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CORPORATION LAW

Landmark cases - Syllabus by Atty. Gumabun


Digests by DMG (unless otherwise stated)

Case 6
SEVENTH DAY ADVENTIST CONFERENCE CHURCH OF SOUTHERN PHILIPPINES, INC.
vs. NORTHEASTERN MINDANAO MISSION OF SEVENTH DAY ADVENTIST, INC.

Re: Juridical Personality & De Facto Corporation

Facts: ​The subject of this case is a land situated in Bayugan, Agusan del Sur.
It was owned by Spouses Felix & Felisa Cosio.

In 1959, the spouses donated the land to the South Philippines Union Mission of Seventh Day
Adventist Church of Bayugan (SDA Bayugan). A Deed of Donation was executed. The donation
was allegedly accepted by one Liberato Rayos, an elder of the church.

Twenty-one years later (1980), this land was sold by the spouses to the Seventh Day Adventist
Church of Northeastern Mindanao Mission (SDA-NEMM). A TCT was issued in its name.

In 1987, SDA Conference Church of Southern Philippines (SDA CCSP) filed a suit for
cancellation of title, quieting of ownership and possession, declaratory relief and reconveyance
with prayer for preliminary injunction and damages in the RTC of Bayugan, Agusan del Sur.

The SDA CCSP claimed to be the SDA Bayugan’s successors-in-interest, and claimed
ownership over the land.

SDA-NEMM opposed this, alleging that SDA Bayugan could not legally be a donee back then
because it was not yet incorporated then, thus, it had no juridical personality.

The RTC ruled against SDA CCSP and upheld the validity of the sale to SDA NEMM. The CA
affirmed. Hence this petition.

Issue: ​Who is the legal owner of the land?

SC’s ruling: ​SDA-NEMM is the legal owner. SDA CCSP cannot claim ownership.

Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor
of another person who accepts it. The donation could not have been made in favor of an entity
yet inexistent at the time it was made. Nor could it have been accepted as there was yet no one
to accept it.
When the deed of donation was executed, SDA Bayugan had no juuridical personality and
therefore had no capacity to accept.

SDA CCSP also argued that SDA Bayugan was a de facto corporation.

Requisites of a de facto corporation:


(a) the existence of a valid law under which it may be incorporated;
(b) an attempt in good faith to incorporate; and
(c) assumption of corporate powers.

In this case, there was no proof that SDA Bayugan attempted to incorporate at the time. They
were not registered with the SEC.

The filing of articles of incorporation and the issuance of the certificate of incorporation are
essential for the existence of a de facto corporation.

Corporate existence begins only from the moment a certificate of incorporation is issued.

Since SDA Bayugan was not a corporation, SDA CCSP cannot claim to be its successor in
interest.

Moreover, there is sufficient basis to affirm the title of SDA-NEMM. A Certificate of Title is
generally a conclusive evidence of ownership of the land. The TCT in this case was issued in
favor of SDA NEMM, after a valid sale as evidenced by a public instrument.

Case 7
LIM TONG LIM v. PHILIPPINE FISHING GEAR INDUSTRIES, INC.

Re: Partnership, Corporation By Estoppel

Facts:​ On behalf of "Ocean Quest Fishing Corporation” (OQFC), Antonio Chua and Peter Yao
entered into a Contract for the purchase of fishing nets of various sizes from the Philippine
Fishing Gear Industries, Inc. (PFG).

Chua and Yao claimed that they were in a business venture with Lim Tong Lim, who was not a
signatory to the agreement.

The buyers failed to pay for the fishing nets and floats; hence, PFG filed a collection suit against
Chua, Yao and Lim. PFG brought this suit against the 3 in their capacities as general partners.
PFG alleged that OQFC was a nonexistent corporation as shown by a Certification from the
SEC.
The trial court ruled against Chua, Yao, and Lim, and declared that they, as general partners,
were jointly liable to pay PFG. This finding was based on a Compromise Agreement (in another
case) where it could be presumed from the equal distribution of the profit and loss that they had
joint liability.

The CA affirmed, agreeing that the 3 undertook a partnership for a specific undertaking (that is,
commercial fishing) and had the goal of dividing profits which is an essential feature of a
partnership.

Hence this petition by Lim. He contends that he had no direct participation in the purchase, that
only Chua and Yao took part in the negotiations, and that he has not met any of PFG’s
representatives. Thus, he shouldn’t be liable for the unpaid purchase.

He also invokes the doctrine of corporation by estoppel, arguing that only Chua and Yao should
be liable for this contract, because his name does not appear on any of the contracts and he
never directly transacted with PFG.

Issues​:
A. Were Chua, Yao, and Lim in a partnership? (An affirmative answer would mean they are
jointy liable to PFG for the unpaid fishing gear.)
B. May Lim avoid liability by invoking the doctrine of corporation by estoppel?

SC’s Ruling:

A. Yes. Article 1767 of the NCC states: By the contract of partnership, two or more persons bind
themselves to contribute money, property, or industry to a common fund, with the intention of
dividing the profits among themselves.

The lower courts were correct in finding that a partnership exists between the 3, based on their
previous activities (they decided to engage in a fishing businesss, they had verbal agreements
to purchase boats and gear, they entered into loans to finance their venture, etc.).

They had a common fund, comrpising of the boats, purchases, and the loans.
The contribution to such fund need not be cash or fixed assets; it could be an intangible like
credit or industry. They also agreed that any loss or profit from the sale and operation of the
boats would be divided equally among them.

B. No, he cannot invoke that doctrine. Lim should still be liable.

Section 21 of the Corporation Code states: Corporation by estoppel. — All persons who assume
to act as a corporation knowing it to be without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided
however, That when any such ostensible corporation is sued on any transaction entered by it as
a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense
its lack of corporate personality.

This means that persons who enter into a transaction as a “corporation”, knowing it is legally
nonexistent, cannot later on use lack of juridical personality as a defense in order to evade
liability.

(Ratio for this doctrine: An unincorporated association has no personality and would be
incompetent to act and appropriate for itself the power and attributes of a corporation as
provided by law; it cannot create agents or confer authority on another to act in its behalf; thus,
those who act or purport to act as its representatives or agents do so without authority and at
their own risk.)

A person acting or purporting to act on behalf of a corporation which has no valid existence
becomes personally liable for contracts entered into or for other acts performed as such agent.

This doctrine also extends to a third party who, knowing an association to be unincorporated,
nonetheless treated it as a corporation and received benefits from it.

In this case, Lim might not have entered into the contract with PFG personally, but he benefited
from the use of the nets that were purchased.

Under the law on estoppel, those acting on behalf of a corporation and those benefited by it,
knowing it to be without valid existence, are held liable as general partners.

——

Case 8
SULO NG BAYAN INC. vs. GREGORIO ARANETA, INC., et al.

Re: Separate and distinct personality

Facts:​ Sulo Ng Bayan Inc (SNB) is a non-stock corporation whose membership is composed of
natural persons. They pioneered in the clearing of the subject land, cultivated it since the
Spanish regime and continuously possessed it openly and public under concept of ownership
adverse against the whole world.

SNB alleged that in 1958, Gregorio Araneta Inc. (GA) ejected the members of SNB from a land
in Bulacan, through force and intimidation; and that in 1961, they found out that their land had
been fraudulently included in an Original Certificate of Title.

They claimed that this OCT is void because no survey or plan was submitted as its basis and
that the CFI that issued its Decree of Registration did not validly acquire jurisdiction for failing to
give notice of the proceeding to SNB’s members who were the actual possessors of the land.

They claimed that because the OCT is void, all subsequent TCTs (including the one issued in
the name of GA), should also be declared void.

SNB filed an accion de revindicacion against GA, et al., to recover the ownership and
possession of the land.

The trial court ruled against SNB and dismissed the case for lack of cause of action.

Issue:​ Whether a corporation may institute an action* in behalf of its individual members.

(*Action for the recovery of certain parcels of land allegedly owned by said members; for the
nullification of the TCTs; for a declaration of said members as absolute owners of the property;
and the issuance of the corresponding certificate of title; and for damages.)

SC’s Ruling: ​No. The corporation cannot institute this action because it is not a real party in
interest in this case, and its personality is separate from the personalities of its members. The
real parties in interest are its members.

Cause of action is composed of two elements: (1) the right of the plaintiff and (2) the violation of
such right by the defendant. Every action must be prosecuted and defended in the name of the
real party in interest. All persons having an interest in the subject of the action and in obtaining
the relief demanded shall be joined as plaintiffs.

In this case, the people whose rights were alleged to have been violated are the members of the
corporation and not the corporation itself.

The corporation has a separate and distinct personality from its individual members. A
corporation has no interest in the individual property of its members unless transferred to the
corporation. There is no allegation that the members have assigned their rights to the
corporation or any showing that the corporation has in any way or manner succeeded to such
rights.

The corporation did not have any rights violated by the defendants. Even if the Court rules
against GA, the plaintiff corporation would not be entitled to the reliefs prayed for. Neither can
reliefs be awarded to the members, since they are not parties to the suit.

Since the action was not filed in the names of the real parties in interest, the complaint must be
dismissed on the ground of failure to state a cause of action.

———
Case 9
CONCEPCION MAGSAYSAY-LABRADOR, et al. vs. COURT OF APPEALS and ADELAIDA
RODRIGUEZ-MAGSAYSAY

Re: Stockholders and Corporate Property; Transfer of Shares

Facts: ​Adelaida and her late husband Sen. Genaro Magsaysay acquired, thru their conjugal
funds, a land known as "Pequena Island", covered by a TCT.

After the death of Genaro, Adelaida discovered an annotation at the back of the TCT that "the
land was acquired by her husband from his separate capital”, that he executed a Deed of
Assignment in favor of Subic Land Corporation, that their old TCT was cancelled as a result,
and that a new TCT was issued in favor of Subic.

Adelaida argued that these acts were void because the land is conjugal and her marital consent
to the annotation on TCT was not obtained. She filed a petition, seeking cancellation of the new
TCT.

The sisters of her husband (Concepcion Labrador, et al.) then filed a motion for intervention on
the ground that their brother conveyed to them 1/2 of his shareholdings in Subic, thus, they
have a substantial and legal interest in the subject matter of litigation.

The court denied this motion, ruling that the sisters have no legal interest in the matter in
litigation and their claim as transferees of shares in Subic cannot legally entitle them to
intervene because Subic has a personality separate and distinct from its stockholders.

Issue:​ Whether the sisters had the legal right to file the motion for intervention.

SC’s Ruling: ​No. Shareholders are not owners of a corporation’s property.

in a pending action, the party must have a legal interes at in the matter in litigation.

The interest must be a direct interest in the cause of action which would put the intervenor in a
legal position to litigate a fact alleged in the complaint.

Here, the interest of the sisters is indirect, contingent, remote, conjectural, consequential, and
collateral. Their interest is purely inchoate, or in sheer expectancy of a right in the management
of the corporation and to share in the profits.

While a share of stock represents a proportionate interest in the property of the corporation, it
does not vest the owner with any legal right or title to any of the property. Shareholders are in
no legal sense the owners of corporate property, which is owned by the corporation as a distinct
legal person.

Moreoer, the corporation did not keep books and records. No transfer was ever recorded. The
transfer must be registered in the books of the corporation to affect third persons.

Section 63 of the Corporation Code provides, thus: "No transfer, however, shall be valid, except
as between the parties, until the transfer is recorded in the books of the corporation showing the
names of the parties to the transaction, the date of the transfer, the number of the certificate or
certificates and the number of shares transferred."

——

Case 10
STRONGHOLD INSURANCE COMPANY, INC. vs. TOMAS CUENCA, et al.

Re: Separate and distinct personality; corporate assets belong to the corporation

Facts: ​Maranon filed a suit for the collection of a sum of money and damages against the
Cuencas in the RTC. This included a writ of preliminary attachment (PA), which the RTC
granted, conditioned upon the posting of a bond of ₱1M executed in favor of the Cuencas.
Maranon posted such bond, issued by Stronghold Insurance Inc.

The sheriff enfored the writ of PA and levied upon properties owned by Arc Cuisine, Inc. (ACI),
found in the leased corporate office-cum-commissary or kitchen of the corporation.

The Cuencas filed a motion to dismiss and to quash the writ of PA, on the ground that the action
involved intra-corporate matters that were within the original and exclusive jurisdiction of the
SEC, and not the RTC. The RTC denied the motion and ruled that since the action is for the
recovery of a sum of money and damages, it had jurisdiction.

The RTC ultimately held Stronghold and Maranon jointly and solidarily liable for damages to the
Cuencas.

Issue: ​May the Cuencas, stockholders of Arc Cuisine, claim damages from the levy of Arc’s
properties?

SC’s Ruling:​ No. The properties subject to the levy on attachment belonged to Arc Cuisine, Inc.
alone, not to the Cuencas in their own right. They were only stockholders of Arc Cuisine, Inc.,
which had a personality distinct and separate from that of any or all of them.

Only Arc Cuisine, Inc. had the right under the substantive law to claim and recover such
damages. This right could not also be asserted by the Cuencas unless they did so in the name
of the corporation itself. But Arc Cuisine, Inc. was not joined in the action either as an original
party or as an intervenor.

The Cuencas lacked the legal personality to claim the damages sustained from the levy of the
Arc Cuisine’s properties.

The personality of a corporation is distinct and separate from the personalities of its
stockholders. Hence, its stockholders are not themselves the real parties in interest to claim and
recover compensation for the damages arising from the wrongful attachment of its assets. Only
the corporation is the real party in interest for that purpose.

It is true, too, that the Cuencas could bring in behalf of Arc Cuisine, Inc. a proper action to
recover damages resulting from the attachment. Such action would be one directly brought in
the name of the corporation. Yet, that was not true here, for, instead, the Cuencas and Tayactac
presented the claim in their own names.

——

Case 11
FILIPINAS BROADCASTING NETWORK, INC., v. AGO MEDICAL AND EDUCATIONAL
CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE and ANGELITA F. AGO

Re: May corporations be entitled to moral damages

G.R. No. 141994 - January 17, 2005

Facts: ​Filipinas Broadcasting Network Inc. (FBNI) owns radio station DZRC-AM which airs the
radio documentary “Expose” every morning, hosted by Mel Rima and Jun Alegre, and heard by
Albay muncipalities, and other Bicol areas.

In 1989, Expose covered various complaints from students, teachers, and parents against Ago
Medical and Educational Center-Bicol Christian College of Medicine (AMEC) and its
administrators.

Claiming that the broadcasts were defamatory and injurious to their institution’s reputation,
AMEC and Angelita Ago, as Dean of AMEC's College of Medicine, filed a complaint for
damages against FBNI, Rima, and Alegre.

FBNI, Rima, and Alegre argued that the exposes were fair and true. They claimed that they
were plainly impelled by a sense of public duty to report the goings-on in AMEC, an institution
imbued with public interest.

The trial court ruled against Alegre, finding that his reports were libeous per se due to them
having no factual basis. It also held FBNI liable for failing to exercise diligence in the selection
and supervision of its employees. As for Rima, the trial court absolved him because his only
participation was that he agreed with Alegre. His statements were within the bounds of freedom
of speech, expression, and of the press.

Alegre and FBNI were ordered to pay, jointly and severally, P300k moral damages to AMEC;
P30,000 reimbursement of attorney's fees; and the costs of suit.

On appeal, the CA made Rima solidarily liable with FBNI and Alegre. The CA also denied Dean
Ago's claim for damages and attorney's fees because the broadcasts were directed against
AMEC, and not against her.

FBNI brings the petition to the SC, contending that, among others, AMEC is not entitled to moral
damages because it is not a natural person.

Issue: ​Is AMEC, a juridical person, entitled to moral damages?

SC’s Ruling:​ Yes.

A juridical person is generally not entitled to moral damages (MD) because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded feelings, serious
anxiety, mental anguish or moral shock.

But the SC had previously justified the award of MD to a corporation in Mambulao v. PNB: “a
corporation may have a good reputation which, if besmirched, may also be a ground for the
award of moral damages”.

This claim for MD finds legal basis under Art. 2219 (7) of the NCC which expressly authorizes
the recovery of MD in cases of libel, slander, or other forms of defamation.

The NCC does not qualify whether the plaintiff is a natural or juridical person. Therefore, a
juridical person can validly complain for libel and claim for MD.

However, the MD in this case should be reduced from 300k to 150k, since AMEC has not
suffered any substantial damage to its reputation.

Issue: ​What is the nature of FBNI, Rima, and Alegre’s liabilities in this case?

SC: ​The basis of the present action is a tort. Joint tortfeasors are jointly and severally liable for
the tort which they commit.

Joint tortfeasors are all the persons who command, instigate, promote, encourage, advise,
countenance, cooperate in, aid or abet the commission of a tort, or who approve of it after it is
done, if done for their benefit.
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to pay for
damages arising from the libelous broadcasts.

Recovery for defamatory statements published by radio or television may be had from the
owner of the station, a licensee, the operator of the station, or a person who procures, or
participates in, the making of the defamatory statements.

An employer and employee are solidarily liable for a defamatory statement by the employee
within the course and scope of his or her employment, at least when the employer authorizes or
ratifies the defamation.

——

Case 12
VILLA REY TRANSIT, INC. vs. EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION
CO., INC. and PUBLIC SERVICE COMMISSION

Re: alter ego theory

G.R. No. L-23893; October 29, 1968

Facts: ​Jose M. Villarama was the operator of Villa Rey Transit. Through certificates of public
convenience (CPC) granted by the Public Service Commission (PSC), he was authorized to
operate 32 units on various bus routes from Pangasinan to Manila, and vice-versa.

Later, he sold these CPCs to Pangasinan Transportation Company, Inc. (Pantranco), for P350k
with the condition that “the seller shall not for a period of 10 years from the date of this sale,
apply for any TPU service identical or competing with the buyer.” (Restrictive clause)

Three months later, a corporation called Villa Rey Transit, Inc. (VRTI) was organized, with
Natividad Villarama (wife of Jose) as one of the incorporators and its treasurer, and Jose’s
brother and sister-in-law as original subscribers.

After registration with the SEC, VRTI then bought 5 CPCs, buses, and equipment from one
Valentin Fernando. The sale was subject to PSC’s final approval.

VRTI was able to secure a provisional permit to operate from the PSC.

Before a final approval of the sale to VRTI could be made, however, a separate civil case was
rendered against Fernando (defendant-debtor), in favor of Eusebio Ferrer, his creditor.

As a result, 2 of the CPCs conditionally sold to VRTI were levied and auctioned. Ferrer was the
highest bidder and was awarded the certificate of sale.

Then, Ferrer sold the 2 CPCs to Pantranco. This sale was also subject to PSC’s final approval.

The PSC issued an order, stating that while the 2 approvals were pending, Pantranco shall be
the one to operate the service under the 2 CPCs. VRTI opposed this and elevated the case to
the SC.

The SC ruled that until the issue on the ownership of the disputed certificates have been finally
settled by the proper court, VRTI should be the one to operate the lines provisionally.

VRTI filed a complaint for the annulment of the sale of the 2 CPCs.

Ferrer and Pantrano argued that VRTI had no valid title to the CPCs since the prior sale to it
was still subject a suspensive condition — the approval of the PSC. Hence, the sale by public
auction to Ferrer, and the subsequent sale to Pantranco were valid.

Pantranco also filed a third-party complaint against Villarama, alleging that he and VRTI are one
and the same. Villarama claimed that he was just a part-time general manager of VRTI.

The CFI ruled in favor of VRTI and declared the sale of the CPCs to Ferrer and Pantranco void.

The CFI also held that VRTI is a distinct and separate entity from Villarama, and dismissed
Pantranco’s third-party complaint. Hence this appeal.

Issue: ​Were VRTI (a corporation) and Jose Villarama one and the same?

S’s Ruling:​ Yes.

Villarama supplied the organization expenses and the assets of the Corporation, such as trucks
and equipment. There was no actual payment by the original subscribers as appearing in the
books. Villarama used the Corporation’s money and deposited them to his private accounts.

Villarama admitted that he mingled the corporate funds with his own money, that some
purchases of the Corporation were made in his name, and that he advanced funds for it.

These circumstances are strong evidence showing that Villarama was not a mere part-time
general manager. The Corporation is his alter ego.

Villarama’s control over VRTI, especially in the management and disposition of its funds, was so
extensive and intimate that it is impossible to segregate and identify which money belonged to
whom.
This interference with the affairs of the corporation, and particularly its finances, are inconsistent
with the purposes of the Corporation law, which seeks to separate personal responsibilities from
corporate undertakings.

It is the very essence of incorporation that the acts and conduct of the corporation be carried out
in its own corporate name because it has its own personality.

A corporation is a legal entity distinct and separate from the members and stockholders who
compose it.

When this corporate fiction is used as a means of perpetrating a fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement
or perfection of a monopoly or the perpetration of a crime, the veil of corporate fiction must be
lifted.

Here, Villarama had the obligation to honor the restrictive clause in the very first sale of CPCs
between him and Pantranco (the condition that Villarama shall not apply for any service identical
with Pantranco). VRTI, being Villarama’s alter ego, cannot evade this obligation by invoking
corporate fiction.

Hence, this restrictive clause should’ve also applied to VRTI.

The SC reversed the CFI’s dismissal of the third party complaint. The case was remanded to the
CFI.

——

Case 13
FRANCISCO MOTORS CORPORATION vs. COURT OF APPEALS and SPOUSES
GREGORIO and LIBRADA MANUEL

Re: Corporate assets cannot answer for members’ personal liabilities

G.R. No. 100812; June 25, 1999

Facts:​ Francisco Motors Corp (FMC) filed a complaint against Spouses Manuel to recover
amounts representing the unpaid balances of a jeep body purchased by the Manuels; cost of
repair of the vehicle; and cost of suit and attorney's fees.

The Manuels filed a counterclaim for unpaid legal services by Gregorio Manuel (P50,000) which
was not paid by the incorporators, directors and officers of FMC.

It would appear that Gregorio used to be FMC’s Assistant Legal Officer. He represented the
Francisco family (the incorporators and officers of FMC) in an estate proceeding. After he was
terminated from FMC, his services were not paid.

The trial court ruled in favor of FMC, but also allowed the counterclaim of the Manuels. Both
parties appealed.

FMC 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.

FMC also contended that it was not the real party in interest as regards the counterclaim,
because the parties involved in the estate case were the individual members of the Francisco
family, not the corporation. The fees being demanded by Gregorio were liabilities of the
individual members of the corporation, in their personal capacities as heir of the decedent in the
estate case. FMC stressed that its personality is separate and distinct from that of its members.

The CA ruled against FMC, ruling that:


As to the question of jurisdiction, FMC is estopped from questioning jurisdiction because it filed
a motion for reconsideration from an order of default issued by the trial court.

As to the defense of corporate fiction, the CA applied the doctrine of piercing of the veil of
corporate fiction. “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.”

Hence this petition.

Issue: ​Was the counterclaim proper? Was the CA correct in applying the doctrine of piercing of
the veil of corporate fiction?

SC’s Ruling: ​The counterclaim was not proper. The CA was incorrect in applying the doctrine.

Under the doctrine of piercing the veil of corporate entity, the corporation's separate juridical
personality may be disregarded 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.

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,
for reasons of public policy and in the interest of justice, will be justifiably set aside.

The estate proceedings did not involve any business of FMC. Gregorio’s legal services were
acquired by the Franciscos in their personal capacities.

Corporate assets cannot be used to answer for the liabilities of the corporation’s individual
members.

Hence, FMC is not liable to Gregorio for the unpaid legal fees mentioned in the counterclaim.

———

Case 14
PHILIPPINE NATIONAL BANK vs. HYDRO RESOURCES CONTRACTORS CORPORATION

Re: The three-prong test

G.R. No. 167530; March 13, 2013

Facts: ​DBP and PNB foreclosed on mortgages made on the properties of Marinduque Mining
and Industrial Corporation (MMIC). As a result, DBP and PNB acquired substantially all the
assets of MMIC and resumed the business operations of the defunct MMIC by organizing NMIC.

DBP owned 57% of the shares of NMIC, while PNB owned 43% of the shares of NMIC. The
members of the Board of Directors of NMIC were either from DBP or PNB.

NMIC engaged the services of Hercon, Inc., for its Mine Stripping and Road Construction
Program. The services remain unpaid despite Hercon’s several demands. After sending its final
demand letter, Hercon filed a complaint for sum of money in the RTC, seeking to hold NMIC,
DBP, and PNB solidarily liable

Subsequent to the filing of the complaint, Hercon was acquired by HRCC in a merger. The
complaint was amended to substitute HRCC for Hercon.

Later, pursuant to Proclamation No. 50 by Pres. Aquino, creating the Asset Privatization Trust
(APT) for the expeditious disposition and privatization of certain government corporations, DBP
and PNB transferred certain assets and liabilities to the National Government, including their
stakes in NMIC. The National Government then transferred these assets and liabilities to the
APT as trustee under a Trust Agreement. Thus, the complaint was amended for the second
time to implead and include the APT as a defendant.

(So the case is now HRCC vs NMIC, DBP, PNB, and APT.)

DBP and PNB both raised the defense that HRCC had no cause of action against it because
they werew not privy to HRCC’s contract with NMIC. Moreover, NMIC’s juridical personality is
separate from that of DBP and PNB.
The RTC ruled in favor of HRCC. It pierced the corporate veil of NMIC and held DBP and PNB
solidarily liable with NMIC.

The RTC held that NMIC is owned by DBP and PNB, all the members of NMIC’s Board of
Directors are either from DBP or PNB, and the business of NMIC was being conducted and
controlled by both DBP and PNB. In fact, it was the Governor of DBP who was signing and
entering into contracts with third persons on behalf of NMIC.

RTC: In this jurisdiction, it is well-settled that "where it appears that the business enterprises are
owned, conducted and controlled by the same parties, both law and equity will, when necessary
to protect the rights of third persons, disregard legal fiction that two corporations are distinct
entities, and treat them as identical."

The CA afirmed, adding that to treat NMIC as a separate legal entity from DBP and PNB, and
then using such separate entity to evade the payment of a just debt, would be the height of
injustice and iniquity.

Hence this petition.

Petitioners assert that NMIC is a corporate entity with a juridical personality separate and
distinct from both PNB and DBP. They insist that the majority ownership by DBP and PNB of
NMIC is not a sufficient ground for disregarding the separate corporate personality of NMIC
because NMIC was not a mere adjunct, business conduit or alter ego of DBP and PNB.

Issue:​ Should the doctrine of piercing the veil of corporate fiction be applied in this case?

SC’s Ruling: ​No. NMIC is separate and distinct from DBP and PNB.

The doctrine of piercing the corporate veil applies only in 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.

The SC discussed the three-pronged test to determine the application of the alter ego theory
(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 plaintiff’s 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 whether 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. 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 3 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.

In this case, not one of the tests was satisfactorily met.

Both the RTC and the CA applied the alter ego theory and penetrated the corporate cover of
NMIC based on two factors: (1) the ownership by DBP and PNB of effectively all the stocks of
NMIC, and (2) the alleged interlocking directorates of DBP, PNB and NMIC.

Ownership by one corporation of all or a great majority of stocks of another corporation and their
interlocking directorates may only serve as indicia of control. By themselves and without more,
these circumstances are insufficient to establish an alter ego relationship or connection between
the two banks and NMIC.

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. Nor is the existence of interlocking directors, corporate officers and
shareholders.

The unpaid services of HRCC here concerned NMIC and NMIC’s officers, without any indication
of or reference to the control exercised by DBP and/or PNB over NMIC’s affairs, policies, and
practices.

Hence, the corporate veil of NMIC must not be pierced. DBP and PNB cannot be held solidarily
liable with NMIC for its unpaid obligations.

————

Case 15
PAMPLONA PLANTATION COMPANY, INC. and/or JOSE LUIS BONDOC vs. RODEL
TINGHIL, et al.

G.R. No. 159121 February 3, 2005

Facts:​ Pamplona Plantations Company Inc (PPCI) was organized to operate the coconut and
sugar plantation of Hacienda Pamplona in Negros Oriental.

This hacienda used to be owned by Mr. Bower. When PPCI took over in 1993, it did not absorb
all the workers of the hacienda, but hired some during harvest season as coconut hookers or
‘sakador,’ filers, haulers, scoopers or ‘lugiteros,’ and charcoal makers.

In 1995, Pamplona Plantation Leisure Corporation (PPLC) was established. The same workers
would later on perform jobs in the golf course and the recreational facilities of this company.

In 1996, the Pamplona Plantation Labor Independent Union (PAPLIU) had a meeting where
Tinghil, et al. (union members andf officers) Participated.
After learning of their participation, Jose Bondoc, the manager of PPCI, disallowed Tinghil, et al.
from working at the plantation.
Thus, Tinghil, et al. filed complaints in the NLRC against PPCI and Bondoc for unfair labor
practice, illegal dismissal, underpayment, overtime pay, etc.

Later, one of the workers (Carlito Tinghil) amended his complaint to implead PPLC.

The LA rendered a decision finding the workers, except for 3, entitled to separation pay.

PPCI appealed to the NLRC. The NLRC reversed the LA and ruled that except for Carlito, the
workers failed to implead PPLC, an indispensable party (the true employer); and that there
exists no employer-employee relation between PPCI and the workers.

The case was elevated to the CA. The CA reversed the NLRC and held that there is an
employer-employee relation between the parties. The fact that respondents were paid by
piecework did not mean that they were not employees. PPCI exercised control over the work
they performed. The four-fold test, specifically the last element—control, was satisfied.

The CA also held that respondents were regular employees, because the tasks they performed
were necessary and indispensable to the operation of the company.

Since there was no compliance with the twin requirements of a valid or authorized cause and of
procedural due process, their dismissal was illegal.

PPCI brings the case to the SC. It claims that it is not a real party in interest because the
workers were employed in PPLC; and that it is distinct and separate from PPLC.

Issue: ​Should the case against PPCI be dismissed for failure to implead PPLC - the true and
real employer?

SC’s Ruling:​ No.

An examination of the facts reveals that, for both the coconut plantation and the golf course,
there is only one management which the laborers deal with regarding their work.

A portion of the plantation had actually been converted into a golf course and other recreational
facilities. The weekly payrolls issued bore the name "Pamplona Plantation Co., Inc." They all
received their pay from the same person, Bondoc.

Since the workers were working for a firm known as Pamplona Plantation Co., Inc., the reason
they sued their employer through that name was natural and understandable.

PPCI and PPLC appear to be separate corporate entities. But this fiction of law cannot be
invoked to further an end subversive of justice.
The corporate mask may be removed and the corporate veil pierced when a corporation is the
mere alter ego of another. The notion of separate legal entity should be set aside and the
factual truth upheld. When that happens, the corporate character is not necessarily abrogated. It
continues for other legitimate objectives. But it may be pierced in the interest of justice.

To protect the rights of labor, two corporations with identical directors, management, office and
payroll should be treated as one entity only. A suit by the employees against one corporation
should be deemed as a suit against the other. Also, the rights and claims of workers should not
be prejudiced by the acts of the employer that tend to confuse them about its corporate identity.
The corporate fiction must yield to truth and justice.

Here, the corporations have basically the same incorporators and directors and are headed by
the same official. Both use only one office and one payroll and are under one management.

The attempt to make the two corporations appear as two separate entities, insofar as the
workers are concerned, should be viewed as a devious but obvious means to defeat the ends of
the law.

——

Case 16
GERARDO LANUZA, JR. AND ANTONIO O. OLBES vs. BF CORPORATION, SHANGRI-LA
PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B. COLAYCO, MAXIMO G. LICAUCO III,
AND BENJAMIN C. RAMOS

(See Case 33 below)

——

Case 17
INDUSTRIAL REFRACTORIES CORPORATION OF THE PHILIPPINES vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and REFRACTORIES
CORPORATION OF THE PHILIPPINES

Re: Corporate name; first registrant has prior right

G.R. No. 122174 October 3, 2002

Facts​: In 1976, the Refractories Corporation of the Philippines (RCP) was organized to engage
in the manufacturing, production, selling, exportation, and dealing with refractory bricks.

In 1977, RCP registered its corporate and business name with the Bureau of Domestic Trade.
In 1979, the Industrial Refractories Corporation of the Philippines (IRCP) was incorporated
under the name of “Synclaire Manufacturing Corporation”.
In 1985, it amended its Articles of Incorporation to change its corporate name to IRCP. It is
engaged in the manufacturing of ceramics and other products.

Both are local suppliers of monolithic gunning mix.

In 1988, RCP filed a petition to compel IRCP to change its name, on the ground that it is
confusingly similar with RCP’s name, such that the public may be confused or deceived in
believing that they are one and the same corporation.

SEC ruled in favor of RCP, declaring that IRCP’s name is deceptiively and confusingly similar
with RCP’s. It directed IRCP to amend its AoI by deleting the name “refractories corporation of
the Philippines”.

IRCP appealed to SEC En Banc, arguing that RCP has no right to the exclusive use of its
corporate name tat’s composed of generic or common words.

The SEC En Banc modified the ruling, and ordered IRCP to delete only “refractories”. The IRCP
appealed to the CA.

The CA ruled against IRCP and held that RCP has established that it had a prior right to use the
word “refractories”.

The IRCP elevated the case to the SC, arguing that RCP is not entitled to use the generic name
"refractories" and that there is no confusing similarity between their corporate names.

Issue​: Are their names confusingly similar?

SC​: Yes.

It is the SEC’s duty to prevent confusion in the use of corporate names not only for the
protection of the corporations involved but more so for the protection of the public, and it has
authority to de-register at all times and under all circumstances corporate names which in its
estimation are likely to generate confusion. The present case falls within the ambit of the SEC’s
regulatory powers.

Section 18 of the Corporation Code expressly prohibits the use of a corporate name which is
"identical or deceptively or confusingly similar to that of any existing corporation or to any other
name already protected by law or is patently deceptive, confusing or contrary to existing laws".

The policy behind the foregoing prohibition is to avoid fraud upon the public that will have
occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the
reduction of difficulties of administration and supervision over corporation.

Pursuant thereto, the Revised Guidelines in the Approval of Corporate and Partnership Names
specifically requires that:
1. a corporate name shall not be identical, misleading or confusingly similar to one already
registered by another corporation with the Commission’
2. if the proposed name is similar to the name of a registered firm, the proposed name must
contain at least one distinctive word different from the name of the company already registered.

As held in Philips Export B.V. vs. Court of Appeals, to fall within the prohibition of the law, two
requisites must be proven, to wit:
1. that the complainant corporation acquired a prior right over the use of such corporate name;
and
2. the proposed name is either: (a) identical, or (b) deceptively or confusingly similar to that of
any existing corporation or to any other name already protected by law; or (c) patently
deceptive, confusing or contrary to existing law.

As regards the first requisite, it has been held that the right to the exclusive use of a corporate
name with freedom from infringement by similarity is determined by priority of adoption.

In this case, RCP was incorporated in 1976 and since then has been using the corporate name
"Refractories Corp. of the Philippines".

Meanwhile, IRCP was incorporated in 1979 originally under the name "Synclaire Manufacturing
Corporation". It only started using the name "Industrial Refractories Corp. of the Philippines" in
1985, or 9 years after RCP started using its name.

Thus, being the prior registrant, RCP has acquired the right to use the word "Refractories" as
part of its corporate name.

Anent the second requisite, in determining the existence of confusing similarity in corporate
names, the test is whether the similarity is such as to mislead a person using ordinary care and
discrimination and the Court must look to the record as well as the names themselves.

Here, both names contain the identical words "Refractories", "Corporation" and "Philippines".
The only word that distinguishes petitioner from respondent RCP is the word "Industrial" which
merely identifies a corporation’s general field of activities or operations.

Both cater to the same clientele, i.e. ̧ the steel industry. There were instances when different
steel companies were actually confused between the two, especially since they also have
similar product packaging.
Even without proof of actual confusion between the two corporate names, it suffices that
confusion is probable or likely to occur.

Refractory materials are described as follows:


"Refractories are structural materials used at high temperatures to [sic] industrial furnaces. They
are supplied mainly in the form of brick of standard sizes and of special shapes. Refractories
also include refractory cements, bonding mortars, plastic firebrick, castables, ramming mixtures,
and other bulk materials such as dead-burned grain magneside, chrome or ground ganister and
special clay."

While the word "refractories" is a generic term, its usage is not widespread and is limited merely
to the industry/trade in which it is used, and its continuous use by RCP for a considerable period
has made the term so closely identified with it.

——

Case 18
ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K. SA BANSANG
PILIPINAS, INC. vs. IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG
KATOTOHANAN

Re: Corporate name

G.R. No. 137592 December 12, 2001

Facts​: Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan (Suhay), is a
non-stock religious society or corporation registered in 1936.

In 1976, Eliseo Soriano and other members of corporation disassociated themselves from the
church. In 1977, they succeeded in registering a new non-stock religious society or corporation,
named Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan (Saligan).

In 1979, Suhay filed with the SEC a petition to compel Saligan to change its corporate name,

The SEC rule in favor of Suhay, ordering Saligan to change its corporate name to another name
that is not similar or identical to any name already used by a corporation, partnership or
association registered with the Commission. No appeal was taken from said decision.

During its pendency, however, or in 1980, Soriano, et al., registered Ang Mga Kaanib sa Iglesia
ng Dios Kay Kristo Hesus, H.S.K, sa Bansang Pilipinas (Kaanib). The acronym "H.S.K." stands
for Haligi at Saligan ng Katotohanan.

In 1994, Suhay filed another petition with the SEC, praying that Kaanib be compelled to change
its corporate name and be barred from using the same or similar name on the ground that the
same causes confusion among their members as well as the public.

Kaanib filed a motion to dismiss on the ground of lack of cause of action. The motion to dismiss
was denied.

SEC ruled against Kaanib and ordered it to change its corporate name.

SEC En Banc and the CA affirmed. Hence this petition.

Issue​: Should Kaanib be allowed to use the name it registered?

SC’s Ruling:​ No.

SEC Guidelines on Corporate Names states:


If the proposed name contains a word similar to a word already used as part of the firm name or
style of a registered company, the proposed name must contain two other words different from
the name of the company already registered;
Parties organizing a corporation must choose a name at their peril; and the use of a name
similar to one adopted by another corporation, whether a business or a nonprofit organization, if
misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may
be prevented by the corporation having a prior right, by a suit for injunction against the new
corporation to prevent the use of the name.

Kaanib claims that it complied with the SEC guideline by adding not only 2 but 8 words to their
registered name, to wit: "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.," which, Kaanib
argues, effectively distinguished it from Suhay.

The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc." are merely descriptive
of and also referring to the members, or kaanib, who are residing in the Philippines. These
words can hardly serve as an effective differentiating medium necessary to avoid confusion or
difficulty in distinguishing petitioner from respondent.

This is especially so, since both petitioner and respondent corporations are using the same
acronym — H.S.K.; not to mention the fact that both are espousing religious beliefs and
operating in the same place.

Significantly, the only difference between the corporate names of petitioner and respondent are
the words SALIGAN and SUHAY. These words are synonymous — both mean ground,
foundation or support.

——
Case 19
LYCEUM OF THE PHILIPPINES, INC. vs. COURT OF APPEALS

Re: Corporate name; doctrine of secondary meaning

G.R. No. 101897. March 5, 1993

Facts​: Lyceum of the Philippines Inc (LPI) is an educational institution duly registered with the
SEC.

When it first registered with the SEC in 1950, it used the corporate name Lyceum of the
Philippines, Inc. and has used that name ever since.

In 1984, petitioner instituted proceedings before the SEC to compel the private respondents,
which are also educational institutions, to delete the word "Lyceum" from their corporate names
and permanently to enjoin them from using "Lyceum" as part of their respective names.

Some of the private respondents actively participated in the proceedings before the SEC. These
are the following, the dates of their original SEC registration being set out below opposite their
respective names:
Western Pangasinan Lyceum — 27 October 1950
Lyceum of Cabagan — 31 October 1962
Lyceum of Lallo, Inc. — 26 March 1972
Lyceum of Aparri — 28 March 1972
Lyceum of Tuao, Inc. — 28 March 1972
Lyceum of Camalaniugan — 28 March 1972

Before this case, it had a case against the Lyceum of Baguio, Inc. to require it to change its
corporate name and to adopt another name not "similar or identical" with that of petitioner. In an
Order SEC held that the corporate name of petitioner and that of the Lyceum of Baguio, Inc.
were substantially identical because of the presence of a "dominant" word, i.e., "Lyceum," the
name of the geographical location of the campus being the only word which distinguished one
from the other corporate name. The SEC also noted that petitioner had registered as a
corporation ahead of the Lyceum of Baguio, Inc. in point of time, and ordered the latter to
change its name to another name "not similar or identical [with]" the names of previously
registered entities.

Armed with this resolution, petitioner then wrote all the educational institutions it could find using
the word "Lyceum" as part of their corporate name, and advised them to discontinue such use of
"Lyceum." Then it instituted a petition before the SEC to enforce what it claims as its proprietary
right to the word "Lyceum."

The SEC hearing officer sustained petitioner’s claim to an exclusive right to use the word
"Lyceum”, relying on the Baguio case, holding that the word "Lyceum" was capable of
appropriation and that petitioner had acquired an enforceable exclusive right to the use of that
word.

On appeal, however, the SEC En Banc reversed the ruling and instead held that the attaching of
geographical names to the word "Lyceum" served sufficiently to distinguish the schools from
one another, especially since the campuses were physically remote from each other.

The CA affirmed. Hence this petition.

Issue​: Does the LPI have exclusive right to the name “Lyceum”?

SC’s Ruling​: No.

We do not consider that the corporate names of private respondent institutions are "identical
with, or deceptively or confusingly similar" to that of the petitioner institution.

True enough, the corporate names of private respondent entities all carry the word "Lyceum" but
confusion and deception are effectively precluded by the appending of geographic names to the
word "Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the
general public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would
be confused with the Lyceum of the Philippines.

Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn referred
to a locality on the river Ilissius in ancient Athens "comprising an enclosure dedicated to Apollo
and adorned with fountains and buildings erected by Pisistratus, Pericles and Lycurgus
frequented by the youth for exercise and by the philosopher Aristotle and his followers for
teaching." 8 In time, the word "Lyceum" became associated with schools and other institutions
providing public lectures and concerts and public discussions.

Thus today, the word "Lyceum" generally refers to a school or an institution of learning.

The use of the word "Lyceum" may not yet be as widespread as the use of "university," but it is
clear that a not inconsiderable number of educational institutions have adopted "Lyceum" or
"Liceo" as part of their corporate names. Since "Lyceum" or "Liceo" denotes a school or
institution of learning, it is not unnatural to use this word to designate an entity which is
organized and operating as an educational institution.

The doctrine of secondary meaning originated in the field of trademark law. Its application has,
however, been extended to corporate names since the right to use a corporate name to the
exclusion of others is based upon the same principle which underlies the right to use a particular
trademark or tradename.
In Philippine Nut Industry, Inc. v. Standard Brands, Inc., 11 the doctrine of secondary meaning
was elaborated in the following terms:
" . . . a word or phrase originally incapable of exclusive appropriation with reference to an article
on the market, because geographically or otherwise descriptive, might nevertheless have been
used so long and so exclusively by one producer with reference to his article that, in that trade
and to that branch of the purchasing public, the word or phrase has come to mean that the
article was his product."

The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its
corporate name has been for such length of time and with such exclusivity as to have become
associated or identified with the petitioner institution in the mind of the general public (or at least
that portion of the general public which has to do with schools).

Here, no evidence was ever presented in the hearing before the Commission which sufficiently
proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of the appellant.

While the LPI may have proved that it had been using the word 'Lyceum' for a long period of
time, this fact alone did not amount to mean that the said word had acquired secondary
meaning in its favor because the appellant failed to prove that it had been using the same word
all by itself to the exclusion of others.

More so, there was no evidence presented to prove that confusion will surely arise if the same
word were to be used by other educational institutions.

The number alone of the private respondents in the case at bar suggests strongly that
petitioner's use of the word "Lyceum" has not been attended with the exclusivity essential for
applicability of the doctrine of secondary meaning.

LPI is not entitled to a legally enforceable exclusive right to use the word "Lyceum" in its
corporate name and that other institutions may use "Lyceum" as part of their corporate names.

To determine whether a given corporate name is "identical" or "confusingly or deceptively


similar" with another entity's corporate name, it is not enough to ascertain the presence of
"Lyceum" or "Liceo" in both names. One must evaluate corporate names in their entirety and
when the name of petitioner is juxtaposed with the names of private respondents, they are not
reasonably regarded as "identical" or "confusingly or deceptively similar" with each other.

——

Case 20
PHILIPPINE FIRST INSURANCE COMPANY, INC. v. MARIA CARMEN HARTIGAN, CGH,
and O. ENGKEE
Re: Effects of change in corporate name

G.R. No. L-26370. July 31, 1970

Facts: ​PFICI was originally organized as an insurance corporation under the name of ‘The Yek
Tong Lin Fire and Marine Insurance Co., Ltd.’, as seen in its original articles of incorporation
presented to the SEC in 1953.

In 1961, the articles of incorporation were amended, changing the name of the corporation to
‘Philippine First Insurance Co., Inc.’

While doing business under the name of Yek Tong Lin Fire, it signed a promissory note as
co-maker together with Maria Carmen Hartigan (P5k) in favor of the China Banking Corporation.

It agreed to act as co-maker upon the application of Hartigan, who together with Antonio F.
Chua and Chang Ka Fu, signed an indemnity agreement in favor of the plaintiff, undertaking
jointly and severally, to pay the plaintiff damages, losses or expenses of whatever kind or
nature, including attorney’s fees and legal costs, which the plaintiff may sustain as a result of
the execution by the plaintiff as co-maker.

Hartigan failed to pay in full. Hence the complaint by PFICI.

Hartigan, et al., admitted the execution of the indemnity agreement but they claim that they
signed it in favor of the Yek Tong Lin and not in favor of PFICI.

They claim that there is no privity of contract between PFICI and them, and that the complaint
did not allege that the plaintiff and the Yek Tong Lin are one and the same or that the plaintiff
has acquired the rights of the latter.

The CFI ruled against PFICI, holding that the change of name is of dubious validity. Such
change of name in effect dissolved the original corporation by a process of dissolution not
authorized by our corporation law (see Secs. 62 and 67, inclusive, of our Corporation Law).

Moreover, said change of name does not appear to have been effected with the written note or
assent of stockholders representing at least two-thirds of the subscribed capital stock of the
corporation, a voting proportion required not only for the dissolution of a corporation but also for
any amendment of its articles of incorporation (Secs. 18 and 62, Corporation Law).

Furthermore, such change of corporate name appears to be against public policy and may be
effected only by express authority of law, but there is nothing in our corporation law authorizing
the change of corporate name in this jurisdiction.

In due time, the PFICI filed an MR, which was denied. The CFI ruled:
"Once a corporation is organized in this jurisdiction by the execution and registration of its
Articles of Incorporation, it shall continue to exist under its corporate name for the lifetime of its
corporate existence fixed in its Articles of Incorporation, unless sooner legally dissolved (Sec.
11, Corp. Law). Significantly, change of name is not one of the methods of dissolution of
corporations expressly authorized by our Corporation Law. Also significant is the fact that the
power to change its corporate name is not one of the general powers conferred on corporations
in this jurisdiction (Sec. 13, Corp. Law). The enumeration of corporate powers made in our
Corporation Law implies the exclusion of all others. It is obvious, in this connection, that change
of name is not one of the powers necessary to the exercise of the powers conferred on
Corporations by said Sec. 13 (see Sec. 14, Corp. Law).”

Hence this appeal.

Issue: ​May a Philippine corporation change its name and still retain its original personality and
individuality as such?

SC’s Ruling: Yes.

The Corporation Code authorizes corporations to amend their charter and lays down the
procedure for such amendment. It contains provisos restricting the power to amend when it
comes to the term of their existence and the increase or decrease of the capital stock. There is
no prohibition against the change of name.

The name of the corporation is “peculiarly important as necessary to the very existence of a
corporation.” Each corporation shall have a name by which it is to sue and be sued and do all
legal acts.

The name of a corporation designates the corporation in the same manner as the name of an
individual designates the person. Since an individual has the right to change his name under
certain conditions, there is no compelling reason why a corporation may not enjoy the same
right.

As in the case of an individual, such change may not be made exclusively by the corporation’s
own act. It has to follow the procedure prescribed by law for the purpose; and this is what is
important and indispensably prescribed — strict adherence to such procedure.

Corporation law commentators are unanimous in the view that a corporation may change its
name by merely amending its charter in the manner prescribed by law.

A general power to alter or amend the charter of a corporation necessarily includes the power to
alter the name of the corporation.

But the change of its name "never appears to be such an act as the corporation could do for
itself, but required the same power as created a corporation." Thus, a corporation cannot
change its name except in the manner provided by the statute. By that name alone is it
authorized to transact business.

The law gives a corporation no express or implied authority to assume another name that is
unappropriated; still less that of another corporation, which is expressly set apart for it and
protected by the law. If any corporation could assume at pleasure as an unregistered trade
name the name of another corporation, this practice would result in confusion and open the door
to frauds and evasions and difficulties of administration and supervision.

"An authorized change in the name of a corporation has no more effect upon its identity as a
corporation than a change of name of a natural person has upon his identity. It does not affect
the rights of the corporation or lessen or add to its obligations."

"A mere change in the name of a corporation, either by the legislature or by the corporators or
stockholders under legislative authority, does not, generally speaking, affect the identity of the
corporation, nor in any way affect the rights, privileges, or obligations previously acquired or
incurred by it. xxx The corporation, Upon such change in its name, is in no sense a new
corporation, nor the successor of the original one, but remains and continues to be the original
corporation. It is the same corporation with a different name, and its character is in no respect
changed . . ."

Hence, the lower court erred in dismissing the complaint.

"Actions brought by a corporation after it has changed its name should be brought under the
new name although for the enforcement of rights existing at the time the change was made.“

"The change in the name of the corporation does not affect its right to bring an action on a note
given to the corporation under its former name. “

The case is then remanded to the trial court for further proceeding.

——

Case 21
ZUELLIG FREIGHT AND CARGO SYSTEMS vs NATIONAL LABOR RELATIONS
COMMISSION AND RONALDO V. SAN MIGUEL

Re: The mere change in the corporate name is not considered under the law as the creation of
a new corporation; hence, the renamed corporation remains liable for the illegal dismissal of its
employee separated under that guise.

G.R. No. 157900, July 22, 2013


Facts:​ Ronaldo San Miguel brought a complaint for unfair labor practice, illegal dismissal,
non-payment of salaries and moral damages against Zuellig Freight, formerly known as Zeta
Brokerage Corporation (Zeta).

He had been a checker/customs representative of Zeta since 1985. In 1994, he and other
employees were informed that Zeta would cease operations, and that all affected employees,
including him, would be separated

Zeta informed him of his termination by letter, effective March 31, 1994. He reluctantly accepted
his separation pay subject to the standing offer to be hired to his former position by Zuellig. On
April 15, 1994, he was summarily terminated, without any valid cause and due process.

San Miguel’s contentions:​ The amendments of the articles of incorporation of Zeta were for
the purpose of changing the corporate name, broadening the primary functions, and increasing
the capital stock; and that such amendments could not mean that Zeta had been thereby
dissolved.

Zuellig’s contentions:​ San Miguel’s termination from Zeta had been for a cause authorized by
the Labor Code; its predecessor-in-interest had complied with the requirements for termination
due to the cessation of business operations; it had no obligation to employ San Miguel in the
exercise of its valid management prerogative

The Labor Arbiter (LA) ruled in favor of San Miguel, holding that he had been illegally dismissed.

LA: ​There was no valid cause for termination because Zeta did not really cease its operations. It
merely changed its business name and primary purpose and upgraded its stocks. Zuellig and
Zeta are legally the same person and entity.

The NLRC affirmed the LA’s decision. Zuellig elevated the case to the CA, which also ruled
against it.

CA:​ The closure of business operation was not validly made.The amendment of the articles of
incorporation merely changed its corporate name, broadened its primary purpose and increased
its authorized capital stocks. There being no valid closure of business operations, the dismissal
of San Miguel on alleged authorized cause of cessation of business was illegal.

Hence this appeal to the SC.

Issue: ​Was San Miguel’s termination legal?

SC’s Ruling:​ No, because there was no valid just or authorized cause for his termination,
because there was no “cessation” of business. There was only a change in the corporate name.
The Labor Code states: “Article 283. Closure of establishment and reduction of personnel. —
The employer may also terminate the employment of any employee due to the installation of
labor-saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of
operation of the establishment or undertaking xxx”

The amendments of the articles of incorporation of Zeta to change the corporate name to Zuellig
Freight and Cargo Systems, Inc. did not produce the dissolution of the former as a corporation.

The Corporation Code defined and delineated the different modes of dissolving a corporation,
and amendment of the articles of incorporation was not one of such modes.

The effect of the change of name was not a change of the corporate being.

The corporation, upon such change in its name, is in no sense a new corporation, nor the
successor of the original corporation. It is the same corporation with a different name, and its
character is in no respect changed.

In short, Zeta and petitioner Zuellig remained one and the same corporation. The change of
name did not give petitioner the license to terminate employees of Zeta without just or
authorized cause.

Zuellig, despite its new name, was the mere continuation of Zeta’s corporate being, and still
held the obligation to honor all of Zeta’s obligations, one of which was to respect San Miguel’s
security of tenure.

——

Case 22 (Digest by Ericha Gonadan)


YOUNG AUTO SUPPLY CO. AND NEMESIO GARCIA vs. THE HONORABLE COURT OF
APPEALS AND GEORGE CHIONG ROXAS

Re: Principal office

G.R. No. 104175 June 25, 1993

Facts:​ In 1987, Young Auto Supply Co. Inc. (YASCO) represented by Nemesio Garcia (its
president), Nelson Garcia and Vicente Sy, sold all of their shares of stock in Consolidated
Marketing & Development Corporation (CMDC) to George Roxas.

The purchase price was P8,000,000.00 payable as follows: a downpayment of P4,000,000.00


and the balance of P4,000,000.00 in four post dated checks of P1,000,000.00 each.
Immediately after the execution of the agreement, Roxas took full control of the four markets of
CMDC. However, the vendors held on to the stock certificates of CMDC as security pending full
payment of the purchase price.

The first check representing the downpayment was honored by the drawee bank but the four
other checks representing the balance of P4M were dishonored.

In the meantime, Roxas sold one of the markets to a third party. Out of the proceeds of the sale,
YASCO received P600,000.00, leaving a balance of P3,400,000.00.
Subsequently, Nelson Garcia and Vicente Sy assigned all their rights and title to the proceeds of
the sale of the CMDC shares to Nemesio Garcia.

In 1988, petitioners filed a complaint against Roxas in the RTC in Cebu City, praying that Roxas
be ordered to pay petitioners P3,400,00.00 or that full control of the three markets be turned
over to YASCO and Garcia. The complaint also prayed for the forfeiture of the partial payment
of P4,600,000.00 and the payment of attorney's fees and costs.

Roxas’ Contention:​ Venue was improperly laid.

The RTC ruled in favor of YASCO, et al., but on appeal, the CA dismissed the case on the
ground of improper venue.

Issue: ​Whether the CA erred in holding that the venue should be in Pasay City, and not in Cebu
City, where the petitioners/plaintiffs are residents.

SC’s Ruling:​ Yes. The CA erred in holding that the venue was improperly laid in Cebu City.

In holding that the venue was improperly laid in Cebu City, the CA relied on the address of
YASCO, as appearing in the Deed of Sale: "No. 1708 Dominga Street, Pasay City." This was
the same address written in YASCO's letters and several commercial documents in the
possession of Roxas.

In the case of Garcia, the CA said that he gave Pasay City as his address in three letters which
he sent to Roxas' brothers and sisters. Roxas was led by petitioners to believe that their
residence is in Pasay City and that he had relied upon those representations.

In the Regional Trial Courts, all personal actions are commenced and tried in the province or
city where the defendant or any of the defendants resides or may be found, or where the plaintiff
or any of the plaintiffs resides, at the election of the plaintiff [Sec. 2(b) Rule 4, Revised Rules of
Court].

There are two plaintiffs here: a natural person and a domestic corporation. Both plaintiffs aver in
their complaint that they are residents of Cebu City, thus:

Plaintiff YASCO is a domestic corporation duly organized and existing under Philippine
laws with principal place of business at M. J. Cuenco Avenue, Cebu City. It also has a
branch office at 1708 Dominga Street, Pasay City, Metro Manila.

Plaintiff Nemesio Garcia is of legal age, married, Filipino citizen and with business
address at Young Auto Supply Co., Inc., M. J. Cuenco Avenue, Cebu City. . . .

The Article of Incorporation of YASCO states: “That the place where the principal office
of the corporation is to be established or located is at Cebu City, Philippines”

A corporation has no residence in the same sense in which this term is applied to a natural
person. But for practical purposes, a corporation is in a metaphysical sense a resident of the
place where its principal office is located as stated in the articles of incorporation.

The Corporation Code precisely requires each corporation to specify in its articles of
incorporation the "place where the principal office of the corporation is to be located which must
be within the Philippines”. The purpose of this requirement is to fix the residence of a
corporation in a definite place, instead of allowing it to be ambulatory.

In Clavencilla Radio System v. Antillon, 19 SCRA 379 (1967), the SC explained why actions
cannot be filed against a corporation in any place where the corporation maintains its branch
offices. The Court ruled that to allow an action to be instituted in any place where the
corporation has branch offices would create confusion and work untold inconvenience to said
entity. By the same token, a corporation cannot be allowed to file personal actions in a place
other than its principal place of business unless such a place is also the residence of a
co-plaintiff or a defendant.

If it was Roxas who sued YASCO in Pasay City and the latter questioned the venue on the
ground that its principal place of business was in Cebu City, Roxas could argue that YASCO
was in estoppel because it misled Roxas to believe that Pasay City was its principal place of
business. But this is not the case.

With the finding that the residence of YASCO for purposes of venue is in Cebu City, where its
principal place of business is located, it becomes unnecessary to decide whether Garcia is also
a resident of Cebu City and whether Roxas was in estoppel from questioning the choice of Cebu
City as the venue.

——————

Case 23 (Digest by Ericha Gonadan)


LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC. vs.
HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY CORPORATION,
EMDEN ENCARNACION and HORATIO AYCARDO

Re: Failure to file by-laws within the period prescribed

G.R. No. 117188 August 7, 1997

Facts: ​LGVHAI was organized on February 8, 1983 as the association of homeowners and
residents of a subdivision called Loyola Grand Villas. It was registered with the Home Financing
Corporation, the predecessor of respondent HIGC, as the sole homeowners' organization in the
said subdivision. It was organized by the developer of the subdivision and its first president was
Victorio V. Soliven, owner of the developer. For unknown reasons, however, LGVHAI did not file
its corporate by-laws.

Sometime in 1988, the officers of the LGVHAI tried to register its by-laws. They failed to do so.
To the officers' consternation, they discovered that there were two other organizations within the
subdivision — the North Association and the South Association. According to private
respondents, a non-resident and Soliven, respectively, headed these associations. They also
discovered that these associations had five registered homeowners each who were also the
incorporators, directors and officers thereof. None of the members of the LGVHAI was listed as
member of the North Association while three members of LGVHAI were listed as members of
the South Association. The North Association was registered with the HIGC on February 13,
1989. It submitted its by-laws on December 20, 1988.

In July 1989, when Soliven inquired about the status of LGVHAI, Atty. Joaquin A. Bautista, the
head of the legal department of the HIGC, informed him that LGVHAI had been automatically
dissolved for two reasons. First, it did not submit its by-laws within the period required by the
Corporation Code and, second, there was non-user of corporate charter because HIGC had not
received any report on the association's activities. Apparently, this information resulted in the
registration of the South Association with the HIGC on July 27, 1989. It filed its by-laws on July
26, 1989.

These developments prompted the officers of the LGVHAI to lodge a complaint with the HIGC.
They questioned the revocation of LGVHAI's certificate of registration without due notice and
hearing and concomitantly prayed for the cancellation of the certificates of registration of the
North and South Associations by reason of the earlier issuance of a certificate of registration in
favor of LGVHAI.

On January 26, 1993, after due notice and hearing, private respondents obtained a favorable
ruling from HIGC, recognizing the Loyola Grand Villas Homeowners Association, Inc. as the
duly registered and existing homeowners association for Loyola Grand Villas homeowners, and
declaring the Certificates of Registration of Loyola Grand Villas Homeowners (North)
Association, Inc. and Loyola Grand Villas Homeowners (South) Association, Inc. as hereby
revoked or cancelled.

The South Association appealed to the Appeals Board of the HIGC. The Board dismissed the
appeal for lack of merit. Thus, it appealed to the CA, raising two issues:

First, whether or not LGVHAI's failure to file its by-laws within the period prescribed by
Section 46 of the Corporation Code resulted in the automatic dissolution of LGVHAI.
Second, whether or not two homeowners' associations may be authorized by the HIGC
in one "sprawling subdivision."

The CA affirmed the Resolution of the HIGC Appeals Board, adding that, as there was no
showing that the registration of LGVHAI had been validly revoked, it continued to be the duly
registered homeowners' association in the Loyola Grand Villas. More importantly, the South
Association did not dispute the fact that LGVHAI had been organized and that, thereafter, it
transacted business within the period prescribed by law.

On the second issue, the Court of Appeals reiterated its previous ruling that the HIGC has the
authority to order the holding of a referendum to determine which of two contending
associations should represent the entire community, village or subdivision.

LGVHAI’s Contentions:​ Requirement of adoption of by-laws is not mandatory. They point to


P.D. No. 902-A as having resolved the issue of whether said requirement is mandatory or
merely directory. Citing Chung Ka Bio v. Intermediate Appellate Court, 8 private respondents
contend that Section 6(I) of that decree provides that non-filing of by-laws is only a ground for
suspension or revocation of the certificate of registration of corporations and, therefore, it may
not result in automatic dissolution of the corporation. Section 9 of the Corporation Code
provides that the corporate existence and juridical personality of a corporation begins from the
date the SEC issues a certificate of incorporation under its official seal. Consequently, even if
the by-laws have not yet been filed, a corporation may be considered a de facto corporation.

SA’s Contention: ​The use of the word MUST in Sec. 46 is no exception — it means file the
by-laws within one month after notice of issuance of certificate of registration OR ELSE. The OR
ELSE, though not specified, is inextricably a part of MUST. P.D. No. 902-A cannot exceed the
scope and power of the Corporation Code which itself does not provide sanctions for non-filing
of by-laws. For the petitioner, it is "not proper to assess the true meaning of Sec. 46 . . . on an
unauthorized provision on such matter contained in the said decree."

South Association filed the instant petition for review on certiorari.

Issue: ​May the failure of a corporation to file its by-laws within one month from the date of its
incorporation, as mandated by Section 46 of the Corporation Code, result in its automatic
dissolution?

SC’s Ruling: ​No. The automatic corporate dissolution for failure to file the by-laws on time was
never the intention of the legislature. The failure to file the by-laws within that period does not
imply the "demise" of the corporation.

By-laws may be necessary for the "government" of the corporation but these are subordinate to
the articles of incorporation as well as to the Corporation Code and related statutes. There are
in fact cases where by-laws are unnecessary to corporate existence or to the valid exercise of
corporate powers. The failure to exercise the power will be ascribed to mere non-action which
will not render void any acts of the corporation which would otherwise be valid. The mere fact,
however, of the existence of power in the corporation to adopt by-laws does not ordinarily and of
necessity make the exercise of such power essential to its corporate life, or to the validity of any
of its acts.

Although the Corporation Code requires the filing of by-laws, it does not expressly provide for
the consequences of the non-filing of the same within the period provided for in Section 46.

However, such omission has been rectified by Presidential Decree No. 902-A, the pertinent
provisions on the jurisdiction of the SEC of which state:
Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the
following powers:
xxx xxx xxx
(1) 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, including the following:
xxx xxx xxx
5. Failure to file by-laws within the required period;
xxx xxx xxx

In the exercise of the foregoing authority and jurisdiction of the Commission or by a


Commissioner or by such other bodies, boards, committees and/or any officer as may be
created or designated by the Commission for the purpose. The decision, ruling or order of any
such Commissioner, bodies, boards, committees and/or officer may be appealed to the
Commission sitting en banc within thirty (30) days after receipt by the appellant of notice of such
decision, ruling or order. The Commission shall promulgate rules of procedures to govern the
proceedings, hearings and appeals of cases falling with its jurisdiction.

The aggrieved party may appeal the order, decision or ruling of the Commission sitting en banc
to the Supreme Court by petition for review in accordance with the pertinent provisions of the
Rules of Court.
“MUST” = “ought” which connotes compulsion or mandatoriness. However, the word "must" in a
statute, like "shall," is not always imperative. It may be consistent with an exercise of discretion.

Sec. 46. Adoption of by-laws. — Every corporation formed under this Code, must within one (1)
month after receipt of official notice of the issuance of its certificate of incorporation by the
Securities and Exchange Commission, adopt a code of by-laws for its government not
inconsistent with this Code. For the adoption of by-laws by the corporation, the affirmative vote
of the stockholders representing at least a majority of the outstanding capital stock, or of at least
a majority of the members, in the case of non-stock corporations, shall be necessary. The
by-laws shall be signed by the stockholders or members voting for them and shall be kept in the
principal office of the corporation, subject to the stockholders or members voting for them and
shall be kept in the principal office of the corporation, subject to inspection of the stockholders or
members during office hours; and a copy thereof, shall be filed with the Securities and
Exchange Commission which shall be attached to the original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed
prior to incorporation; in such case, such by-laws shall be approved and signed by all the
incorporators and submitted to the Securities and Exchange Commission, together with the
articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange
Commission of a certification that the by-laws are not inconsistent with this Code.

The Securities and Exchange Commission shall not accept for filing the by-laws or any
amendment thereto of any bank, banking institution, building and loan association, trust
company, insurance company, public utility, educational institution or other special corporations
governed by special laws, unless accompanied by a certificate of the appropriate government
agency to the effect that such by-laws or amendments are in accordance with law.

——

Case 24 (Digest by Ericha Gonadan)


CHINA BANKING CORPORATION vs. COURT OF APPEALS, and VALLEY GOLF and
COUNTRY CLUB, INC.

Re: Intra-corporate disputes; doctrine of primary jurisdiction

G.R. No. 117604 March 26, 1997

​Facts: ​In 1974, Galicano Calapatia, Jr., a stockholder ofValley Golf & Country Club, Inc.
(VGCC), pledged his Stock Certificate to China Banking Corporation (CBC).
CBC wrote to VGCCI, requesting that the pledge agreement be recorded in its books. VGCCI
replied that the deed of pledge executed by Calapatia in CBC’s favor was duly noted in its
corporate books.

In 1983, Calapatia obtained a loan of P20,000.00 from CBC, payment of which was secured by
the pledge agreement still existing between Calapatia and CBC.

In 1985, due to Calapatia's failure to pay his obligation, CBC filed a petition for extrajudicial
foreclosure before Notary Public Antonio T. de Vera of Manila, requesting the latter to conduct a
public auction sale of the pledged stock.

CBC informed VGCCI of the foreclosure proceedings and requested that the pledged stock be
transferred to its name and the same be recorded in the corporate books.

However, VGCCI wrote petitioner expressing its inability to accede to CBC’s request in view of
Calapatia's unsettled accounts with the club.

Despite this, Notary Public de Vera held a public auction and CBC emerged as the highest
bidder at P20,000.00 for the pledged stock. Consequently, CBC was issued the corresponding
certificate of sale.

VGCCI sent Calapatia a notice demanding full payment of his overdue account in the amount of
P18,783.24, followed by a demand letter dated for the same amount9 and another notice in
1986 for P23,483.24.

In 1986, VGCCI caused to be published in the newspaper Daily Express a notice of auction sale
of a number of its stock certificates, to be held on 10 December 1986 at 10:00 a.m. Included
therein was Calapatia's own share of stock. VGCCI informed Calapatia of the termination of his
membership due to the sale of his share of stock in the 10 December 1986 auction.

In 1989, CBC advised VGCCI that it is the new owner of Calapatia's Stock Certificate by virtue
of being the highest bidder in the 1985 auction and requested that a new certificate of stock be
issued in its name.

In 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold at the public
auction held on 10 December 1986 for P25,000.00.

CBC protested the sale by VGCCI of the subject share of stock and thereafter filed a case with
the RTC of Makati for the nullification of the 10 December 1986 auction and for the issuance of
a new stock certificate in its name.

RTC:​ It dismissed the complaint for lack of jurisdiction over the subject matter on the theory that
it involves an intra-corporate dispute It also denied petitioner's motion for reconsideration.
CBC filed a complaint with the SEC for the nullification of the sale of Calapatia's stock by
VGCCI; the cancellation of any new stock certificate issued pursuant thereto; for the issuance of
a new certificate in its name; and for damages, attorney's fees and costs of litigation.

SEC Hearing Officer rendered a decision in favor of VGCCI, stating that "considering that the
said share is delinquent, VGCCI had valid reason not to transfer the share in the name of the
petitioner in the books of VGCCI until liquidation of delinquency."
CBC appealed to the SEC en banc.

SEC En Banc issued an order reversing the decision of its hearing officer. It declared thus: “The
Commission en banc believes that appellant-petitioner has a prior right over the pledged share
and because of pledgor's failure to pay the principal debt upon maturity, appellant-petitioner can
proceed with the foreclosure of the pledged share.”

The auction sale conducted on December 10, 1986 was declared void. VGCCI was ordered to
issue another membership certificate in the name of CBC.

The sudden turn of events sent VGCCI to seek redress from the CA.

The CA reversed the orders of the SEC and its hearing officer on ground of lack of jurisdiction
over the subject matter and, consequently, dismissed petitioner's original complaint. The CA
declared that the controversy between CBC and VGCCI is not intra-corporate.

In order that the SEC can take cognizance of a case, the controversy must pertain to any of the
following relationships:
(a) between the corporation, partnership or association and the public;
(b) between the corporation, partnership or association and its stockholders, partners,
members, or officers;
(c) between the corporation, partnership or association and the state in so far as its franchise,
permit or license to operate is concerned, and
(d) among the stockholders, partners or associates themselves

The establishment of any of the relationship mentioned will not necessarily always confer
jurisdiction over the dispute on the SEC to the exclusion of the regular courts.

The better policy in determining which body has jurisdiction over a case would be to consider
not only the status or relationship of the parties but also the nature of the question that is the
subject of their controversy.

Issues:
(1) Whether or not petitioner is a stockholder of VGCCI
(2) Whether or not the nature of the controversy between petitioner and private respondent
corporation is intra-corporate.
(3) Whether SEC or the regular courts has jurisdiction over the controversy of the case.

SC’s Ruling:
(1) Yes. By virtue of the sale, CBC became a bona fide stockholder of VGCCI.
(2) Yes. It is an intra-corporate relationship between petitioner and respondent.
(3) The SEC, therefore, took proper cognizance of the instant case. SEC's technical expertise
cannot be over-emphasized involving as it does the meticulous analysis and correct
interpretation of a corporation's by-laws as well as the applicable provisions of the Corporation
Code in order to determine the validity of VGCCI's claims.

The Court held that under the "sense-making and expeditious ​doctrine of primary jurisdiction
. . . the courts cannot or will not determine a controversy involving a question which is within the
jurisdiction of an administrative tribunal, where the question demands the exercise of sound
administrative discretion requiring the special knowledge, experience, and services of the
administrative tribunal to determine technical and intricate matters of fact, and a uniformity of
ruling is essential to comply with the purposes of the regulatory statute administered.”

Thus, in 1984, the Court noted that "between the power lodged in an administrative body and a
court, the unmistakable trend has been to refer it to the former. 'Increasingly, this Court has
been committed to the view that unless the law speaks clearly and unequivocally, the choice
should fall on [an administrative agency.]'

VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art VIII of its
by-laws which provides that "after a member shall have been posted as delinquent, the Board
may order his/her/its share sold to satisfy the claims of the Club. . ."

It is pursuant to this provision that VGCCI also sold the subject share at public auction, of which
it was the highest bidder. VGCCI caps its argument by asserting that its corporate by-laws
should prevail. The bone of contention, thus, is the proper interpretation and application of
VGCCI's aforequoted by-laws, a subject which irrefutably calls for the special competence of the
SEC.

The contracting parties explicitly stipulated therein that the said pledge will also stand as
security for any future advancements (or renewals thereof) that Calapatia (the pledgor) may
procure from petitioner. The validity of the pledge agreement between petitioner and Calapatia
cannot thus be held suspect by VGCCI. As candidly explained by petitioner, the promissory note
of 3 August 1983 in the amount of P20,000.00 was but a renewal of the first promissory note
covered by the same pledge agreement. VGCCI completely disregarded petitioner's rights as
pledgee. It even failed to give petitioner notice of said auction sale. Such actuations of VGCCI
thus belie its claim of good faith.

In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at
the time the transaction or agreement between said third party and the shareholder was entered
into, in this case, at the time the pledge agreement was executed. VGCCI could have easily
informed petitioner of its by-laws when it sent notice formally recognizing petitioner as pledgee
of one of its shares registered in Calapatia's name. Petitioner's belated notice of said by-laws at
the time of foreclosure will not suffice.

The purpose of a by-law is to regulate the conduct and define the duties of the members
towards the corporation and among themselves. They are self-imposed and, although adopted
pursuant to statutory authority, have no status as public law.
Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except
when they have knowledge of the provisions either actually or constructively.

In the case of Fleisher v. Botica Nolasco, 47 Phil. 584, the Supreme Court held that the by-law
restricting the transfer of shares cannot have any effect on the transferee of the shares in
question as he "had no knowledge of such by-law when the shares were assigned to him. He
obtained them in good faith and for a valuable consideration. He was not a privy to the contract
created by the by-law between the shareholder . . .and the Botica Nolasco, Inc. Said by-law
cannot operate to defeat his right as a purchaser.

By analogy of the above-cited case, the Commission en banc is of the opinion that said case is
applicable to the present controversy. Appellant-petitioner bank as a third party can not be
bound by appellee-respondent's by-laws. It must be recalled that when appellee-respondent
communicated to appellant-petitioner bank that the pledge agreement was duly noted in the
club's books there was no mention of the shareholder-pledgor's unpaid accounts.

The Commission en banc also believes that for the exception to the general accepted rule that
third persons are not bound by by-laws to be applicable and binding upon the pledgee,
knowledge of the provisions of the VGCI By-laws must be acquired at the time the pledge
agreement was contracted. Knowledge of said provisions, either actual or constructive, at the
time of foreclosure will not affect pledgee's right over the pledged share. Art. 2087 of the Civil
Code provides that it is also of the essence of these contracts that when the principal obligation
becomes due, the things in which the pledge or mortgage consists maybe alienated for the
payment to the creditor.
Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock against which
the corporation holds any unpaid claim shall be transferable in the books of the corporation"
cannot be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from
unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe
the corporation arising from any other transaction." 40 In the case at bar, the subscription for the
share in question has been fully paid as evidenced by the issuance of Membership Certificate
No. 1219. 41 What Calapatia owed the corporation were merely the monthly dues. Hence, the
aforequoted provision does not apply.
WHEREFORE, premises considered, the assailed decision of the Court of Appeals is
REVERSED and the order of the SEC en banc dated 4 June 1993 is hereby AFFIRMED.
P. D. No. 902-A conferred upon the SEC the following pertinent powers:
Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all
corporations, partnerships or associations, who are the grantees of primary franchises and/or a
license or permit issued by the government to operate in the Philippines, and in the exercise of
its authority, it shall have the power to enlist the aid and support of and to deputize any and all
enforcement agencies of the government, civil or military as well as any private institution,
corporation, firm, association or person.
xxx xxx xxx
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it
as expressly granted under existing laws and decrees, it shall have original and exclusive
jurisdiction to hear and decide cases involving:
a) Devices or schemes employed by or any acts of the board of directors, business associates,
its officers or partners, amounting to fraud and misrepresentation which may be detrimental to
the interest of the public and/or of the stockholders, partners, members of associations or
organizations registered with the Commission.
b) Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members or associates, respectively;
and between such corporation, partnership or association and the State insofar as it concerns
their individual franchise or right to exist as such entity;
c) Controversies in the election or appointment of directors, trustees, officers, or managers of
such corporations, partnerships or associations.
d) Petitions of corporations, partnerships or associations to be declared in the state of
suspension of payments in cases where the corporation, partnership or association possesses
property to cover all of its debts but foresees the impossibility of meeting them when they
respectively fall due or in cases where the corporation, partnership or association has no
sufficient assets to cover its liabilities, but is under the Management Committee created
pursuant to this Decree.

——

Case 25
WILSON GAMBOA vs FINANCE SECRETARY MARGARITO B. TEVES, ET AL.

Re: meaning of “capital” in the constitutional provision that limits foreign ownership over public
utilities

G.R. No. 176579; June 2011

Facts:​ In 1928, Act No. 3236 was enacted, granting PLDT a franchise and the right to engage
in the telecommunications business.
In 1969, General Telephone and Electric Corporation (GTE), an American company and a major
stockholder of PLDT, sold 26% of the outstanding capital stock (OCS) of PLDT to Philippine
Telecommunications Investment Corporation (PTIC).

In 1977, Prime Holdings Inc. (PHI) was incorporated. It later became the owner of 111,415
shares of PTIC thru 3 Deeds of Assignment executed by PTIC’s stockholders.

In 1986, those 111, 415 shares were sequestered by the PCGG. This represented 46.125% of
PTIC’s OCS.

In 1999, First Pacific, a company registered in Bermuda and based in Hong Kong, acquired the
remaining 54% of PTIC.

In 2006, the government, thru the Inter-Agency Privatization Council (IPC), caused a public
bidding for the sequestered shares. Parallax Venture Fund won the bid. However, First Pacific
announced that it would exercise its right of first refusal and buy the sequestered shares by
matching Parallax’s bid. It later entered into a conditional sale and purchase agreement with the
government. The sale to First Pacific was completed in 2007.

Since PTIC is a stockholder of PLDT, the sale by the government is actually an indirect sale of
PLDT’s shares (specifically, 12 million shares representing 6.3% of its OCS).

This sale increased First Pacific’s common shareholdings in PLDT from 30.7% to 37%, thereby
increasing the common shareholdings of foreigners in PLDT to 81.41%. This violates Section
11, Article XII of the Constitution.

Section 11, Article XII, Constitution states: “No franchise, certification, or any other form of
authority for the operation of a public utility shall be granted except to citizens of the Philippines,
or to corporations or associations organized under Philippine laws, at least 60% of whose
capital is owned by such citizens.” —This means that foreign ownership of a public utility is
limited to not more than 40%. 60% must be Filipinos.

This provision was included in the Constitution as a recognition the sensitive and vital position of
public utilities both in the national economy and for national security. This ensures that the
Filipinos will have “effective control” over public utility companies.

Later, the House of Representatives Commission on Good Governance conducted a public


hearing regarding the sale and concluded that it followed due diligence and conformed to the
legal procedures. It also concluded that First Pacific’s acquisition will not violate the
constitutional limitation since PTIC only holds 13.847% of PLDT’s OCS.

Pablito and Arno Sanidad joined themselves as petitioners-in-intervention, claiming that as


PLDT subscribers, they have a stake in the outcome of the controversy.

Main issue:​ Whether the term “capital” in Sec. 11, Art. XII of the Constitution refers to total
common shares only or to total OCS (which includes both common and non-voting preferred
shares).

Sub-issue:​ Whether Gamboa, a stockholder of PLDT, has locus standi (legal standing).

Ruling on the sub-issue:​ Yes. As stockholder of PLDT, he has the right to question the sale
because the possible unconstitutionality of such sale can result to revocation of PLDT’s
franchise, which would then directly affect his interest as stockholder.

Also, the SC mentioned the doctrine of transcendental importance. This case involves a public
utility company, and thus, it would affect national economy and the economic welfare of the
Filipino people.

Petitioners’ argument on the main issue:​ “Capital” should only mean the total common
shares because such shares are entitled to vote and it is through voting that control over a
corporation is exercised.

Respondent’s contention:​ “Capital” should include preferred shares since the Constitution
does not distinguish among classes of stock.

Ruling on the main issue:​ The “capital” in the provision should be construed to mean only the
voting shares (common shares) of the corporation.

Owning a voting share means having a “controlling” interest in the corporation. Non-voting
shares are not included in the “capital” mentioned in the constitutional limitation on foreign
ownership of public utilities.

One of the rights of a stockholder is the right to participate in the control or management of the
corporation. This is exercised through his vote in the election of directors because it is the board
of directors that controls or manages the corporation.

In the absence of provisions in the articles of incorporation denying voting rights to preferred
shares, preferred shares have the same voting rights as common shares. However, preferred
shareholders are often excluded from any control, that is, deprived of the right to vote in the
election of directors and on other matters, on the theory that the preferred shareholders are
merely investors in the corporation for income in the same manner as bondholders.

In fact, under the Corporation Code, only preferred or redeemable shares can be deprived of
the right to vote. 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.

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 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.

This interpretation is reinforced by the definition of “Philippine national” in the Foreign


Investments Act of 1991: “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; xxx”

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

Motion for Reconsideration (October 2012)

Movants contend that the term "capital" has long been settled and defined to refer to the total
outstanding shares of stock, whether voting or non-voting.

They claim that the SEC, which is the administrative agency tasked to enforce the 60-40
ownership requirement, has consistently adopted this particular definition in its numerous
opinions.

SC​: MRs are denied, with finality.

For more than 75 years since the 1935 Constitution, the SC 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" until now.
The opinions of the SEC, as well as of the 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
June 2011 Decision.

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 Grandfather Rule in determining compliance with
the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for
certain economic activities.

“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.
Compliance with the constitutional limitation(s) on engaging in nationalized 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 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.”

It was the intent of the framers of the 1987 Constitution to adopt the Grandfather Rule.

Section 19, Article II of the 1987 Constitution declares: 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.

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:


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; xxx

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Case 26
RICHARD K. TOM vs. SAMUEL N. RODRIGUEZ

Re: Corporation acts through its Board

July 6, 2015; G.R. No. 215764

Facts: ​Golden Dragon International Terminals, Inc. (GDITI) is the exclusive Shore Reception
Facility (SRF) Service Provider of the Philippine Ports Authority (PPA) tasked to collect, treat,
and dispose of all ship-generated oil wastes in all bases and private ports under the PPA’s
jurisdiction.

In 2008, Fidel Cu sold via Deed of Conditional Sale his 17,237 shares of stock in GDITI to
Virgilio S. Ramos and Cirilo C. Basalo, Jr.

The two failed to pay the purchase price, so Cu sold 15,233 of the same shares through a Deed
of Sale in favor of Edgar D. Lim, Eddie C. Ong, and Arnold Gunnacao, who also failed to pay
later on.

In 2009, the following were elected as officers of GDITI: Lim as President and Chairman of the
Board, Basalo as Vice President for Visayas and Mindanao, Ong as Treasurer and Vice
President for Luzon, and Gunnacao as Director, among others.

However, a group led by Ramos composed of individuals who were not elected as officers of
GDITI – which included Tom – forcibly took over the GDITI offices and performed the functions
of its officers. This prompted GDITI, through its duly-elected Chairman and President, Lim, to file
an action for injunction and damages against Ramos, et al., before the RTC of Manila.

Pending the injunction case, Cu resold his shares of stock in GDITI to Basalo for 60M in 2010.
Cu sold not only his remaining 1,997 shares of stock in GDITI, but also the shares of stock
subject of the previously-executed Deed of Conditional Sale in favor of Ramos, as well as the
Deed of Sale in favor of Lim, Ong, and Gunnacao.

As such, Cu intervened in the injunction case claiming that, as an unpaid seller, he was still the
legal owner of the shares of stock subject of the previous contracts he entered into with Ramos,
Lim, Ong, and Gunnacao.

The RTC granted Cu’s application for Preliminary Mandatory and Preliminary Prohibitory
Injunctions, and thereafter issued corresponding writs and directed the original parties (plaintiff
Lim and those acting under his authority, and defendants Ramos, et al.) to cease and desist
from performing or causing the performance of any and all acts of management and control over
GDITI, and to give Cu the authority to put in order GDITI’s business operations.

Cu executed an SPA in favor of Cezar O. Mancao II to be his duly authorized representative to


exercise the powers granted to him in Order, and to perform all acts of management and control
over GDITI.

In a 2011 letter ddressed to Mancao, Basalo, and the BoD of GDITI filed before the RTC, Cu
expressly revoked the authority, reinstating the power to control and manage the affairs of
GDITI unto himself.

Thus, Mancao and Basalo filed a complaint for Specific Performance with Prayer for TRO and a
Writ of Preliminary Injunction against Cu, Tom, et al., in another RTC.

Samuel N. Rodriguez filed a Complaint-in-Intervention, alleging that in a Memorandum of


Agreement in 2012, Basalo authorized him to take over, manage, and control the operations of
GDITI in the Luzon area. Basalo and Rodriguez agreed to divide between them the monthly net
profit of GDITI equally. Basalo refused to honor the terms, so Rodriguez sought to intervene to
compel Basalo to faithfully comply with his undertaking.

The RTC ruled in favor of Rodriguez and ordered Basalo to: (a) place the management and
control of GDITI in Luzon to Rodriguez as representative of Basalo; (b)allocate the power to
administer and manage the Visayas and Mindanao regions of GDITI to Rodriguez in the
concept of a partner of Basalo; (c) allow Rodriguez to provide the manpower services for the
operations of GDITI; and (d) give to Rodriguez his share in the monthly net proceeds from
GDITI’s operations, subject to the rules of the corporation on fees relative to the management
contracts.

Basalo, Mancao, and Tom, separately filed MRs which were denied.

Tom elevated the matter before the CA. The CA, without touching upon the merits, denied his
prayer for TRO and/or writ of preliminary injunction, finding no urgency in the case. Hence this.
Main Issue: ​Whether the CA committed grave abuse of discretion in denying Tom’s prayer for
the issuance of a TRO and/or writ of preliminary injunction.

SC’s Ruling: ​Yes.

The issuance of an injunctive writ is warranted to enjoin the RTC from implementing its Orders
in the specific performance case placing the management and control of GDITI to Rodriguez,
among other directives. This pronouncement follows the well-entrenched rule that a corporation
exercises its powers through its board of directors and/or its duly authorized officers and agents,
except in instances where the Corporation Code requires stockholders’ approval for certain
specific acts.

Accordingly, it cannot be doubted that the management and control of GDITI, being a stock
corporation, are vested in its duly elected Board of Directors, the body that: (1) exercises all
powers provided for under the Corporation Code; (2) conducts all business of the corporation;
and (3) controls and holds all property of the corporation. Its members have been characterized
as trustees or directors clothed with a fiduciary character.

Thus, by denying Tom's prayer for the issuance of a TRO and/or writ of preliminary injunction,
the CA effectively affirmed the RTC's Order placing the management and control of GDITI to
Rodriguez, a mere intervenor, on the basis of a MOA between the latter and Basalo, in violation
of the foregoing provision of the Corporation Code. In so doing, the CA committed grave abuse
of discretion amounting to lack or excess of jurisdiction.

Hence, a Writ of Preliminary Injunction was issued against Rodriguez, his agents, and all
persons acting under his authority to refrain and desist from further exercising any powers of
management and control over GDITI.

——-

Case 27
MAMITUA SABER, substituted by his HEIRS, represented by ORFIA ALICER SABER,
petitioners, vs. COURT OF APPEALS, PHILIPPINE AMANAH BANK and ASGARI ARADJI

Re: Business Judgment

G.R. No. 132981 August 31, 2004

Facts: ​In 1974, Marcos appointed Dr. Mamitua Saber, then Dean of Research at the Mindanao
State University and Acting Director of National Science Museum, as Executive Vice-President
of the Philippine Amanah Bank (PAB). He was also designated as the Officer-in-Charge of the
bank pending the election of its president by the BoD.
Saber was surprised because he did not apply for appointment to the position. He inquired as to
why he was appointed, considering that he had no experience in the field of business and
banking. He was told that he was chosen because of his proven personal integrity. Saber took a
year-long leave of absence from the university and assumed office at the PAB.

Saber was sent to Malaysia to study how its government prepared and managed the annual
Muslim pilgrimage (Hajj) to Mecca, and thus, avoid the fiascos that plagued pilgrimages of
Filipino Muslims in the past. After his stint in Malaysia, Saber resumed his duties at the PAB.

Thereafter, the PAB BoD Chairman directed him to undertake the appropriate arrangements for
the Hajj.

Saber was concerned because he only had 2 months to prepare. Considering that Saber had no
experience, the BoD designated Martin Saludo (management consultant of PAB) as the head of
the one-man oversight committee.

Saber decided to charter the M/V Sweet Homes. In behalf of the PAB, Saber executed a
Uniform Time-Charter to transport the pilgrims, as well as a Rider to Charter Party in which the
PAB was allowed to load cargoes.

The PAB conducted a massive information drive to inform the Muslims of the arrangements and
urged them to join the Hajj through the bank. Prospective pilgrims, including PAB depositors,
made reservations for the voyage and partial payments for their tickets.

Saber wrote to Marcos, requesting that other parties not be allowed to charter any ship or
aircraft bringing pilgrims to Jeddah, to avoid unfair competition with the PAB.

However, Marcos granted some politicians permission to charter private plane to transport the
pilgrims.

Because of this, many prospective passengers withdrew their reservations; and about 200 cabin
accommodations were rendered vacant.

Rather than allow the vessel to leave for Mecca with many vacant cabins, Saber decided to sell
tickets to AGEAC (via Basman) on credit: 40 first class cabin accommodations and 30 second
class accommodations, paid via a postdated check.

AGEAC loaded exportable goods on board the vessel. When the vessel arrived in Saudi Arabia,
the authorities did not allow the M/V Sweet Homes to dock. Its passengers were boarded on
boats and transported to the pier. AGEAC failed to unload and sell the exportable goods.

When the postdated checks were deposited on the due dates thereof in the account of the PAB,
they were dishonored. AGEAC, likewise, failed to pay for the freight charge. Consequently, the
PAB sustained a huge financial loss.

During a meeting of the PAB BoD, where Saber was present, a Resolution was approved,
declaring Saber liable for the receivables on the ground that the Board did not authorize him to
sell tickets on credit payable via postdated checks, and to execute the Freight Contract with
AGEAC.

The Board directed Saber to collect the receivables himself, because of its perception that if the
PAB were to collect the receivables, it would, thereby, be ratifying the unauthorized acts of
Saber.

PAB Director Aradji made verbal representations to the Board to grant Saludo the power to
perform the duties and exercise the powers of PAB President, in lieu of Saber, on account of the
mishandling of the pilgrimage and “lack of exercise of effective leadership”.

The PAB BoD issued another Resolution, creating an Investigating Committee, chaired by
Aradji, to look into the administrative and/or criminal liabilities of the persons involved in the
Pilgrimage.

During the formal investigation, Saber testified and submitted documentary evidence. Aradji
submitted his Report that there was basis for Saber to be charged with violation of RA No. 3019
(Anti-Graft and Corrupt Practices Act) and recommended that the proper criminal complaint be
filed.

Thus, PAB BoD issued a resolution to authorize the filing of a criminal complaint against Saber.

Saber filed a civil complaint for damages in the RTC against PAB, its BoD, and its officers,
claiming that the complaint caused him dishonor, shame, discredit and contempt, shock,
besmirched reputation, and wounded feelings.

He also alleged that because of his preventive suspension, he failed to receive his salary from
the University, causing him and his family severe economic losses. He further claimed that
Aradji and Saludo conspired to oust him from the PAB.

Three Informations were filed against Saber, et al., for violation of Section 3(e) of RA 3019.

After trial, the Sandiganbayan rendered a Decision acquitting all the accused.

In acquitting Saber of the charge, the Sandiganbayan ruled that no undue injury was caused to
PAB nor were unwarranted benefits, advantage or preference given through manifest partiality,
evident bad faith or gross inexcusable negligence of the accused Bank officials. It also held that
Dr. Saber, who was then the EVP and OiC must be deemed to have been impliedly clothed with
authority to enter into any contract related to the pilgrimage. A corporate officer, entrusted with
the general management and control of its business, has implied authority to make any contract
or do any other act which is necessary or appropriate to the conduct of the ordinary business of
the corporation.

As for the civil case, the RTC also ruled in favor of Saber, thereby holding PAB and Aradji
solidarily liable to pay Saber: 900k moral damages, 100k nominal damages, and 70k attorney’s
fees.

The RTC based the judgment partly on the Sandiganbayan’s ruling, and on the following: (1)
Malicious Prosecution of the criminal cases; (2) Libel arising from derogatory and malicious
publications; and (3) willful injury against plaintiff under the provisions of the New Civil Code on
Human Relations.

On appeal, however, the CA reversed the RTC, ruling that Saber failed to prove bad faith and
malice against the PAB and Aradji; and that they could not be blamed for acting the way they
did for they were charged with the duty to act for the bank with loyalty and dedication. ​Questions
of policy or of management are left solely to the honest decisions of officers and directors of a
corporation, and so long as they act in good faith, their orders are not reviewable by the courts.

According to the CA, PAB and Aradji were not motivated by any malicious intent or by a sinister
design to unduly harass Saber, but only by a well-founded anxiety to protect the interests of the
bank.

In the meantime, Saber died intestate. His heirs filed this petition for review on certiorari before
the SC, alleging, among others, that Saber acted in good faith as OiC of the PAB, that he
suffered damages for the malicious prosecution, and that PAB made Saber as a scapegoat.

Issue:​ Is Saber (through his heirs) entitled to damages? Was there malice on the part of PAB
when it filed the criminal complaint against Saber?

SC’s Ruling:​ No and no.

Saber anchored his claim for damages on Abuse of right under Article 19 of the New Civil Code:
“Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.”

The elements of abuse of rights are the following: (a) the existence of a legal right or duty which
is exercised in bad faith; and (b) for the sole intent of prejudicing or injuring another.

Malice or bad faith is at the core of said provision. Good faith is presumed and he who alleges
bad faith has the duty to prove the same. Good faith refers to the state of the mind which is
manifested by the acts of the individual concerned. It consists of the intention to abstain from
taking an unconscionable and unscrupulous advantage of another.

Bad faith does not simply connote bad judgment to simple negligence, dishonest purpose or
some moral obloquy and conscious doing of a wrong, a breach of known duty due to some
motives or interest or ill-will that partakes of the nature of fraud. Malice connotes ill-will or spite
and speaks not in response to duty. It implies an intention to do ulterior and unjustifiable harm.
testified:

The BoD of PAB did not act in bad faith or with malice in designating Aradji as chairman. There
were 4 other members of the Investigating Committee, all of whom could have ruled in favor of
Saber based on the evidence on record. But they didn’t. Moreover, the report and
recommendations of the committee were still subject to the review of the BoD.

Even though the Sandiganbayan ruled that Saber had the implied authority to do those acts and
thus he cannot be held criminally liable, it cannot be concluded that the PAB BoD acted in bad
faith or with malice.

To constitute malicious prosecution, there must be proof that the prosecutor was prompted by a
sinister or devious design to vex and humiliate a person, and that it was initiated deliberately,
knowing that the charges are false and groundless.

One cannot be held liable for damages for malicious prosecution where he acted with probable
cause.

Probable cause is that which engenders a well-founded belief that a crime has been committed
and that the respondent is probably guilty thereof and should be held for trial. A finding for
probable cause needs only to rest on evidence showing that in all probability, a crime has been
committed by the respondent.

In this case, there was probable cause to initiate a case against Saber. The Tanodbayan found
probable cause based on the evidence, particularly the following: (1) Saber allowed Basman of
AGEAC to buy tickets worth P756K payable on credit via postdated checks that were blank as
to the amounts; and (2) Saber allowed the AGEAC to pay freight charges of P178K via
post-dated checks although the balance of the account of Basman was only P1,834.55.

That the Sandiganbayan later on acquitted him does not automatically mean that the
prosecution against him had no probable cause.

Saber failed to prove that the criminal complaints against him were filed with malice on the part
of PAB and despite lack of probable cause. Hence, he (through his heirs) is not entitled to
damages.

——-
Case 28
EASYCALL v EDWARD KING

Re: Corporate officers

GR no. 145901; December 15, 2005

Facts: ​Edward King was the assistant to the General Manager of Easycall. He rose to ranks
and became the “VP for nationwide expansion”.

Later, he was scrutinized for his poor performance and for spending 40% of his work days for
field works. Eventually, he was terminated on the ground of loss of confidence.

He filed a complaint for illegal dismissal. The Labor Arbiter ruled against him and declared that
his dismissal was valid.

The NLRC affirmed the LA’s decision but with modification: that he be indemnified (P10,000) for
the violation of his right to due process. King filed a MR but it was denied for lack of merit and
lack of jurisdiction, because as a case involving a corporate officer, the NLRC had no
jurisdiction over the subject matter.

The applicable law at the time was PD 902-A (SEC Reorganization Act) which states that the
SEC has original and exclusive jurisdiction over cases involving removal of corporate officers.

King elevated the case to the CA and his petition was granted there. The CA held that he was
not a corporate officer, that the NLRC had jurisdiction, and that King’s dismissal was illegal.

Hence the petition to the SC by Easycall. Easycall contends that King was a corporate officer.

Issue:​ Was King a corporate officer (under SEC’s jurisdiction) or an employee (under NLRC’s
jurisdiction)?

SC’s Ruling: ​King was only an employee. The NLRC had jurisdiction over his illegal dismissal
case.

Corporate officers are those given that character by the Corporation Code or by the By-Laws.
The Code mentions: President, Secretary, Treasurer, and such other officers as may be
provided for in the by-laws.

Easycall failed to prove that its bylaws provided for the office of the “VP for nationwide
expansion”.
An office is created by the charter of the corporation. An officer is elected by the directors/the
Board.

An employee occupies no office and is employed not by the Board or stockholders, but by the
managing officer of the corporation.

Here, King was appointed “VP” by Easycall’s general manager, not its Board. Hence, King was
an employee, and not an officer.

——-

Case 29
NACPIL v INTERNATIONAL BROADCASTING CORPORATION (IBC)

Re: corporate officers

GR no. 144767; March 21, 2002

Facts​: Dily Dany Nacpil was the Assistant General Manager for Finance/Administration and
Comptroller of IBC. He had beef with Emiliano Templo who told the Board that when he
assumes presidency, he would terminate Nacpil’s services. He blamed Nacpil for the prior
mismanagement of IBC.

Upon assumption of presidency, Templo harassed Nacpil and pressured him into resigning.
Nacpil succumbed and resigned. Templo refused to pay Nacpil his retirement benefits and to
acknowledge his employment, claiming that he was not IBC’s comptroller and merely usurped
the powers of a comptroller.

Nacpil filed a complaint for illegal dismissal and non-payment of benefits. The LA ruled in his
favor. IBC appealed to the NLRC which dismissed the appeal. And so the case was raised to
the CA.

The CA ruled in favor of IBC this time and reversed the NLRC. Hence this petition to the SC.

Nacpil’s contention: He was not a corporate officer but an employee. He was not elected by the
Board as comptroller. Such position isn’t even in the bylaws of IBC. He was appointed by the
general manager. The labor courts, and not the SEC, have jurisdiction.

Issue​: Was Nacpil a corporate officer?

SC’s Ruling:​ Yes. Nacpil was a corporate officer. SEC has jurisdiction.

There are two elements in determining whether the SEC has jurisdiction:
1. Status/relationship of the parties
2. Nature of the question that is the subject matter of the controversy.

Nacpil was a corporate officer even if he was appointed by the general manager, because his
appointment was subsequently approved by the Board.

It also doesn't matter that the comptroller position was not expressly mentioned in the bylaws,
because under the bylaws, the Board Is empowered to appoint such other officers as it may
deem necessary.

Nacpil’s appointment required the approval and formal action of IBC’s Board. Thus, he was a
corporate officer.

Dismissal of a corporate officer is an intra-corporate matter within the SEC’s jurisdiction under
PD 902-A, Section 5. Note however that this jurisdiction has been transferred to the RTCs by
virtue of RA 8799 (Securities Regulation Code, Section 5.2)

———

Case 30
LITONJUA v ETERNIT CORPORATION

Re: agency by estoppel

GR no. 144805; June 8, 2006

Facts​: Eternit Corporation is engaged in the manufacturing of roofing materials and pipe
products. It conducted its operations parcels of land in Mandaluyong.

90% of Eternit’s stock is owned by a corporation in Belgium, Eteroutremer SA Corporation


(ESAC). Eternit’s general manager and President is Jack Glanville, an Australian. ESAC’s
Regional Director for Asia is Claude Delsaux.

In 1986, ESAC’s management grew concerned about the political situation in the Philippines
and wanted to stop its operations there.

Eternit’s Board then engaged the services of a realtor, Lauro Marquez, to dispose of the parcels
of land.

Marquez offered to Eduardo Litonjua Jr. of Litonjua and Co., Inc. Marquez declared that he was
authorized to sell the property for P27M and that the terms can be subject to negotiation.
Litonjua offered to buy the lands for P20M cash. Marquez relayed this to Glanville who then
telexed Delsaux. Delsaux replied that the final offer is $1M and P2.5M. Litonjua accepted this
counterproposal and deposited $1M with Security Bank.

After Cory Aquino’s assumption as President, however the political situation in the Philippines
“improved”. Glanville called Marquez and advised him that the sale will no longer proceed. This
was followed by a letter confirming that the Board had decided not to sell the lands.

Litonjua wrote to Eternit, demanding damages for the aborted sale. Eternit rejected the demand.
Thus, Litonjua filed a case against Eternit.

Issue:​ Were Marquez, Glanville, and Dedlsaux were authorized by Eternit to act as its agents?

SC’s Ruling: ​No, they were not authorized agents of Eternit.

A corporation may only act through its Board or, when authorized by the bylaws or by Board
Resolution through its officers or agents, subject to the Articles of Incorporation, By-Laws, or
other relevant laws.

The property of a corporation is not the property of the stockholders/members and may not be
sold without express authority of the Board. Physical acts—offer, acceptance of
counter-offer—can be performed by the officers or agents duly authorized for the purpose by the
bylaws or by acts (resolutions) by the Board. Absent such valid authority, declarations of an
individual director relating to corporate affairs, not in the course of the performance of his duties,
are not binding on the corporation.

The unauthorized act of an officer is not binding on a corporation unless the latter ratifies it
expressly or impliedly by its Board.

Any sale of real property of a corporation by a person without written authority from the
corporation is null and void.

Litonjua failed to adduce in evidence any Board Resolution by Eternit empowering Marquez,
Glanville, and Delsaux as its agents to sell the lands.

Requisites of agency by estoppel:


1. The principal manifested a representation of the agent’s authority or knowingly allowed
the agent to assume sch authority.
2. The third person, in good faith, relied upon such representation.
3. Relying upon such representation, the third person has changed his position to his
detriment.

———
Case 31
LAPULAPU FOUNDATION INC (LLF) v CA

Re: Holding out theory; doctrine of ostensible or apparent authority

GR no. 126006; January 29, 2004

Facts:​ Elias Tan, President of LLF obtained 4 loans from Allied Banking Corporation, secured
by 4 promissory notes for 100k each.

In 1979, despite demands, Tan failed to pay. The bank filed a complaint in the RTC, praying that
Tan and LLF be held jointly and solidarily liable to pay the entire obligation.

LLF denied incurring the debts, claiming that Tan obtained the loans in his personal capacity
and for his own use and benefit. LLF never authorized Tan to co-sign any promissory note.
Thus, LLF interposed a cross claim against Tan, alleging that he exceeded his authority, and
that he should be solely liable for the loans.

Tan admitted that he obtained the loan in his personal capacity, but that they agreed that the
loans were to be paid from the proceeds of Tan’s shares of common stock in the Lapu-Lapu
Industries Corp., a real estate firm.

The RTC ruled against Tan and LLF and found them solidarily liable.

Issue:​ Should Tan and LLF be solidarily liable?

SC’s Ruling:​ Yes. Corporate fiction on the part of LLF must be pierced in this case.
Tan represented himself as the President of LLF, opened accounts in the name of LLP. He
submitted a Secretary’s Certificate attesting that he is authorized to sign for and on behalf of
LLF any check, and to transact business with the bank. All the while, LLF never questioned
Tan’s acts except when court action has been initiated.

LLF is liable for the transactions entered into by Tan on its behalf.

Per the Secretary’s Certificate, LLF gave Tan ostensible and apparent authority to deal with the
bank. The corporation is estopped from questioning Tan’s authority to obtain the loans.

If a corporation knowingly permits one of its officers or any other agent, to act within the scope
of an apparent authority, it holds him out to the public as possessing the power to do those acts,
and thus, the corporation will, as against anyone who has in good faith dealt with it through such
agent, be estopped from denying the agent’s authority.
———

Case 32
MEGAN SUGAR CORPORATION v. REGIONAL TRIAL COURT OF ILOILO, BRANCH 68,
DUMANGAS, ILOILO; NEW FRONTIER SUGAR CORP. AND EQUITABLE PCI BANK

Re: Doctrine of ostensible agency; holding out theory

G.R. No. 193840; June 15, 2011

Facts​: New Frontier Sugar Corporation (NFSC) obtained a loan from Equitable PCI Bank
(EPCIB) which was secured by a real estate mortgage over NFSC’s landin Iloilo, and a chattel
mortgage over NFSC’s sugar mill.

NFSC entered into a Memorandum of Agreement (MOA) with Central Iloilo Milling Corporation
(CIMICO), whereby the latter agreed to take-over the operation and management of the NFSC
raw sugar factory and facilities.

Later, NFSC filed a compliant for specific performance and collection against CIMICO for its
failure to pay its obligations under the MOA.

CIMICO filed a case against NFSC for sum of money and/or breach of contract in the RTC.

Meanwhile, NFSC to pay its debt with EPCIB. Thus, EPCIB instituted extra-judicial foreclosure
proceedings over NFSC’s land and sugar mill. During the public auction, EPCIB was the sole
bidder and was thus able to buy the entire property.

However, the RTC issued a restraining order directing EPCIB to desist from taking possession
over the property. Hence, CIMICO was able to continue its possession over the property.

CIMICO and Megan Sugar Corporation entered into a MOA whereby Megan assumed
CIMICO’s rights, interests and obligations over the property.

During a hearing on the motion for intervention, Atty. Reuben Mikhail Sabig appeared before the
RTC as counsel for Megan.

Several counsels objected to Atty. Sabig appearance since Megan was not a party to the
proceedings; however, Atty. Sabig explained to the court that Megan had purchased the interest
of CIMICO and manifested that his statements would bind Megan.

The RTC ruled against CIMICO and Megan. Megan later filed a petition in the CA, assailing the
RTC’s jurisdiction over it.
The CA denied such petition, ruling that since Atty. Sabig had actively participated before the
RTC as its agent, Megan was already estopped from assailing the RTC jurisdiction.

Issue​: Whether Megan is estopped from assailing the jurisdiction of the RTC.

SC’s Ruling: ​Yes.

The doctrine of estoppel is based upon the grounds of public policy, fair dealing, good faith and
justice, and its purpose is to forbid one to speak against his own act, representations, or
commitments to the injury of one to whom they were directed and who reasonably relied
thereon.

While it is true, as claimed by Megan, that Atty. Sabig said in court that he was only appearing
for the hearing of Passi Sugar’s motion for intervention and not for the case itself, his
subsequent acts, coupled with Megan’s inaction and negligence to repudiate his authority,
effectively bars Megan from assailing the validity of the RTC proceedings under the principle of
estoppel.

Megan can no longer deny the authority of Atty. Sabig as they have already clothed him with
apparent authority to act in their behalf. It must be remembered that when Atty. Sabig entered
his appearance, he was accompanied by Mr. Concha, the director and general manager of
Megan. Concha himself attended several court hearings and even sent a letter to the RTC
asking for the status of the case.

A corporation may be held in estoppel from denying as against innocent third persons the
authority of its officers or agents who have been clothed by it with ostensible or apparent
authority.

Atty. Sabig may not have been armed with a board resolution, but the appearance of Concha
made the parties assume that the corporation (Megan) had knowledge of Atty. Sabig’s actions
and, thus, clothed Atty. Sabig with apparent authority.

Apparent authority, or what is sometimes referred to as the "holding out" theory, or doctrine of
ostensible agency, imposes liability, not as the result of the reality of a contractual relationship,
but rather because of the actions of a principal or an employer in somehow misleading the
public into believing that the relationship or the authority exists.

One of the instances of estoppel is when the principal has clothed the agent with indicia of
authority as to lead a reasonably prudent person to believe that the agent actually has such
authority.
Here, the corporation had all the opportunity to repudiate the authority of Atty. Sabig since all
motions, pleadings, and court orders were sent to its office. However, it never questioned the
acts of Atty. Sabig and even took time and effort to forward all the court documents to him.

Hence, Megan cannot feign knowledge of the acts of Atty. Sabig.

————

Case 33
GERARDO LANUZA, JR. AND ANTONIO O. OLBES v. BF CORPORATION, SHANGRI-LA
PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B. COLAYCO, MAXIMO G. LICAUCO III,
AND BENJAMIN C. RAMOS

Re: When may directors/officers be personally liable?

G.R. No. 174938, October 01, 2014

Facts​: Gerardo Lanuza, Jr. and Antonio Olbes are members of the Board of Directors of
Shangri-La Properties, Inc.

BF Corporation entered into agreements with Shangri-La wherein it undertook to construct a


mall and a multilevel parking structure along EDSA.

Shangri-La had been consistent in paying BF Corp in accordance with its progress billing
statements. However, Shangri-La started defaulting in payment.

BF Corp filed a complaint against Shangri-La and its board of directors. BF Corp alleged that
Shangri-La misrepresented that it had funds to pay and that it was simply a matter of delayed
processing of BF’s progress billing statements.

Construction eventually was completed but despite demands, Shangri-La refused to pay the
balance. BF also alleged that Shangri-La’s directors were in bad faith so they should be held
jointly and severally liable with Shangri-La.

Shangri-La and respondent board members filed a motion to suspend the proceedings in view
of BF’s failure to submit its dispute to arbitration. RTC denied the motion. Petitioners filed an
answer saying they are resigned members of the board since July 15, 1991.

Shangri-La and respondents then filed certiorari with CA which granted their petition and
ordered submission of the directors to arbitration.

Issue​: Whether the directors can be made parties to the arbitration proceedings, pursuant to the
arbitration clause provided in the contract between BF Corporation and Shangri-La.
SC’s Ruling: ​Yes.

Lanuza, et al., argue that their personalities as directors of Shangri-La are separate and distinct
from Shangri-La.

Because a corporation's existence is only by fiction of law, it can only exercise its rights and
powers through its directors, officers, or agents, who are all natural persons. A corporation
cannot sue or enter into contracts without them.

A consequence of a corporation's separate personality is that consent by a corporation through


its representatives is not consent of the representative, personally. Its obligations, incurred
through official acts of its representatives, are its own. A stockholder, director, or representative
does not become a party to a contract.

However, when there are allegations of bad faith or malice against corporate directors or
representatives, it becomes the duty of courts or tribunals to determine if these persons and the
corporation should be treated as one.

The Corporation Code provides the instances when directors, trustees, or officers may become
solidarily liable for corporate acts:

a) The director or trustee willfully and knowingly voted for or assented to a patently unlawful
corporate act;
b) The director or trustee was guilty of gross negligence or bad faith in directing corporate
affairs; and
c) The director or trustee acquired personal or pecuniary interest in conflict with his or her duties
as a director or trustee.

When the courts disregard the corporation’s distinct and separate personality from its directors
or officers, the courts do not say that the corporation, in all instances and for all purposes, is the
same as its directors, stockholders, officers, and agents. It does not result in an absolute
confusion of personalities of the corporation and the persons composing or representing it.

Courts merely discount the distinction and treat them as one, in relation to a specific act, in
order to extend the terms of the contract and the liabilities for all damages to erring corporate
officials who participated in the corporation’s illegal acts. This is done so that the legal fiction
cannot be used to perpetrate illegalities and injustices.

Thus, in cases alleging solidary liability with the corporation or praying for the piercing of the
corporate veil, parties who are normally treated as distinct individuals should be made to
participate in the arbitration proceedings in order to determine if such distinction should indeed
be disregarded and, if so, to determine the extent of their liabilities.

———
Case 34
BANK OF COMMERCE vs. MARILYN NITE

Re: Requisites of Piercing the Veil of Corporate Fiction; Ultra Vires Acts

GR No. 211535; July 22, 2015

Facts​: Marilyn Nite was charged, along with others, with violation of Section 19 of Batas
Pambansa 178 (Revised Securities Act), as well as Estafa. The two cases were tried jointly.

Nite, as President of Bancapital Development Corporation (Bancap), was accused of violating


BP 178 which states that no broker, dealer, or salesman may sell securities unless he/she is
registered as such.

Bancap sold P250M worth of treasury bills to Bank of Commerce (Bancom) without being
registered as broker, dealer, or salesman of securities.

The prosecution also alleged that Nite defrauded Bancom by falsely pretending to possess and
own P250 million worth of treasury bills when none of the treasury bills described in the
Confirmation of Sale and Letter of Undertaking issued by Bancap were ever delivered to
Bancom.

The trial court ruled that the prosecution was not able to establish that Bancap acted as a
primary dealer that needed to be accredited. According to the trial court, Bancap acted as a
secondary dealer and did not buy the treasury bills directly from the Central Bank. The trial court
ruled that the element of deceit was non-existent and that at the time of the transaction,
because Bancom was aware that Bancap was not in physical possession of the treasury bills
subject of the sale.

Hence, Nite was acquitted. However, she was ordered to pay the civil obligation of Bancap to
Bancom. Nite filed a partial motion for reconsideration which was later granted. Thus, she was
also absolved of the civil liability.

This prompted the prosecution to file its motion for reconsideration, alleging that the trial court
erred in not piercing the corporate veil of Bancap when it was adequately shown that Nite used
the company to perpetuate fraud and to evade an existing obligation. This motion was denied
for lack of merit.

On appeal, the CA affirmed the trial court. Hence this petition.


Issue:​ Does the doctrine of piercing the veil of corporate fiction apply in this case? Should Nite
be personally liable?

SC’s Ruling:​ No and no.

The general rule is that a corporation is vested by law with a personality separate and distinct
from that of the persons composing it, or from any other legal entity that it may be related to.
The obligations of a corporation, acting through its directors, officers, and employees, are its
own sole liabilities. Therefore, the corporation's directors, officers, or employees are generally
not personally liable for the obligations of the corporation.

To hold a director or officer personally liable for corporate obligations, two requisites must
concur:
(1) 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) complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.

To hold a director personally liable for debts of the corporation, and thus pierce the veil of
corporate fiction, the bad faith or wrongdoing of the director must be established clearly and
convincingly.

Then transaction between Bancom and Bancap is an ordinary sale. The trial court considered
the testimony of Lagrimas Nuqui, the Legal Officer in Charge of the Government Securities
Department of the Bangko Sentral ng Pilipinas, who explained that primary issues of treasury
bills are supposed to be issued only to accredited dealers but these accredited banks can sell to
anyone who need not be accredited, and such buyers, who may be corporations or individuals,
are classified as the secondary market. The trial court and the CA found that Bancap sold the
treasury bills as a secondary dealer. As such, Bancap's act of selling securities to Bancom is at
most “ultra vires” but not patently unlawful.

Nite cannot personally liable for Bancap's corporate liability.

———

Case 35
PIONEER INSURANCE SURETY CORPORATION vs. MORNING STAR TRAVEL & TOURS,
INC., ESTELITA CO WONG, BENNY H. WONG, ARSENIO CHUA, SONNY CHUA, AND
WONG YAN TAK

Facts​: Morning Star is a travel and tours agency, with Benny Wong, Estelita Wong, Arsenio
Chua, Sonny Chua, and Wong Yan Tak as shareholders and members of the board of directors.
International Air Transport Association (IATA) is a Canadian corporation licensed to do business
in the Philippines. IATA appointed Morning Star as its accredited travel agent.

IATA and Morning Star entered into a passengers sales agency agreement in which Morning
Star is tasked to report all air transport ticket sales to IATA

Pioneer Insurance Surety Corp. is the surety company of Morning Star. Morning Star
accumulated over Php 100m and USD 457k of debt from IATA which was paid for by Pioneer
Insurance.

Pioneer Insurance filed a case against Morning Star and its shareholders for a sum of money.

Pioneer’s arguments: ​They included the individual respondents because they, as shareholders
and members of the board of directors, were grossly negligent and were in bad faith when they
handled Morning Star (massive debt was caused by their gross negligence and bad faith).

Shareholders/directors’ argument: The shareholders are separate and distinct from the
corporation, hence they cannot be sued.

RTC​: Morning Star and the individual respondents are liable.

CA​: The individual respondents are absolved and only Morning Star is liable for the debt.

Issue​: Whether the individual respondents should be held liable for the company’s debt.

SC’s Ruling​: No.

The SC maintained that the corporation’s personality is separate and distinct from those that
represent the corporation. This separate corporate personality shields corporate officers acting
in good faith and within the scope of their authority from personal liability except for situations
enumerated by law and jurisprudence.

The Court also found that the individual respondents did not act in bad faith. Bad faith imports a
dishonest purpose or some moral obliquity and conscious doing of a wrong, not simply bad
judgement or negligence.

Also, individual respondents did no exhibit gross negligence because the Court found out that
the same board of directors were also managing another corporation which did fairly well
compared to Morning Star. The mere fact that Morning Star incurred huge losses and that it has
no assets at the time it contracted the large financial obligations did not amount to gross
negligence by the members of the board of directors (individual respondents).

————
Case 36
ELIZABETH M. GAGUI v SIMEON DEJERO and TEODORO R. PERMEJO

G.R. No. 196036; October 23, 2013

Facts​: Simeon Dejero and Teodoro Permejo filed separate Complaints for illegal dismissal,
nonpayment of salaries and overtime pay, refund of transportation expenses, damages, and
attorney fees against PRO Agency Manila, Inc., and Abdul Rahman Al Mahwes.

The Labor Arbiter rendered a decision ordering Pro Agecy Manila Inc., and Abdul Rahman Al
Mahwes to pay complainants. The LA also issued a Writ of Execution. When the writ was
returned unsatisfied, an Alias Writ of Execution was issued, but was also returned unsatisfied.

Dejero and Permejo filed a Motion to Implead Pro Agency’s Corporate Officers and Directors as
Judgment Debtor. It included Gagui as the Vice-president. The LA granted the motion.

A 2nd Alias Writ of Execution was issued. Judgment remained unsatisfied, so Dejero and
Permejo sought a 3rd alias writ of execution. The motion was granted resulting in the levying of
two parcels of lot owned by Gagui located in San Fernando, Pampanga.

Gagui filed a Motion to Quash 3rd Alias Writ of Execution. She alleged that apart from not being
made aware that she was impleaded as one of the parties to the case, the LA decision did not
hold her liable in any form whatsoever. Executive Labor Arbiter denied the motion.

Upon appeal, NLRC denied the appeal for lack of merit. NLRC ruled that in so far as overseas
migrant workers are concerned, it is R.A. 8042 (Migrant Workers Act) itself that describes the
nature of the liability of the corporation and its officers and directors. It is not essential that the
individual officers and directors be impleaded as party respondents to the case instituted by the
worker. A finding of liability on the part of the corporation will necessarily mean the liability of the
corporate officers or directors.

The CA affirmed the NLRC decision. The two Motions for Reconsideration were denied. Hence
this.

Issue​: Whether Gagui may be held jointly and severally liable with PRO Agency Manila, Inc. in
accordance with the Migrant Workers Act.

SC’s Ruling​: No. Gagui cannot be held automatically liable.

The pertinent portion of Section 10, R.A. 8042 reads as follows: The liability of the
principal/employer and the recruitment/placement agency for any and all claims under this
section shall be joint and several. This provision shall be incorporated in the contract for
overseas employment and shall be a condition precedent for its approval.

In Sto. Tomas v. Salac, it was held that pending adjudication of this case, the liability of
corporate directors and officers is not automatic.

To make them jointly and solidarily liable with their company, there must be a finding that they
were remiss in directing the affairs of that company, such as sponsoring or tolerating the
conduct of illegal activities.

Hence, for petitioner to be found jointly and solidarily liable, there must be a separate finding
that she was remiss in directing the affairs of the agency, resulting in the illegal dismissal of
respondents.

Examination of the records would reveal that there was no finding of neglect on the part of the
petitioner in directing the affairs of the agency. In fact, respondents made no mention of any
instance when petitioner allegedly failed to manage the agency in accordance with law, thereby
contributing to their illegal dismissal.

———

Case 37
MARK II MARKETING v JOSON

GR No. 171993, December 12, 2011

Facts​: Alfredo Joson was the General Manager, incorporator, director and stockholder of Marc
II Market (M2M). Before M2M was officially incorporated, Joson has already been engaged by
Lucila Jos, in her capacity as President of Marc Marketing Inc., to work as the General Manager
of M2M through a management contract.

However, M2M decided to stop and cease its operation. Joson’s services were then terminated.
Feeling aggrieved, he filed a Complaint for Reinstatement and Money Claim against M2M
before the Labor Arbiter which ruled in favor of Joson. The NLRC reversed said decision. The
CA, however, upheld the ruling of the Labor Arbiter and held that it had jurisdiction because
Joson was just an employee, not an officer. Hence this petition.

Issue: ​Whether Joson is a corporate officer.

Ruling: ​No, he is an employee.

​In conformity with the Corporation Code, whoever are the corporate officers enumerated in the
by-laws are the exclusive officers of the corporation and the Board has no power to create other
officers without amending first the corporate by-laws.
However, the Board may create appointive positions other than the positions of the corporate
officers, but the persons occupying such positions are not considered as corporate officers
within the meaning of the Corporation Code and are not empowered to exercise the functions of
the corporate officers, except those functions lawfully delegated to them. Their functioning and
duties are to be determined by the Board of Directors/Trustees.

​In the case at bar, the Joson was not a corporate officer of Petitioner Corporation because his
position as General Manager was not specifically mentioned in the roster of corporate officers in
its corporate by-laws. Thus he can only be regarded as its employee or subordinate official.

Accordingly, his dismissal did not amount to an intra-corporate controversy. Jurisdiction


therefore properly belongs with the Labor Arbiter and not with the RTC.

—————

Case 38
ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, INC. vs SECURITIES &
EXCHANGE COMMISSION

G.R. No. L-23606; July 29, 1968

Re: May a corporation extend its life by amendment of its articles of incorporation effected
during the three-year statutory period for liquidation when its original term of existence had
already expired?

Facts​: Alhambra Cigar and Cigarette Manufacturing Company, Inc. was duly incorporated in
1912. By its corporate articles, it was to exist for 50 years from incorporation. Its term of
existence expired on January 15, 1962. On that date, it ceased transacting business and
entered into a state of liquidation. Its stockholders named Angel S. Gamboa trustee to take
charge of its liquidation.


A new corporation—Alhambra Industries, Inc.—was formed to carry on the business of


Alhambra.

On June 20, 1963 (within the 3-year statutory period for liquidation) RA 3531 was enacted. It
amended Section 18 of the Corporation Law, empowering domestic private corporations to
extend their corporate life beyond the period fixed by the articles of incorporation for a term not
to exceed 50 years in any one instance. Previous to RA 3531, the maximum non-extendible
term was 50 years.
On July 15, 1963, at a special meeting, Alhambra's board of directors resolved to amend its
articles of incorporation to extend its corporate life for an additional fifty years, or a total of 100
years from its incorporation.

On August 26, 1963, Alhambra's stockholders, representing more than 2/3 of its subscribed
capital stock, voted to approve the resolution.

On October 28, 1963, Alhambra's amended articles of incorporation were filed with the SEC.

On November 18, 1963, the SEC ruled that RA 3531 which took effect only on June 20, 1963,
cannot be availed of by Alhambra because its term had already expired when the law took
effect. RA 3531 has no retroactive effect.

After its motion for reconsideration and refilling of the amended articles were denied by the
SEC, Alhambra comes to the SC.

Issue​: May a corporation whose term has already expired when the new law allowing a 50-year
extension for domestic corporations was enacted be allowed to amend its articles (while it is
already in its liquidation period) in order to extend its term?

SC’s Ruling​: No.

Continuance of a "dissolved" corporation as a body corporate for 3 years has for its purpose the
final closure of its affairs, and no other. The corporation is specifically enjoined from "continuing
the business for which it was established". Thus, the corporate existence and juridical
personality of that corporation to do business may no longer be extended.

RA 3531 is silent as to when such act of extension may be made. But the SC opined that the
privilege given to prolong corporate life under the amendment must be exercised before the
expiry of the term fixed in the articles of incorporation.

No corporation in a state of liquidation can act in any way, much less amend its articles, "for the
purpose of continuing the business for which it was established".

Since the privilege of extension is purely statutory, all of the statutory conditions precedent must
be complied with in order that the extension may be effectuated. These conditions must be
complied with during the life of the corporation, and before the expiration of the term of
existence as original fixed by its charter or the general law. This is because the corporation is
ipso facto dissolved as soon as that time expires.Since extension is by amendment of the
articles of incorporation, the amendment must be adopted before the expiration of its term.
The filing and recording of a certificate of extension after that time cannot relate back to the date
of the passage of a resolution by the stockholders in favor of the extension so as to save the life
of the corporation.

However, there is an exception. The doctrine of relation will apply where the delay is due to the
neglect of the officer with whom the certificate is required to be filed, or to a wrongful refusal on
his part to receive it.

When the corporate life of the corporation was ended, there was nothing to extend. At the time
of the passage of Republic Act 3531, Alhambra's corporate life had already expired. It had
overstepped the limits of its limited existence. No life there is to prolong.

Besides, a new corporation — Alhambra Industries, Inc., with but slight change in
stockholdings15 — has already been established. Its purpose is to carry on, and it actually does
carry on, the business of the dissolved entity.

—————

Case 39
RYUICHI YAMAMOTO vs. NISHINO LEATHER INDUSTRIES, INC. and IKUO NISHINO

Re: promissory estoppel, trust fund doctrine

G.R. No. 150283; April 16, 2008

Facts​: Ryuichi Yamamoto, a Japanese national, organized under Philippine laws Wako
Enterprises Manila, Inc., a corporation engaged principally in leather tanning.

Later, Yamamoto and Ikuo Nishino, also a Japanese, forged a Memorandum of Agreement to
enter into a joint venture, wherein Nishino would acquire 70% of the authorized capital stock of
WAKO.

Eventually, Nishino and his brother Yoshinobu acquired more than 70% of the authorized capital
stock of WAKO, reducing Yamamoto’s investment to 10% (less than 10% according to Nishino).

The corporate name of WAKO was later changed to its current name Nishino Leather
Industries, Inc. (NLII).

Nishino planned to take over NLII by buying out the shares of Yamamoto. The Nishino brother’s
counsel Atty. Emmanuel G. Doce advised Yamamoto that he may take out, for his own use and
sale, the following machines he contributed to Wako:
Splitting machine - 1 unit
Samming machine - 1 unit
Forklift - 1 unit
Drums - 4 units
Toggling machine - 2 units

The condition was that the value of such machines will be deducted from Yamamoto’s capital
contributions.

He attempted to recover the machineries but he was frustrated by the Nishinos, so he filed a
complaint against them for replevin in the RTC.

The Nishinos claimed that the machineries form part of Yamamoto’s capital contributions in
consideration of his equity in NLII and should be treated as corporate property; and that the
letter of Atty. Doce was merely a proposal, yet to be authorized by the stockholders and Board
of Directors of NLII.

The Nishinos also filed a counterclaim, alleging that they suffered damage (moral and
exemplary) from the seizure (by virtue of the writ of replevin).

The RTC decided in favor of Yamamoto, declaring him as the rightful owner and possessor of
the machineries and making the writ of seizure permanent.

The CA reversed the RTC, holding that corporate fiction shouldn’t be pierced and that they are
corporate property and may not be retrieved without the authority of the NLII’s BoD.

It also held that, insofar as Atty. Doce’s involvement, the doctrine of promissory estoppel doesn’t
apply.

Issue​: Whether the advice of Atty. Doce that Yamamoto may retrieve the machineries, bound
the corporation.

SC’s ruling:​ No.

Without a Board Resolution authorizing a person to act for and in behalf of the corporation, such
cannot bind the latter. Under the Corporation Law, unless

Yamamoto argued that the veil of corporate fiction must be pierced because
NLII is but a mere instrumentality of Ikuo and Yoshinobu. The Company hardly holds board
meetings. It has an inactive board, the directors are directors in name only. The 20% that was
previously Yamamoto’s went to Ikuo. Yoshinobu is the younger brother of Ikuo and has no say
at all in the business. Only Ikuo makes the decisions.

SC: Although the veil of separate corporate personality may be pierced when the corporation is
merely an adjunct, a business conduit, or alter ego of a person, mere ownership by a single
stockholder of even all or nearly all of the capital stock is not by itself a sufficient ground to
disregard the separate corporate personality.

The elements determinative of the applicability of the doctrine of piercing the veil of corporate
fiction follow:
1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its
own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate
the violation of a statutory or other positive legal duty, or dishonest and unjust act in
contravention of the plaintiff’s legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.
The absence of any one of these elements prevents "piercing the corporate veil."

In applying the ‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with reality and
not form, with how the corporation operated and the individual defendant’s relationship to that
operation.

In relation to the second element, the wrongdoing or unjust act in contravention of a plaintiff’s
legal rights must be clearly and convincingly established; it cannot be presumed. Without a
demonstration that any of the evils sought to be prevented by the doctrine is present, it does not
apply.

Here, it wasn’t shown that Nishino used the separate personality of NLII to unjustly act or do
wrong to Yamamoto in contravention of his legal rights.

Yamamoto also argued that promissory estoppel applies.

Under the doctrine of promissory estoppel, estoppel may arise from the making of a promise,
even though without consideration, if it was intended that the promise should be relied upon and
in fact it was relied upon, and if a refusal to enforce it would be virtually to sanction the
perpetration of fraud or would result in other injustice.

SC: It doesn’t apply in this case because the letter of Atty. Doce included a request for
Yamamoto to give his "comments on all the above, soonest."

What was thus proffered to Yamamoto was not a promise, but a mere offer, subject to his
acceptance. Without acceptance, a mere offer produces no obligation.
Under Article 1181 of the Civil Code, "in conditional obligations, the acquisition of rights, as well
as the extinguishment or loss of those already acquired, shall depend upon the happening of
the event which constitutes the condition."

Here, the condition was the deduction of the machine’s value from Yamamoto’s capital
contribution due him in the buy-out of his interests in NLII. There was no proof that this condition
was complied with.

The machineries and equipment remained part of the capital property of the corporation. The
property of a corporation is not the property of its stockholders or members.

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

——————

Case 40
DONNINA C. HALLEY vs. PRINTWELL, INC.

G.R. No. 157549 May 30, 2011

Re: Stockholders of a corporation are liable for the debts of the corporation up to the extent of
their unpaid subscriptions. They cannot invoke the veil of corporate identity as a shield from
liability, because the veil may be lifted to avoid defrauding corporate creditors.

Facts​: Halley was an incorporator and original director of Business Media Philippines, Inc.
(BMPI).

Printwell engaged in commercial and industrial printing. BMPI commissioned Printwell for the
printing of a magazine that BMPI published and sold. For that purpose, Printwell extended
30-day credit accommodations to BMPI.

BMPI failed to pay the full amount, so Printwell sued BMPI for the unpaid balance.
Printwell amended the complaint to implead all the original stockholders and incorporators.

The defendants filed a consolidated answer, averring that BMPI had a separate personality from
those of its stockholders.
The RTC ruled in favor of Printwell, holding that the defendants had used BMPI’s corporate
personality to evade payment and create injustice

The CA affirmed the RTC, holding that the defendants’ resort to the corporate personality would
create an injustice because Printwell would be at a loss against whom it would assert the right
to collect, and that the trust fund doctrine applies:
It is an established doctrine that subscription to the capital stock of a corporation constitute a
fund to which creditors have a right to look up to for satisfaction of their claims, and that the
assignee in insolvency can maintain an action upon any unpaid stock subscription in order to
realize assets for the payment of its debts.

The funds, which consists of the payment of subscriptions of the stockholders, is where the
creditors can claim monetary considerations for the satisfaction of their claims. If these funds
which ought to be fully subscribed by the stockholders were not paid or remain an unpaid
subscription of the corporation then the creditors have no other recourse to collect from the
corporation of its liability. A stockholder may be sued directly by creditors to the extent of their
unpaid subscriptions to the corporation.

Issue​: Does the trust fund doctrine apply in this case? Are the individual stockholders liable?

SC’s ruling: ​Yes.


Corporate personality not to be used to foster injustice. Printwell impleaded the petitioner and
the other stockholders of BMPI for two reasons, namely: (a) to reach the unpaid subscriptions
because it appeared that such subscriptions were the remaining visible assets of BMPI; and (b)
to avoid multiplicity of suits.

The petitionersubmits that she had no participation in the transaction between BMPI and
Printwell;that BMPI acted on its own; and that shehad no hand in persuading BMPI to renege on
its obligation to pay. Hence, she should not be personally liable.

The SC rules against the petitioner’s submission.

Although a corporation has a personality separate and distinct from those of its stockholders,
directors, or officers, that separate and distinct personality is merely a fiction created by law for
the sake of convenience and to promote the ends of justice. This may be disregarded, and the
individuals composing the corporation will be treated as individuals, if the corporate entity is
being used as a cloak or cover for fraud or illegality;as a justification for a wrong; as an alter
ego, an adjunct, or a business conduit for the sole benefit of the stockholders.

In order to protect its right, the creditor can collect from the stockholders regarding their unpaid
subscriptions. To deny appellee from recovering from appellants would place appellee in a
limbo on where to assert their right to collect from BMPI since the stockholders who are
appellants herein are availing the defense of corporate fiction to evade payment of its
obligations.

Unpaid creditor may satisfy its claim from unpaid subscriptions;stockholders must prove full
payment oftheir subscriptions.

Subscriptions to the capital of a corporation constitute a fund to which creditors have a right to
look for satisfaction of their claims and that the assignee in insolvency can maintain an action
upon any unpaid stock subscription in order to realize assets for the payment of its debts.

The trust fund doctrine is not limited to reaching the stockholder’s unpaid subscriptions. The
scope of the doctrine when the corporation is insolvent encompasses not only the capital stock,
but also other property and assets generally regarded in equity as a trust fund for the payment
of corporate debts. All assets and property belonging to the corporation held in trust for the
benefit of creditors that were distributed or in the possession of the stockholders, regardless of
full paymentof their subscriptions, may be reached by the creditor in satisfaction of its claim.

A stockholder is personally liable for the financial obligations of the corporation to the extent of
his unpaid subscription.