at the Central
Bank prevailing rate of exchange in October 1980 and with legal interest thereon
computed from the filing of plaintiffs complaint on June 17, 1983 until fully paid;
2. Declaring that defendant Cintas Largas Ltd. is a mere business conduit and
alter ego of the individual defendants, thereby holding the individual defendants,
jointly and severally, liable to pay plaintiff the aforesaid amount of
US$340,000.00 or its equivalent in Philippine Currency measured at the Central
Bank prevailing rate of exchange in October 1980, with interest thereon as above-
stated;
3. Ordering all defendants to, jointly and severally, pay unto plaintiff the amount
of P50,000.00 as and for attorneys fees, plus costs.
All counterclaims and cross-claims are dismissed for lack of merit.
SO ORDERED.[34]
The trial court ruled that the CLL was a mere paper company with nominee
shareholders in Hongkong. It ruled that the principle of piercing the veil of
corporate entity was applicable in this case, and held the defendants liable, jointly
and severally, for the claim of the respondent, on its finding that the defendants
merely used the CLL as their business conduit. The trial court declared that the
majority shareholder of Mar Tierra Corporation was the RJL, controlled by
petitioner Ruben Martinez and his brothers, Jose and Luis Martinez, as majority
shareholders thereof. Moreover, petitioner Ruben Martinez was a joint account
holder of MMP Nos. 063 and 084. The trial court, likewise, found that the auditors
of Mar Tierra Corporation and the CLL confirmed that the defendants owed
US$340,000. The trial court concluded that the respondent had established its
causes of action against Wilfrido Martinez, Lacson, Gonzales, and petitioner Ruben
Martinez; hence, held all of them liable for the claim of the respondent.
The decision was appealed to the CA. On June 27, 1997, the CA rendered its
decision, the dispositive portion of which reads:
WHEREFORE, the decision of the Court a quo dated December [19], 1991 is
hereby MODIFIED, by exonerating appellant Blamar Gonzales from any liability
to appellee and the complaint against him is DISMISSED. The decision
appealed from is AFFIRMED in all other respect.
SO ORDERED.[35]
The appellate court exonerated Gonzales of any liability, reasoning that he
was not a stockholder of the CLL nor of Mar Tierra Corporation, but was a mere
employee of the latter corporation.[36] Petitioner Ruben Martinez sought a
reconsideration of the decision of the CA, to no avail.[37]
Dissatisfied with the decision and resolution of the appellate court, the
petitioner, filed the petition at bar, on the following grounds:
I
RESPONDENT COURT OF APPEALS ERRED IN FINDING THAT HEREIN
PETITIONER RUBEN MARTINEZ IS LIABLE TO RESPONDENT BPI
INTERNATIONAL FINANCE FOR REIMBURSEMENT OF THE US$340,000.00
REMITTED BY SAID RESPONDENT BPI INTERNATIONAL FINANCE TO FCD
SA ACCOUNT NO. 18402-7 AT THE PHILIPPINE BANKING CORPORATION,
PORT AREA BRANCH.
II
RESPONDENT COURT OF APPEALS ERRED IN NOT GRANTING THE
COUNTER-CLAIM OF PETITIONER RUBEN MARTINEZ CONSIDERING THE
EVIDENCE ON RECORD THAT PROVES THE SAME.[38]
The paramount issue posed for resolution is whether or not the petitioner is
obliged to reimburse to the respondent the principal amount of US$340,000.
The petitioner asserts that the trial and appellate courts erred when they held
him liable for the reimbursement of US$340,000 to the respondent. He contends
that he is not in actuality a stockholder of Mar Tierra Corporation, nor a
stockholder of the CLL. He was not involved in any way in the operations of the
said corporations. He added that while he may have signed the signature cards of
MMP Nos. 063 and 084 in blank, he never had any involvement in the
management and disposition of the said accounts, nor of any deposits in or
withdrawals from either or both accounts. He was not aware of any transactions
Page 29 of 120
 CORPORATION LAW- 1
between the respondent, Wilfrido Martinez, and Gonzales, with reference to the
remittance of the US$340,000 to FCD SA 18402-7; nor did he oblige himself to
pay the said amount to the respondent. According to the petitioner, there is no
evidence that he had benefited from any of the following: (a) the remittance by the
respondent of the US$340,000 to Account No. FCD SA 18402-7 owned by Mar
Tierra Corporation; (b) the money market placements in MMP Nos. 063 and 084,
or, (c) from any deposits in or withdrawals from the said account and money
market placements.
On the other hand, the appellate court found the petitioner and his co-
defendants, jointly and severally, liable to the respondent for the payment of the
US$340,000 based on the following findings of the trial court:
The Court finds that defendant Cintas Largas (Ltd.) with capitalization of
$10,000.00 divided into 1,000 shares at HK$10 per share, is a mere paper
company with nominee shareholders in Hongkong, namely: Overseas Nominees
Ltd. and Shares Nominees Ltd., with defendants Wilfrido and Miguel J. Lacson as
the sole directors (Exh. A). Since the said shareholders are mere nominee
companies, it would appear that the said defendants Wilfrido and Miguel J.
Lacson who are the sole directors are the real and beneficial shareholders (t.s.n.,
9-1-87, p. 5). Further, defendant Cintas Largas Ltd. has no real office in
Hongkong as it is merely being accommodated by Price Waterhouse, a large
accounting office in Hongkong (t.s.n., 9-1-87, pp. 7-8).
Defendant Cintas Largas Ltd., being a mere alter ego or business conduit for the
individual defendants with no corporate personality distinct and separate from
that of its beneficial shareholders and with no substantial assets in its own name,
it is safe to conclude that the remittance of US$340,000.00 was, in fact, a
remittance made for the benefit of the individual defendants. Plaintiff was
supposed to deduct the US$340,000.00 remitted to the foreign currency deposit
account from Cintas Largas (Ltd.) funds or from money market placement
account Nos. 063 and 084 as well as Cintas Largas Ltd. deposit account (Exh. FF-
24).
Defendant Cintas Largas Ltd. was established only for financing (t.s.n., 12-19-88,
pp. 25-26) and the active owners of Cintas are defendants Miguel Lacson and
Wilfrido C. Martinez (t.s.n., 12-19-88, p. 22). Mar Tierra Corporation of which
defendant Wilfrido Martinez is the President and one of its owners and defendant
Blamar Gonzales as the Vice President, sells molasses to defendant Cintas Largas
Ltd. Defendant Miguel J. Lacson is a business partner in purchasing molasses for
Mar Tierra Corporation. Mar Tierra Corporation was selling molasses to Cintas
Largas Ltd. which were purchased by Miguel Lacson and Wilfrido C. Martinez
(t.s.n., 12-19-88, pp. 23-24). The majority owner of Mar Tierra Corporation is
RJL Martinez Fishing Corporation which is owned by brothers Ruben Martinez,
Jose Martinez and Luis Martinez (t.s.n., 12-19-88, pp. 24-25; t.s.n., 6-20-88, pp.
11-12). The FCD SA-18402-7 account at Philippine Banking Corporation, Port
Area Branch, where the US$340,000.00 was remitted by the plaintiff is the
account of Mar Tierra Corporation, and with the interlapping connection of the
defendants to each other, these could be the reason why the funds of Cintas
Largas Ltd. were being co-mingled and controlled by defendants more
particularly defendants Blamar Gonzales and Wilfrido C. Martinez (Exhs. D, E, F,
G, H, I, J, L, M, N, O, P, R, S, and T).
On the basis of the evidence, the Court finds and so holds that the cause of action
of the plaintiff against the defendants has been established.[39]
We do not agree with the trial court and appellate court.
We note that the question of whether or not a corporation is merely an alter
ego is purely one of fact.[40] So is the question of whether or not a corporation is a
paper company or a sham or subterfuge or whether the respondent adduced the
requisite quantum of evidence warranting the piercing of the veil of corporate
entity of the CLL.[41]The Court is not a trier of facts. Hence, the factual findings of
the trial court, as affirmed by the appellate court, are generally conclusive upon
this Court.[42] However, the rule is subject to the following exceptions: (a) where
the conclusion is a finding grounded entirely on speculation, surmise and
conjectures; (b) where the information made is manifestly mistaken; (c) where
there is grave abuse of discretion; (d) where the judgment is based on a
misapplication of facts, and the findings of facts of the trial court and the appellate
court are contradicted by the evidence on record; and (e) when certain material
facts and circumstances had been overlooked by the trial court which, if taken into
account, would alter the result of the case.
We have reviewed the records and find that some substantial factual findings
of the trial court and the appellate court and, consequently, their conclusions based
on the said findings, are not supported by the evidence on record.
The general rule is that a corporation is clothed with a personality separate
and distinct from the persons composing it. Such corporation may not be held
liable for the obligation of the persons composing it; and neither can its
stockholders be held liable for such obligation.[43] A corporation has a separate
personality distinct from its stockholders and from other corporation to which it
may be connected.[44] This separate and distinct personality of a corporation is a
fiction created by law for convenience and to prevent injustice.[45]
Nevertheless, being a mere fiction of law, peculiar situations or valid grounds
can exist to warrant, albeit sparingly, the disregard of its independent being and
the piercing of the corporate veil.[46] Thus, the veil of separate corporate
personality may be lifted when such personality is used to defeat public
convenience, justify wrong, protect fraud or defend crime; or used as a shield to
Page 30 of 120
 CORPORATION LAW- 1
confuse the legitimate issues; or when the corporation is merely an adjunct, a
business conduit or an alter ego of another corporation or where the corporation
is so organized and controlled and its affairs are so conducted as to make it merely
an instrumentality, agency, conduit or adjunct of another corporation;[47] or 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 for the protection of the
creditors.[48] In such cases where valid grounds exist for piercing the veil of
corporate entity, the corporation will be considered as a mere association of
persons.[49] The liability will directly attach to them.[50]
However, mere ownership by a single stockholder or by another corporation
of all or nearly all of the capital stocks of a corporation is not by itself a sufficient
ground to disregard the separate corporate personality. The substantial identity of
the incorporators of two or more corporations does not warrantly imply that there
was fraud so as to justify the piercing of the writ of corporate fiction.[51] To
disregard the said separate juridical personality of a corporation, the wrongdoing
must be proven clearly and convincingly.[52]
The test in determining the application of the instrumentality or alter ego
doctrine is as follows:
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 plaintiffs 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
defendants relationship to that operation.[53]
In this case, the respondent failed to adduce the quantum of evidence
necessary to prove any valid ground for the piercing of the veil of corporate entity
of Mar Tierra Corporation, or of RJL for that matter, and render the petitioner
liable for the respondents claim, jointly and severally, with Wilfrido Martinez and
Lacson. The mere fact that the majority stockholder of Mar Tierra Corporation is
the RJL, and that the petitioner, along with Jose and Luis Martinez, owned about
42% of the capital stock of RJL, do not constitute sufficient evidence that the latter
corporation, and/or the petitioner and his brothers, had complete domination of
Mar Tierra Corporation. It does not automatically follow that the said corporation
was used by the petitioner for the purpose of committing fraud or wrong, or to
perpetrate an injustice on the respondent. There is no evidence on record that the
petitioner had any involvement in the purchases of molasses by Wilfrido Martinez,
Gonzales and Lacson, and the subsequent sale thereof to the CLL, through Mar
Tierra Corporation. On the contrary, the evidence on record shows that the CLL
purchased molasses from Mar Tierra Corporation and paid for the same through
the credit facility granted by the respondent to the CLL. The CLL, thereafter, made
remittances to Mar Tierra Corporation from its deposit account and MMP Nos.
063 and 084 with the respondent. The close business relationship of the two
corporations does not warrant a finding that Mar Tierra Corporation was but a
conduit of the CLL.
Likewise, the respondent failed to adduce preponderant evidence to prove
that the Mar Tierra Corporation and the RJL were so organized and controlled, its
affairs so conducted as to make the latter corporation merely an instrumentality,
agency, conduit or adjunct of the former or of Wilfrido Martinez, Gonzales, and
Lacson for that matter, or that such corporations were organized to defraud their
creditors, including the respondent. The mere fact, therefore, that the businesses
of two or more corporations are interrelated is not a justification for disregarding
their separate personalities, absent sufficient showing that the corporate entity was
purposely used as a shield to defraud creditors and third persons of their rights.[54]
Also, the mere fact that part of the proceeds of the sale of molasses made by
Mar Tierra Corporation to the CLL may have been used by the latter as deposits in
its deposit account with the respondent or in the money market placements in
MMP Nos. 063 and 084, or that the funds of Mar Tierra Corporation and the CLL
with the respondent were mingled, and their disposition controlled by Wilfrido
Martinez, does not constitute preponderant evidence that the petitioner, Wilfrido
Martinez and Lacson used the Mar Tierra Corporation and the RJL to defraud the
respondent. The respondent treated the CLL and Mar Tierra Corporation as
separate entities and considered them as one and the same entity only when
Wilfrido C. Martinez and/or Blamar Gonzales failed to pay the US$340,000
remitted by the respondent to FCD SA 18402-7. This being the case, there is no
factual and legal basis to hold the petitioner liable to the respondent for the said
amount.
Contrary to the ruling of the trial court and the appellate court, the auditors
of the CLL and the Mar Tierra Corporation, in their report, did not find the
petitioner liable for the respondents claim in their report. The auditors, in fact,
found the CLL alone liable for the said amount.[55] Even a cursory reading of the
report will show that the name of the petitioner was not mentioned therein.
Page 31 of 120
 CORPORATION LAW- 1
The respondent failed to adduce evidence that the petitioner had any
involvement in the transactions between the CLL, through Wilfrido Martinez and
Gonzales, and the respondent, with reference to the remittance of the US$340,000
to FCD SA 18402-7. In fact, the said transaction was so confidential that Gonzales
even suggested to the respondent that the name of Wilfrido Martinez or Mar Tierra
Corporation be not made of record, and to authorize only Wilfrido Martinez to sign
the telex instruction:
OCT. 10, 1980
TO: AYALA FINANCE
ATTN: MICHAEL SUNG/BING MATOTO
FR: B. GONZALES
RE: TRANSFER OF FUNDS
THIS IS TO CONFRM OUR TELEPHONE CONVERSATION THAT WE WLD
LIKE TO SUGGEST THE FF PROCEDURES FOR FUND TRANSFER.
1. TLX INSTRUCTION THAT FUNDS BE TRANSFERRED TO OUR FCD ACCT
BY TELEGRAPHIC TRANSFER.
2. WE WILL ONLY USE ONE ACCT W/C IS FCD SA 18402-7 OF
PHILBANKING CORPORATION, PORT AREA BRANCH, UNION
CEMENT BLDG, BONIFACIO DRIVE, PORT AREA, METRO
MANILA, PHILS.
3. PAYEE SHLD BE FCD SA 18402-7 AND NO MENTION OF W.C.
MARTINEZ OR MAR TIERRA CORP. TLX INSTRUCTION SHLD BE
SIGNED BY W.C. MARTINEZ AND WILL BE SENT ONLY THRU
TLX MACHINE OF MAR TIERRA CORP.
4. FINAL CONFIRMATION OF THE TRANSFER BY TELEPHONE CALL.
PLS CONFRM TODAY TOTAL AMT. THAT IS FREE AND AVAILABLE SO WE
CAN FORMALIZE INSTRUCTION OF TRANSFER IF THE ABOVE
PROCEDURE IS APPROVED BY YOU. PLS CONFRM ALSO LIST OF
CORRESPONDENT BANK IN HK.
IN CASE OF WELLS FARGO HK, WE WLD LIKE TO SUGGEST THE FF
PROCEDURE:
1. WELLS FARGO HK WIL SEND A TLX TO MANILA INSTRUCTING PHIL
BANKING CORP TO CREDIT FCD SA 18402-7.
2. REIMBURSEMENT INSTRUCTION, AT THE SAME TIME WELLS FARGO
HK WIL REQUEST WELLS FARGO NEW YORK TO CREDIT FCDU NO. 003-
019205 FOR THE ACCT OF PHIL BANKING CORP.[56]
Even the respondent admitted, in its complaint, that the CLL, Gonzales, and
Wilfrido Martinez, bound and obliged themselves to repay the US$340,000, viz:
2.2 The remittance by plaintiff of the sum of US$340,000.00 as previously
explained in the foregoing paragraphs was made upon the express instructions of
defendants GONZALES and WILFRIDO C. MARTINEZ acting for and in behalf
of the defendant CINTAS, defendants GONZALES and WILFRIDO C.
MARTINEZ being the duly authorized representatives of defendant CINTAS to
transact any and all of its business with plaintiff.
2.3 The remittance of US$340,000.00 was made under an agreement for plaintiff
to advance the said amount and for defendants GONZALES, WILFRIDO C.
MARTINEZ and CINTAS to repay plaintiff all such monies so advanced to said
defendants or to their order.
2.4 In making said remittance, plaintiff acted as the agent of the foregoing
defendants in meeting the latters liability to the recipient/s of the amount so
remitted.
2.5 The remittance of US$340,000.00 which remains unsettled to date is a just,
binding and lawful obligation of the defendants GONZALES, WILFRIDO C.
MARTINEZ and CINTAS.
2.6 Defendant CINTAS is a reinvoicing or paper company with nominee
shareholders in Hongkong. The real and beneficial shareholders of the foregoing
defendants are the defendants LACSON, and WILFRIDO C. MARTINEZ.
2.7 Defendant CINTAS is being used by the foregoing defendants as an alter ego
or business conduit for their sole benefit and/or to defeat public convenience.
2.8 Defendant CINTAS, being a mere alter ego or business conduit for the
foregoing defendants, has no corporate personality distinct and separate from
that of its beneficial shareholders and likewise has no substantial assets in its own
name.
2.9 The remittance of US$340,000.00 as referred to previously, although made
upon the instructions of defendants GONZALES, WILFRIDO C. MARTINEZ and
CINTAS, was in fact a remittance made for the benefit of the beneficial
shareholders of defendant CINTAS.[57]
Page 32 of 120
 CORPORATION LAW- 1
The admissions made by the respondent in its complaint are judicial
admissions which cannot be contradicted unless there is a showing that it was
made through palpable mistake or that no such admission was made.[58]
The respondent impleaded the petitioner only in its second alternative cause
of action, on its allegation that the latter was a joint account holder of MMP Nos.
063 and 084, simply because he signed the signature cards with Wilfrido Martinez
and/or Lacson in blank. The trial court found the submission of the respondent
duly established, based on Wilfrido Martinezs answer to the complaint, and held
the petitioner liable for the said amount based on the signature cards in this
language:
Defendants Ruben Martinez, Wilfrido C. Martinez and Miguel Lacson are joint
account holders of the money market placement account Nos. 063 and 084 (par.
17 page 4 Answer of defendant Wilfrido C. Martinez; par. 2, page 5, Amended
Answer of defendant Lacson; t.s.n., 4-18-88, p. 7).[59]
The appellate court affirmed the ruling of the trial court without making any
specific reference to the aforequoted ruling of the trial court.[60]
We do not agree. The judicial admissions made by Wilfrido Martinez in his
answer to the complaint are not binding on the petitioner.[61] The evidence on
record shows that the petitioner affixed his signatures on the signature cards
merely upon the request of his son, Wilfrido Martinez. The signature cards were
printed forms of the respondent with the names of the signatories and the
supposed account holders typewritten thereon and, except for the account number,
were similarly worded, viz:
SIGNATURE CARD
Account Name: Mr. Ruben Martinez and/or Account Number: MMP-063
Mr. Wilfrido C. Martinez
and/or Mr. Miguel J. Lacson
I.D. Card/Passport
No.:________________________________________
Residence Address:
__________________________________________
_____________________________________Tel.________
___________
Office
Address:__________________________________________
_____
_____________________________________Tel.
___________________
Number of signature required to withdraw
funds:_____________________
Confirmation/Correspondence to be mailed to: _____Office
_____Residence
_____Others:__
_________
______________
_________
Other
Instructions:_______________________________________
_______
________________________________________________
_____________
________________________________________________
_____________
Specimen of signature:
1. Sgd. (Ruben Martinez) 3. Sgd. (Wilfrido Martinez)
SIGNATURE NAME SIGNATURE NAME
2. Sgd. (Ruben Martinez) 4. Sgd. (Miguel J. Lacson)
SIGNATURE NAME SIGNATURE NAME[62]
The respondent failed to adduce any evidence, testimonial or documentary,
including the relevant laws[63] of Hongkong where the placements were made to
hold the petitioner liable for the respondents claims. Other than the signature
cards, the respondent failed to adduce a shred of evidence to prove (a) the terms
and conditions of the money market placements of the CLL in MMP Nos. 063 and
084; and, (b) the rights and obligations of the petitioner, Wilfrido Martinez and
Lacson, over the money market placements. In light of the evidence on record, the
CLL and/or Wilfrido Martinez never surrendered their ownership over the funds
in favor of the petitioner when the latter co-signed the signature cards. The CLL
and/or Wilfrido Martinez retained complete control and dominion over the funds.
By merely affixing his signatures on the signature cards, the petitioner did
not necessarily become a joint and solidary creditor of the respondent over the said
placements. Neither did the petitioner bind himself to pay to the respondent the
US$340,000 which was borrowed by the CLL and/or Wilfrido Martinez, and later
remitted to FCD SA 18402-7.
The respondent has no one but itself to blame for its failure to deduct the
US$340,000 from the foreign currency and deposit accounts and money market
placements of the CLL. The evidence on record shows that the respondent was
supposed to deduct the said amount from the money market placements of the CLL
in MMP Nos. 063 and 084, but failed to do so. The respondent remitted the
Page 33 of 120
 CORPORATION LAW- 1

amount from its own funds and, by its negligence, merely posted the amount in the the knowledge, involvement, and consent of the petitioner. Furthermore, the
account of the CLL. Worse, the respondent allowed the CLL and Wilfrido Martinez documentary evidence of the respondent shows the following:
to withdraw the entirety of the deposits in the said accounts, without first
deducting the US$340,000. By the time the respondent realized its mistakes, the MMP 063
funds in the said accounts had already been withdrawn solely by the CLL and/or Statement of Accounts (Deposit)
Wilfrido Martinez. This was the testimony of Michael Sung, the witness for the
respondent. Funds In Funds Out Remarks
Value Date
Q: Do you know whether this US$340,000 was really transferred to
Foreign Currency Deposit Account No. 18402-7 of the Philippine
28/11/80 6,664.95
Banking Corporation in Manila? Interests earned
A: Yes. 29/12/80 4,779.66 ""
21/01/81 4,024.83 ""
Q: Pursuant to the procedure for fund transfer as contained in Exhs. B, 21/01/81 119,478.51 Purchase HK$632,041.33
C, D and E, after having made such remittance of @5.29 & transferred to its
US$340,000.00, what was plaintiff supposed to do, if any, in statement A/C
order to get reimbursement for such transfer? 13/02/81 2,321.99 Interests earned
" 100,015.00 Transfer to Cintas Largas
A: Plaintiff was supposed to deduct the US$340,000.00 remitted to A/C Receivable.
the foreign currency deposit account from the Cintas Largas 17/02/81 55.07 Interests earned
funds or from Money Market Placement Account Nos. 063 and 18/03/81 1,317.27 ""
100,000.00 Purchase
084 as well as the Cintas Largas, Ltd. deposit account. HK$525,000.00 @5.25
Q: Do you know if plaintiff was able to obtain reimbursement of the cheque made payable to
Grand Solid Enterprises
US$340,000 remitted to the Philippine Banking Corporation in Co., Ltd.
Manila? 5,713.74 Transfer to A/C
Receivable (MMP-063)
A: No, because instead of deducting the remittance of US$340,000
from the funds in the money market placement accounts and/or ____________ ____________
the Cintas Largas Deposit Account, we posted the US$340,000
remittance as an account receivable of Cintas Largas, Ltd. since US$443,975.85 US$443,975.85[65]
at that time the money market placement deposits have not yet
matured. Subsequently, we failed to charge the deposit and MMP
accounts when they matured and Cintas Largas, Ltd. and/or =========== ============
Wilfrido C. Martinez had already withdrawn the bulk of the
funds contained in Money Market Placement Account No. 063
and the Cintas Largas, Ltd. Deposit Account thus, we were MMP 084
unable to obtain reimbursement therefrom.[64] Statement of Accounts (Deposit)

It cannot even be argued that if the petitioner would not be adjudged liable Value Date Funds In Funds Out Remarks
for the respondents claim, he would thereby be enriching himself at the expense of
the respondent. There is no evidence on record that the petitioner withdrew a
single centavo from or was personally benefited by the funds in MMP Nos. 063 and
28/11/80 16,374.36 Interests
084. The testimonial and documentary evidence of the respondent clearly shows earned
that the CLL and/or Wilfrido Martinez used and disposed of the said funds without
01/12/80 488.16 ""

Page 34 of 120
 CORPORATION LAW- 1

04/12/80 1,089.06 "" =========== ============

" US$250,000.00 Transfer to A/C

of Cintas
Largas CINTAS LARGAS
Statement of Accounts (Deposit)
09/12/80 1,290.56 Interests
earned
Value Date Funds In Funds Out Remarks
" 200,000.00 Transfer to
Cintas Largas
A/R.
31/10/8 5,011.99 Interests
18/12/80 1,545.42 Interests 0 earned
earned
17/11/8 8,067.70 ""
200,000.00 T/T to Chase 0
Manhattan NY
for Credit A/C " 350,000.00 Transfer to
Allied Capital A/C of Grand
F/O Frank Solid
Chan B/O
Grand Solid. 09/11/8 3,062.23 Interests
02/03/81 4,608.27 Interests 0 earned
earned
" 350,000.00 Purchase
" 20,470.74 Transfer to A/C HK$1,789,200.
of Grand Solid 00 @5.112,
Cheque made
09/03/81 321.91 Interests
earned
payable to
Grand Solid.
" 60,000.00 Transfer to A/C
of Trinisia Ltd. 26/11/8 3,264.34 Interests
0 earned
20/03/81 213.40 Interests
earned " 300,000.00 Purchase
HK$1,535,100.
" 45,286.26 T/T to Nitto
00 @5.117,
Trading &
Josho Ind. Co., Cheque made
Ltd., Japan. payable to
Grand Solid
" 2,028.02 Transfer to A/C
Receivable 21/01/8 1,299.80 Interests
(MMP-084) 1 earned
" 30.00 Cable Charges " 81,415.00 Remittance
____________ _____________ from C. Itoh &
Co., NY
US$777,815.02 US$777,815.02[66]

Page 35 of 120
 CORPORATION LAW- 1

02/03/ 2,445.49 Interests NY. REF.

81 earned KOMEIMARU
" 129,529.26 Transfer to 19/05/ 178,465.18 Transfer from
Grand Solids 81 CLs A/C
A/C Receivable Receivable
02/04/ 143,000.00 Transfer from 22/05/ 46,472.00 Remittance
81 CLs Statement 81 from C. Itoh &
A/C Co., NY Re.
Pacific Geory.
10/04/ 456.81 Interests
81 earned 26/05/ 28.40 Interests
81 earned
" 50,000.00 Purchase
HK$267,150.0 04/06/ 1,242.80 ""
0 @5.343, 81
Cheque made
payable to " 50,000.00 Purchase
Grand Solid. HK$275,750.0
0 @5.515,
13/04/ US$ 40.89 Interests Cheque made
81 earned payable to
Grand Solid
21/04/ 311.66 ""
81 11/06/8 2,252.36 Interests
1 earned
" US$ 50,000.00 Purchase
HK$268,850.0 " 66,400.00 T/T to Security
0 @5.377, Pacific Natl
cheque made Bank LA for
payable to A/C of
Grand Solid. Twentieth
Century Fox
28/04/ 132.04 Interests Intl Corp.
81 earned
" 15.00 Cable Charge
" 40,000.00 Purchase
HK$214,480.0 " 31.65 Purchase
0 @5.362, HK$175.00
cheque made @5.53 for
payable to payment of
Grand Solid. Business
Registration
" 52,692.00 Remittance Fee.
from Dai Ichi
Kangyo Bank 25/06/ 1,192.24 Interests
81 earned

Page 36 of 120
 CORPORATION LAW- 1

" 60,000.00 Purchase of Takashiro

HK$331,500.0 Maru.
0 @5.525,
cheque made " 15.00 Cable Charge
payable to 15/09/ US$ 482.29 Interests
Grand Solid. 81 earned
" 22,656.88 T/T to Daiwa " US$ 1,250.00 Reimbursemen
Bank, Los t of expenses
Angeles for paid to Price
A/C of OAC Waterhouse &
Equipment Co.
Corp.
17/09/ 11.91 Interests
" 45,800.00 T/T to Josho 81 earned
Ind. Co. Ltd.,
Japan " 237.43 Purchase
HK$1,421.50
" 15.00 Cable Charge for cheque
03/07/ 165.47 Interests payment to
81 earned Price
Waterhouse &
" 11,870.00 T/T to Bank of Co.
Tokyo, Kobe
Branch for A/C 08/01/ 70,360.00 Remittance
of Furuno 82 from C. Itoh &
Electric Co. Co., NY
Ref.: Mar 19/01/8 268.74 Interests
Tierra 2 earned
Takashiro
Maru, Eatelite " 3,064.81 Transfer to CLs
Nav. and Margin A/C
Radar.
" 50,000.00 Purchase
" 15.00 Cable Charge HK$295,100.0
0, cheque
06/07/ 17.60 Interests made payable
81 earned to Grand Solid.
07/07/ 14.83 "" " 5,952.38 Transfer to
81 A/C of Trinisia
" 16,000.00 T/T to Dai Ichi Ltd.
Kangyo Bank, ___________ ____________
Shimizu __ _
Branch for A/C

Page 37 of 120
 CORPORATION LAW- 1

TOTAL US$1,756,387.3 US$1,732,103.25

: 2
- 24,284.07 Outstanding
deposits
___________ ____________
__ _
US$1,756,387.3 US$1,756,387.32
2 [67]

=========== ============
= =

Clearly from the foregoing, the withdrawals from the deposit and foreign
currency accounts and MMP Nos. 063 and 084 of the CLL, after the respondent
remitted the US$340,000, were for the account of the CLL and/or Wilfrido
Martinez, and not of the petitioner.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The
Decision of the Court of Appeals is REVERSED AND SET ASIDE. The complaint
of the respondent against the petitioner in Civil Case No. C-10811 is DISMISSED.
No costs.
SO ORDERED.
Puno, (Chairman), and Tinga, JJ., concur.
Austria-Martinez, J., on official leave.
Chico-Nazario, J., on leave.

Page 38 of 120
 CORPORATION LAW- 1
SECOND DIVISION
[G.R. No. 100812. June 25, 1999]
FRANCISCO MOTORS CORPORATION, petitioner, vs. COURT OF
APPEALS and SPOUSES GREGORIO and LIBRADA
MANUEL, respondents.
DECISION
QUISUMBING, J.:
This petition for review on certiorari, under Rule 45 of the Rules of Court,
seeks to annul the decision[1] of the Court of Appeals in C.A. G.R. CV No. 10014
affirming the decision rendered by Branch 135, Regional Trial Court of Makati,
Metro Manila. The procedural antecedents of this petition are as follows:
On January 23, 1985, petitioner filed a complaint[2] against private
respondents to recover three thousand four hundred twelve and six centavos
(P3,412.06), representing the balance of the jeep body purchased by the Manuels
from petitioner; an additional sum of twenty thousand four hundred fifty-four and
eighty centavos (P20,454.80) representing the unpaid balance on the cost of repair
of the vehicle; and six thousand pesos (P6,000.00) for cost of suit and attorneys
fees.[3] To the original balance on the price of jeep body were added the costs of
repair.[4] In their answer, private respondents interposed a counterclaim for
unpaid legal services by Gregorio Manuel in the amount of fifty thousand pesos
(P50,000) which was not paid by the incorporators, directors and officers of the
petitioner. The trial court decided the case on June 26, 1985, in favor of petitioner
in regard to the petitioners claim for money, but also allowed the counter-claim of
private respondents. Both parties appealed. On April 15, 1991, the Court of Appeals
sustained the trial courts decision.[5] Hence, the present petition.
For our review in particular is the propriety of the permissive counterclaim
which private respondents filed together with their answer to petitioners
complaint for a sum of money. Private respondent Gregorio Manuel alleged as an
affirmative defense that, while he was petitioners Assistant Legal Officer, he
represented members of the Francisco family in the intestate estate proceedings of
the late Benita Trinidad. However, even after the termination of the proceedings,
his services were not paid. Said family members, he said, were also incorporators,
directors and officers of petitioner. Hence to counter petitioners collection suit, he
filed a permissive counterclaim for the unpaid attorneys fees.[6]
For failure of petitioner to answer the counterclaim, the trial court declared
petitioner in default on this score, and evidence ex-parte was presented on the
counterclaim. The trial court ruled in favor of private respondents and found that
Gregorio Manuel indeed rendered legal services to the Francisco family in Special
Proceedings Number 7803- In the Matter of Intestate Estate of Benita
Trinidad. Said court also found that his legal services were not compensated
despite repeated demands, and thus ordered petitioner to pay him the amount of
fifty thousand (P50,000.00) pesos.[7]
Dissatisfied with the trial courts order, petitioner elevated the matter to the
Court of Appeals, posing the following issues:
I.
WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS
NULL AND VOID AS IT NEVER ACQUIRED JURISDICTION OVER THE
PERSON OF THE DEFENDANT.
II.
WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN
THE ALLEGED PERMISSIVE COUNTERCLAIM SHOULD BE HELD LIABLE
TO THE CLAIM OF DEFENDANT-APPELLEES.
III.
WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF-
APPELLANT TO ANSWER THE ALLEGED PERMISSIVE COUNTERCLAIM.[8]
Petitioner contended that the trial court did not acquire jurisdiction over it
because no summons was validly served on it together with the copy of the answer
containing the permissive counterclaim. Further, petitioner questions the
propriety of its being made party to the case because it was not the real party in
interest but the individual members of the Francisco family concerned with the
intestate case.
In its assailed decision now before us for review, respondent Court of Appeals
held that a counterclaim must be answered in ten (10) days, pursuant to Section 4,
Rule 11, of the Rules of Court; and nowhere does it state in the Rules that a party
still needed to be summoned anew if a counterclaim was set up against him. Failure
to serve summons, said respondent court, did not effectively negate trial courts
Page 39 of 120
 CORPORATION LAW- 1
jurisdiction over petitioner in the matter of the counterclaim. It likewise pointed
out that there was no reason for petitioner to be excused from answering the
counterclaim. Court records showed that its former counsel, Nicanor G. Alvarez,
received the copy of the answer with counterclaim two (2) days prior to his
withdrawal as counsel for petitioner. Moreover when petitioners new counsel, Jose
N. Aquino, entered his appearance, three (3) days still remained within the period
to file an answer to the counterclaim. Having failed to answer, petitioner was
correctly considered in default by the trial court.[9] Even assuming that the trial
court acquired no jurisdiction over petitioner, respondent court also said, but
having filed a motion for reconsideration seeking relief from the said order of
default, petitioner was estopped from further questioning the trial courts
jurisdiction.[10]
On the question of its liability for attorneys fees owing to private respondent
Gregorio Manuel, petitioner argued that being a corporation, it should not be held
liable therefor because these fees were owed by the incorporators, directors and
officers of the corporation in their personal capacity as heirs of Benita
Trinidad. Petitioner stressed that the personality of the corporation, vis--vis the
individual persons who hired the services of private respondent, is separate and
distinct,[11] hence, the liability of said individuals did not become an obligation
chargeable against petitioner.
Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:
However, this distinct and separate personality is merely a fiction created by law
for convenience and to promote justice. Accordingly, this separate personality of
the corporation may be disregarded, or the veil of corporate fiction pierced, in
cases where it is used as a cloak or cover for found (sic) illegality, or to work an
injustice, or where necessary to achieve equity or when necessary for the
protection of creditors. (Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA
347) Corporations are composed of natural persons and the legal fiction of a
separate corporate personality is not a shield for the commission of injustice and
inequity. (Chemplex Philippines, Inc. vs. Pamatian, 57 SCRA 408)
In the instant case, evidence shows that the plaintiff-appellant Francisco Motors
Corporation is composed of the heirs of the late Benita Trinidad as directors and
incorporators for whom defendant Gregorio Manuel rendered legal services in
the intestate estate case of their deceased mother. Considering the aforestated
principles and circumstances established in this case, equity and justice demands
plaintiff-appellants veil of corporate identity should be pierced and the defendant
be compensated for legal services rendered to the heirs, who are directors of the
plaintiff-appellant corporation.[12]
Now before us, petitioner assigns the following errors:
I.
THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF
PIERCING THE VEIL OF CORPORATE ENTITY.
II.
THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS
JURISDICTION OVER PETITIONER WITH RESPECT TO THE
COUNTERCLAIM.[13]
Petitioner submits that respondent court should not have resorted to piercing
the veil of corporate fiction because the transaction concerned only respondent
Gregorio Manuel and the heirs of the late Benita Trinidad. According to petitioner,
there was no cause of action by said respondent against petitioner; personal
concerns of the heirs should be distinguished from those involving corporate
affairs. Petitioner further contends that the present case does not fall among the
instances wherein the courts may look beyond the distinct personality of a
corporation.According to petitioner, the services for which respondent Gregorio
Manuel seeks to collect fees from petitioner are personal in nature. Hence, it avers
the heirs should have been sued in their personal capacity, and not involve the
corporation.[14]
With regard to the permissive counterclaim, petitioner also insists that there
was no proper service of the answer containing the permissive counterclaim. It
claims that the counterclaim is a separate case which can only be properly served
upon the opposing party through summons. Further petitioner states that by
nature, a permissive counterclaim is one which does not arise out of nor is
necessarily connected with the subject of the opposing partys claim. Petitioner
avers that since there was no service of summons upon it with regard to the
counterclaim, then the court did not acquire jurisdiction over petitioner. Since a
counterclaim is considered an action independent from the answer, according to
petitioner, then in effect there should be two simultaneous actions between the
same parties: each party is at the same time both plaintiff and defendant with
respect to the other,[15] requiring in each case separate summonses.
In their Comment, private respondents focus on the two questions raised by
petitioner. They defend the propriety of piercing the veil of corporate fiction, but
deny the necessity of serving separate summonses on petitioner in regard to their
permissive counterclaim contained in the answer.
Private respondents maintain both trial and appellate courts found that
respondent Gregorio Manuel was employed as assistant legal officer of petitioner
corporation, and that his services were solicited by the incorporators, directors and
members to handle and represent them in Special Proceedings No. 7803,
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 CORPORATION LAW- 1
concerning the Intestate Estate of the late Benita Trinidad. They assert that the
members of petitioner corporation took advantage of their positions by not
compensating respondent Gregorio Manuel after the termination of the estate
proceedings despite his repeated demands for payment of his services. They cite
findings of the appellate court that support piercing the veil of corporate identity
in this particular case. They assert that the corporate veil may be disregarded when
it is used to defeat public convenience, justify wrong, protect fraud, and defend
crime. It may also be pierced, according to them, where the corporate entity is
being used as an alter ego, adjunct, or business conduit for the sole benefit of the
stockholders or of another corporate entity. In these instances, they aver, the
corporation should be treated merely as an association of individual persons.[16]
Private respondents dispute petitioners claim that its right to due process was
violated when respondents counterclaim was granted due course, although no
summons was served upon it.They claim that no provision in the Rules of Court
requires service of summons upon a defendant in a counterclaim. Private
respondents argue that when the petitioner filed its complaint before the trial court
it voluntarily submitted itself to the jurisdiction of the court. As a consequence, the
issuance of summons on it was no longer necessary. Private respondents say they
served a copy of their answer with affirmative defenses and counterclaim on
petitioners former counsel, Nicanor G. Alvarez. While petitioner would have the
Court believe that respondents served said copy upon Alvarez after he had
withdrawn his appearance as counsel for the petitioner, private respondents assert
that this contention is utterly baseless. Records disclose that the answer was
received two (2) days before the former counsel for petitioner withdrew his
appearance, according to private respondents. They maintain that the present
petition is but a form of dilatory appeal, to set off petitioners obligations to the
respondents by running up more interest it could recover from them. Private
respondents therefore claim damages against petitioner.[17]
To resolve the issues in this case, we must first determine the propriety of
piercing the veil of corporate fiction.
Basic in corporation law is the principle that a corporation has a separate
personality distinct from its stockholders and from other corporations to which it
may be connected.[18] However, under the doctrine of piercing the veil of corporate
entity, the corporations separate juridical personality may be disregarded, for
example, when the corporate identity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime. Also, where the corporation is a mere alter
ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation, then its distinct personality may
be ignored.[19] In these circumstances, the courts will treat the corporation as a
mere aggrupation of persons and the liability will directly attach to them. The legal
fiction of a separate corporate personality in those cited instances, for reasons of
public policy and in the interest of justice, will be justifiably set aside.
In our view, however, given the facts and circumstances of this case, the
doctrine of piercing the corporate veil has no relevant application
here. Respondent court erred in permitting the trial courts resort to this
doctrine. The rationale behind piercing a corporations identity in a given case is to
remove the barrier between the corporation from the persons comprising it to
thwart the fraudulent and illegal schemes of those who use the corporate
personality as a shield for undertaking certain proscribed activities. However, in
the case at bar, instead of holding certain individuals or persons responsible for an
alleged corporate act, the situation has been reversed. It is the petitioner as a
corporation which is being ordered to answer for the personal liability of certain
individual directors, officers and incorporators concerned. Hence, it appears to us
that the doctrine has been turned upside down because of its erroneous
invocation. Note that according to private respondent Gregorio Manuel his
services were solicited as counsel for members of the Francisco family to represent
them in the intestate proceedings over Benita Trinidads estate.These estate
proceedings did not involve any business of petitioner.
Note also that he sought to collect legal fees not just from certain Francisco
family members but also from petitioner corporation on the claims that its
management had requested his services and he acceded thereto as an employee of
petitioner from whom it could be deduced he was also receiving a salary. His move
to recover unpaid legal fees through a counterclaim against Francisco Motors
Corporation, to offset the unpaid balance of the purchase and repair of a jeep body
could only result from an obvious misapprehension that petitioners corporate
assets could be used to answer for the liabilities of its individual directors, officers,
and incorporators. Such result if permitted could easily prejudice the corporation,
its own creditors, and even other stockholders; hence, clearly inequitous to
petitioner.
Furthermore, considering the nature of the legal services involved, whatever
obligation said incorporators, directors and officers of the corporation had
incurred, it was incurred in their personal capacity. When directors and officers of
a corporation are unable to compensate a party for a personal obligation, it is far-
fetched to allege that the corporation is perpetuating fraud or promoting injustice,
and be thereby held liable therefor by piercing its corporate veil. While there are
no hard and fast rules on disregarding separate corporate identity, we must always
be mindful of its function and purpose. A court should be careful in assessing the
milieu where the doctrine of piercing the corporate veil may be applied. Otherwise
an injustice, although unintended, may result from its erroneous application.
The personality of the corporation and those of its incorporators, directors
and officers in their personal capacities ought to be kept separate in this case. The
claim for legal fees against the concerned individual incorporators, officers and
directors could not be properly directed against the corporation without violating
basic principles governing corporations. Moreover, every action including a
counterclaim must be prosecuted or defended in the name of the real party in
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 CORPORATION LAW- 1

interest.[20] It is plainly an error to lay the claim for legal fees of private respondent Bellosillo, (Chairman), Puno, Mendoza, and Buena, JJ., concur.
Gregorio Manuel at the door of petitioner (FMC) rather than individual members
of the Francisco family.
However, with regard to the procedural issue raised by petitioners allegation,
that it needed to be summoned anew in order for the court to acquire jurisdiction
over it, we agree with respondent courts view to the contrary. Section 4, Rule 11 of
the Rules of Court provides that a counterclaim or cross-claim must be answered
within ten (10) days from service. Nothing in the Rules of Court says that summons
should first be served on the defendant before an answer to counterclaim must be
made. The purpose of a summons is to enable the court to acquire jurisdiction over
the person of the defendant. Although a counterclaim is treated as an entirely
distinct and independent action, the defendant in the counterclaim, being the
plaintiff in the original complaint, has already submitted to the jurisdiction of the
court. Following Rule 9, Section 3 of the 1997 Rules of Civil Procedure,[21] if a
defendant (herein petitioner) fails to answer the counterclaim, then upon motion
of plaintiff, the defendant may be declared in default. This is what happened to
petitioner in this case, and this Court finds no procedural error in the disposition
of the appellate court on this particular issue. Moreover, as noted by the
respondent court, when petitioner filed its motion seeking to set aside the order of
default, in effect it submitted itself to the jurisdiction of the court. As well said by
respondent court:

Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he records

show that upon its request, plaintiff-appellant was granted time to file a motion
for reconsideration of the disputed decision. Plaintiff-appellant did file its motion
for reconsideration to set aside the order of default and the judgment rendered
on the counterclaim.

Thus, even if the court acquired no jurisdiction over plaintiff-appellant on the

counterclaim, as it vigorously insists, plaintiff-appellant is considered to have
submitted to the courts jurisdiction when it filed the motion for reconsideration
seeking relief from the court. (Soriano vs. Palacio, 12 SCRA 447). A party is
estopped from assailing the jurisdiction of a court after voluntarily submitting
himself to its jurisdiction. (Tejones vs. Gironella, 159 SCRA 100). Estoppel is a
bar against any claims of lack of jurisdiction. (Balais vs. Balais, 159 SCRA 37).[22]

WHEREFORE, the petition is hereby GRANTED and the assailed decision

is hereby REVERSED insofar only as it held Francisco Motors Corporation liable
for the legal obligation owing to private respondent Gregorio Manuel; but this
decision is without prejudice to his filing the proper suit against the concerned
members of the Francisco family in their personal capacity. No pronouncement as
to costs.
SO ORDERED.

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 CORPORATION LAW- 1
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 182729 September 29, 2010
KUKAN INTERNATIONAL CORPORATION, Petitioner,
vs.
HON. AMOR REYES, in her capacity as Presiding Judge of the
Regional Trial Court of Manila, Branch 21, and ROMEO M. MORALES,
doing business under the name and style "RM Morales Trophies and
Plaques,"Respondents.
DECISION
VELASCO, JR., J.:
The Case
This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse
the January 23, 2008 Decision1and the April 16, 2008 Resolution2 rendered by
the Court of Appeals (CA) in CA-G.R. SP No. 100152.
The assailed CA decision affirmed the March 12, 20073 and June 7, 20074 Orders
of the Regional Trial Court (RTC) of Manila, Branch 21, in Civil Case No. 99-
93173, entitled Romeo M. Morales, doing business under the name and style RM
Morales Trophies and Plaques v. Kukan, Inc. In the said orders, the RTC
disregarded the separate corporate identities of Kukan, Inc. and Kukan
International Corporation and declared them to be one and the same entity.
Accordingly, the RTC held Kukan International Corporation, albeit not
impleaded in the underlying complaint of Romeo M. Morales, liable for the
judgment award decreed in a Decision dated November 28, 20025 in favor of
Morales and against Kukan, Inc.
The Facts
Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and
installation of signages in a building being constructed in Makati City. Morales
tendered the winning bid and was awarded the PhP 5 million contract. Some of
the items in the project award were later excluded resulting in the corresponding
reduction of the contract price to PhP 3,388,502. Despite his compliance with his
contractual undertakings, Morales was only paid the amount of PhP 1,976,371.07,
leaving a balance of PhP 1,412,130.93, which Kukan, Inc. refused to pay despite
demands. Shortchanged, Morales filed a Complaint6 with the RTC against Kukan,
Inc. for a sum of money, the case docketed as Civil Case No. 99-93173 and
eventually raffled to Branch 17 of the court.
Following the joinder of issues after Kukan, Inc. filed an answer with
counterclaim, trial ensued. However, starting November 2000, Kukan, Inc. no
longer appeared and participated in the proceedings before the trial court,
prompting the RTC to declare Kukan, Inc. in default and paving the way for
Morales to present his evidence ex parte.
On November 28, 2002, the RTC rendered a Decision finding for Morales and
against Kukan, Inc., disposing as follows:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil
Procedure, and by preponderance of evidence, judgment is hereby rendered in
favor of the plaintiff, ordering Kukan, Inc.:
1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND
SEVEN HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal
interest at 12% per annum from February 17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral
damages;
3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as
reasonable attorney’s fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY
PESOS and SIX CENTAVOS (P7,960.06) as litigation expenses.
For lack of factual foundation, the counterclaim is DISMISSED.
IT IS SO ORDERED.7
After the above decision became final and executory, Morales moved for and
secured a writ of execution8 against Kukan, Inc. The sheriff then levied upon
various personal properties found at what was supposed to be Kukan, Inc.’s office
at Unit 2205, 88 Corporate Center, Salcedo Village, Makati City. Alleging that it
owned the properties thus levied and that it was a different corporation from
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 CORPORATION LAW- 1
Kukan, Inc., Kukan International Corporation (KIC) filed an Affidavit of Third-
Party Claim. Notably, KIC was incorporated in August 2000, or shortly after
Kukan, Inc. had stopped participating in Civil Case No. 99-93173.
In reaction to the third party claim, Morales interposed an Omnibus Motion
dated April 30, 2003. In it, Morales prayed, applying the principle of piercing the
veil of corporate fiction, that an order be issued for the satisfaction of the
judgment debt of Kukan, Inc. with the properties under the name or in the
possession of KIC, it being alleged that both corporations are but one and the
same entity. KIC opposed Morales’ motion. By Order of May 29, 20039as
reiterated in a subsequent order, the court denied the omnibus motion.
In a bid to establish the link between KIC and Kukan, Inc., and thus determine
the true relationship between the two, Morales filed a Motion for Examination of
Judgment Debtors dated May 4, 2005. In this motion Morales sought that
subponae be issued against the primary stockholders of Kukan, Inc., among them
Michael Chan, a.k.a. Chan Kai Kit. This too was denied by the trial court in an
Order dated May 24, 2005.10
Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr.,
who eventually granted the motion. The case was re-raffled to Branch 21,
presided by public respondent Judge Amor Reyes.
Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of
Corporate Fiction to declare KIC as having no existence separate from Kukan,
Inc. This time around, the RTC, by Order dated March 12, 2007, granted the
motion, the dispositive portion of which reads:
WHEREFORE, premises considered, the motion is hereby GRANTED. The Court
hereby declares as follows:
1. defendant Kukan, Inc. and newly created Kukan International Corp.
as one and the same corporation;
2. the levy made on the properties of Kukan International Corp. is
hereby valid;
3. Kukan International Corp. and Michael Chan are jointly and severally
liable to pay the amount awarded to plaintiff pursuant to the decision of
November [28], 2002 which has long been final and executory.
SO ORDERED.
From the above order, KIC moved but was denied reconsideration in another
Order dated June 7, 2007.
KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12
and June 7, 2007 RTC Orders.
On January 23, 2008, the CA rendered the assailed decision, the dispositive
portion of which states:
WHEREFORE, premises considered, the petition is hereby DENIED and the
assailed Orders dated March 12, 2007 and June 7, 2007 of the court a quo are
both AFFIRMED. No costs.
SO ORDERED.11
The CA later denied KIC’s motion for reconsideration in the assailed resolution.
Hence, the instant petition for review, with the following issues KIC raises for the
Court’s consideration:
1. There is no legal basis for the [CA] to resolve and declare that
petitioner’s Constitutional Right to Due Process was not violated by the
public respondent in rendering the Orders dated March 12, 2007 and
June 7, 2007 and in declaring petitioner to be liable for the judgment
obligations of the corporation "Kukan, Inc." to private respondent – as
petitioner is a stranger to the case and was never made a party in the
case before the trial court nor was it ever served a summons and a copy
of the complaint.
2. There is no legal basis for the [CA] to resolve and declare that the
Orders dated March 12, 2007 and June 7, 2007 rendered by public
respondent declaring the petitioner liable to the judgment obligations of
the corporation "Kukan, Inc." to private respondent are valid as said
orders of the public respondent modify and/or amend the trial court’s
final and executory decision rendered on November 28, 2002.
3. There is no legal basis for the [CA] to resolve and declare that the
Orders dated March 12, 2007 and June 7, 2007 rendered by public
respondent declaring the petitioner [KIC] and the corporation "Kukan,
Inc." as one and the same, and, therefore, the Veil of Corporate Fiction
between them be pierced – as the procedure undertaken by public
respondent which the [CA] upheld is not sanctioned by the Rules of
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 CORPORATION LAW- 1
Court and/or established jurisprudence enunciated by this Honorable
Supreme Court.12
In gist, the issues to be resolved boil down to the question of, first, whether the
trial court can, after the judgment against Kukan, Inc. has attained finality,
execute it against the property of KIC; second, whether the trial court acquired
jurisdiction over KIC; and third, whether the trial and appellate courts correctly
applied, under the premises, the principle of piercing the veil of corporate fiction.
The Ruling of the Court
The petition is meritorious.
First Issue: Against Whom Can a Final and
Executory Judgment Be Executed
The preliminary question that must be answered is whether or not the trial court
can, after adjudging Kukan, Inc. liable for a sum of money in a final and
executory judgment, execute such judgment debt against the property of KIC.
The poser must be answered in the negative.
In Carpio v. Doroja,13 the Court ruled that the deciding court has supervisory
control over the execution of its judgment:
A case in which an execution has been issued is regarded as still pending so that
all proceedings on the execution are proceedings in the suit. There is no question
that the court which rendered the judgment has a general supervisory control
over its process of execution, and this power carries with it the right to determine
every question of fact and law which may be involved in the execution.
We reiterated the above holding in Javier v. Court of Appeals14 in this wise: "The
said branch has a general supervisory control over its processes in the execution
of its judgment with a right to determine every question of fact and law which
may be involved in the execution."
The court’s supervisory control does not, however, extend as to authorize the
alteration or amendment of a final and executory decision, save for certain
recognized exceptions, among which is the correction of clerical errors. Else, the
court violates the principle of finality of judgment and its immutability, concepts
which the Court, in Tan v. Timbal,15 defined:
As we held in Industrial Management International Development Corporation vs.
NLRC:
It is an elementary principle of procedure that the resolution of the court in a
given issue as embodied in the dispositive part of a decision or order is the
controlling factor as to settlement of rights of the parties. Once a decision or
order becomes final and executory, it is removed from the power or jurisdiction
of the court which rendered it to further alter or amend it. It thereby becomes
immutable and unalterable and any amendment or alteration which substantially
affects a final and executory judgment is null and void for lack of jurisdiction,
including the entire proceedings held for that purpose. An order of execution
which varies the tenor of the judgment or exceeds the terms thereof is a nullity.
(Emphasis supplied.)
Republic v. Tango16 expounded on the same principle and its exceptions:
Deeply ingrained in our jurisprudence is the principle that a decision that has
acquired finality becomes immutable and unalterable. As such, it may
no longer be modified in any respect even if the modification is meant to
correct erroneous conclusions of fact or law and whether it will be made by the
court that rendered it or by the highest court of the land. x x x
The doctrine of finality of judgment is grounded on the fundamental principle of
public policy and sound practice that, at the risk of occasional error, the judgment
of courts and the award of quasi-judicial agencies must become final on some
definite date fixed by law. The only exceptions to the general rule are the
correction of clerical errors, the so-called nunc pro tunc entries which cause no
prejudice to any party, void judgments, and whenever circumstances transpire
after the finality of the decision which render its execution unjust and
inequitable. None of the exceptions obtains here to merit the review sought.
(Emphasis added.)
So, did the RTC, in breach of the doctrine of immutability and inalterability of
judgment, order the execution of its final decision in a manner as would amount
to its prohibited alteration or modification?
We repair to the dispositive portion of the final and executory RTC decision.
Pertinently, it provides:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil
Procedure, and by preponderance of evidence, judgment is hereby rendered in
favor of the plaintiff, ordering Kukan, Inc.:
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 CORPORATION LAW- 1
1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND
SEVEN HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal
interest at 12% per annum from February 17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral
damages;
3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as
reasonable attorney’s fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY
PESOS and SIX CENTAVOS (P7,960.06) as litigation expenses.
x x x x (Emphasis supplied.)
As may be noted, the above decision, in unequivocal terms, directed Kukan, Inc.
to pay the aforementioned awards to Morales. Thus, making KIC, thru the
medium of a writ of execution, answerable for the above judgment liability is a
clear case of altering a decision, an instance of granting relief not contemplated in
the decision sought to be executed. And the change does not fall under any of the
recognized exceptions to the doctrine of finality and immutability of judgment. It
is a settled rule that a writ of execution must conform to the fallo of the
judgment; as an inevitable corollary, a writ beyond the terms of the judgment is a
nullity.17
Thus, on this ground alone, the instant petition can already be granted.
Nonetheless, an examination of the other issues raised by KIC would be proper.
Second Issue: Propriety of the RTC
Assuming Jurisdiction over KIC
The next issue turns on the validity of the execution the trial court authorized
against KIC and its property, given that it was neither made a party nor
impleaded in Civil Case No. 99-93173, let alone served with summons. In other
words, did the trial court acquire jurisdiction over KIC?
In the assailed decision, the appellate court deemed KIC to have voluntarily
submitted itself to the jurisdiction of the trial court owing to its filing of four (4)
pleadings adverted to earlier, namely: (a) the Affidavit of Third-Party Claim;18(b)
the Comment and Opposition to Plaintiff’s Omnibus Motion;19 (c) the Motion for
Reconsideration of the RTC Order dated March 12, 2007;20 and (d) the Motion
for Leave to Admit Reply.21 The CA, citing Section 20, Rule 14 of the Rules of
Court, stated that "the procedural rule on service of summons can be waived by
voluntary submission to the court’s jurisdiction through any form of appearance
by the party or its counsel."22
We cannot give imprimatur to the appellate court’s appreciation of the thrust of
Sec. 20, Rule 14 of the Rules in concluding that the trial court acquired
jurisdiction over KIC.
Orion Security Corporation v. Kalfam Enterprises, Inc.23 explains how courts
acquire jurisdiction over the parties in a civil case:
Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On
the other hand, jurisdiction over the defendants in a civil case is acquired either
through the service of summons upon them or through their voluntary
appearance in court and their submission to its authority. (Emphasis supplied.)
In the fairly recent Palma v. Galvez,24 the Court reiterated its holding in Orion
Security Corporation, stating: "[I]n civil cases, the trial court acquires
jurisdiction over the person of the defendant either by the service of summons or
by the latter’s voluntary appearance and submission to the authority of the
former."
The court’s jurisdiction over a party-defendant resulting from his voluntary
submission to its authority is provided under Sec. 20, Rule 14 of the Rules, which
states:
Section 20. Voluntary appearance. – The defendant’s voluntary appearance in the
actions shall be equivalent to service of summons. The inclusion in a motion to
dismiss of other grounds aside from lack of jurisdiction over the person of the
defendant shall not be deemed a voluntary appearance.
To be sure, the CA’s ruling that any form of appearance by the party or its counsel
is deemed as voluntary appearance finds support in the kindred Republic v. Ker &
Co., Ltd.25 and De Midgely v. Ferandos.26
Republic and De Midgely, however, have already been modified if not altogether
superseded27 by La Naval Drug Corporation v. Court of Appeals,28 wherein the
Court essentially ruled and elucidated on the current view in our jurisdiction, to
wit: "[A] special appearance before the court––challenging its jurisdiction over
the person through a motion to dismiss even if the movant invokes other
grounds––is not tantamount to estoppel or a waiver by the movant of his
Page 46 of 120
 CORPORATION LAW- 1
objection to jurisdiction over his person; and such is not constitutive of a
voluntary submission to the jurisdiction of the court."29
In the instant case, KIC was not made a party-defendant in Civil Case No. 99-
93173. Even if it is conceded that it raised affirmative defenses through its
aforementioned pleadings, KIC never abandoned its challenge, however implicit,
to the RTC’s jurisdiction over its person. The challenge was subsumed in KIC’s
primary assertion that it was not the same entity as Kukan, Inc. Pertinently, in its
Comment and Opposition to Plaintiff’s Omnibus Motion dated May 20, 2003,
KIC entered its "special but not voluntary appearance" alleging therein that
it was a different entity and has a separate legal personality from Kukan, Inc. And
KIC would consistently reiterate this assertion in all its pleadings, thus effectively
resisting all along the RTC’s jurisdiction of its person. It cannot be
overemphasized that KIC could not file before the RTC a motion to dismiss and
its attachments in Civil Case No. 99-93173, precisely because KIC was neither
impleaded nor served with summons. Consequently, KIC could only assert and
claim through its affidavits, comments, and motions filed by special appearance
before the RTC that it is separate and distinct from Kukan, Inc.
Following La Naval Drug Corporation,30 KIC cannot be deemed to have waived
its objection to the court’s lack of jurisdiction over its person. It would defy logic
to say that KIC unequivocally submitted itself to the jurisdiction of the RTC when
it strongly asserted that it and Kukan, Inc. are different entities. In the scheme of
things obtaining, KIC had no other option but to insist on its separate identity
and plead for relief consistent with that position.
Third Issue: Piercing the
Veil of Corporate Fiction
The third and main issue in this case is whether or not the trial and appellate
courts correctly applied the principle of piercing the veil of corporate entity––
called also as disregarding the fiction of a separate juridical personality of a
corporation––to support a conclusion that Kukan, Inc. and KIC are but one and
the same corporation with respect to the contract award referred to at the outset.
This principle finds its context on the postulate that a corporation is an artificial
being invested with a personality separate and distinct from those of the
stockholders and from other corporations to which it may be connected or
related.31
In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations
Commission,32 the Court revisited the subject principle of piercing the veil of
corporate fiction and wrote:
Under the doctrine of "piercing the veil of corporate fiction," the court looks at
the corporation as a mere collection of individuals or an aggregation of persons
undertaking business as a group, disregarding the separate juridical personality
of the corporation unifying the group. Another formulation of this doctrine is that
when two business enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the rights of third
parties, disregard the legal fiction that two corporations are distinct entities and
treat them as identical or as one and the same.
Whether the separate personality of the corporation should be pierced
hinges on obtaining facts appropriately pleaded or proved. However,
any piercing of the corporate veil has to be done with caution, albeit the Court
will not hesitate to disregard the corporate veil when it is misused or when
necessary in the interest of justice. x x x (Emphasis supplied.)
The same principle was the subject and discussed in Rivera v. United
Laboratories, Inc.:
While a corporation may exist for any lawful purpose, the law will regard it as an
association of persons or, in case of two corporations, merge them into one, when
its corporate legal entity is used as a cloak for fraud or illegality. This is the
doctrine of piercing the veil of corporate fiction. The doctrine applies only when
such corporate fiction is used to defeat public convenience, justify wrong, protect
fraud, or defend crime, or when it is made as a shield to confuse the legitimate
issues, or where a corporation is the mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit or adjunct
of another corporation.
To disregard the separate juridical personality of a corporation, the wrongdoing
must be established clearly and convincingly. It cannot be
presumed.33 (Emphasis supplied.)
Now, as before the appellate court, petitioner KIC maintains that the RTC
violated its right to due process when, in the execution of its November 28, 2002
Decision, the court authorized the issuance of the writ against KIC for Kukan,
Inc.’s judgment debt, albeit KIC has never been a party to the underlying suit. As
a counterpoint, Morales argues that KIC’s specific concern on due process and on
the validity of the writ to execute the RTC’s November 28, 2002 Decision would
be mooted if it were established that KIC and Kukan, Inc. are indeed one and the
same corporation.
Morales’ contention is untenable.
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The principle of piercing the veil of corporate fiction, and the resulting treatment
of two related corporations as one and the same juridical person with respect to a
given transaction, is basically applied only to determine established liability;34 it
is not available to confer on the court a jurisdiction it has not acquired, in the first
place, over a party not impleaded in a case. Elsewise put, a corporation not
impleaded in a suit cannot be subject to the court’s process of piercing the veil of
its corporate fiction. In that situation, the court has not acquired jurisdiction over
the corporation and, hence, any proceedings taken against that corporation and
its property would infringe on its right to due process. Aguedo Agbayani, a
recognized authority on Commercial Law, stated as much:
23. Piercing the veil of corporate entity applies to determination of liability not of
jurisdiction. x x x
This is so because the doctrine of piercing the veil of corporate fiction comes to
play only during the trial of the case after the court has already acquired
jurisdiction over the corporation. Hence, before this doctrine can be applied,
based on the evidence presented, it is imperative that the court must first have
jurisdiction over the corporation.35 x x x (Emphasis supplied.)
The implication of the above comment is twofold: (1) the court must first acquire
jurisdiction over the corporation or corporations involved before its or their
separate personalities are disregarded; and (2) the doctrine of piercing the veil of
corporate entity can only be raised during a full-blown trial over a cause of action
duly commenced involving parties duly brought under the authority of the court
by way of service of summons or what passes as such service.
The issue of jurisdiction or the lack of it over KIC has already been discussed.
Anent the matter of the time and manner of raising the principle in question, it is
undisputed that no full-blown trial involving KIC was had when the RTC
disregarded the corporate veil of KIC. The reason for this actuality is simple and
undisputed: KIC was not impleaded in Civil Case No. 99-93173 and that the RTC
did not acquire jurisdiction over it. It was dragged to the case after it reacted to
the improper execution of its properties and veritably hauled to court, not thru
the usual process of service of summons, but by mere motion of a party with
whom it has no privity of contract and after the decision in the main case had
already become final and executory. As to the propriety of a plea for the
application of the principle by mere motion, the following excerpts are
instructive:
Generally, a motion is appropriate only in the absence of remedies by regular
pleadings, and is not available to settle important questions of law, or to dispose
of the merits of the case. A motion is usually a proceeding incidental to an action,
but it may be a wholly distinct or independent proceeding. A motion in this sense
is not within this discussion even though the relief demanded is denominated an
"order."
A motion generally relates to procedure and is often resorted to in order to
correct errors which have crept in along the line of the principal action’s progress.
Generally, where there is a procedural defect in a proceeding and no method
under statute or rule of court by which it may be called to the attention of the
court, a motion is an appropriate remedy. In many jurisdictions, the motion has
replaced the common-law pleas testing the sufficiency of the pleadings, and
various common-law writs, such as writ of error coram nobis and audita querela.
In some cases, a motion may be one of several remedies available. For example,
in some jurisdictions, a motion to vacate an order is a remedy alternative to an
appeal therefrom.
Statutes governing motions are given a liberal construction.36 (Emphasis
supplied.)
The bottom line issue of whether Morales can proceed against KIC for the
judgment debt of Kukan, Inc.––assuming hypothetically that he can, applying the
piercing the corporate veil principle––resolves itself into the question of whether
a mere motion is the appropriate vehicle for such purpose.
Verily, Morales espouses the application of the principle of piercing the corporate
veil to hold KIC liable on theory that Kukan, Inc. was out to defraud him through
the use of the separate and distinct personality of another corporation, KIC. In
net effect, Morales’ adverted motion to pierce the veil of corporate fiction dated
January 3, 2007 stated a new cause of action, i.e., for the liability of judgment
debtor Kukan, Inc. to be borne by KIC on the alleged identity of the two
corporations. This new cause of action should be properly ventilated in another
complaint and subsequent trial where the doctrine of piercing the corporate veil
can, if appropriate, be applied, based on the evidence adduced. Establishing the
claim of Morales and the corresponding liability of KIC for Kukan Inc.’s
indebtedness could hardly be the subject, under the premises, of a mere motion
interposed after the principal action against Kukan, Inc. alone had peremptorily
been terminated. After all, a complaint is one where the plaintiff alleges causes of
action.
In any event, the principle of piercing the veil of corporate fiction finds no
application to the instant case.
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As a general rule, courts should be wary of lifting the corporate veil between
corporations, however related. Philippine National Bank v. Andrada Electric
Engineering Company37 explains why:
A corporation is an artificial being created by operation of law. x x x It has a
personality separate and distinct from the persons composing it, as well as from
any other legal entity to which it may be related. This is basic.
Equally well-settled is the principle that the corporate mask may be removed or
the corporate veil pierced when the corporation is just an alter ego of a person or
of another corporation. For reasons of public policy and in the interest of justice,
the corporate veil will justifiably be impaled only when it becomes a shield for
fraud, illegality or inequity committed against third persons.
Hence, any application of the doctrine of piercing the corporate veil should be
done with caution. A court should be mindful of the milieu where it is to be
applied. It must be certain that the corporate fiction was misused to such an
extent that injustice, fraud, or crime was committed against another, in disregard
of its rights. The wrongdoing must be clearly and convincingly established; it
cannot be presumed. Otherwise, an injustice that was never unintended may
result from an erroneous application.
This Court has pierced the corporate veil to ward off a judgment credit, to avoid
inclusion of corporate assets as part of the estate of the decedent, to escape
liability arising from a debt, or to perpetuate fraud and/or confuse legitimate
issues either to promote or to shield unfair objectives or to cover up an otherwise
blatant violation of the prohibition against forum-shopping. Only in these and
similar instances may the veil be pierced and disregarded. (Emphasis
supplied.)
In fine, to justify the piercing of the veil of corporate fiction, it must be shown by
clear and convincing proof that the separate and distinct personality of the
corporation was purposefully employed to evade a legitimate and binding
commitment and perpetuate a fraud or like wrongdoings. To be sure, the Court
has, on numerous occasions,38applied the principle where a corporation is
dissolved and its assets are transferred to another to avoid a financial liability of
the first corporation with the result that the second corporation should be
considered a continuation and successor of the first entity.
In those instances when the Court pierced the veil of corporate fiction of two
corporations, there was a confluence of the following factors:
1. A first corporation is dissolved;
2. The assets of the first corporation is transferred to a second
corporation to avoid a financial liability of the first corporation; and
3. Both corporations are owned and controlled by the same persons such
that the second corporation should be considered as a continuation and
successor of the first corporation.
In the instant case, however, the second and third factors are conspicuously
absent. There is, therefore, no compelling justification for disregarding the fiction
of corporate entity separating Kukan, Inc. from KIC. In applying the principle,
both the RTC and the CA miserably failed to identify the presence of the
abovementioned factors. Consider:
The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC
based on the following premises and arguments:
While it is true that a corporation has a separate and distinct personality from its
stockholder, director and officers, the law expressly provides for an exception.
When Michael Chan, the Managing Director of defendant Kukan, Inc. (majority
stockholder of the newly formed corporation [KIC]) confirmed the award to
plaintiff to supply and install interior signages in the Enterprise Center he
(Michael Chan, Managing Director of defendant Kukan, Inc.) knew that there was
no sufficient corporate funds to pay its obligation/account, thus implying bad
faith on his part and fraud in contracting the obligation. Michael Chan neither
returned the interior signages nor tendered payment to the plaintiff. This
circumstance may warrant the piercing of the veil of corporation fiction. Having
been guilty of bad faith in the management of corporate matters the corporate
trustee, director or officer may be held personally liable. x x x
Since fraud is a state of mind, it need not be proved by direct evidence but may be
inferred from the circumstances of the case. x x x [A]nd the circumstances are:
the signature of Michael Chan, Managing Director of Kukan, Inc. appearing in the
confirmation of the award sent to the plaintiff; signature of Chan Kai Kit, a
British National appearing in the Articles of Incorporation and signature of
Michael Chan also a British National appearing in the Articles of Incorporation
[of] Kukan International Corp. give the impression that they are one and the
same person, that Michael Chan and Chan Kai Kit are both majority stockholders
of Kukan International Corp. and Kukan, Inc. holding 40% of the stocks; that
Kukan International Corp. is practically doing the same kind of business as that
of Kukan, Inc.39 (Emphasis supplied.)
As is apparent from its disquisition, the RTC brushed aside the separate
corporate existence of Kukan, Inc. and KIC on the main argument that Michael
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Chan owns 40% of the common shares of both corporations, obviously oblivious
that overlapping stock ownership is a common business phenomenon. It must be
remembered, however, that KIC’s properties were the ones seized upon levy on
execution and not that of Kukan, Inc. or of Michael Chan for that matter. Mere
ownership by a single stockholder or by another corporation of a substantial
block of shares of a corporation does not, standing alone, provide sufficient
justification for disregarding the separate corporate personality.40 For this
ground to hold sway in this case, there must be proof that Chan had control or
complete dominion of Kukan and KIC’s finances, policies, and business practices;
he used such control to commit fraud; and the control was the proximate cause of
the financial loss complained of by Morales. The absence of any of the elements
prevents the piercing of the corporate veil.41 And indeed, the records do not show
the presence of these elements.
On the other hand, the CA held:
In the present case, the facts disclose that Kukan, Inc. entered into a contractual
obligation x x x worth more than three million pesos although it had only
Php5,000.00 paid-up capital; [KIC] was incorporated shortly before Kukan, Inc.
suddenly ceased to appear and participate in the trial; [KIC’s] purpose is related
and somewhat akin to that of Kukan, Inc.; and in [KIC] Michael Chan, a.k.a.,
Chan Kai Kit, holds forty percent of the outstanding stocks, while he formerly
held the same amount of stocks in Kukan Inc. These would lead to the
inescapable conclusion that Kukan, Inc. committed fraudulent representation by
awarding to the private respondent the contract with full knowledge that it was
not in a position to comply with the obligation it had assumed because of
inadequate paid-up capital. It bears stressing that shareholders should in good
faith put at the risk of the business, unencumbered capital reasonably adequate
for its prospective liabilities. The capital should not be illusory or trifling
compared with the business to be done and the risk of loss.
Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc.
Michael Chan, a.k.a. Chan Kai Kit has the largest block of shares in both business
enterprises. The emergence of the former was cleverly timed with the hasty
withdrawal of the latter during the trial to avoid the financial liability that was
eventually suffered by the latter. The two companies have a related business
purpose. Considering these circumstances, the obvious conclusion is that the
creation of Kukan International Corporation served as a device to evade the
obligation incurred by Kukan, Inc. and yet profit from the goodwill attained by
the name "Kukan" by continuing to engage in the same line of business with the
same list of clients.42 (Emphasis supplied.)
Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the
similarity of the business activities in which both corporations are engaged as a
jumping board to its conclusion that the creation of KIC "served as a device to
evade the obligation incurred by Kukan, Inc." The appellate court, however, left a
gaping hole by failing to demonstrate that Kukan, Inc. and its stockholders
defrauded Morales. In fine, there is no showing that the incorporation, and the
separate and distinct personality, of KIC was used to defeat Morales’ right to
recover from Kukan, Inc. Judging from the records, no serious attempt was made
to levy on the properties of Kukan, Inc. Morales could not, thus, validly argue that
Kukan, Inc. tried to avoid liability or had no property against which to proceed.
Morales further contends that Kukan, Inc.’s closure is evidenced by its failure to
file its 2001 General Information Sheet (GIS) with the Securities and Exchange
Commission. However, such fact does not necessarily mean that Kukan, Inc. had
altogether ceased operations, as Morales would have this Court believe, for it is
stated on the face of the GIS that it is only upon a failure to file the corporate GIS
for five (5) consecutive years that non-operation shall be presumed.
The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only had
a paid-up capital of PhP 5,000 is not an indication of the intent on the part of its
management to defraud creditors. Paid-up capital is merely seed money to start a
corporation or a business entity. As in this case, it merely represented the
capitalization upon incorporation in 1997 of Kukan, Inc. Paid-up capitalization of
PhP 5,000 is not and should not be taken as a reflection of the firm’s capacity to
meet its recurrent and long-term obligations. It must be borne in mind that the
equity portion cannot be equated to the viability of a business concern, for the
best test is the working capital which consists of the liquid assets of a given
business relating to the nature of the business concern.lawphil
Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation
be viewed as a badge of fraud, for it is in compliance with Sec. 13 of the
Corporation Code,43 which only requires a minimum paid-up capital of PhP
5,000.1avvphi1
The suggestion that KIC is but a continuation and successor of Kukan, Inc.,
owned and controlled as they are by the same stockholders, stands without
factual basis. It is true that Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the
outstanding capital stock of both corporations. But such circumstance, standing
alone, is insufficient to establish identity. There must be at least a substantial
identity of stockholders for both corporations in order to consider this factor to
be constitutive of corporate identity.
It would not avail Morales any to rely44 on General Credit Corporation v. Alsons
Development and Investment Corporation.45 General Credit Corporation is
factually not on all fours with the instant case. There, the common stockholders
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 CORPORATION LAW- 1

of the corporations represented 90% of the outstanding capital stock of the

companies, unlike here where Michael Chan merely represents 40% of the
outstanding capital stock of both KIC and Kukan, Inc., not even a majority of it.
In that case, moreover, evidence was adduced to support the finding that the
funds of the second corporation came from the first. Finally, there was proof in
General Credit Corporation of complete control, such that one corporation was a
mere dummy or alter ego of the other, which is absent in the instant case.

Evidently, the aforementioned case relied upon by Morales cannot justify the
application of the principle of piercing the veil of corporate fiction to the instant
case. As shown by the records, the name Michael Chan, the similarity of business
activities engaged in, and incidentally the word "Kukan" appearing in the
corporate names provide the nexus between Kukan, Inc. and KIC. As illustrated,
these circumstances are insufficient to establish the identity of KIC as the alter
ego or successor of Kukan, Inc.

It bears reiterating that piercing the veil of corporate fiction is frowned upon.
Accordingly, those who seek to pierce the veil must clearly establish that the
separate and distinct personalities of the corporations are set up to justify a
wrong, protect fraud, or perpetrate a deception. In the concrete and on the
assumption that the RTC has validly acquired jurisdiction over the party
concerned, Morales ought to have proved by convincing evidence that Kukan, Inc.
was collapsed and thereafter KIC purposely formed and operated to defraud him.
Morales has not to us discharged his burden.

WHEREFORE, the petition is hereby GRANTED. The CA’s January 23, 2008
Decision and April 16, 2008 Resolution in CA-G.R. SP No. 100152 are hereby
REVERSED and SET ASIDE. The levy placed upon the personal properties of
Kukan International Corporation is hereby ordered lifted and the personal
properties ordered returned to Kukan International Corporation. The RTC of
Manila, Branch 21 is hereby directed to execute the RTC Decision dated
November 28, 2002 against Kukan, Inc. with reasonable dispatch.

No costs.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice

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Republic of the Philippines Malatagao, Bataraza, Palawan. The MPSA and EP were then transferred to
SUPREME COURT Madridejos Mining Corporation (MMC) and, on November 6, 2006, assigned to
Baguio City petitioner McArthur.2

THIRD DIVISION Petitioner Narra acquired its MPSA from Alpha Resources and Development
Corporation and Patricia Louise Mining & Development Corporation (PLMDC)
G.R. No. 195580 April 21, 2014 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
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC conveyed,
MINING AND DEVELOPMENT, INC., and MCARTHUR MINING, transferred and/or assigned its rights and interests over the MPSA application in
INC., Petitioners, favor of Narra.
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
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
DECISION Barangays Malinao and Princesa Urduja, Municipality of Narra, Province of
Palawan. SMMI subsequently conveyed, transferred and assigned its rights and
VELASCO, JR., J.: interest over the said MPSA application to Tesoro.

Before this Court is a Petition for Review on Certiorari under Rule 45 filed by On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the
Narra Nickel and Mining Development Corp. (Narra), Tesoro Mining and DENR three (3) separate petitions for the denial of petitioners’ applications for
Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur), which seeks MPSA designated as AMA-IVB-153, AMA-IVB-154 and MPSA IV-1-12.
to reverse the October 1, 2010 Decision1 and the February 15, 2011 Resolution of
the Court of Appeals (CA). 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.
The Facts (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
Sometime in December 2006, respondent Redmont Consolidated Mines Corp.
knows that it can only participate in mining activities through corporations which
(Redmont), a domestic corporation organized and existing under Philippine laws,
are deemed Filipino citizens. Redmont argued that given that petitioners’ capital
took interest in mining and exploring certain areas of the province of Palawan.
stocks were mostly owned by MBMI, they were likewise disqualified from
After inquiring with the Department of Environment and Natural Resources
engaging in mining activities through MPSAs, which are reserved only for
(DENR), it learned that the areas where it wanted to undertake exploration and
Filipino citizens.
mining activities where already covered by Mineral Production Sharing
Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.
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
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc.
which provided:
(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). Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following
terms, whether in singular or plural, shall mean:
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over
1,782 hectares in Barangay Sumbiling, Municipality of Bataraza, Province of xxxx
Palawan and EPA-IVB-44 which includes an area of 3,720 hectares in Barangay

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(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
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 Appeal10 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:
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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.
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.
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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
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.
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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; 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:
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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
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.
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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,
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
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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?
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
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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
Corporation must be traced (i.e., "grandfathered") to determine the total
percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership of the shares must first be traced to
the level of the Investing Corporation and added to the shares directly owned in
the Investee Corporation x x x.
xxxx
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 equity ownership is in doubt (i.e., in cases where the joint venture
corporation with Filipino and foreign stockholders with less than 60% Filipino
stockholdings [or 59%] invests in other joint venture corporation which is either
60-40% Filipino-alien or the 59% less Filipino). Stated differently, where the 60-
40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will
not apply. (emphasis supplied)
After a scrutiny of the evidence extant on record, the Court finds that this case
calls 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. Also, as found by the CA, doubt is present in the 60-40 Filipino
equity ownership of petitioners Narra, McArthur and Tesoro, since their common
investor, the 100% Canadian corporation––MBMI, funded them. However,
petitioners also claim that there is "doubt" only when the stockholdings of
Filipinos are less than 60%.43
The assertion of petitioners that "doubt" only exists when the stockholdings are
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
the ownership of the corporation exists. It would be ludicrous to limit the
application of the said word only to the instances where the stockholdings of non-
Filipino stockholders are more than 40% of the total stockholdings in a
corporation. The corporations interested in circumventing our laws would clearly
strive to have "60% Filipino Ownership" at face value. It would be senseless for
these applying corporations to state in their respective articles of incorporation
that they have less than 60% Filipino stockholders since the applications will be
denied instantly. Thus, various corporate schemes and layerings are utilized to
circumvent the application of the Constitution.
Obviously, the instant case presents a situation which exhibits a scheme
employed by stockholders to circumvent the law, creating a cloud of doubt in the
Court’s mind. To determine, therefore, the actual participation, direct or indirect,
of MBMI, the grandfather rule must be used.
McArthur Mining, Inc.
To establish the actual ownership, interest or participation of MBMI in each of
petitioners’ corporate structure, they have to be "grandfathered."
As previously discussed, McArthur acquired its MPSA application from MMC,
which acquired its application from SMMI. McArthur has a capital stock of ten
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
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Name Nationality Number Amount Amount Paid

of Shares Subscribed
Inc.
Madridejos Filipino 5,997 PhP PhP 825,000.00
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Mining 5,997,000.00
Corporation Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
MBMI Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60
Resources, Esguerra
Inc.
Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Lauro L. Filipino 1 PhP 1,000.00 PhP 1,000.00
Salazar Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Esguerra Hernando

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00 Michael T. American 1 PhP 1,000.00 PhP 1,000.00
Agcaoili Mason

Michael T. American 1 PhP 1,000.00 PhP 1,000.00 Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00
Mason Cawkell

Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00 Total 10,000 PhP PhP 2,809,900.00
Cawkell 10,000,000.00

Total 10,000 PhP PhP 2,708,174.60 (emphasis

10,000,000.00 (emphasis
supplied)
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 also a major investor and "controls"45 MBMI and also, similar nominal
shareholders were present, i.e. Fernando B. Esguerra (Esguerra), Lauro L.
Salazar (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):
Madridejos Mining Corporation
supplied)
Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay
any amount with respect to the number of shares they subscribed to in the
corporation, which is quite absurd since Olympic is the major stockholder in
MMC. MBMI’s 2006 Annual Report sheds light on why Olympic failed to pay any
amount with respect to the number of shares it subscribed to. It states that
Olympic entered into joint venture agreements with several Philippine
companies, wherein it holds directly and indirectly a 60% effective equity interest
in the Olympic Properties.46 Quoting the said Annual report:

On September 9, 2004, the Company and Olympic Mines & Development

Name Nationality Number Amount Amount Paid Corporation ("Olympic") entered into a series of agreements including a Property
of Shares Subscribed Purchase and Development Agreement (the Transaction Documents) with
Olympic Filipino 6,663 PhP PhP 0 respect to three nickel laterite properties in Palawan, Philippines (the "Olympic
Mines & 6,663,000.00 Properties"). The Transaction Documents effectively establish a joint venture
between the Company and Olympic for purposes of developing the Olympic
Development Properties. The Company holds directly and indirectly an initial 60% interest in
the joint venture. Under certain circumstances and upon achieving certain
Corp.
milestones, the Company may earn up to a 100% interest, subject to a 2.5% net
revenue royalty.47 (emphasis supplied)
MBMI Canadian 3,331 PhP PhP 2,803,900.00
Resources, 3,331,000.00

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Thus, as demonstrated in this first corporation, McArthur, when it is Total 10,000 PhP PhP 2,708,174.60
"grandfathered," company layering was utilized by MBMI to gain control over 10,000,000.00
McArthur. It is apparent that MBMI has more than 60% or more equity interest
(emphasis
in McArthur, making the latter a foreign corporation. supplied)

Tesoro Mining and Development, Inc.

Tesoro, which acquired its MPSA application from SMMI, has a capital stock of
ten million pesos (PhP 10,000,000) divided into ten thousand (10,000) common
shares at PhP 1,000 per share, as demonstrated below:
[[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/apr
il2014/195580.pdf]]
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
centavo. All the other shareholders are the same: MBMI, Salazar, Esguerra,
Agcaoili, Mason and Cawkell. The figures under "Nationality," "Number of
Shares," "Amount Subscribed," and "Amount Paid" are exactly the same. Delving
deeper, we scrutinize SMMI’s corporate structure:
Sara Marie Mining, Inc.

[[reference
Name Nationality Number Amount Amount Paid = http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/apr
of il2014/195580.pdf]]
Subscribed
Shares
Name Nationality Number Amount Amount Paid
Sara Marie Filipino 5,997 PhP PhP 825,000.00 of
5,997,000.00 Subscribed
Mining, Inc. Shares

MBMI Canadian 3,998 PhP PhP 1,878,174.60 Olympic Filipino 6,663 PhP PhP 0
3,998,000.00 Mines & 6,663,000.00
Resources,
Inc. Development

Lauro L. Filipino 1 PhP 1,000.00 PhP 1,000.00

Salazar Corp.

Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00 MBMI Canadian 3,331 PhP PhP
Resources, 3,331,000.00 2,794,000.00

Esguerra
Inc.
Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00

Michael T. American 1 PhP 1,000.00 PhP 1,000.00

Mason Esguerra

Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00 Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Cawkell Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

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 CORPORATION LAW- 1

Name Nationality Number Amount Amount Paid

of
Hernando
Subscribed
Michael T. American 1 PhP 1,000.00 PhP 1,000.00 Shares
Mason
Patricia Louise Filipino 5,997 PhP PhP
Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00 5,997,000.00 1,677,000.00
Cawkell
Mining &
Total 10,000 PhP PhP
10,000,000.00 2,809,900.00
Development

(emphasis
Corp.
supplied)
MBMI Canadian 3,998 PhP PhP 1,116,000.00
3,996,000.00
After subsequently studying SMMI’s corporate structure, it is not farfetched for
us to spot the glaring similarity between SMMI and MMC’s corporate structure. Resources,
Inc.
Again, the presence of identical stockholders, namely: Olympic, MBMI, Amanti
Limson (Limson), Esguerra, Salazar, Hernando, Mason and Cawkell. The figures Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00
under the headings "Nationality," "Number of Shares," "Amount Subscribed,"
and "Amount Paid" are exactly the same except for the amount paid by MBMI Mendoza, Jr.
which now reflects 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 Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00
million eight hundred nine thousand nine hundred pesos (PhP 2,809,900).
Fernandez
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

Bayani H. Filipino 1 PhP 1,000.00 PhP 1,000.00

Moving on to the last petitioner, Narra, which is the transferee and assignee of
Agabin
PLMDC’s MPSA application, whose corporate structure’s arrangement is similar
to that of the first two petitioners discussed. The capital stock of Narra is ten Robert L. American 1 PhP 1,000.00 PhP 1,000.00
million pesos (PhP 10,000,000), which is divided into ten thousand common
shares (10,000) at one thousand pesos (PhP 1,000) per share, shown as follows: McCurdy

Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00

[[reference
Cawkell
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/apr
il2014/195580.pdf]] Total 10,000 PhP PhP
10,000,000.00 2,800,000.00

Page 63 of 120
 CORPORATION LAW- 1

(emphasis Studying MBMI’s Summary of Significant Accounting Policies dated October 31,
supplied) 2005 explains the reason behind the intricate corporate layering that MBMI
immersed itself in:

Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and
JOINT VENTURES The Company’s ownership interests in various mining
Esguerra, is present in this corporate structure.
ventures engaged in the acquisition, exploration and development of mineral
properties in the Philippines is described as follows:
Patricia Louise Mining & Development Corporation
(a) Olympic Group
Using the grandfather method, we further look and examine PLMDC’s corporate
structure:
The Philippine companies holding the Olympic Property, and the ownership and
interests therein, are as follows:
Name Nationality Number Amount Amount
of Shares Subscribed Paid
Olympic- Philippines (the "Olympic Group")
Palawan Alpha South Filipino 6,596 PhP PhP 0
Resources 6,596,000.00
Development Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%
Corporation
MBMI Resources, Canadian 3,396 PhP PhP Tesoro Mining & Development, Inc. (Tesoro) 60.0%
3,396,000.00 2,796,000.00
Inc. 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
Higinio C. Mendoza, Filipino 1 PhP 1,000.00 PhP 1,000.00
Jr.
to a shareholders’ agreement, the Company exercises joint control over the
companies in the Olympic Group.
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
(b) Alpha 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 The Philippine companies holding the Alpha Property, and the ownership
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00 interests therein, are as follows:
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
Alpha- Philippines (the "Alpha Group")
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
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
(emphasis Narra Nickel Mining & Development Corporation (Narra) 60.4%
supplied)
Under a joint venture agreement the Company holds directly and indirectly an
Yet again, the usual players in petitioners’ corporate structures are present. effective equity interest in the Alpha Property of 60.4%. Pursuant to a
Similarly, the amount of money paid by the 2nd tier majority stock holder, in this shareholders’ agreement, the Company exercises joint control over the companies
case, Palawan Alpha South Resources and Development Corp. (PASRDC), is zero. in the Alpha Group.48 (emphasis supplied)

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 CORPORATION LAW- 1
Concluding from the above-stated facts, it is quite safe to say that petitioners
McArthur, Tesoro and Narra are not Filipino since MBMI, a 100% Canadian
corporation, owns 60% or more of their equity interests. Such conclusion is
derived from grandfathering petitioners’ corporate owners, namely: MMI, SMMI
and PLMDC. Going further and adding to the picture, MBMI’s Summary of
Significant Accounting Policies statement– –regarding the "joint venture"
agreements that it entered into with the "Olympic" and "Alpha" groups––
involves SMMI, Tesoro, PLMDC and Narra. Noticeably, the ownership of the
"layered" corporations boils down to MBMI, Olympic or corporations under the
"Alpha" group wherein MBMI has joint venture agreements with, practically
exercising majority control over the corporations mentioned. In effect, whether
looking at the capital structure or the underlying relationships between and
among the 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.
Application of the res inter alios acta rule
Petitioners question the CA’s use of the exception of the res inter alios acta or the
"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:
[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."
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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.
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
Page 66 of 120
 CORPORATION LAW- 1
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 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
Page 67 of 120
 CORPORATION LAW- 1
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.
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
Page 68 of 120
 CORPORATION LAW- 1

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

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 CORPORATION LAW- 1
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.
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
Page 70 of 120
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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
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
Page 71 of 120
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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
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
Page 72 of 120
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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 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
Page 73 of 120
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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.
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:
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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 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
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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 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
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.
With this in mind, we find it proper for the EPD to investigate the subject
corporation. The EPD is advised to avail of the Commission’s subpoena powers in
order to gather sufficient evidence, and file the necessary complaint.
As will be discussed, even if atfirst glance the petitioners comply with the 60-40
Filipino to foreign equity ratio, doubt exists in the present case that gives rise to a
reasonable suspicion that the Filipino shareholders do not actually have the
requisite number of control and beneficial ownership in petitioners Narra,
Tesoro, and McArthur. Hence, a further investigation and dissection of the extent
of the ownership of the corporate shareholders through the Grandfather Rule is
justified.
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.
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
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doubt exists as to the actual extent of the participation of MBMI in the equity of Olympic Mines Filipino 6,663 ₱6,663,000.00 P0.00
the petitioners and their investing corporations. &
Development
Corp.17
We considered the following membership and control structures and like
nuances: MBMI Canadian 3,331 ₱3,331,000.00 ₱2,794,000.00
Resources, Inc.

Tesoro Amanti Filipino 1 ₱1,000.00 ₱1,000.00

Limson

Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Esguerra
59.97% of the 10,000 commonshares of petitioner Tesoro while the Canadian-
owned company, MBMI, holds 39.98% of its shares. Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00
Name Nationality Number of Amount Amount Paid
Shares Subscribed Hernando
Sara Marie Filipino 5,997 ₱5,997,000.00 ₱825,000.00 Michael T. American 1 ₱1,000.00 ₱1,000.00
Mining, Inc. Mason
MBMI Canadian 3,998 ₱3,998,000.00 ₱1,878,174.60 Kenneth Canadian 1 ₱1,000.00 ₱1,000.00
Resources, Cawkel
Inc.16
Total 10,000 ₱10,000,000.00 ₱2,800,000.00
Lauro L. Filipino 1 ₱1,000.00 ₱1,000.00
Salazar
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
The fact that MBMI had practically provided all the funds in Sara
Esguerra Marie and Tesoro creates serious doubt as to the true extent of its
(MBMI) control and ownership over both Sara Marie and Tesoro since,
Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00 as observed by the SEC, "a reasonable investor would expect to have greater
Agcaoili
control and economic rights than other investors who invested less capital than
Michael T. American 1 ₱1,000.00 ₱1,000.00 him." The application of the Grandfather Rule is clearly called for, and as shown
Mason below, the Filipinos’ control and economic benefits in petitioner Tesoro (through
Kenneth Canadian 1 ₱1,000.00 ₱1,000.00 Sara Marie) fallbelow the threshold 60%, viz:
Cawkel
Total 10,000 ₱10,000,000.00 ₱2,708,174.60 Filipino participation in petitioner Tesoro: 40.01%

In turn, the Filipino corporation Olympic Mines & Development Corp. (Olympic) 66.67
(Filipino equity in Sara Marie) x 59.97 (Sara Marie’s share in
holds 66.63% of Sara Marie’s shares while the same Canadian company MBMI
Tesoro) = 39.98%
holds 33.31% of Sara Marie’s shares. Nonetheless, it is admitted that Olympic did 100
not pay a single peso for its shares. On the contrary, MBMI paid for 99% of the
paid-up capital of Sara Marie. 39.98% + .03% (shares of individual Filipino shareholders [SHs] in
Tesoro)
=40.01%
Name Nationality Number of Amount Amount Paid
Shares Subscribed
Foreign participation in petitioner Tesoro: 59.99%

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33.33 In turn, 66.63% of Madridejos’ shares were held by Olympic while 33.31% of its
(Foreign equity in Sara Marie) x 59.97 (Sara Marie’s share in shares belonged to MBMI. Yet again, Olympic did not contribute to the paid-up
Tesoro) = 19.99% capital of Madridejos and it was MBMI that provided 99.79% of the paid-up
100
capital of Madridejos.
19.99% + 39.98% (MBMI’s direct participation in Tesoro) + .02%
(shares of foreign individual SHs in Tesoro)
Name Nationality Number of Amount Amount Paid
= 59.99% Shares Subscribed
Olympic Mines Filipino 6,663 ₱6,663,000.00 P0.00
With only 40.01% Filipino ownership in petitioner Tesoro, as compared to &
59.99% foreign ownership of its shares, it is clear that petitioner Tesoro does not Development
comply with the minimum Filipino equity requirement imposed in Sec. 2, Art. Corp.19
XII of the Constitution. Hence, the appellate court’s observation that Tesoro is a MBMI Canadian 3,331 ₱3,331,000.00 ₱2,803,900.00
foreign corporation not entitled to an MPSA is apt. Resources, Inc.
Amanti Filipino 1 ₱1,000.00 ₱1,000.00
McArthur Limson
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Petitioner McArthur follows the corporate layering structure of Tesoro, as 59.97% Esguerra
of its 10, 000 common shares is owned by supposedly Filipino Madridejos Lauro Salazar Filipino 1 ₱1,000.00 ₱1,000.00
Mining Corporation (Madridejos), while 39.98% belonged to the Canadian
Emmanuel G. Filipino 1 ₱1,000.00 ₱1,000.00
MBMI. Hernando
Michael T. American 1 ₱1,000.00 ₱1,000.00
Name Nationality Number of Amount Amount Paid Mason
Shares Subscribed
Kenneth Canadian 1 ₱1,000.00 ₱1,000.00
Madridejos Filipino 5,997 ₱5,997,000.00 ₱825,000.00 Cawkel
Mining
Corporation Total 10,000 ₱10,000,000.00 ₱2,809,900.00

MBMI Canadian 3,998 ₱3,998,000.0 ₱1,878,174.60

Resources, Again, the fact that MBMI had practically provided all the funds in Madridejos
Inc.18 and McArthur creates serious doubt as to the true extent of its control and
Lauro L. Filipino 1 ₱1,000.00 ₱1,000.00 ownership of MBMI over both Madridejos and McArthur. The application of the
Salazar Grandfather Rule is clearly called for, and as will be shown below, MBMI, along
with the other foreign shareholders, breached the maximum limit of 40%
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
ownership in petitioner McArthur, rendering the petitioner disqualified to an
Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00 MPSA:
Agcaoili
Michael T. American 1 ₱1,000.00 ₱1,000.00 Filipino participation in petitioner McArthur: 40.01%
Mason
Kenneth Canadian 1 ₱1,000.00 ₱1,000.00
Cawkel 66.67
(Filipino equity in Madridejos) x 59.97 (Madridejos’ share in
Total 10,000 ₱10,000,000.00 ₱2,708,174.60 McArthur) = 39.98%
100

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39.98% + .03% (shares of individual Filipino SHs in McArthur) Michael T. American 1 ₱1,000.00 ₱1,000.00
=40.01% Mason
Robert L. Canadian 1 ₱1,000.00 ₱1,000.00
McCurdy
Foreign participation in petitioner McArthur: 59.99%
Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00
Agcaoili
33.33 (Foreign equity in Madridejos) x 59.97 (Madridejos’ share in Bayani H. Filipino 1 ₱1,000.00 ₱1,000.00
McArthur) = 19.99% Agabin

19.99% + 39.98% (MBMI’s direct participation inMcArthur) + .02% Total 10,000 ₱10,000,000.00 ₱2,800,000.00
(shares of foreign individual SHs in McArthur)
= 59.99% PLMDC’s shares, in turn, were held by Palawan Alpha South Resources
Development Corporation (PASRDC), which subscribed to 65.96% of PLMDC’s
As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner shares, and the Canadian MBMI, which subscribed to 33.96% of PLMDC’s shares.
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 Name Nationality Number of Amount Amount Paid
requirement imposed in Sec. 2, Art. XII of the Constitution. Thus, the appellate Shares Subscribed
court did not err in holding that petitioner McArthur is a foreign corporation not Palawan Alpha Filipino 6,596 ₱6,596,000.00 P0
entitled to an MPSA. South
Resource
Narra Development
Corp.
MBMI Canadian 3,396 ₱3,396,000.00 ₱2,796,000.00
As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise Mining &
Resources,
Development Corporation (PLMDC), while Canadian MBMI held 39.98% of its Inc.21
shares.
Higinio C. Filipino 1 ₱1,000.00 ₱1,000.00
Mendoza, Jr.
Name Nationality Number of Amount Amount Paid
Fernando B. Filipino 1 ₱1,000.00 ₱1,000.00
Shares Subscribed
Esguerra
Patricia Lousie Filipino 5,997 ₱5,997,000.00 ₱1,677,000.00
Henry E. Filipino 1 ₱1,000.00 ₱1,000.00
Mining and
Fernandez
Development
Corp. Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00
Bocalan
MBMI Canadian 3,996 ₱3,996,000.00 ₱1,116,000.00
Resources, Michael T. American 1 ₱1,000.00 ₱1,000.00
Inc.20 Mason
Higinio C. Filipino 1 ₱1,000.00 ₱1,000.00 Robert L. Canadian 1 ₱1,000.00 ₱1,000.00
Mendoza, McCurdy
Henry E. Filipino 1 ₱1,000.00 ₱1,000.00 Manuel A. Filipino 1 ₱1,000.00 ₱1,000.00
Fernandez Agcaoili
Ma. Elena A. Filipino 1 ₱1,000.00 ₱1,000.00 Bayani H, Filipino 1 ₱1,000.00 ₱1,000.00
Bocalan Agabin

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 CORPORATION LAW- 1
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 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
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corporate applicant in order to determine its right to a mining area or a mineral

agreement.

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

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EN BANC THE PHILIPPINE STOCK

EXCHANGE,

Respondents.
WILSON P. GAMBOA, G.R. No. 176579
PABLITO V. SANIDAD and Promulgated:
Petitioner,
Present: ARNO V. SANIDAD,
- versus -
Petitioners-in-Intervention. June 28, 2011
CORONA, C.J.,
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
FINANCE SECRETARY CARPIO,
MARGARITO B. TEVES, FINANCE DECISION
UNDERSECRETARY JOHN P. VELASCO, JR.,
SEVILLA, AND COMMISSIONER CARPIO, J.:
RICARDO ABCEDE OF THE
PRESIDENTIAL COMMISSION LEONARDO-DE CASTRO,
ON GOOD GOVERNMENT (PCGG) The Case
IN THEIR CAPACITIES AS CHAIR BRION,
AND MEMBERS, RESPECTIVELY, This is an original petition for prohibition, injunction, declaratory relief and
OF THE PRIVATIZATION declaration of nullity of the sale of shares of stock of Philippine
PERALTA,
COUNCIL, Telecommunications Investment Corporation (PTIC) by the government of the
Republic of the Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an
BERSAMIN, affiliate of First Pacific Company Limited (First Pacific).
CHAIRMAN ANTHONI SALIM OF
FIRST PACIFIC CO., LTD. IN HIS
CAPACITY AS DIRECTOR OF DEL CASTILLO, The Antecedents
METRO PACIFIC ASSET
HOLDINGS INC., CHAIRMAN ABAD, The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine
MANUEL V. PANGILINAN OF
Long Distance Telephone Company (PLDT), are as follows:1
PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY (PLDT) VILLARAMA, JR.,
IN HIS CAPACITY AS MANAGING On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which
DIRECTOR OF FIRST PACIFIC PEREZ, granted PLDT a franchise and the right to engage in telecommunications
CO., LTD., PRESIDENT business. In 1969, General Telephone and Electronics Corporation (GTE), an
NAPOLEON L. NAZARENO OF MENDOZA, and American company and a major PLDT stockholder, sold 26 percent of the
PHILIPPINE LONG DISTANCE outstanding common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc.
TELEPHONE COMPANY, CHAIR (PHI) was incorporated by several persons, including Roland Gapud and Jose
FE BARIN OF THE SECURITIES SERENO, JJ. Campos, Jr. Subsequently, PHI became the owner of 111,415 shares of stock of
EXCHANGE COMMISSION, and PTIC by virtue of three Deeds of Assignment executed by PTIC stockholders
PRESIDENT FRANCIS LIM OF 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

Page 82 of 120
 CORPORATION LAW- 1
Government (PCGG). The 111,415 PTIC shares, which represent about 46.125
percent of the outstanding capital stock of PTIC, were later declared by this Court
to be owned by the Republic of the Philippines.2
In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm,
acquired the remaining 54 percent of the outstanding capital stock of PTIC. On
20 November 2006, the Inter-Agency Privatization Council (IPC) of the
Philippine Government announced that it would sell the 111,415 PTIC shares, or
46.125 percent of the outstanding capital stock of PTIC, through a public bidding
to be conducted on 4 December 2006. Subsequently, the public bidding was reset
to 8 December 2006, and only two bidders, Parallax Venture Fund XXVII
(Parallax) and Pan-Asia Presidio Capital, submitted their bids. Parallax won with
a bid of P25.6 billion or US$510 million.
Thereafter, First Pacific announced that it would exercise its right of first refusal
as a PTIC stockholder and buy the 111,415 PTIC shares by matching the bid price
of Parallax. However, First Pacific failed to do so by the 1 February 2007 deadline
set by IPC and instead, yielded its right to PTIC itself which was then given by
IPC until 2 March 2007 to buy the PTIC shares. On 14 February 2007, First
Pacific, through its subsidiary, MPAH, entered into a Conditional Sale and
Purchase Agreement of the 111,415 PTIC shares, or 46.125 percent of the
outstanding capital stock of PTIC, with the Philippine Government for the price
of P25,217,556,000 or US$510,580,189. The sale was completed on 28 February
2007.
Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of
46.125 percent of PTIC shares is actually an indirect sale of 12 million shares or
about 6.3 percent of the outstanding common shares of PLDT. With the sale,
First Pacifics common shareholdings in PLDT increased from 30.7
percent to 37 percent, thereby increasing the common shareholdings
of foreigners in PLDT to about 81.47 percent. This violates Section 11,
Article XII of the 1987 Philippine Constitution which limits foreign ownership of
the capital of a public utility to not more than 40 percent.3
On the other hand, public respondents Finance Secretary Margarito B. Teves,
Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege
the following relevant facts:
On 9 November 1967, PTIC was incorporated and had since engaged in the
business of investment holdings. PTIC held 26,034,263 PLDT common shares, or
13.847 percent of the total PLDT outstanding common shares. PHI, on the other
hand, was incorporated in 1977, and became the owner of 111,415 PTIC shares or
46.125 percent of the outstanding capital stock of PTIC by virtue of three Deeds of
Assignment executed by Ramon Cojuangco and Luis 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 Courts decision4 which
became final and executory on 8 August 2006.
The Philippine Government decided to sell the 111,415 PTIC shares, which
represent 6.4 percent of the outstanding common shares of stock of PLDT, and
designated the Inter-Agency Privatization Council (IPC), composed of the
Department of Finance and the PCGG, as the disposing entity. An invitation to
bid was published in seven different newspapers from 13 to 24 November 2006.
On 20 November 2006, a pre-bid conference was held, and the original deadline
for bidding scheduled on 4 December 2006 was reset to 8 December 2006. The
extension was published in nine different newspapers.
During the 8 December 2006 bidding, Parallax Capital Management LP emerged
as the highest bidder with a bid of P25,217,556,000. The government notified
First Pacific, the majority owner of PTIC shares, of the bidding results and gave
First Pacific until 1 February 2007 to exercise its right of first refusal in
accordance with PTICs Articles of Incorporation. First Pacific announced its
intention to match Parallaxs bid.
On 31 January 2007, the House of Representatives (HR) Committee on Good
Government conducted a public hearing on the particulars of the then impending
sale of the 111,415 PTIC shares. Respondents Teves and Sevilla were among those
who attended the public hearing. The HR Committee Report No. 2270 concluded
that: (a) the auction of the governments 111,415 PTIC shares bore due diligence,
transparency and conformity with existing legal procedures; and (b) First
Pacifics intended acquisition of the governments 111,415 PTIC shares
resulting in First Pacifics 100% ownership of PTIC will not violate the
40 percent constitutional limit on foreign ownership of a public utility
since PTIC holds only 13.847 percent of the total outstanding common
shares of PLDT.5 On 28 February 2007, First Pacific completed the acquisition
of the 111,415 shares of stock of PTIC.
Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC
conducted a public bidding for the sale of 111,415 PTIC shares or 46 percent of the
outstanding capital stock of PTIC (the remaining 54 percent of PTIC shares was
already owned by First Pacific and its affiliates); (b) Parallax offered the highest
bid amounting to P25,217,556,000; (c) pursuant to the right of first refusal in
favor of PTIC and its shareholders granted in PTICs Articles of Incorporation,
MPAH, a First Pacific affiliate, exercised its right of first refusal by matching the
highest bid offered for PTIC shares on 13 February 2007; and (d) on 28 February
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 CORPORATION LAW- 1
2007, the sale was consummated when MPAH paid IPC P25,217,556,000 and the
government delivered the certificates for the 111,415 PTIC shares.
Respondent Pangilinan denies the other allegations of facts of petitioner.
On 28 February 2007, petitioner filed the instant petition for prohibition,
injunction, declaratory relief, and declaration of nullity of sale of the 111,415 PTIC
shares. Petitioner claims, among others, that the sale of the 111,415 PTIC shares
would result in an increase in First Pacifics common shareholdings in PLDT from
30.7 percent to 37 percent, and this, combined with Japanese
NTT DoCoMos common shareholdings in PLDT, would result to a total foreign
common shareholdings in PLDT of 51.56 percent which is over the 40 percent
constitutional limit.6 Petitioner asserts:
If and when the sale is completed, First Pacifics equity in PLDT will go
up from 30.7 percent to 37.0 percent of its common or voting-
stockholdings, x x x. Hence, the consummation of the sale will put the
two largest foreign investors in PLDT First Pacific and Japans
NTT DoCoMo, which is the worlds largest wireless telecommunications
firm, owning 51.56 percent of PLDT common equity. x x x With the
completion of the sale, data culled from the official website of the New
York Stock Exchange (www.nyse.com) showed that those foreign
entities, which own at least five percent of common equity, will
collectively own 81.47 percent of PLDTs common equity. x x x
x x x as the annual disclosure reports, also referred to
as Form 20-K reports x x x which PLDT submitted to
the New York Stock Exchange for the period 2003-
2005, revealed that First Pacific and several other
foreign entities breached the constitutional limit of 40
percent ownership as early as 2003. x x x7
Petitioner raises the following issues: (1) whether the consummation of the then
impending sale of 111,415 PTIC shares to First Pacific violates the constitutional
limit on foreign ownership of a public utility; (2) whether public respondents
committed grave abuse of discretion in allowing the sale of the 111,415 PTIC
shares to First Pacific; and (3) whether the sale of common shares to foreigners in
excess of 40 percent of the entire subscribed common capital stock violates the
constitutional limit on foreign ownership of a public utility.8
On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for
Leave to Intervene and Admit Attached Petition-in-Intervention. In the
Resolution of 28 August 2007, the Court granted the motion and noted the
Petition-in-Intervention.
Petitioners-in-intervention join petitioner Wilson Gamboa x x x in seeking,
among others, to enjoin and/or nullify the sale by respondents of the 111,415
PTIC shares to First Pacific or assignee. Petitioners-in-intervention claim that, as
PLDT subscribers, they have a stake in the outcome of the controversy
x x x where the Philippine Government is completing the sale of government
owned assets in [PLDT], unquestionably a public utility, in violation of the
nationality restrictions of the Philippine Constitution.
The Issue
This Court is not a trier of facts. Factual questions such as those raised by
petitioner,9 which indisputably demand a thorough examination of the evidence
of the parties, are generally beyond this Courts jurisdiction. Adhering to this well-
settled principle, the Court shall confine the resolution of the instant controversy
solely on the threshold and purely legal issue of whether the term capital in
Section 11, Article XII of the Constitution refers to the total common shares only
or to the total outstanding capital stock (combined total of common and non-
voting preferred shares) of PLDT, a public utility.
The Ruling of the Court
The petition is partly meritorious.
Petition for declaratory relief treated as petition for mandamus
At the outset, petitioner is faced with a procedural barrier. Among the remedies
petitioner seeks, only the petition for prohibition is within the original
jurisdiction of this court, which however is not exclusive but is concurrent with
the Regional Trial Court and the Court of Appeals. The actions for declaratory
relief,10 injunction, and annulment of sale are not embraced within the original
jurisdiction of the Supreme Court. On this ground alone, the petition could have
been dismissed outright.
While direct resort to this Court may be justified in a petition for
prohibition,11 the Court shall nevertheless refrain from discussing the grounds in
support of the petition for prohibition since on 28 February 2007, the questioned
sale was consummated when MPAH paid IPC P25,217,556,000 and the
government delivered the certificates for the 111,415 PTIC shares.
However, since the threshold and purely legal issue on the definition of the term
capital in Section 11, Article XII of the Constitution has far-reaching implications
Page 84 of 120
 CORPORATION LAW- 1
to the national economy, the Court treats the petition for declaratory relief as one
for mandamus.12
In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition
for declaratory relief as one for mandamus considering the grave injustice that
would result in the interpretation of a banking law. In that case, which involved
the crime of rape committed by a foreign tourist against a Filipino minor and the
execution of the final judgment in the civil case for damages on the tourists dollar
deposit with a local bank, the Court declared Section 113 of Central Bank Circular
No. 960, exempting foreign currency deposits from attachment, garnishment or
any other order or process of any court, inapplicable due to the peculiar
circumstances of the case. The Court held that injustice would result especially to
a citizen aggrieved by a foreign guest like accused x x x that would negate Article
10 of the Civil Code which provides that in case of doubt in the interpretation or
application of laws, it is presumed that the lawmaking body intended right and
justice to prevail. The Court therefore required respondents Central Bank of the
Philippines, the local bank, and the accused to comply with the writ of execution
issued in the civil case for damages and to release the dollar deposit of the
accused to satisfy the judgment.
In Alliance of Government Workers v. Minister of Labor,14 the Court similarly
brushed aside the procedural infirmity of the petition for declaratory relief and
treated the same as one for mandamus. In Alliance, the issue was whether the
government unlawfully excluded petitioners, who were government employees,
from the enjoyment of rights to which they were entitled under the law.
Specifically, the question was: Are the branches, agencies, subdivisions, and
instrumentalities of the Government, including government owned or controlled
corporations included among the four employers under Presidential Decree No.
851 which are required to pay their employees x x x a thirteenth (13th) month pay
x x x ? The Constitutional principle involved therein affected all government
employees, clearly justifying a relaxation of the technical rules of procedure, and
certainly requiring the interpretation of the assailed presidential decree.
In short, it is well-settled that this Court may treat a petition for declaratory relief
as one for mandamus if the issue involved has far-reaching implications. As this
Court held in Salvacion:
The Court has no original and exclusive jurisdiction over a petition for
declaratory relief. However, exceptions to this rule have been
recognized. Thus, where the petition has far-reaching
implications and raises questions that should be resolved, it
may be treated as one for mandamus.15 (Emphasis supplied)
In the present case, petitioner seeks primarily the interpretation of the term
capital in Section 11, Article XII of the Constitution. He prays that this Court
declare that the term capital refers to common shares only, and that such shares
constitute the sole basis in determining foreign equity in a public utility.
Petitioner further asks this Court to declare any ruling inconsistent with such
interpretation unconstitutional.
The interpretation of the term capital in Section 11, Article XII of the Constitution
has far-reaching implications to the national economy. In fact, a resolution of this
issue will determine whether Filipinos are masters, or second class citizens, in
their own country. What is at stake here is whether Filipinos or foreigners will
have effective control of the national economy. Indeed, if ever there is a legal
issue that has far-reaching implications to the entire nation, and to future
generations of Filipinos, it is the threshhold legal issue presented in this case.
The Court first encountered the issue on the definition of the term capital in
Section 11, Article XII of the Constitution in the case of Fernandez
v. Cojuangco, docketed as G.R. No. 157360.16 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.17 There, petitioner Fernandez assailed on a pure question of
law the Regional Trial Courts Decision of 21 February 2003 via a petition for
review under Rule 45. The Courts Resolution, denying the petition, became final
on 21 December 2004.
The instant petition therefore presents the Court with another opportunity to
finally settle this purely legal issue which is of transcendental importance to
the national economy and a fundamental requirement to a faithful adherence to
our Constitution. The Court must forthwith seize such opportunity, not only for
the benefit of the litigants, but more significantly for the benefit of the entire
Filipino people, to ensure, in the words of the Constitution, a self-reliant and
independent national economy effectively controlled by Filipinos.18 Besides,
in the light of vague and confusing positions taken by government agencies on
this purely legal issue, present and future foreign investors in this country
deserve, as a matter of basic fairness, a categorical ruling from this Court on the
extent of their participation in the capital of public utilities and other nationalized
businesses.
Despite its far-reaching implications to the national economy, this purely legal
issue has remained unresolved for over 75 years since the 1935 Constitution.
There is no reason for this Court to evade this ever recurring fundamental issue
and delay again defining the term capital, which appears not only in Section 11,
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Article XII of the Constitution, but also in Section 2, Article XII on co-production
and joint venture agreements for the development of our natural resources,19 in
Section 7, Article XII on ownership of private lands,20 in Section 10, Article XII
on the reservation of certain investments to Filipino citizens,21 in Section 4(2),
Article XIV on the ownership of educational institutions,22 and in Section 11(2),
Article XVI on the ownership of advertising companies.23
Petitioner has locus standi
There is no dispute that petitioner is a stockholder of PLDT. As such, he has the
right to question the subject sale, which he claims to violate the nationality
requirement prescribed in Section 11, Article XII of the Constitution. If the sale
indeed violates the Constitution, then there is a possibility that PLDTs franchise
could be revoked, a dire consequence directly affecting petitioners interest as a
stockholder.
More importantly, there is no question that the instant petition raises matters of
transcendental importance to the public. The fundamental and threshold legal
issue in this case, involving the national economy and the economic welfare of the
Filipino people, far outweighs any perceived impediment in the legal personality
of the petitioner to bring this action.
In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on
matters of transcendental importance to the public, thus:
In Taada v. Tuvera, the Court asserted that when the issue concerns a
public right and the object of mandamus is to obtain the enforcement
of a public duty, the people are regarded as the real parties in
interest; and because it is sufficient that petitioner is a citizen and as
such is interested in the execution of the laws, he need not show that
he has any legal or special interest in the result of the action. In the
aforesaid case, the petitioners sought to enforce their right to be informed on
matters of public concern, a right then recognized in Section 6, Article IV of the
1973 Constitution, in connection with the rule that laws in order to be valid and
enforceable must be published in the Official Gazette or otherwise effectively
promulgated. In ruling for the petitioners legal standing, the Court declared that
the right they sought to be enforced is a public right recognized by no less than
the fundamental law of the land.
Legaspi v. Civil Service Commission, while reiterating Taada, further declared
that when a mandamus proceeding involves the assertion of a public
right, the requirement of personal interest is satisfied by the mere
fact that petitioner is a citizen and, therefore, part of the general
public which possesses the right.
Further, in Albano v. Reyes, we said that while expenditure of public funds may
not have been involved under the questioned contract for the development,
management and operation of the Manila International Container
Terminal, public interest [was] definitely involved considering the
important role [of the subject contract] . . . in the economic
development of the country and the magnitude of the financial
consideration involved. We concluded that, as a consequence, the disclosure
provision in the Constitution would constitute sufficient authority for upholding
the petitioners standing. (Emphasis supplied)
Clearly, since the instant petition, brought by a citizen, involves matters of
transcendental public importance, the petitioner has the requisite locus standi.
Definition of the Term Capital in
Section 11, Article XII of the 1987 Constitution
Section 11, Article XII (National Economy and Patrimony) of the 1987
Constitution mandates the Filipinization of public utilities, to wit:
Section 11. No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations
or associations organized under the laws of the Philippines, at
least sixty per centum of whose capital is owned by such
citizens; nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. Neither
shall any such franchise or right be granted except under the condition
that it shall be subject to amendment, alteration, or repeal by the
Congress when the common good so requires. The State shall encourage
equity participation in public utilities by the general public. The
participation of foreign investors in the governing body of any public
utility enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such corporation
or association must be citizens of the Philippines. (Emphasis supplied)
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The above provision substantially reiterates Section 5, Article XIV of the 1973
Constitution, thus:
Section 5. No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations
or associations organized under the laws of the Philippines at
least sixty per centum of the capital of which is owned by such
citizens, nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. Neither
shall any such franchise or right be granted except under the condition
that it shall be subject to amendment, alteration, or repeal by the
National Assembly when the public interest so requires. The State shall
encourage equity participation in public utilities by the general public.
The participation of foreign investors in the governing body of any
public utility enterprise shall be limited to their proportionate share in
the capital thereof. (Emphasis supplied)
The foregoing provision in the 1973 Constitution reproduced Section 8, Article
XIV of the 1935 Constitution, viz:
Section 8. No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations
or other entities organized under the laws of the Philippines
sixty per centum of the capital of which is owned by citizens of
the Philippines, nor shall such franchise, certificate, or authorization
be exclusive in character or for a longer period than fifty years. No
franchise or right shall be granted to any individual, firm, or
corporation, except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the public
interest so requires. (Emphasis supplied)
Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional
Commission, reminds us that the Filipinization provision in the 1987
Constitution is one of the products of the spirit of nationalism which gripped the
1935 Constitutional Convention.25 The 1987 Constitution provides for
the Filipinization of public utilities by requiring that any form of authorization for
the operation of public utilities should be granted only to citizens of the
Philippines or to corporations or associations organized under the laws of the
Philippines at least sixty per centum of whose capital is owned by such
citizens. The provision is [an express] recognition of the sensitive and
vital position of public utilities both in the national economy and for
national security.26 The evident purpose of the citizenship requirement is to
prevent aliens from assuming control of public utilities, which may be inimical to
the national interest.27 This specific provision explicitly reserves to Filipino
citizens control of public utilities, pursuant to an overriding economic goal of the
1987 Constitution: to conserve and develop our patrimony28 and ensure a self-
reliant and independent national economy effectively controlled by
Filipinos.29
Any citizen or juridical entity desiring to operate a public utility must therefore
meet the minimum nationality requirement prescribed in Section 11, Article XII
of the Constitution. Hence, for a corporation to be granted authority to operate a
public utility, at least 60 percent of its capital must be owned by Filipino citizens.
The crux of the controversy is the definition of the term capital. Does the term
capital in Section 11, Article XII of the Constitution refer to common shares or to
the total outstanding capital stock (combined total of common and non-voting
preferred shares)?
Petitioner submits that the 40 percent foreign equity limitation in domestic
public utilities refers only to common shares because such shares are entitled to
vote and it is through voting that control over a corporation is exercised.
Petitioner posits that the term capital in Section 11, Article XII of the Constitution
refers to the ownership of common capital stock subscribed and outstanding,
which class of shares alone, under the corporate set-up of PLDT, can vote and
elect members of the board of directors. It is undisputed that PLDTs non-voting
preferred shares are held mostly by Filipino citizens.30 This arose from
Presidential Decree No. 217,31 issued on 16 June 1973 by then President
Ferdinand Marcos, requiring every applicant of a PLDT telephone line to
subscribe to non-voting preferred shares to pay for the investment cost of
installing the telephone line.32
Petitioners-in-intervention basically reiterate petitioners arguments and adopt
petitioners definition of the term capital.33 Petitioners-in-intervention allege that
the approximate foreign ownership of common capital stock of PLDT
x x x already amounts to at least 63.54% of the total outstanding common stock,
which means that foreigners exercise significant control over PLDT, patently
violating the 40 percent foreign equity limitation in public utilities prescribed by
the Constitution.
Respondents, on the other hand, do not offer any definition of the term capital in
Section 11, Article XII of the Constitution. More importantly, private
respondents Nazareno and Pangilinan of PLDT do not dispute that more than 40
percent of the common shares of PLDT are held by foreigners.
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In particular, respondent Nazarenos Memorandum, consisting of 73 pages, harps
mainly on the procedural infirmities of the petition and the supposed violation of
the due process rights of the affected foreign common shareholders.
Respondent Nazareno does not deny petitioners allegation of foreigners
dominating the common shareholdings of PLDT. Nazareno stressed mainly that
the petition seeks to divest foreign common shareholders purportedly
exceeding 40% of the total common shareholdings in PLDT of their
ownership over their shares. Thus, the foreign natural and juridical PLDT
shareholders must be impleaded in this suit so that they can be
heard.34 Essentially, Nazareno invokes denial of due process on behalf of the
foreign common shareholders.
While Nazareno does not introduce any definition of the term capital, he states
that among the factual assertions that need to be established to
counter petitioners allegations is the uniform interpretation by
government agencies (such as the SEC), institutions and corporations
(such as the Philippine National Oil Company-Energy Development
Corporation or PNOC-EDC) of including both preferred shares and
common shares in controlling interest in view of testing compliance
with the 40% constitutional limitation on foreign ownership in public
utilities.35
Similarly, respondent Manuel V. Pangilinan does not define the term capital in
Section 11, Article XII of the Constitution. Neither does he refute petitioners
claim of foreigners holding more than 40 percent of PLDTs common shares.
Instead, respondent Pangilinan focuses on the procedural flaws of the petition
and the alleged violation of the due process rights of foreigners.
Respondent Pangilinan emphasizes in his Memorandum (1) the absence of this
Courts jurisdiction over the petition; (2) petitioners lack of standing;
(3) mootness of the petition; (4) non-availability of declaratory relief; and (5) the
denial of due process rights. Moreover, respondent 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 persons property (the shareholders stock in the utility
company) on the basis of another partys alleged failure to satisfy a requirement
that is a condition only for that other partys retention of another piece of
property (the utility company being at least 60% Filipino-owned to keep its
franchise).36
The OSG, representing public respondents Secretary Margarito Teves,
Undersecretary John P. Sevilla, Commissioner Ricardo Abcede, and Chairman
Fe Barin, is likewise silent on the definition of the term capital. In its
Memorandum37 dated 24 September 2007, the OSG also limits its discussion on
the supposed procedural defects of the petition, i.e. lack of standing, lack of
jurisdiction, non-inclusion of interested parties, and lack of basis for injunction.
The OSG does not present any definition or interpretation of the term capital in
Section 11, Article XII of the Constitution. The OSG contends that the petition
actually partakes of a collateral attack on PLDTs franchise as a public utility,
which in effect requires a full-blown trial where all the parties in interest are
given their day in court.38
Respondent Francisco Ed Lim, impleaded as President and Chief Executive
Officer of the Philippine Stock Exchange (PSE), does not also define the term
capital and seeks the dismissal of the petition on the following grounds: (1)
failure to state a cause of action against Lim; (2) the PSE allegedly implemented
its rules and required all listed companies, including PLDT, to make proper and
timely disclosures; and (3) the reliefs prayed for in the petition would adversely
impact the stock market.
In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed
to be a stockholder of record of PLDT, contended that the term capital in the 1987
Constitution refers to shares entitled to vote or the common shares. Fernandez
explained thus:
The forty percent (40%) foreign equity limitation in public utilities
prescribed by the Constitution refers to ownership of shares of stock
entitled to vote, i.e., common shares, considering that it is through
voting that control is being exercised. x x x
Obviously, the intent of the framers of the Constitution in imposing
limitations and restrictions on fully nationalized and partially
nationalized activities is for Filipino nationals to be always in control of
the corporation undertaking said activities. Otherwise, if the Trial
Courts ruling upholding respondents arguments were to be given
credence, it would be possible for the ownership structure of a public
utility corporation to be divided into one percent (1%) common stocks
and ninety-nine percent (99%) preferred stocks. Following the Trial
Courts ruling adopting respondents arguments, the common shares can
be owned entirely by foreigners thus creating an absurd situation
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wherein foreigners, who are supposed to be minority shareholders,
control the public utility corporation.
xxxx
Thus, the 40% foreign ownership limitation should be interpreted to
apply to both the beneficial ownership and the controlling interest.
xxxx
Clearly, therefore, the forty percent (40%) foreign equity limitation in
public utilities prescribed by the Constitution refers to ownership of
shares of stock entitled to vote, i.e., common shares. Furthermore,
ownership of record of shares will not suffice but it must be shown that
the legal and beneficial ownership rests in the hands of Filipino citizens.
Consequently, in the case of petitioner PLDT, since it is already
admitted that the voting interests of foreigners which would gain entry
to petitioner PLDT by the acquisition of SMART shares through the
Questioned Transactions is equivalent to 82.99%, and the nominee
arrangements between the foreign principals and the Filipino owners is
likewise admitted, there is, therefore, a violation of Section 11, Article
XII of the Constitution.
Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987
cited by the Trial Court to support the proposition that the meaning of
the word capital as used in Section 11, Article XII of the Constitution
allegedly refers to the sum total of the shares subscribed and paid-in by
the shareholder and it allegedly is immaterial how the stock is classified,
whether as common or preferred, cannot stand in the face of a clear
legislative policy as stated in the FIA which took effect in 1991 or way
after said opinions were rendered, and as clarified by the above-quoted
Amendments. In this regard, suffice it to state that as between the law
and an opinion rendered by an administrative agency, the law
indubitably prevails. Moreover, said Opinions are merely advisory and
cannot prevail over the clear intent of the framers of the Constitution.
In the same vein, the SECs construction of Section 11, Article XII of the
Constitution is at best merely advisory for it is the courts that finally
determine what a law means.39
On the other hand, respondents therein, Antonio O. Cojuangco, Manuel
V. Pangilinan, Carlos A. Arellano, Helen Y. Dee, Magdangal B.
Elma, Mariles Cacho-Romulo, Fr. Bienvenido F. Nebres, Ray C. Espinosa,
Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando B. Vea, argued that
the term capital in Section 11, Article XII of the Constitution includes preferred
shares since the Constitution does not distinguish among classes of stock, thus:
16. The Constitution applies its foreign ownership limitation on the
corporations capital, without distinction as to classes of shares. x x x
In this connection, the Corporation Code which was already in force at
the time the present (1987) Constitution was drafted defined
outstanding capital stock as follows:
Section 137. Outstanding capital stock defined. The term outstanding
capital stock, as used in this Code, means the total shares of stock issued
under binding subscription agreements to subscribers or stockholders,
whether or not fully or partially paid, except treasury shares.
Section 137 of the Corporation Code also does not distinguish between
common and preferred shares, nor exclude either class of shares, in
determining the outstanding capital stock (the capital) of a corporation.
Consequently, petitioners suggestion to reckon PLDTs foreign equity
only on the basis of PLDTs outstanding common shares is without legal
basis. The language of the Constitution should be understood in the
sense it has in common use.
xxxx
17. But even assuming that resort to the proceedings of the Constitutional
Commission is necessary, there is nothing in the Record of the
Constitutional Commission (Vol. III) which petitioner misleadingly cited
in the Petition x x x which supports petitioners view that only common
shares should form the basis for computing a public utilitys foreign
equity.
xxxx
18. In addition, the SEC the government agency primarily responsible for
implementing the Corporation Code, and which also has the
responsibility of ensuring compliance with the Constitutions foreign
equity restrictions as regards nationalized activities x x x has
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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.
the value of five (P5.00) pesos per share: Provided, further, That the
entire consideration received by the corporation for its no-par value
shares shall be treated as capital and shall not be available for
distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of
insuring compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated
in the certificate of stock, each share shall be equal in all respects to
every other share.
Where the articles of incorporation provide for non-voting shares in the
cases allowed by this Code, the holders of such shares shall nevertheless
be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition
of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

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 6. Merger or consolidation of the corporation with another
preferences as may be stated in the articles of incorporation which are corporation or other corporations;
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 7. Investment of corporate funds in another corporation or
Directors, where authorized in the articles of incorporation, may fix the business in accordance with this Code; and
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 8. Dissolution of the corporation.
Commission.
Except as provided in the immediately preceding paragraph, the vote
Shares of capital stock issued without par value shall be deemed fully necessary to approve a particular corporate act as provided in this Code
paid and non-assessable and the holder of such shares shall not be liable shall be deemed to refer only to stocks with voting rights.
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

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Indisputably, one of the rights of a stockholder is the right to participate in the
control or management of the corporation.43 This is exercised through his vote in
the election of directors because it is the board of directors that controls or
manages the corporation.44 In the absence of provisions in the articles of
incorporation denying voting rights to preferred shares, preferred shares have the
same voting rights as common shares. However, preferred shareholders are often
excluded from any control, that is, deprived of the right to vote in the election of
directors and on other matters, on the theory that the preferred shareholders are
merely investors in the corporation for income in the same manner as
bondholders.45 In fact, under the Corporation Code only preferred or redeemable
shares can be deprived of the right to vote.46 Common shares cannot be deprived
of the right to vote in any corporate meeting, and any provision in the articles of
incorporation restricting the right of common shareholders to vote is invalid.47
Considering that common shares have voting rights which translate to control, as
opposed to preferred shares which usually have no voting rights, the term capital
in Section 11, Article XII of the Constitution refers only to common shares.
However, if the preferred shares also have the right to vote in the election of
directors, then the term capital shall include such preferred shares because the
right to participate in the control or management of the corporation is exercised
through the right to vote in the election of directors. In short, the term capital
in Section 11, Article XII of the Constitution refers only to shares of
stock that can vote in the election of directors.
This interpretation is consistent with the intent of the framers of the
Constitution to place in the hands of Filipino citizens the control and
management of public utilities. As revealed in the deliberations of the
Constitutional Commission, capital refers to the voting stock or controlling
interest of a corporation, to wit:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or
Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in
Section 9 and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with this question:
Where do we base the equity requirement, is it on the authorized capital
stock, on the subscribed capital stock, or on the paid-up capital stock of
a corporation? Will the Committee please enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members
of the team from the UP Law Center who provided us a draft. The
phrase that is contained here which we adopted from the UP
draft is 60 percent of voting stock.
MR. NOLLEDO. That must be based on the subscribed capital stock,
because unless declared delinquent, unpaid capital stock shall be
entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another
corporation, say, a corporation with 60-40 percent equity invests in
another corporation which is permitted by the Corporation Code, does
the Committee adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.48
xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted by
the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion
of the phrase voting stock or controlling interest.
MR. AZCUNA. Hence, without the Davide amendment, the committee
report would read: corporations or associations at least sixty percent of
whose CAPITAL is owned by such citizens.
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60
percent of the capital to be owned by citizens.
MR. VILLEGAS. That is right.
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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
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)
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Mere legal title is insufficient to meet the 60 percent Filipino-owned capital
required in the Constitution. Full beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60 percent of the voting rights, is
required. The legal and beneficial ownership of 60 percent of the outstanding
capital stock must rest in the hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is considered as non-
Philippine national[s].
Under Section 10, Article XII of the Constitution, Congress may reserve to
citizens of the Philippines or to corporations or associations at least sixty per
centum of whose capital is owned by such citizens, or such higher percentage as
Congress may prescribe, certain areas of investments. Thus, in numerous laws
Congress has reserved certain areas of investments to Filipino citizens or to
corporations at least sixty percent of the capital of which is owned by Filipino
citizens. Some of these laws are: (1) Regulation of Award of Government
Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No.
3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No.
6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5)
Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine
Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage
Decree or P.D. No. 1521. Hence, the term capital in Section 11, Article XII of the
Constitution is also used in the same context in numerous laws reserving
certain areas of investments to Filipino citizens.
To construe broadly the term capital as the total outstanding capital stock,
including both common and non-voting preferred shares, grossly contravenes the
intent and letter of the Constitution that the State shall develop a self-reliant and
independent national economy effectively controlled by Filipinos. A broad
definition unjustifiably disregards who owns the all-important voting stock,
which necessarily equates to control of the public utility.
We shall illustrate the glaring anomaly in giving a broad definition to the term
capital. Let us assume that a corporation has 100 common shares owned by
foreigners and 1,000,000 non-voting preferred shares owned by Filipinos, with
both classes of share having a par value of one peso (P1.00) per share. Under the
broad definition of the term capital, such corporation would be considered
compliant with the 40 percent constitutional limit on foreign equity of public
utilities since the overwhelming majority, or more than 99.999 percent, of the
total outstanding capital stock is Filipino owned. This is obviously absurd.
In the example given, only the foreigners holding the common shares have voting
rights in the election of directors, even if they hold only 100 shares. The
foreigners, with a minuscule equity of less than 0.001 percent, exercise control
over the public utility. On the other hand, the Filipinos, holding more than
99.999 percent of the equity, cannot vote in the election of directors and hence,
have no control over the public utility. This starkly circumvents the intent of the
framers of the Constitution, as well as the clear language of the Constitution, to
place the control of public utilities in the hands of Filipinos. It also renders
illusory the State policy of an independent national economy effectively
controlled by Filipinos.
The example given is not theoretical but can be found in the real world, and in
fact exists in the present case.
Holders of PLDT preferred shares are explicitly denied of the right to vote in the
election of directors. PLDTs Articles of Incorporation expressly state that the
holders of Serial Preferred Stock shall not be entitled to vote at any
meeting of the stockholders for the election of directors or for any
other purpose or otherwise participate in any action taken by the corporation
or its stockholders, or to receive notice of any meeting of stockholders.51
On the other hand, holders of common shares are granted the exclusive right to
vote in the election of directors. PLDTs Articles of Incorporation52 state that each
holder of Common Capital Stock shall have one vote in respect of each share of
such stock held by him on all matters voted upon by the stockholders, and the
holders of Common Capital Stock shall have the exclusive right to vote
for the election of directors and for all other purposes.53
In short, only holders of common shares can vote in the election of directors,
meaning only common shareholders exercise control over PLDT. Conversely,
holders of preferred shares, who have no voting rights in the election of directors,
do not have any control over PLDT. In fact, under PLDTs Articles of
Incorporation, holders of common shares have voting rights for all purposes,
while holders of preferred shares have no voting right for any purpose
whatsoever.
It must be stressed, and respondents do not dispute, that foreigners hold a
majority of the common shares of PLDT. In fact, based on PLDTs 2010 General
Information Sheet (GIS),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
PLDTs common shares, while Filipinos hold only 35.73%. Since holding a
majority of the common shares equates to control, it is clear that foreigners
exercise control over PLDT. Such amount of control unmistakably exceeds the
allowable 40 percent limit on foreign ownership of public utilities expressly
mandated in Section 11, Article XII of the Constitution.
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Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the
SEC, shows that per share the SIP58 preferred shares earn a pittance in dividends
compared to the common shares. PLDT declared dividends for the common
shares at P70.00 per share, while the declared dividends for the preferred shares
amounted to a measly P1.00 per share.59 So the preferred shares not only cannot
vote in the election of directors, they also have very little and obviously negligible
dividend earning capacity compared to common shares.
As shown in PLDTs 2010 GIS,60 as submitted to the SEC, the par value of PLDT
common shares is P5.00 per share, whereas the par value of preferred shares
is P10.00 per share. In other words, preferred shares have twice the par value of
common shares but cannot elect directors and have only 1/70 of the dividends of
common shares. Moreover, 99.44% of the preferred shares are owned by
Filipinos while foreigners own only a minuscule 0.56% of the preferred
shares.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
States grant of authority to operate a public utility. The undisputed fact that the
PLDT preferred shares, 99.44% owned by Filipinos, are non-voting and earn only
1/70 of the dividends that PLDT common shares earn, grossly violates the
constitutional requirement of 60 percent Filipino control and Filipino beneficial
ownership of a public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and
earn less than 60 percent of the dividends, of PLDT. This directly
contravenes the express command in Section 11, Article XII of the Constitution
that [n]o franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to x x x corporations
x x x organized under the laws of the Philippines, at least sixty per centum of
whose capital is owned by such citizens x x x.
To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class
of shares exercises the sole right to vote in the election of directors, and thus
exercise control over PLDT; (2) Filipinos own only 35.73% of PLDTs common
shares, constituting a minority of the voting stock, and thus do not exercise
control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no
voting rights; (4) preferred shares earn only 1/70 of the dividends that common
shares earn;63 (5) preferred shares have twice the par value of common shares;
and (6) preferred shares constitute 77.85% of the authorized capital stock of
PLDT and common shares only 22.15%. This kind of ownership and control of a
public utility is a mockery of the Constitution.
Incidentally, the fact that PLDT common shares with a par value of P5.00 have a
current stock market value of P2,328.00 per share,64 while PLDT preferred
shares with a par value of P10.00 per share have a current stock market value
ranging from only P10.92 to P11.06 per share,65 is a glaring confirmation by the
market that control and beneficial ownership of PLDT rest with the common
shares, not with the preferred shares.
Indisputably, construing the term capital in Section 11, Article XII of the
Constitution to include both voting and non-voting shares will result in the abject
surrender of our telecommunications industry to foreigners, amounting to a clear
abdication of the States constitutional duty to limit control of public utilities to
Filipino citizens. Such an interpretation certainly runs counter to the
constitutional provision reserving certain areas of investment to Filipino citizens,
such as the exploitation of natural resources as well as the ownership of land,
educational institutions and advertising businesses. The Court should never open
to foreign control what the Constitution has expressly reserved to Filipinos for
that would be a betrayal of the Constitution and of the national interest. The
Court must perform its solemn duty to defend and uphold the intent and letter of
the Constitution to ensure, in the words of the Constitution, a self-reliant and
independent national economy effectively controlled by Filipinos.
Section 11, Article XII of the Constitution, like other provisions of the
Constitution expressly reserving to Filipinos specific areas of investment, such as
the development of natural resources and ownership of land, educational
institutions and advertising business, is self-executing. There is no need for
legislation to implement these self-executing provisions of the Constitution. The
rationale why these constitutional provisions are self-executing was explained
in Manila Prince Hotel v. GSIS,66 thus:
x x x Hence, unless it is expressly provided that a legislative act is
necessary to enforce a constitutional mandate, the presumption now is
that all provisions of the constitution are self-executing. If the
constitutional provisions are treated as requiring legislation instead of
self-executing, the legislature would have the power to ignore and
practically nullify the mandate of the fundamental law. This can be
cataclysmic. That is why the prevailing view is, as it has always been,
that
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. . . in case of doubt, the Constitution should be considered self-
executing rather than non-self-executing. . . . Unless the contrary is
clearly intended, the provisions of the Constitution should be
considered self-executing, as a contrary rule would give the
legislature discretion to determine when, or whether, they
shall be effective. These provisions would be subordinated to the will
of the lawmaking body, which could make them entirely meaningless by
simply refusing to pass the needed implementing statute. (Emphasis
supplied)
In Manila Prince Hotel, even the Dissenting Opinion of then Associate
Justice Reynato S. Puno, later Chief Justice, agreed that constitutional provisions
are presumed to be self-executing. Justice Puno stated:
Courts as a rule consider the provisions of the Constitution as self-
executing, rather than as requiring future legislation for their
enforcement. The reason is not difficult to discern. For if they are not
treated as self-executing, the mandate of the fundamental law
ratified by the sovereign people can be easily ignored and
nullified by Congress. Suffused with wisdom of the ages is the
unyielding rule that legislative actions may give breath to
constitutional rights but congressional inaction should not
suffocate them.
Thus, we have treated as self-executing the provisions in the Bill of
Rights on arrests, searches and seizures, the rights of a person under
custodial investigation, the rights of an accused, and the privilege
against self-incrimination. It is recognized that legislation is
unnecessary to enable courts to effectuate constitutional provisions
guaranteeing the fundamental rights of life, liberty and the protection of
property. The same treatment is accorded to constitutional provisions
forbidding the taking or damaging of property for public use without
just compensation. (Emphasis supplied)
Thus, in numerous cases,67 this Court, even in the absence of implementing
legislation, applied directly the provisions of the 1935, 1973 and 1987
Constitutions limiting land ownership to Filipinos. In Soriano v. Ong Hoo,68 this
Court ruled:
x x x As the Constitution is silent as to the effects or consequences of a
sale by a citizen of his land to an alien, and as both the citizen and the
alien have violated the law, none of them should have a recourse against
the other, and it should only be the State that should be allowed to
intervene and determine what is to be done with the property subject of
the violation. We have said that what the State should do or could do in
such matters is a matter of public policy, entirely beyond the scope of
judicial authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R.
No. L-5996, June 27, 1956.) While the legislature has not
definitely decided what policy should be followed in cases of
violations against the constitutional prohibition, courts of
justice cannot go beyond by declaring the disposition to be
null and void as violative of the Constitution. x x x (Emphasis
supplied)
To treat Section 11, Article XII of the Constitution as not self-executing would
mean that since the 1935 Constitution, or over the last 75 years, not one of the
constitutional provisions expressly reserving specific areas of investments to
corporations, at least 60 percent of the capital of which is owned by Filipinos, was
enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions
miserably failed to effectively reserve to Filipinos specific areas of investment,
like the operation by corporations of public utilities, the exploitation by
corporations of mineral resources, the ownership by corporations of real estate,
and the ownership of educational institutions. All the legislatures that convened
since 1935 also miserably failed to enact legislations to implement these vital
constitutional provisions that determine who will effectively control the national
economy, Filipinos or foreigners. This Court cannot allow such an absurd
interpretation of the Constitution.
This Court has held that the SEC has both regulatory and adjudicative
functions.69 Under its regulatory functions, the SEC can be compelled by
mandamus to perform its statutory duty when it unlawfully neglects to perform
the same. Under its adjudicative or quasi-judicial functions, the SEC can be also
be compelled by mandamus to hear and decide a possible violation of any law it
administers or enforces when it is mandated by law to investigate such violation.
Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory
function to reject or disapprove the Articles of Incorporation of any corporation
where the required percentage of ownership of the capital stock to be
owned by citizens of the Philippines has not been complied with as
required by existing laws or the Constitution. Thus, the SEC is the
government agency tasked with the statutory duty to enforce the nationality
requirement prescribed in Section 11, Article XII of the Constitution on the
ownership of public utilities. This Court, in a petition for declaratory relief that is
treated as a petition for mandamus as in the present case, can direct the SEC to
perform its statutory duty under the law, a duty that the SEC has apparently
unlawfully neglected to do based on the 2010 GIS that respondent PLDT
submitted to the SEC.
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Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with
the power and function to suspend or revoke, after proper notice and
hearing, the franchise or certificate of registration of corporations,
partnerships or associations, upon any of the grounds provided by
law. The SEC is mandated under Section 5(d) of the same Code with the power
and function to investigate x x x the activities of persons to ensure
compliance with the laws and regulations that SEC administers or enforces.
The GIS that all corporations are required to submit to SEC annually should put
the SEC on guard against violations of the nationality requirement prescribed in
the Constitution and existing laws. This Court can compel the SEC, in a petition
for declaratory relief that is treated as a petition for mandamus as in the present
case, to hear and decide a possible violation of Section 11, Article XII of the
Constitution in view of the ownership structure of PLDTs voting shares, as
admitted by respondents and as stated in PLDTs 2010 GIS that PLDT submitted
to SEC.

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

SO ORDERED.

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Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 176579 October 9, 2012
HEIRS OF WILSON P. GAMBOA,* Petitioners,
vs.
FINANCE SECRETARYMARGARITO B. TEVES, FINANCE
UNDERSECRETARYJOHN 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
AND EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF
THE PHILIPPINE STOCK EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-
Intervention.
RESOLUTION
CARPIO, J.:
This resolves the motions for reconsideration of the 28 June 2011 Decision filed
by (1) the Philippine Stock Exchange's (PSE) President, 1 (2) Manuel V.
Pangilinan (Pangilinan),2 (3) Napoleon L. Nazareno (Nazareno ),3 and ( 4) the
Securities and Exchange Commission (SEC)4 (collectively, movants ).
The Office of the Solicitor General (OSG) initially filed a motion for
reconsideration on behalfofthe SEC,5 assailing the 28 June 2011 Decision.
However, it subsequently filed a Consolidated Comment on behalf of the
State,6declaring expressly that it agrees with the Court's definition of the term
"capital" in Section 11, Article XII of the Constitution. During the Oral Arguments
on 26 June 2012, the OSG reiterated its position consistent with the Court's 28
June 2011 Decision.
We deny the motions for reconsideration.
I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.
As we emphatically stated in the 28 June 2011 Decision, 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 Philippine 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 threshold legal issue presented in this
case.
Contrary to Pangilinan’s narrow view, the serious economic consequences
resulting in the interpretation of the term "capital" in Section 11, Article XII of the
Constitution undoubtedly demand an immediate adjudication of this
issue. Simply put, the far-reaching implications of this issue justify the
treatment of the petition as one for mandamus.7
In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise
and expedient to resolve the case although the petition for declaratory relief could
be outrightly dismissed for being procedurally defective. There, appellant
admittedly had already committed a breach of the Public Service Act in relation
to the Anti-Dummy Law since it had been employing non- American aliens long
before the decision in a prior similar case. However, the main issue in Luzon
Stevedoring was of transcendental importance, involving the exercise or
enjoyment of rights, franchises, privileges, properties and businesses which only
Filipinos and qualified corporations could exercise or enjoy under the
Constitution and the statutes. Moreover, the same issue could be raised by
appellant in an appropriate action. Thus, in Luzon Stevedoring the Court deemed
it necessary to finally dispose of the case for the guidance of all concerned,
despite the apparent procedural flaw in the petition.
The circumstances surrounding the present case, such as the supposed
procedural defect of the petition and the pivotal legal issue involved, resemble
those in Luzon Stevedoring. Consequently, in the interest of substantial justice
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and faithful adherence to the Constitution, we opted to resolve this case for the
guidance of the public and all concerned parties.
II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."
Movants contend that the term "capital" in Section 11, Article XII of the
Constitution has long been settled and defined to refer to the total outstanding
shares of stock, whether voting or non-voting. In fact, movants claim that the
SEC, which is the administrative agency tasked to enforce the 60-40 ownership
requirement in favor of Filipino citizens in the Constitution and various statutes,
has consistently adopted this particular definition in its numerous opinions.
Movants point out that with the 28 June 2011 Decision, the Court in effect
introduced a "new" definition or "midstream redefinition"9 of the term "capital"
in Section 11, Article XII of the Constitution.
This is egregious error.
For more than 75 years since the 1935 Constitution, the Court
has not interpreted or defined the term "capital" found in various economic
provisions of the 1935, 1973 and 1987 Constitutions. There has never been a
judicial precedent interpreting the term "capital" in the 1935, 1973 and 1987
Constitutions, until now. Hence, it is patently wrong and utterly baseless to claim
that the Court in defining the term "capital" in its 28 June 2011 Decision
modified, reversed, or set aside the purported long-standing definition of the
term "capital," which supposedly refers to the total outstanding shares of stock,
whether voting or non-voting. To repeat, until the present case there has never
been a Court ruling categorically defining the term "capital" found in the various
economic provisions of the 1935, 1973 and 1987 Philippine Constitutions.
The opinions of the SEC, as well as of the Department of Justice (DOJ), on the
definition of the term "capital" as referring to both voting and non-voting shares
(combined total of common and preferred shares) are, in the first place,
conflicting and inconsistent. There is no basis whatsoever to the claim that the
SEC and the DOJ have consistently and uniformly adopted a definition of the
term "capital" contrary to the definition that this Court adopted in its 28 June
2011 Decision.
In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term
"capital" in Section 9, Article XIV of the 1973 Constitution was raised, that is,
whether the term "capital" includes "both preferred and common stocks." The
issue was raised in relation to a stock-swap transaction between a Filipino and a
Japanese corporation, both stockholders of a domestic corporation that owned
lands in the Philippines. Then Minister of Justice Estelito P. Mendoza ruled that
the resulting ownership structure of the corporation would
be unconstitutional because 60% of the voting stock would be owned by
Japanese while Filipinos would own only 40% of the voting stock, although when
the non-voting stock is added, Filipinos would own 60% of the combined voting
and non-voting stock. This ownership structure is remarkably similar to
the current ownership structure of PLDT. Minister Mendoza ruled:
xxxx
Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital
stock (common and preferred) while the Japanese investors control sixty percent
(60%) of the common (voting) shares.
It is your position that x x x since Section 9, Article XIV of the
Constitution uses the word "capital," which is construed "to include
both preferred and common shares" and "that where the law does not
distinguish, the courts shall not distinguish."
xxxx
In light of the foregoing jurisprudence, it is my opinion that the stock-swap
transaction in question may not be constitutionally upheld. While it
may be ordinary corporate practice to classify corporate shares into common
voting shares and preferred non-voting shares, any arrangement which attempts
to defeat the constitutional purpose should be eschewed. Thus, the resultant
equity arrangement which would place ownership of 60%11 of the
common (voting) shares in the Japanese group, while retaining 60%
of the total percentage of common and preferred shares in Filipino
hands would amount to circumvention of the principle of control by
Philippine stockholders that is implicit in the 60% Philippine
nationality requirement in the Constitution. (Emphasis supplied)
In short, Minister Mendoza categorically rejected the theory that the term
"capital" in Section 9, Article XIV of the 1973 Constitution includes "both
preferred and common stocks" treated as the same class of shares regardless of
differences in voting rights and privileges. Minister Mendoza stressed that the
60-40 ownership requirement in favor of Filipino citizens in the Constitution is
not complied with unless the corporation "satisfies the criterion of
beneficial ownership" and that in applying the same "the primordial
consideration is situs of control."
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On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to
Castillo Laman Tan Pantaleon & San Jose, then SEC General Counsel Vernette G.
Umali-Paco applied the Voting Control Test, that is, using only the voting
stock to determine whether a corporation is a Philippine national. The Opinion
states:
Applying the foregoing, particularly the Control Test, MLRC is deemed as a
Philippine national because: (1) sixty percent (60%) of its outstanding capital
stock entitled to vote is owned by a Philippine national, the Trustee; and (2) at
least sixty percent (60%) of the ERF will accrue to the benefit of Philippine
nationals. Still pursuant to the Control Test, MLRC’s investment in 60%
of BFDC’s outstanding capital stock entitled to vote shall be deemed
as of Philippine nationality, thereby qualifying BFDC to own private
land.
Further, under, and for purposes of, the FIA, MLRC and BFDC are both
Philippine nationals, considering that: (1) sixty percent (60%) of their
respective outstanding capital stock entitled to vote is owned by a
Philippine national (i.e., by the Trustee, in the case of MLRC; and by MLRC, in
the case of BFDC); and (2) at least 60% of their respective board of directors are
Filipino citizens. (Boldfacing and italicization supplied)
Clearly, these DOJ and SEC opinions are compatible with the Court’s
interpretation of the 60-40 ownership requirement in favor of Filipino citizens
mandated by the Constitution for certain economic activities. At the same time,
these opinions highlight the conflicting, contradictory, and inconsistent positions
taken by the DOJ and the SEC on the definition of the term "capital" found in the
economic provisions of the Constitution.
The opinions issued by SEC legal officers do not have the force and effect of SEC
rules and regulations because only the SEC en banc can adopt rules and
regulations. As expressly provided in Section 4.6 of the Securities Regulation
Code,12 the SEC cannot delegate to any of its individual Commissioner or staff the
power to adopt any rule or regulation. Further, under Section 5.1 of the same
Code, it is the SEC as a collegial body, and not any of its legal officers,
that is empowered to issue opinions and approve rules and
regulations. Thus:
4.6. The Commission may, for purposes of efficiency, delegate any of its functions
to any department or office of the Commission, an individual Commissioner or
staff member of the Commission except its review or appellate authority and its
power to adopt, alter and supplement any rule or regulation.
The Commission may review upon its own initiative or upon the petition of any
interested party any action of any department or office, individual Commissioner,
or staff member of the Commission.
SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act
with transparency and shall have the powers and functions provided by this Code,
Presidential Decree No. 902-A, the Corporation Code, the Investment Houses
Law, the Financing Company Act and other existing laws. Pursuant thereto the
Commission shall have, among others, the following powers and functions:
xxxx
(g) Prepare, approve, amend or repeal rules, regulations and orders,
and issue opinions and provide guidance on and supervise
compliance with such rules, regulations and orders;
x x x x (Emphasis supplied)
Thus, the act of the individual Commissioners or legal officers of the SEC in
issuing opinions that have the effect of SEC rules or regulations is ultra vires.
Under Sections 4.6 and 5.1(g) of the Code, only the SEC en banc can "issue
opinions" that have the force and effect of rules or regulations. Section 4.6 of the
Code bars the SEC en banc from delegating to any individual Commissioner or
staff the power to adopt rules or regulations. In short, any opinion of
individual Commissioners or SEC legal officers does not constitute a
rule or regulation of the SEC.
The SEC admits during the Oral Arguments that only the SEC en banc, and not
any of its individual commissioners or legal staff, is empowered to issue opinions
which have the same binding effect as SEC rules and regulations, thus:
JUSTICE CARPIO:
So, under the law, it is the Commission En Banc that can issue
an
SEC Opinion, correct?
COMMISSIONER GAITE:13
That’s correct, Your Honor.
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JUSTICE CARPIO: JUSTICE CARPIO:

Can the Commission En Banc delegate this function to an SEC So, all of these opinions that you mentioned they are
officer? not rules and regulations, correct?

COMMISSIONER GAITE: COMMISSIONER GAITE:

Yes, Your Honor, we have delegated it to the General Counsel. They are not rules and regulations.

JUSTICE CARPIO: JUSTICE CARPIO:

It can be delegated. What cannot be delegated by the If they are not rules and regulations, they apply only to that
Commission En Banc to a commissioner or an individual particular situation and will not constitute a precedent,
employee of the Commission? correct?

COMMISSIONER GAITE: COMMISSIONER GAITE:

Novel opinions that [have] to be decided by the En Banc... Yes, Your Honor.14 (Emphasis supplied)

JUSTICE CARPIO: Significantly, the SEC en banc, which is the collegial body statutorily empowered
to issue rules and opinions on behalf of the SEC, has adopted even the
What cannot be delegated, among others, is the power to adopt Grandfather Rule in determining compliance with the 60-40 ownership
or amend rules and regulations, correct? 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
COMMISSIONER GAITE: control," is laid down in the 25 March 2010 SEC en banc ruling in Redmont
Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 to wit:
That’s correct, Your Honor.
The avowed purpose of the Constitution is to place in the hands of Filipinos the
JUSTICE CARPIO: 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
So, you combine the two (2), the SEC officer, if
the constitutional provision, as interpreted and practiced via the 1967 SEC Rules,
delegated that power, can issue an opinion but that
has favored foreigners contrary to the command of the Constitution. Hence, the
opinion does not constitute a rule or regulation,
Grandfather Rule must be applied to accurately determine the actual
correct?
participation, both direct and indirect, of foreigners in a corporation
engaged in a nationalized activity or business.
COMMISSIONER GAITE:
Compliance with the constitutional limitation(s) on engaging in nationalized
Correct, Your Honor. activities must be determined by ascertaining if 60% of the investing
corporation’s outstanding capital stock is owned by "Filipino citizens", or as
interpreted, by natural or individual Filipino citizens. If such investing

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corporation is in turn owned to some extent by another investing corporation, the
same process must be observed. One must not stop until the citizenships of the
individual or natural stockholders of layer after layer of investing corporations
have been established, the very essence of the Grandfather Rule.
Lastly, it was the intent of the framers of the 1987 Constitution to
adopt the Grandfather Rule. In one of the discussions on what is now Article
XII of the present Constitution, the framers made the following exchange:
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 a draft. The phrase that is
contained here which we adopted from the UP draft is ‘60 percent of voting
stock.’
MR. NOLLEDO. That must be based on the subscribed capital stock, because
unless declared delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you. With respect to an investment by one corporation in
another corporation, say, a corporation with 60-40 percent equity invests in
another corporation which is permitted by the Corporation Code, does the
Committee adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the
original)
This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40
ownership requirement in favor of Filipino citizens in the Constitution to engage
in certain economic activities applies not only to voting control of the
corporation, but also to the beneficial ownership of the corporation.
Thus, in our 28 June 2011 Decision we stated:
Mere legal title is insufficient to meet the 60 percent Filipinoowned "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]." (Emphasis supplied)
Both the Voting Control Test and the Beneficial Ownership Test must be applied
to determine whether a corporation is a "Philippine national."
The interpretation by legal officers of the SEC of the term "capital," embodied in
various opinions which respondents relied upon, is merely preliminary and an
opinion only of such officers. To repeat, any such opinion does not constitute an
SEC rule or regulation. In fact, many of these opinions contain a disclaimer which
expressly states: "x x x the foregoing opinion is based solely on facts disclosed
in your query and relevant only to the particular issue raised therein and shall
not be used in the nature of a standing rule binding upon the
Commission in other cases whether of similar or dissimilar
circumstances."16 Thus, the opinions clearly make a caveat that they do not
constitute binding precedents on any one, not even on the SEC itself.
Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the
law are neither conclusive nor controlling and thus, do not bind the Court. It is
hornbook doctrine that any interpretation of the law that administrative or quasi-
judicial agencies make is only preliminary, never conclusive on the Court. The
power to make a final interpretation of the law, in this case the term "capital" in
Section 11, Article XII of the 1987 Constitution, lies with this Court, not with any
other government entity.
In his motion for reconsideration, the PSE President cites the cases of National
Telecommunications Commission v. Court of Appeals17 and Philippine Long
Distance Telephone Company v. National Telecommunications Commission18 in
arguing that the Court has already defined the term "capital" in Section 11, Article
XII of the 1987 Constitution.19
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The PSE President is grossly mistaken. In both cases of National
Telecommunications v. Court of Appeals20 and Philippine Long Distance
Telephone Company v. National Telecommunications Commission,21 the Court
did not define the term "capital" as found in Section 11, Article XII of the 1987
Constitution. In fact, these two cases never mentioned, discussed or
cited Section 11, Article XII of the Constitution or any of its economic
provisions, and thus cannot serve as precedent in the interpretation
of Section 11, Article XII of the Constitution. These two cases dealt solely
with the determination of the correct regulatory fees under Section 40(e) and (f)
of the Public Service Act, to wit:
(e) For annual reimbursement of the expenses incurred by the Commission in the
supervision of other public services and/or in the regulation or fixing of their
rates, twenty centavos for each one hundred pesos or fraction thereof, of
the capital stock subscribed or paid, or if no shares have been issued, of the
capital invested, or of the property and equipment whichever is higher.
(f) For the issue or increase of capital stock, twenty centavos for each one
hundred pesos or fraction thereof, of the increased capital. (Emphasis supplied)
The Court’s interpretation in these two cases of the terms "capital stock
subscribed or paid," "capital stock" and "capital" does not pertain to, and cannot
control, the definition of the term "capital" as used in Section 11, Article XII of the
Constitution, or any of the economic provisions of the Constitution where the
term "capital" is found. The definition of the term "capital" found in the
Constitution must not be taken out of context. A careful reading of these two
cases reveals that the terms "capital stock subscribed or paid," "capital stock" and
"capital" were defined solely to determine the basis for computing the supervision
and regulation fees under Section 40(e) and (f) of the Public Service Act.
III.
Filipinization of Public Utilities
The Preamble of the 1987 Constitution, as the prologue of the supreme law of the
land, embodies the ideals that the Constitution intends to achieve.22 The
Preamble reads:
We, the sovereign Filipino people, imploring the aid of Almighty God, in order to
build a just and humane society, and establish a Government that shall embody
our ideals and aspirations, promote the common good, conserve and develop
our patrimony, and secure to ourselves and our posterity, the blessings of
independence and democracy under the rule of law and a regime of truth, justice,
freedom, love, equality, and peace, do ordain and promulgate this Constitution.
(Emphasis supplied)
Consistent with these ideals, Section 19, Article II of the 1987 Constitution
declares as State policy the development of a national economy "effectively
controlled" by Filipinos:
Section 19. The State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos.
Fortifying the State policy of a Filipino-controlled economy, the Constitution
decrees:
Section 10. The Congress shall, upon recommendation of the economic and
planning agency, when the national interest dictates, 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. The Congress shall enact measures that
will encourage the formation and operation of enterprises whose capital is wholly
owned by Filipinos.
In the grant of rights, privileges, and concessions covering the national economy
and patrimony, the State shall give preference to qualified Filipinos.
The State shall regulate and exercise authority over foreign investments within its
national jurisdiction and in accordance with its national goals and priorities.23
Under Section 10, Article XII of the 1987 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.
With respect to public utilities, the 1987 Constitution specifically ordains:
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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)
This provision, which mandates the Filipinization of public utilities, requires that
any form of authorization for the operation of public utilities shall 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."24
The 1987 Constitution reserves the ownership and operation of public utilities
exclusively to (1) Filipino citizens, or (2) corporations or associations at least 60
percent of whose "capital" is owned by Filipino citizens. Hence, in the case of
individuals, only Filipino citizens can validly own and operate a public utility. In
the case of corporations or associations, at least 60 percent of their "capital" must
be owned by Filipino citizens. In other words, under Section 11, Article XII
of the 1987 Constitution, to own and operate a public utility a
corporation’s capital must at least be 60 percent owned by Philippine
nationals.
IV.
Definition of "Philippine National"
Pursuant to the express mandate of Section 11, Article XII of the 1987
Constitution, Congress enacted Republic Act No. 7042 or the Foreign
Investments Act of 1991 (FIA), as amended, which defined a "Philippine
national" as follows:
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." (Boldfacing, italicization and underscoring supplied)
Thus, the FIA clearly and unequivocally defines a "Philippine national" as a
Philippine citizen, or a domestic corporation at least "60% of the capital stock
outstanding and entitled to vote" is owned by Philippine citizens.
The definition of a "Philippine national" in the FIA reiterated the meaning of such
term as provided in its predecessor statute, Executive Order No. 226 or
the Omnibus Investments Code of 1987,25 which was issued by then President
Corazon C. Aquino. Article 15 of this Code states:
Article 15. "Philippine national" shall mean a citizen of the Philippines or a
diplomatic 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 per cent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty
per cent (60%) of the fund will accrue to the benefit of Philippine nationals:
Provided, That where a corporation and its non-Filipino stockholders own stock
in a registered enterprise, at least sixty per cent (60%) of the capital stock
outstanding and entitled to vote of both corporations must be owned and held by
the citizens of the Philippines and at least sixty per cent (60%) of the members of
the Board of Directors of both corporations must be citizens of the Philippines in
order that the corporation shall be considered a Philippine national. (Boldfacing,
italicization and underscoring supplied)
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Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation
x x x which is not a ‘Philippine national’ x x x shall do business
x x x in the Philippines x x x without first securing from the Board of Investments
a written certificate to the effect that such business or economic activity x x x
would not conflict with the Constitution or laws of the Philippines."27 Thus, a
"non-Philippine national" cannot own and operate a reserved economic activity
like a public utility. This means, of course, that only a "Philippine national" can
own and operate a public utility.
In turn, the definition of a "Philippine national" under Article 15 of the Omnibus
Investments Code of 1987 was a reiteration of the meaning of such term as
provided in Article 14 of the Omnibus Investments Code of 1981,28 to wit:
Article 14. "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 per cent (60%) of the capital stock outstanding and
entitled to vote is owned and held by citizens of the Philippines; or a
trustee of funds for pension or other employee retirement or separation benefits,
where the trustee is a Philippine national and at least sixty per cent (60%) of the
fund will accrue to the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stock in a registered
enterprise, at least sixty per cent (60%) of the capital stock outstanding and
entitled to vote of both corporations must be owned and held by the citizens of
the Philippines and at least sixty per cent (60%) of the members of the Board of
Directors of both corporations must be citizens of the Philippines in order that
the corporation shall be considered a Philippine national. (Boldfacing,
italicization and underscoring supplied)
Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x
x x which is not a ‘Philippine national’ x x x shall do business x x x in the
Philippines x x x without first securing a written certificate from the Board of
Investments to the effect that such business or economic activity x x x
would not conflict with the Constitution or laws of the Philippines."29 Thus, a
"non-Philippine national" cannot own and operate a reserved economic activity
like a public utility. Again, this means that only a "Philippine national" can own
and operate a public utility.
Prior to the Omnibus Investments Code of 1981, Republic Act No. 518630 or
the Investment Incentives Act, which took effect on 16 September 1967,
contained a similar definition of a "Philippine national," to wit:
(f) "Philippine National" shall mean a citizen of the Philippines; or a 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 per
cent of the capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine
National and at least sixty per cent of the fund will accrue to the benefit of
Philippine Nationals: Provided, That where a corporation and its non-Filipino
stockholders own stock in a registered enterprise, at least sixty per cent of the
capital stock outstanding and entitled to vote of both corporations must be owned
and held by the citizens of the Philippines and at least sixty per cent of the
members of the Board of Directors of both corporations must be citizens of the
Philippines in order that the corporation shall be considered a Philippine
National. (Boldfacing, italicization and underscoring supplied)
Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations
Act, which took effect on 30 September 1968, if the investment in a domestic
enterprise by non-Philippine nationals exceeds 30% of its outstanding capital
stock, such enterprise must obtain prior approval from the Board of Investments
before accepting such investment. Such approval shall not be granted if the
investment "would conflict with existing constitutional provisions and laws
regulating the degree of required ownership by Philippine nationals in the
enterprise."31 A "non-Philippine national" cannot own and operate a reserved
economic activity like a public utility. Again, this means that only a "Philippine
national" can own and operate a public utility.
The FIA, like all its predecessor statutes, clearly defines a "Philippine
national" as a Filipino citizen, or a domestic corporation "at least sixty
percent (60%) of the capital stock outstanding and entitled to vote" is
owned by Filipino citizens. A domestic corporation is a "Philippine national" only
if at least 60% of its voting stock is owned by Filipino citizens. This definition
of a "Philippine national" is crucial in the present case because the FIA reiterates
and clarifies Section 11, Article XII of the 1987 Constitution, which limits the
ownership and operation of public utilities to Filipino citizens or to corporations
or associations at least 60% Filipino-owned.
The FIA is the basic law governing foreign investments in the Philippines,
irrespective of the nature of business and area of investment. The FIA spells out
the procedures by which non-Philippine nationals can invest in the Philippines.
Among the key features of this law is the concept of a negative list or the Foreign
Investments Negative List.32 Section 8 of the law states:
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SEC. 8. List of Investment Areas Reserved to Philippine
Nationals [Foreign Investment Negative List]. - The Foreign Investment
Negative List shall have two 2 component lists: A and B:
a. List A shall enumerate the areas of activities reserved to Philippine
nationals by mandate of the Constitution and specific laws.
b. List B shall contain the areas of activities and enterprises regulated pursuant to
law:
1. which are defense-related activities, requiring prior clearance and
authorization from the Department of National Defense [DND] to engage in such
activity, such as the manufacture, repair, storage and/or distribution of firearms,
ammunition, lethal weapons, military ordinance, explosives, pyrotechnics and
similar materials; unless such manufacturing or repair activity is specifically
authorized, with a substantial export component, to a non-Philippine national by
the Secretary of National Defense; or
2. which have implications on public health and morals, such as the manufacture
and distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beer
houses, dance halls, sauna and steam bathhouses and massage clinics.
(Boldfacing, underscoring and italicization supplied)
Section 8 of the FIA enumerates the investment areas "reserved to Philippine
nationals." Foreign Investment Negative List A consists of "areas of
activities reserved to Philippine nationals by mandate of the
Constitution and specific laws," where foreign equity participation in
any enterprise shall be limited to the maximum percentage expressly
prescribed by the Constitution and other specific laws. In short, to
own and operate a public utility in the Philippines one must be a
"Philippine national" as defined in the FIA. The FIA is abundant
notice to foreign investors to what extent they can invest in public
utilities in the Philippines.
To repeat, among the areas of investment covered by the Foreign Investment
Negative List A is the ownership and operation of public utilities, which the
Constitution expressly reserves to Filipino citizens and to corporations at least
60% owned by Filipino citizens. In other words, Negative List A of the FIA
reserves the ownership and operation of public utilities only to
"Philippine nationals," defined in Section 3(a) of the FIA as "(1) a
citizen of the Philippines; x x x or (3) 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 (4) 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."
Clearly, from the effectivity of the Investment Incentives Act of 1967 to the
adoption of the Omnibus Investments Code of 1981, to the enactment of the
Omnibus Investments Code of 1987, and to the passage of the present Foreign
Investments Act of 1991, or for more than four decades, the statutory
definition of the term "Philippine national" has been uniform and
consistent: it means a Filipino citizen, or a domestic corporation at
least 60% of the voting stock is owned by Filipinos. Likewise, these
same statutes have uniformly and consistently required that only
"Philippine nationals" could own and operate public utilities in the
Philippines. The following exchange during the Oral Arguments is revealing:
JUSTICE CARPIO:
Counsel, I have some questions. You are aware of the Foreign
Investments Act of 1991, x x x? And the FIA of 1991 took effect
in 1991, correct? That’s over twenty (20) years ago, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And Section 8 of the Foreign Investments Act of 1991 states
that []only Philippine nationals can own and operate public
utilities[], correct?
COMMISSIONER GAITE:
Yes, Your Honor.
JUSTICE CARPIO:
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And the same Foreign Investments Act of 1991 defines a
"Philippine national" either as a citizen of the Philippines, or if
it is a corporation at least sixty percent (60%) of the voting
stock is owned by citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And, you are also aware that under the predecessor law of the
Foreign Investments Act of 1991, the Omnibus Investments Act
of 1987, the same provisions apply: x x x only Philippine
nationals can own and operate a public utility and the
Philippine national, if it is a corporation, x x x sixty percent
(60%) of the capital stock of that corporation must be owned by
citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And even prior to the Omnibus Investments Act of 1987, under
the Omnibus Investments Act of 1981, the same rules apply: x x
x only a Philippine national can own and operate a public
utility and a Philippine national, if it is a corporation, sixty
percent (60%) of its x x x voting stock, must be owned by
citizens of the Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
And even prior to that, under [the]1967 Investments Incentives
Act and the Foreign Company Act of 1968, the same rules
applied, correct?
COMMISSIONER GAITE:
Correct, Your Honor.
JUSTICE CARPIO:
So, for the last four (4) decades, x x x, the law has been
very consistent – only a Philippine national can own
and operate a public utility, and a Philippine national,
if it is a corporation, x x x at least sixty percent (60%)
of the voting stock must be owned by citizens of the
Philippines, correct?
COMMISSIONER GAITE:
Correct, Your Honor.33 (Emphasis supplied)
Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of
the FIA which categorically prescribe that certain economic activities, like the
ownership and operation of public utilities, are reserved to corporations "at least
sixty percent (60%) of the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines." Foreign Investment Negative List
A refers to "activities reserved to Philippine nationals by mandate of the
Constitution and specific laws." The FIA is the basic statute regulating
foreign investments in the Philippines. Government agencies tasked with
regulating or monitoring foreign investments, as well as counsels of foreign
investors, should start with the FIA in determining to what extent a particular
foreign investment is allowed in the Philippines. Foreign investors and their
counsels who ignore the FIA do so at their own peril. Foreign investors and their
counsels who rely on opinions of SEC legal officers that obviously contradict the
FIA do so also at their own peril.
Occasional opinions of SEC legal officers that obviously contradict the FIA should
immediately raise a red flag. There are already numerous opinions of SEC legal
officers that cite the definition of a "Philippine national" in Section 3(a) of the
FIA in determining whether a particular corporation is qualified to own and
operate a nationalized or partially nationalized business in the Philippines. This
shows that SEC legal officers are not only aware of, but also rely on and invoke,
the provisions of the FIA in ascertaining the eligibility of a corporation to engage
in partially nationalized industries. The following are some of such opinions:
1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;
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2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of
the Philippine Overseas Employment Administration;
3. Opinion of 23 November 1993, addressed to Messrs. Dominador
Almeda and Renato S. Calma;
4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan
Migallos & Jardeleza;
5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura
Sayoc & De Los Angeles;
6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David;
and
7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi
and Rudyard S. Arbolado.
The SEC legal officers’ occasional but blatant disregard of the definition of the
term "Philippine national" in the FIA signifies their lack of integrity and
competence in resolving issues on the 60-40 ownership requirement in favor of
Filipino citizens in Section 11, Article XII of the Constitution.
The PSE President argues that the term "Philippine national" defined in the FIA
should be limited and interpreted to refer to corporations seeking to avail of tax
and fiscal incentives under investment incentives laws and cannot be equated
with the term "capital" in Section 11, Article XII of the 1987 Constitution.
Pangilinan similarly contends that the FIA and its predecessor statutes do not
apply to "companies which have not registered and obtained special incentives
under the schemes established by those laws."
Both are desperately grasping at straws. The FIA does not grant tax or fiscal
incentives to any enterprise. Tax and fiscal incentives to investments are granted
separately under the Omnibus Investments Code of 1987, not under the FIA. In
fact, the FIA expressly repealed Articles 44 to 56 of Book II of the Omnibus
Investments Code of 1987, which articles previously regulated foreign
investments in nationalized or partially nationalized industries.
The FIA is the applicable law regulating foreign investments in nationalized or
partially nationalized industries. There is nothing in the FIA, or even in the
Omnibus Investments Code of 1987 or its predecessor statutes, that states,
expressly or impliedly, that the FIA or its predecessor statutes do not apply to
enterprises not availing of tax and fiscal incentives under the Code. The FIA and
its predecessor statutes apply to investments in all domestic enterprises, whether
or not such enterprises enjoy tax and fiscal incentives under the Omnibus
Investments Code of 1987 or its predecessor statutes. The reason is quite
obvious – mere non-availment of tax and fiscal incentives by a non-
Philippine national cannot exempt it from Section 11, Article XII of
the Constitution regulating foreign investments in public utilities. In
fact, the Board of Investments’ Primer on Investment Policies in the
Philippines,34 which is given out to foreign investors, provides:
PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES
Investors who do not seek incentives and/or whose chosen activities do not
qualify for incentives, (i.e., the activity is not listed in the IPP, and they are not
exporting at least 70% of their production) may go ahead and make the
investments without seeking incentives. They only have to be guided by the
Foreign Investments Negative List (FINL).
The FINL clearly defines investment areas requiring at least 60% Filipino
ownership. All other areas outside of this list are fully open to foreign investors.
(Emphasis supplied)
V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.
The 28 June 2011 Decision declares that the 60 percent Filipino ownership
required by the Constitution to engage in certain economic activities applies not
only to voting control of the corporation, but also to the beneficial
ownership of the corporation. To repeat, we held:
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]." (Emphasis supplied)
This is consistent with Section 3 of the FIA which provides that where 100% of
the capital stock is held by "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."
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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."
Since the constitutional requirement of at least 60 percent Filipino ownership
applies not only to voting control of the corporation but also to the beneficial
ownership of the corporation, it is therefore imperative that such requirement
apply uniformly and across the board to all classes of shares, regardless of
nomenclature and category, comprising the capital of a corporation. Under the
Corporation Code, capital stock35 consists of all classes of shares issued to
stockholders, that is, common shares as well as preferred shares, which may have
different rights, privileges or restrictions as stated in the articles of
incorporation.36
The Corporation Code allows denial of the right to vote to preferred and
redeemable shares, but disallows denial of the right to vote in specific corporate
matters. Thus, common shares have the right to vote in the election of directors,
while preferred shares may be denied such right. Nonetheless, preferred shares,
even if denied the right to vote in the election of directors, are entitled to vote on
the following corporate matters: (1) amendment of articles of incorporation; (2)
increase and decrease of capital stock; (3) incurring, creating or increasing
bonded indebtedness; (4) sale, lease, mortgage or other disposition of
substantially all corporate assets; (5) investment of funds in another business or
corporation or for a purpose other than the primary purpose for which the
corporation was organized; (6) adoption, amendment and repeal of by-laws; (7)
merger and consolidation; and (8) dissolution of corporation.37
Since a specific class of shares may have rights and privileges or restrictions
different from the rest of the shares in a corporation, the 60-40 ownership
requirement in favor of Filipino citizens in Section 11, Article XII of the
Constitution must apply not only to shares with voting rights but also to shares
without voting rights. Preferred shares, denied the right to vote in the election of
directors, are anyway still entitled to vote on the eight specific corporate matters
mentioned above. Thus, if a corporation, engaged in a partially
nationalized industry, issues a mixture of common and preferred
non-voting shares, at least 60 percent of the common shares and at
least 60 percent of the preferred non-voting shares must be owned by
Filipinos. Of course, if a corporation issues only a single class of shares, at least
60 percent of such shares must necessarily be owned by Filipinos. In short, the
60-40 ownership requirement in favor of Filipino citizens must apply
separately to each class of shares, whether common, preferred non-
voting, preferred voting or any other class of shares. This uniform
application of the 60-40 ownership requirement in favor of Filipino citizens
clearly breathes life to the constitutional command that the ownership and
operation of public utilities shall be reserved exclusively to corporations at least
60 percent of whose capital is Filipino-owned. Applying uniformly the 60-40
ownership requirement in favor of Filipino citizens to each class of shares,
regardless of differences in voting rights, privileges and restrictions, guarantees
effective Filipino control of public utilities, as mandated by the Constitution.
Moreover, such uniform application to each class of shares insures that the
"controlling interest" in public utilities always lies in the hands of Filipino
citizens. This addresses and extinguishes Pangilinan’s worry that foreigners,
owning most of the non-voting shares, will exercise greater control over
fundamental corporate matters requiring two-thirds or majority vote of all
shareholders.
VI.
Intent of the framers of the Constitution
While Justice Velasco quoted in his Dissenting Opinion38 a portion of the
deliberations of the Constitutional Commission to support his claim that the term
"capital" refers to the total outstanding shares of stock, whether voting or non-
voting, the following excerpts of the deliberations reveal otherwise. It is clear
from the following exchange that the term "capital" refers to controlling
interest of a corporation, thus:
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."
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MR. NOLLEDO. That must be based on the subscribed capital stock, because
unless declared delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another corporation, say, a
corporation with 60-40 percent equity invests in another corporation which is
permitted by the Corporation Code, does the Committee adopt the grandfather
rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.39
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.40 (Boldfacing and underscoring supplied)
Thus, 60 percent of the "capital" assumes, or should result in, a "controlling
interest" in the corporation.
The use of the term "capital" was intended to replace the word "stock" because
associations without stocks can operate public utilities as long as they meet the
60-40 ownership requirement in favor of Filipino citizens prescribed in Section
11, Article XII of the Constitution. However, this did not change the intent of the
framers of the Constitution to reserve exclusively to Philippine nationals the
"controlling interest" in public utilities.
During the drafting of the 1935 Constitution, economic protectionism was "the
battle-cry of the nationalists in the Convention."41 The same battle-cry resulted in
the nationalization of the public utilities.42 This is also the same intent of the
framers of the 1987 Constitution who adopted the exact formulation embodied in
the 1935 and 1973 Constitutions on foreign equity limitations in partially
nationalized industries.
The OSG, in its own behalf and as counsel for the State,43 agrees fully with the
Court’s interpretation of the term "capital." In its Consolidated Comment, the
OSG explains that the deletion of the phrase "controlling interest" and
replacement of the word "stock" with the term "capital" were intended specifically
to extend the scope of the entities qualified to operate public utilities to include
associations without stocks. The framers’ omission of the phrase "controlling
interest" did not mean the inclusion of all shares of stock, whether voting or non-
voting. The OSG reiterated essentially the Court’s declaration that the
Constitution reserved exclusively to Philippine nationals the ownership and
operation of public utilities consistent with the State’s policy to "develop a self-
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reliant and independent national economy effectively controlled by
Filipinos."
As we held in our 28 June 2011 Decision, to construe broadly the term "capital"
as the total outstanding capital stock, treated as a single class regardless of the
actual classification of 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." We illustrated the glaring
anomaly which would result in defining the term "capital" as the total
outstanding capital stock of a corporation, treated as a single class of shares
regardless of the actual classification of shares, to wit:
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. x x x
Further, even if foreigners who own more than forty percent of the voting shares
elect an all-Filipino board of directors, this situation does not guarantee Filipino
control and does not in any way cure the violation of the Constitution. The
independence of the Filipino board members so elected by such foreign
shareholders is highly doubtful. As the OSG pointed out, quoting Justice George
Sutherland’s words in Humphrey’s Executor v. US,44 "x x x it is quite evident that
one who holds his office only during the pleasure of another cannot be depended
upon to maintain an attitude of independence against the latter’s will." Allowing
foreign shareholders to elect a controlling majority of the board, even if all the
directors are Filipinos, grossly circumvents the letter and intent of the
Constitution and defeats the very purpose of our nationalization laws.
VII.
Last sentence of Section 11, Article XII of the Constitution
The last sentence of Section 11, Article XII of the 1987 Constitution reads:
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.
During the Oral Arguments, the OSG emphasized that there was never a question
on the intent of the framers of the Constitution to limit foreign ownership, and
assure majority Filipino ownership and control of public utilities. The OSG
argued, "while the delegates disagreed as to the percentage threshold to adopt, x x
x the records show they clearly understood that Filipino control of the public
utility corporation can only be and is obtained only through the election of a
majority of the members of the board."
Indeed, the only point of contention during the deliberations of the
Constitutional Commission on 23 August 1986 was the extent of majority Filipino
control of public utilities. This is evident from the following exchange:
THE PRESIDENT. Commissioner Jamir is recognized.
MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to
delete the phrase "two thirds of whose voting stock or controlling interest," and
instead substitute the words "SIXTY PERCENT OF WHOSE CAPITAL" so that
the sentence will read: "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 PERCENT OF WHOSE CAPITAL is owned
by such citizens."
xxxx
THE PRESIDENT: Will Commissioner Jamir first explain?
MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were
two previous sections in which we fixed the Filipino equity to 60 percent as
against 40 percent for foreigners. It is only in this Section 15 with respect to
public utilities that the committee proposal was increased to two-thirds. I think it
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would be better to harmonize this provision by providing that even in the case of
public utilities, the minimum equity for Filipino citizens should be 60 percent.
MR. ROMULO. Madam President.
THE PRESIDENT. Commissioner Romulo is recognized.
MR. ROMULO. My reason for supporting the amendment is based on the
discussions I have had with representatives of the Filipino majority owners of the
international record carriers, and the subsequent memoranda they submitted to
me. x x x
Their second point is that under the Corporation Code, the management and
control of a corporation is vested in the board of directors, not in the officers but
in the board of directors. The officers are only agents of the board. And they
believe that with 60 percent of the equity, the Filipino majority stockholders
undeniably control the board. Only on important corporate acts can the 40-
percent foreign equity exercise a veto, x x x.
x x x x45
MS. ROSARIO BRAID. Madam President.
THE PRESIDENT. Commissioner Rosario Braid is recognized.
MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a
memorandum by the spokesman of the Philippine Chamber of Communications
on why they would like to maintain the present equity, I am referring to the 66
2/3. They would prefer to have a 75-25 ratio but would settle for 66 2/3. x x x
xxxx
THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support
the proposal of two-thirds rather than the 60 percent?
MS. ROSARIO BRAID. I have added a clause that will put management in the
hands of Filipino citizens.
x x x x46
While they had differing views on the percentage of Filipino ownership of capital,
it is clear that the framers of the Constitution intended public utilities to
be majority Filipino-owned and controlled. To ensure that Filipinos control
public utilities, the framers of the Constitution approved, as additional safeguard,
the inclusion of the last sentence of Section 11, Article XII of the Constitution
commanding that "[t]he 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." In other words, the last sentence
of Section 11, Article XII of the Constitution mandates that (1) the participation of
foreign investors in the governing body of the corporation or association shall be
limited to their proportionate share in the capital of such entity; and (2) all
officers of the corporation or association must be Filipino citizens.
Commissioner Rosario Braid proposed the inclusion of the phrase requiring the
managing officers of the corporation or association to be Filipino citizens
specifically to prevent management contracts, which were designed primarily to
circumvent the Filipinization of public utilities, and to assure Filipino control of
public utilities, thus:
MS. ROSARIO BRAID. x x x They also like to suggest that we amend this
provision by adding a phrase which states: "THE MANAGEMENT BODY OF
EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE
CONTROLLED BY CITIZENS OF THE PHILIPPINES." I have with me their
position paper.
THE PRESIDENT. The Commissioner may proceed.
MS. ROSARIO BRAID. The three major international record carriers in the
Philippines, which Commissioner Romulo mentioned – Philippine Global
Communications, Eastern Telecommunications, Globe Mackay Cable – are 40-
percent owned by foreign multinational companies and 60-percent owned by
their respective Filipino partners. All three, however, also have management
contracts with these foreign companies – Philcom with RCA, ETPI with Cable
and Wireless PLC, and GMCR with ITT. Up to the present time, the general
managers of these carriers are foreigners. While the foreigners in these common
carriers are only minority owners, the foreign multinationals are the ones
managing and controlling their operations by virtue of their management
contracts and by virtue of their strength in the governing bodies of these
carriers.47
xxxx
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MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario
Braid to propose an amendment with respect to the operating management of
public utilities, and in this amendment, we are associated with Fr. Bernas,
Commissioners Nieva and Rodrigo. Commissioner Rosario Braid will state this
amendment now.
Thank you.
MS. ROSARIO BRAID. Madam President.
THE PRESIDENT. This is still on Section 15.
MS. ROSARIO BRAID. Yes.
MR. VILLEGAS. Yes, Madam President.
xxxx
MS. ROSARIO BRAID. Madam President, I propose a new section to read: ‘THE
MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL
IN ALL CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."
This will prevent management contracts and assure control by
Filipino citizens. Will the committee assure us that this amendment will insure
that past activities such as management contracts will no longer be possible
under this amendment?
xxxx
FR. BERNAS. Madam President.
THE PRESIDENT. Commissioner Bernas is recognized.
FR. BERNAS. Will the committee accept a reformulation of the first part?
MR. BENGZON. Let us hear it.
FR. BERNAS. The reformulation will be essentially the formula of the 1973
Constitution which reads: "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
AND..."
MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF
SUCH CORPORATIONS AND ASSOCIATIONS MUST BE CITIZENS OF THE
PHILIPPINES."
MR. BENGZON. Will Commissioner Bernas read the whole thing again?
FR. BERNAS. "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..." I do not have the rest of the copy.
MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF
SUCH CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE
PHILIPPINES." Is that correct?
MR. VILLEGAS. Yes.
MR. BENGZON. Madam President, I think that was said in a more elegant
language. We accept the amendment. Is that all right with Commissioner Rosario
Braid?
MS. ROSARIO BRAID. Yes.
xxxx
MR. DE LOS REYES. The governing body refers to the board of directors and
trustees.
MR. VILLEGAS. That is right.
MR. BENGZON. Yes, the governing body refers to the board of directors.
MR. REGALADO. It is accepted.
MR. RAMA. The body is now ready to vote, Madam President.
VOTING
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xxxx The last sentence of Section 11, Article XII of the 1987 Constitution, particularly
the provision on the limited participation of foreign investors in the governing
The results show 29 votes in favor and none against; so the proposed amendment body of public utilities, is a reiteration of the last sentence of Section 5, Article
is approved. XIV of the 1973 Constitution,49 signifying its importance in reserving ownership
and control of public utilities to Filipino citizens.
xxxx
VIII.
The undisputed facts
THE PRESIDENT. All right. Can we proceed now to vote on Section 15?
There is no dispute, and respondents do not claim the contrary, that (1)
MR. RAMA. Yes, Madam President. 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 foreigners
THE PRESIDENT. Will the chairman of the committee please read Section 15? control PLDT; (2) Filipinos own only 35.73% of PLDT’s common shares,
constituting a minority of the voting stock, and thus Filipinos do not control
PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4)
MR. VILLEGAS. The entire Section 15, as amended, reads: "No franchise,
preferred shares earn only 1/70 of the dividends that common shares earn;50 (5)
certificate, or any other form of authorization for the operation of a public utility
preferred shares have twice the par value of common shares; and (6) preferred
shall be granted except to citizens of the Philippines or to corporations or
shares constitute 77.85% of the authorized capital stock of PLDT and common
associations organized under the laws of the Philippines at least 60 PERCENT OF
shares only 22.15%.
WHOSE CAPITAL is owned by such citizens." May I request Commissioner
Bengzon to please continue reading.
Despite the foregoing facts, the Court did not decide, and in fact refrained from
ruling on the question of whether PLDT violated the 60-40 ownership
MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE
requirement in favor of Filipino citizens in Section 11, Article XII of the 1987
GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE
Constitution. Such question indisputably calls for a presentation and
LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF
determination of evidence through a hearing, which is generally outside the
AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
province of the Court’s jurisdiction, but well within the SEC’s statutory powers.
CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE
Thus, for obvious reasons, the Court limited its decision on the purely legal and
PHILIPPINES."
threshold issue on the definition of the term "capital" in Section 11, Article XII of
the Constitution and directed the SEC to apply such definition in determining the
MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR exact percentage of foreign ownership in PLDT.
AUTHORIZATION BE EXCLUSIVE IN CHARACTER OR FOR A PERIOD
LONGER THAN TWENTY-FIVE YEARS RENEWABLE FOR NOT MORE THAN
IX.
TWENTY-FIVE YEARS. Neither shall any such franchise or right be granted
PLDT is not an indispensable party;
except under the condition that it shall be subject to amendment, alteration, or
SEC is impleaded in this case.
repeal by Congress when the common good so requires. The State shall encourage
equity participation in public utilities by the general public."
In his petition, Gamboa prays, among others:
VOTING
xxxx
xxxx
5. For the Honorable Court to issue a declaratory relief that ownership of
common or voting shares is the sole basis in determining foreign equity in a
The results show 29 votes in favor and 4 against; Section 15, as amended, is
public utility and that any other government rulings, opinions, and regulations
approved.48 (Emphasis supplied)

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inconsistent with this declaratory relief be declared unconstitutional and a
violation of the intent and spirit of the 1987 Constitution;
6. For the Honorable Court to declare null and void all sales of common stocks to
foreigners in excess of 40 percent of the total subscribed common shareholdings;
and
7. For the Honorable Court to direct the Securities and Exchange
Commission and Philippine Stock Exchange to require PLDT to make a
public disclosure of all of its foreign shareholdings and their actual
and real beneficial owners.
Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)
As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the
SEC to perform its statutory duty to investigate whether "the required percentage
of ownership of the capital stock to be owned by citizens of the Philippines has
been complied with [by PLDT] as required by x x x the Constitution."51 Such plea
clearly negates SEC’s argument that it was not impleaded.
Granting that only the SEC Chairman was impleaded in this case, the Court has
ample powers to order the SEC’s compliance with its directive contained in the 28
June 2011 Decision in view of the far-reaching implications of this case.
In Domingo v. Scheer,52 the Court dispensed with the amendment of the
pleadings to implead the Bureau of Customs considering (1) the unique backdrop
of the case; (2) the utmost need to avoid further delays; and (3) the issue of public
interest involved. The Court held:
The Court may be curing the defect in this case by adding the BOC as party-
petitioner. The petition should not be dismissed because the second action would
only be a repetition of the first. In Salvador, et al., v. Court of Appeals, et al., we
held that this Court has full powers, apart from that power and authority which is
inherent, to amend the processes, pleadings, proceedings and decisions by
substituting as party-plaintiff the real party-in-interest. The Court has the
power to avoid delay in the disposition of this case, to order its
amendment as to implead the BOC as party-respondent. Indeed, it
may no longer be necessary to do so taking into account the unique
backdrop in this case, involving as it does an issue of public
interest. After all, the Office of the Solicitor General has represented the
petitioner in the instant proceedings, as well as in the appellate court, and
maintained the validity of the deportation order and of the BOC’s Omnibus
Resolution. It cannot, thus, be claimed by the State that the BOC was not afforded
its day in court, simply because only the petitioner, the Chairperson of the BOC,
was the respondent in the CA, and the petitioner in the instant recourse.
In Alonso v. Villamor, we had the occasion to state:
There is nothing sacred about processes or pleadings, their forms or
contents. Their sole purpose is to facilitate the application of justice to
the rival claims of contending parties. They were created, not to hinder and
delay, but to facilitate and promote, the administration of justice. They do not
constitute the thing itself, which courts are always striving to secure to litigants.
They are designed as the means best adapted to obtain that thing. In other words,
they are a means to an end. When they lose the character of the one and become
the other, the administration of justice is at fault and courts are correspondingly
remiss in the performance of their obvious duty.53 (Emphasis supplied)
In any event, the SEC has expressly manifested54 that it will abide by
the Court’s decision and defer to the Court’s definition of the term
"capital" in Section 11, Article XII of the Constitution. Further, the
SEC entered its special appearance in this case and argued during the
Oral Arguments, indicating its submission to the Court’s jurisdiction.
It is clear, therefore, that there exists no legal impediment against the
proper and immediate implementation of the Court’s directive to the
SEC.
PLDT is an indispensable party only insofar as the other issues, particularly the
factual questions, are concerned. In other words, PLDT must be impleaded in
order to fully resolve the issues on (1) whether the sale of 111,415 PTIC shares to
First Pacific violates the constitutional limit on foreign ownership of PLDT; (2)
whether the sale of common shares to foreigners exceeded the 40 percent limit on
foreign equity in PLDT; and (3) whether the total percentage of the PLDT
common shares with voting rights complies with the 60-40 ownership
requirement in favor of Filipino citizens under the Constitution for the ownership
and operation of PLDT. These issues indisputably call for an examination of the
parties’ respective evidence, and thus are clearly within the jurisdiction of the
SEC. In short, PLDT must be impleaded, and must necessarily be heard, in the
proceedings before the SEC where the factual issues will be thoroughly threshed
out and resolved.
Notably, the foregoing issues were left untouched by the Court. The
Court did not rule on the factual issues raised by Gamboa, except the single and
purely legal issue on the definition of the term "capital" in Section 11, Article XII
of the Constitution. The Court confined the resolution of the instant case to this
threshold legal issue in deference to the fact-finding power of the SEC.
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Needless to state, the Court can validly, properly, and fully dispose of the
fundamental legal issue in this case even without the participation of PLDT since
defining the term "capital" in Section 11, Article XII of the Constitution does not,
in any way, depend on whether PLDT was impleaded. Simply put, PLDT is not
indispensable for a complete resolution of the purely legal question in this
case.55 In fact, the Court, by treating the petition as one for mandamus,56 merely
directed the SEC to apply the Court’s definition of the term "capital" in Section 11,
Article XII of the Constitution in determining whether PLDT committed any
violation of the said constitutional provision. The dispositive portion of the
Court’s ruling is addressed not to PLDT but solely to the SEC, which is
the administrative agency tasked to enforce the 60-40 ownership
requirement in favor of Filipino citizens in Section 11, Article XII of
the Constitution.
Since the Court limited its resolution on the purely legal issue on the definition of
the term "capital" in Section 11, Article XII of the 1987 Constitution, and directed
the SEC to investigate any violation by PLDT of the 60-40 ownership
requirement in favor of Filipino citizens under the Constitution,57 there is no
deprivation of PLDT’s property or denial of PLDT’s right to due process, contrary
to Pangilinan and Nazareno’s misimpression. Due process will be afforded to
PLDT when it presents proof to the SEC that it complies, as it claims here, with
Section 11, Article XII of the Constitution.
X.
Foreign Investments in the Philippines
Movants fear that the 28 June 2011 Decision would spell disaster to our economy,
as it may result in a sudden flight of existing foreign investors to "friendlier"
countries and simultaneously deterring new foreign investors to our country. In
particular, the PSE claims that the 28 June 2011 Decision may result in the
following: (1) loss of more than ₱ 630 billion in foreign investments in PSE-listed
shares; (2) massive decrease in foreign trading transactions; (3) lower PSE
Composite Index; and (4) local investors not investing in PSE-listed shares.58
Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared
movants’ apprehension. Without providing specific details, he pointed out the
depressing state of the Philippine economy compared to our neighboring
countries which boast of growing economies. Further, Dr. Villegas explained that
the solution to our economic woes is for the government to "take-over" strategic
industries, such as the public utilities sector, thus:
JUSTICE CARPIO:
I would like also to get from you Dr. Villegas if you have additional information
on whether this high FDI59 countries in East Asia have allowed foreigners x x x
control [of] their public utilities, so that we can compare apples with apples.
DR. VILLEGAS:
Correct, but let me just make a comment. When these neighbors of ours find an
industry strategic, their solution is not to "Filipinize" or "Vietnamize" or
"Singaporize." Their solution is to make sure that those industries are in
the hands of state enterprises. So, in these countries, nationalization
means the government takes over. And because their governments
are competent and honest enough to the public, that is the solution. x
x x 60 (Emphasis supplied)
If government ownership of public utilities is the solution, then foreign
investments in our public utilities serve no purpose. Obviously, there can never
be foreign investments in public utilities if, as Dr. Villegas claims, the "solution is
to make sure that those industries are in the hands of state enterprises." Dr.
Villegas’s argument that foreign investments in telecommunication companies
like PLDT are badly needed to save our ailing economy contradicts his own
theory that the solution is for government to take over these companies. Dr.
Villegas is barking up the wrong tree since State ownership of public utilities and
foreign investments in such industries are diametrically opposed concepts, which
cannot possibly be reconciled.
In any event, the experience of our neighboring countries cannot be used as
argument to decide the present case differently for two reasons. First, the
governments of our neighboring countries have, as claimed by Dr. Villegas, taken
over ownership and control of their strategic public utilities like the
telecommunications industry. Second, our Constitution has specific provisions
limiting foreign ownership in public utilities which the Court is sworn to uphold
regardless of the experience of our neighboring countries.
In our jurisdiction, the Constitution expressly reserves the ownership and
operation of public utilities to Filipino citizens, or corporations or associations at
least 60 percent of whose capital belongs to Filipinos. Following Dr. Villegas’s
claim, the Philippines appears to be more liberal in allowing foreign investors to
own 40 percent of public utilities, unlike in other Asian countries whose
governments own and operate such industries.
XI.
Prospective Application of Sanctions
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In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning
period of the application and imposition of appropriate sanctions against PLDT if
found violating Section 11, Article XII of the Constitution.1avvphi1
As discussed, the Court has directed the SEC to investigate and determine
whether PLDT violated Section 11, Article XII of the Constitution. Thus, there is
no dispute that it is only after the SEC has determined PLDT’s violation, if any
exists at the time of the commencement of the administrative case or
investigation, that the SEC may impose the statutory sanctions against PLDT. In
other words, once the 28 June 2011 Decision becomes final, the SEC shall impose
the appropriate sanctions only if it finds after due hearing that, at the start of the
administrative case or investigation, there is an existing violation of Section 11,
Article XII of the Constitution. Under prevailing jurisprudence, public utilities
that fail to comply with the nationality requirement under Section 11, Article XII
and the FIA can cure their deficiencies prior to the start of the administrative case
or investigation.61
XII.
Final Word
The Constitution expressly declares as State policy the development of an
economy "effectively controlled" by Filipinos. Consistent with such State
policy, the Constitution explicitly reserves the ownership and operation of public
utilities to Philippine nationals, who are defined in the Foreign Investments Act
of 1991 as Filipino citizens, or corporations or associations at least 60 percent of
whose capital with voting rights belongs to Filipinos. The FIA’s implementing
rules explain that "[f]or 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." In effect, the FIA clarifies,
reiterates and confirms the interpretation that the term "capital" in Section 11,
Article XII of the 1987 Constitution refers to shares with voting rights, as
well as with full beneficial ownership. This is precisely because the right to
vote in the election of directors, coupled with full beneficial ownership of stocks,
translates to effective control of a corporation.
Any other construction of the term "capital" in Section 11, Article XII of the
Constitution contravenes the letter and intent of the Constitution. Any other
meaning of the term "capital" openly invites alien domination of economic
activities reserved exclusively to Philippine nationals. Therefore, respondents’
interpretation will ultimately result in handing over effective control of our
national economy to foreigners in patent violation of the Constitution, making
Filipinos second-class citizens in their own country.
Filipinos have only to remind themselves of how this country was exploited under
the Parity Amendment, which gave Americans the same rights as Filipinos in the
exploitation of natural resources, and in the ownership and control of public
utilities, in the Philippines. To do this the 1935 Constitution, which contained the
same 60 percent Filipino ownership and control requirement as the present 1987
Constitution, had to be amended to give Americans parity rights with Filipinos.
There was bitter opposition to the Parity Amendment62 and many Filipinos
eagerly awaited its expiration. In late 1968, PLDT was one of the American-
controlled public utilities that became Filipino-controlled when the controlling
American stockholders divested in anticipation of the expiration of the Parity
Amendment on 3 July 1974.63 No economic suicide happened when control of
public utilities and mining corporations passed to Filipinos’ hands upon
expiration of the Parity Amendment.
Movants’ interpretation of the term "capital" would bring us back to the same
evils spawned by the Parity Amendment, effectively giving foreigners
parity rights with Filipinos, but this time even without any
amendment to the present Constitution. Worse, movants’ interpretation
opens up our national economy to effective control not only by Americans but
also by all foreigners, be they Indonesians, Malaysians or Chinese,
even in the absence of reciprocal treaty arrangements. At least the Parity
Amendment, as implemented by the Laurel-Langley Agreement, gave the capital-
starved Filipinos theoretical parity – the same rights as Americans to exploit
natural resources, and to own and control public utilities, in the United States of
America. Here, movants’ interpretation would effectively mean
a unilateral opening up of our national economy to all foreigners, without
any reciprocal arrangements. That would mean that Indonesians,
Malaysians and Chinese nationals could effectively control our mining companies
and public utilities while Filipinos, even if they have the capital, could not control
similar corporations in these countries.
The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino
ownership and control requirement for public utilities like PLOT. Any deviation
from this requirement necessitates an amendment to the Constitution as
exemplified by the Parity Amendment. This Court has no power to amend the
Constitution for its power and duty is only to faithfully apply and interpret the
Constitution.
WHEREFORE, we DENY the motions for reconsideration WITH
FINALITY. No further pleadings shall be entertained.
SO ORDERED.
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EN BANC
April 18, 2017
G.R. No. 207246
JOSE M. ROY III, Petitioner
vs.
CHAIRPERSON TERESITA HERBOSA, THE SECURITIES AND
EXCHANGE COMMISSION, and PHILIPPINE LONG DISTANCE
TELEPHONE COMP ANY,, Respondents
x-----------------------x
WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN
P. GABINETE, ANTONIO V. PESINA, JR., MODESTO MARTINY.
MAMON III, and GERARDO C. EREBAREN, Petitioners-in-Intervention,
x-----------------------x
PHILIPPINE STOCK EXCHANGE, INC. Respondent-in-Intervention,
x-----------------------x
SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES,
INC., Respondent-in-Intervention.
RESOLUTION
CAGUIOA, J.:
Before the Court is the Motion for Reconsideration dated January 19, 20171 (the
Motion) filed by petitioner Jose M. Roy III (movant) seeking the reversal and
setting aside of the Decision dated November 22, 20162 (the Decision) which
denied the movant's petition, and declared that the Securities and Exchange
Commission (SEC) did not commit grave abuse of discretion in issuing
Memorandum Circular No. 8, Series of 2013 (SEC-MC No. 8) as the same was in
compliance with, and in fealty to, the decision of the Court in Gamboa v. Finance
Secretary Teves,3(Gamboa Decision) and the resolution4 denying the Motion for
Reconsideration therein (Gamboa Resolution).
The Motion presents no compelling and new arguments to justify the
reconsideration of the Decision.
The grounds raised by movant are: (1) He has the requisite standing because this
case is one of transcendental importance; (2) The Court has the constitutional
duty to exercise judicial review over any grave abuse of discretion by any
instrumentality of government; (3) He did not rely on an obiter dictum; and (4)
The Court should have treated the petition as the appropriate device to explain
the Gamboa Decision.
The Decision has already exhaustively discussed and directly passed upon these
grounds. Movant's petition was dismissed based on both procedural and
substantive grounds.
Regarding the procedural grounds, the Court ruled that petitioners (movant and
petitioners-in-intervention) failed to sufficiently allege and establish the
existence of a case or controversy and locus standi on their part to warrant the
Court's exercise of judicial review; the rule on the hierarchy of courts was
violated; and petitioners failed to implead indispensable parties such as the
Philippine Stock Exchange, Inc. and Shareholders' Association of the Philippines,
Inc. 5
In connection with the failure to implead indispensable parties, the Court's
Decision held:
Under Section 3, Rule 7 of the Rules of Court, an indispensable party is a party-
in-interest without whom there can be no final determination of an action.
Indispensable parties are those with such a material and direct interest in the
controversy that a final decree would necessarily affect their rights, so that the
court cannot proceed without their presence. The interests of such indispensable
parties in the subject matter of the suit and the relief are so bound with those of
the other parties that their legal presence as parties to the proceeding is an
absolute necessity and a complete and efficient determination of the equities and
rights of the parties is not possible if they are not joined.
Other than PLDT, the petitions failed to join or implead other public utility
corporations subject to the same restriction imposed by Section 11, Article XII of
the Constitution. These corporations are in danger of losing their franchise and
property if they are found not compliant with the restrictive interpretation of the
constitutional provision under review which is being espoused by petitioners.
They should be afforded due notice and opportunity to be heard, lest they be
deprived of their property without due process.
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Not only are public utility corporations other than PLDT directly and materially
affected by the outcome of the petitions, their shareholders also stand to suffer in
case they will be forced to divest their shareholdings to ensure compliance with
the said restrictive interpretation of the term "capital". As explained by
SHAREPHIL, in five corporations alone, more than Php158 Billion worth of
shares must be divested by foreign shareholders and absorbed by Filipino
investors if petitioners' position is upheld.
Petitioners' disregard of the rights of these other corporations and numerous
shareholders constitutes another fatal procedural flaw, justifying the dismissal of
their petitions. Without giving all of them their day in court, they will
definitely be deprived of their property without due process of law. 6
This is highlighted to clear any misimpression that the Gamboa Decision
and Gamboa Resolution made a categorical ruling on the meaning of the word
"capital" under Section 11, Article XII of the Constitution only in respect of, or
only confined to, respondent Philippine Long Distance Telephone Company
(PLDT). Nothing is further from the truth. Indeed, a fair reading of
the Gamboa Decision and Gamboa Resolution shows that the Court's
pronouncements therein would affect all public utilities, and not just respondent
PLDT.
On the substantive grounds, the Court disposed of the issue on whether the SEC
gravely abused its discretion in ruling that respondent PLDT is compliant with
the limitation on foreign ownership under the Constitution and other relevant
laws as without merit. The Court reasoned that "in the absence of a definitive
ruling by the SEC on PLDT's compliance with the capital requirement pursuant to
the Gamboa Decision and Resolution, any question relative to the inexistent
ruling is premature."7
In resolving the other substantive issue raised by petitioners, the Court held that:
[E]ven if the resolution of the procedural issues were conceded in favor of
petitioners, the petitions, being anchored on Rule 65, must nonetheless fail
because the SEC did not commit grave abuse of discretion amounting to lack or
excess of jurisdiction when it issued SEC-MC No. 8. To the contrary, the Court
finds SEC-MC No. 8 to have been issued in fealty to the Gamboa Decision and
Resolution.8
To belabor the point, movant's petition is not a continuation of the Gamboa case
as the Gamboa Decision attained finality on October 18, 2012, and thereafter
Entry of Judgment was issued on December 11, 2012.9
As regards movant's repeated invocation of the transcendental importance of
the Gamboa case, this does not ipso facto accord locus standi to movant. Being a
new petition, movant had the burden to justify his locus standi in his own
petition. The Court, however, was not persuaded by his justification.
Pursuant to the Court's constitutional duty to exercise judicial review, the Court
has conclusively found no grave abuse of discretion on the part of SEC in issuing
SEC-MC No. 8.
The Decision has painstakingly explained why it considered as obiter dictum that
pronouncement in the Gamboa Resolution that the constitutional requirement
on Filipino ownership should "apply uniformly and across the board to all classes
of shares, regardless of nomenclature and category, comprising the capital of a
corporation."[[9-a]] The Court stated that:
[T]he fallo or decretal/dispositive portions of both the Gamboa Decision and
Resolution are definite, clear and unequivocal. While there is a passage in the
body of the Gamboa Resolution that might have appeared contrary to the fallo of
the Gamboa Decision x x x the definiteness and clarity of the fallo of
the Gamboa Decision must control over the obiter dictum in
the Gamboa Resolution regarding the application of the 60-40 Filipino-foreign
ownership requirement to "each class of shares, regardless of differences in
voting rights, privileges and restrictions." 10
To the Court's mind and, as exhaustively demonstrated in the Decision, the
dispositive portion of the Gamboa Decision was in no way modified by
the Gamboa Resolution.
The heart of the controversy is the interpretation of Section 11, Article XII of the
Constitution, which provides: "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 x x x."
The Gamboa Decision already held, in no uncertain terms, that what the
Constitution requires is "[fJull [and legal] beneficial ownership of 60 percent of
the outstanding capital stock, coupled with 60 percent of the voting rights x x x
must rest in the hands of Filipino nationals x x x." 11 And, precisely that is
what SEC-MC No. 8 provides, viz.: "x x x For purposes of determining
compliance [with the constitutional or statutory ownership], the required
percentage of Filipino ownership shall be applied to BOTH (a) the total number
of outstanding shares of stock entitled to vote in the election of directors; AND
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(b) the total number of outstanding shares of stock, whether or not entitled to
vote x x x." 12
In construing "full beneficial ownership," the Implementing Rules and
Regulations of the Foreign Investments Act of 1991 (FIA-IRR) provides:
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. 13
In turn, "beneficial owner" or "beneficial ownership" is defined in the
Implementing Rules and Regulations of the Securities Regulation Code (SRC-
IRR) as:
[A]ny person who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, has or shares voting power (which
includes the power to vote or direct the voting of such security) and/or
investment returns or power (which includes the power to dispose of, or direct
the disposition of such security) x x x. 14
Thus, the definition of "beneficial owner or beneficial ownership" in the SRC-
IRR, which is in consonance with the concept of "full beneficial ownership" in the
FIA-IRR, is, as stressed in the Decision, relevant in resolving only the question of
who is the beneficial owner or has beneficial ownership of each "specific stock" of
the public utility company whose stocks are under review. If the Filipino has
the voting power of the "specific stock", i.e., he can vote the stock or direct
another to vote for him, or the Filipino has the investment power over the
"specific stock", i.e., he can dispose of the stock or direct another to dispose of it
for him, or both, i.e., he can vote and dispose of that "specific stock" or direct
another to vote or dispose it for him, then such Filipino is the "beneficial owner"
of that "specific stock." Being considered Filipino, that "specific stock" is then to
be counted as part of the 60% Filipino ownership requirement under the
Constitution. The right to the dividends, jus fruendi - a right emanating from
ownership of that "specific stock" necessarily accrues to its Filipino "beneficial
owner."
Once more, this is emphasized anew to disabuse any notion that the dividends
accruing to any particular stock are determinative of that stock's "beneficial
ownership." Dividend declaration is dictated by the corporation's unrestricted
retained earnings. On the other hand, the corporation's need of capital for
expansion programs and special reserve for probable contingencies may limit
retained earnings available for dividend declaration. 15 It bears repeating here
that the Court in the Gamboa Decision adopted the foregoing definition of the
term "capital" in Section 11, Article XII of the 1987 Constitution in express
recognition of the sensitive and vital position of public utilities both in the
national economy and for national security, so that 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. 16 This purpose prescinds
from the "benefits"/dividends that are derived from or accorded to the particular
stocks held by Filipinos vis-a-vis the stocks held by aliens. So long as Filipinos
have controlling interest of a public utility corporation, their decision to declare
more dividends for a particular stock over other kinds of stock is their sole
prerogative - an act of ownership that would presumably be for the benefit of the
public utility corporation itself. Thus, as explained in the Decision:
In this regard, it would be apropos to state that since Filipinos own at least 60%
of the outstanding shares of stock entitled to vote directors, which is what the
Constitution precisely requires, then the Filipino stockholders control the
corporation, i.e., they dictate corporate actions and decisions, and they have all
the rights of ownership including, but not limited to, offering certain preferred
shares that may have greater economic interest to foreign investors - as the need
for capital for corporate pursuits (such as expansion), may be good for the
corporation that they own. Surely, these "true owners" will not allow any dilution
of their ownership and control if such move will not be beneficial to them. 17
Finally, as to how the SEC will classify or treat certain stocks with voting rights
held by a trust fund that is created by the public entity whose compliance with the
limitation on foreign ownership under the Constitution is under scrutiny, and
how the SEC will determine if such public utility does, in fact, control how the
said stocks will be voted, and whether, resultantly, the trust fund would be
considered as Philippine national or not - lengthily discussed in the dissenting
opinion of Justice Carpio - is speculative at this juncture. The Court cannot
engage in guesswork. Thus, there is need of an actual case or controversy before
the Court may exercise its power of judicial review. The movant's petition
is not that actual case or controversy.
Thus, the discussion of Justice Carpio' s dissenting opinion as to the voting
preferred shares created by respondent PLDT, their acquisition by BTF Holdings,
Inc., which appears to be a wholly-owned company of the PLDT Beneficial Trust
Fund (BTF), and whether or not it is respondent PLDT's management that
controls BTF and BTF Holdings, Inc. - all these are factual matters that are
outside the ambit of this Court's review which, as stated in the beginning, is
confined to determining whether or not the SEC committed grave abuse of
discretion in issuing SEC-MC No. 8; that is, whether or not SEC-MC No. 8
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violated the ruling of the Court in Gamboa v. Finance Secretary Teves, 18 and the
resolution in Heirs of Wilson P. Gamboa v. Finance Sec. Teves19denying the
Motion for Reconsideration therein as to the proper understanding of "capital".

To be sure, it would be more prudent and advisable for the Court to await the
SEC's prior determination of the citizenship of specific shares of stock held in
trust - based on proven facts - before the Court proceeds to pass upon the
legality of such determination.

As to whether respondent PLDT is currently in compliance with the

Constitutional provision regarding public utility entities, the Court must likewise
await the SEC's determination thereof applying SEC-MC No. 8. After all, as stated
in the Decision, it is the SEC which is the government agency with the competent
expertise and the mandate of law to make such determination.

In conclusion, the basic issues raised in the Motion having been duly considered
and passed upon by the Court in the Decision and no substantial argument
having been adduced to warrant the reconsideration sought, the Court resolves
to DENY the Motion with FINALITY.

WHEREFORE, the subject Motion for Reconsideration is hereby DENIED

WITH FINALITY. No further pleadings or motions shall be entertained in this
case. Let entry of final judgment be issued immediately.

SO ORDERED.

ALFREDO BENJAMIN S. CAGUIOA,

Associate Justice

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